By divorced one like Bush
I’m reading Kevin Phillips “Bad Money”. I want to understand where this idea that money is made from money comes from. On page 61 he writes:
In 1996 a much discussed article in Foreign Policy titled “Securities: The New World Wealth Machine” had set out the ultimate paper entrepreneurial opportunity: high-quality stocks and bonds could be issued against clusters and pools of existing loans and assets, an innovation that “requires that a state find ways to increase the market value of its stock of productive assets.” By such a strategy, “an economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective.”
Wealth was created when a portion of income was diverted from consumption into investment of buildings, machinery and technological change. Societies accumulated wealth slowly over generations. Now many societies and indeed the entire world have learned how to create wealth directly.
Now I don’t know but, is that not the grand slam of free lunch economics you have ever read? How could a learned person make such a statement?
What Edmunds refers to as “Securitization,” is nothing more than the shuffling of money from one market to another. However, this approach does create something known as a financial bubble; an instance in which an increase in speculation within a financial market, inflates the market value of stocks and bonds beyond their underlying value. It also results in a number of unpleasant systemic consequences.
First, an inflated financial market tends to exacerbate the trend for money to concentrate in the hands of the rich.
A second consequence of an inflated financial market is that it tends to draw money away from the productive sector that actually engages in the creation of wealth. This can put an economy in a very tenuous position, as was evidenced by Thailand in 1997.
Back to Mr. Phillips, page 63:
Back in 1986, Minsky had written in Stabilizing an Unstable Economy that where as a banker’s orientation to cash flow was sober, “an emphasis by bankers on the collateral value and expected value of assets is conducive to the emergence of a fragile financial structure.”
I searched “Minsky” at AB. He comes up as early as 2004. Unfortunately, I could not find the actual post. I googled Professor Minsky and to my surprise found an original document
The Financial Instability Hypothesis
Hyman P. Minsky*
Working Paper No. 74
The readily observed empirical aspect is that, from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control.
I guess it wasn’t to observed for the mantra I believe prior to the current fiasco was that everything was smooth sailing, the oceans have been tamed by man.
In this paper, I believe the following is the relevant aspect of his theory that we need to learn:
The theoretical argument of the financial instability hypothesis starts from the characterization of the economy as a capitalist economy with expensive capital assets and a complex, sophisticated financial system.
This Keynes “veil of money” is different from the Quantity
Theory of money “veil of money.” The Quantity Theory “veil of money” has the trading exchanges in commodity markets be of goods for money and money for goods: therefore, the exchanges are really of goods for goods. The Keynes veil implies that money is connected with financing through time.
It is the following in Professor Minsky’s paper that I believe would lead someone to make the statements Professor Edmunds made:
Thus, in a capitalist economy the past, the present, and the future are linked not only by capital assets and labor force characteristics but also by financial relations. The key financial relationships link the creation and the ownership of capital assets to the structure of financial relations and changes in this structure…In contrast to the orthodox Quantity Theory of money, the financial instability hypothesis takes banking seriously as a profit-seeking activity.
Banks seek profits by financing activity and bankers. Like all entrepreneurs in a capitalist economy, bankers are aware that innovation assures profits. Thus, bankers (using the term generically for all intermediaries in finance), whether they be brokers or dealers, are merchants of debt who strive to innovate in the assets they acquire and the liabilities they market. This innovative characteristic of banking and finance invalidates the fundamental presupposition of the orthodox Quantity Theory of money to the effect that there is an unchanging “money” item whose velocity of circulation is sufficiently close to being constant: hence, changes in this money’s supply have a linear proportional relation to a well defined price level.
And thus is born the idea that you can make money from money. That is if you ignor that Professor Minsky does not state that finance stands alone, or that “an economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective”. On the contrary, he says nothing about primacy. He just notes that what is missing in the Quantity Theory is finance.
Thus, in a capitalist economy the past, the present, and the future are linked not only by capital assets and labor force characteristics but also by financial relations.