Big editorial by Paul Volcker in today’s NYT:

“The phrase “too big to fail” has entered into our everyday vocabulary. It carries the implication that really large, complex and highly interconnected financial institutions can count on public support at critical times. The sense of public outrage over seemingly unfair treatment is palpable. Beyond the emotion, the result is to provide those institutions with a competitive advantage in their financing, in their size and in their ability to take and absorb risks.

As things stand, the consequence will be to enhance incentives to risk-taking and leverage, with the implication of an even more fragile financial system. We need to find more effective fail-safe arrangements.

In approaching that challenge, we need to recognize that the basic operations of commercial banks are integral to a well-functioning private financial system. It is those institutions, after all, that manage and protect the basic payments systems upon which we all depend. More broadly, they provide the essential intermediating function of matching the need for safe and readily available depositories for liquid funds with the need for reliable sources of credit for businesses, individuals and governments.

Combining those essential functions unavoidably entails risk, sometimes substantial risk. That is why Adam Smith more than 200 years ago advocated keeping banks small. Then an individual failure would not be so destructive for the economy. That approach does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required.”

The full piece though long, is worth the time to read.


How to Reform Our Financial System
NYT, January 30, 2010

Category: Bailouts, Credit, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

61 Responses to “Volcker on Reforming Banks”

  1. tawm says:

    This administration trots out Volker whenever it needs credibility for addressing the financial markets. But his advice is not heeded, he’s discarded like a used tissue. Surely, the NYTimes will bury St Paul’s words and sing the praises of the current entrenched political elite increasingly as the election draws near…

  2. snapshot says:

    As your friend Chris Whalen @ IRA states..”The 2010 mid-term elections and the general elections in 2012 likewise promise to see the unseating of an entrenched elite and the start of an extended period of political instability in America.”

    There will be plenty more to talk about…..Plus, we still have the same jokers running things, mark-to-fantasy is still in place, all sorts of junk off balance sheet, regulations are still not in place, CDOs are still not beings handled through clearing houses…

    We are in for a bumpy ride…

  3. “…We need to find more effective fail-safe arrangements…”

    Honestly, after reading that, above, the “Do not take Seriously”-flag went up..

    the rest of the snip is, equally, riddled with contradictions.

    the last paragraph, of the snip, seems like an ‘argument’, but, guess what? it isn’t.

    LSS: this “That approach does not really seem feasible in today’s world…” is a classic tip-off of one excusing Systemic Inefficiencies/Structural Defects.

    this is, yet, more Agitprop from our, so-called, ‘leaders’..

    with ‘leaders’ like this, We’d be better off “Walking around Blind, w/o a Cane.”

  4. Wrencher says:

    Tawm summed it up pretty well – Volker as window dressing, or a distraction. I would love to see Mr. Volker have more influence, and to see some of his reforms come to light, but there are too many skunks living under the hen house.

    Larry Summers is the core of the boil, the center of the rot. Nothing can really be fixed until the pus and corruption is removed.

  5. clawback says:

    Wow, they’re saying some of the *right* things, now — the kind of stuff we want to hear. Phew, don’t I feel better, now. It’s so nice to know they understand our anger. Nothing for us peasants to do now, but just sit back and wait for them to take the appropriate actions. (I’m sure they will be investigating recently perpetrated fraud, as well, and clawing back ill-gotten gains and false “profits.” No doubt in my mind, at all.)

  6. wunsacon says:

    Yves has some critical things to say. Her post is long and it’s too early on a Sunday for me to want to digest it. But, it must be worth a read:

  7. snapshot says:

    I really think things will change with the 2010 elections. If Mass. wasn’t a wake-up call, what will be? All of a sudden O is talking about deficits and jobs. The Dems had the agenda all worked out – health care then cap and trade – on and on. Maybe we are finally getting somewhere.

    As more folks lose their jobs – pols I mean – maybe change can take place…the entrenched uprooted.

    I can only hope this is true…They might even listen to Tall Paul now….from the article…

    “To put it simply, in no sense would these capital market institutions be deemed “too big to fail.” What they would be free to do is to innovate, to trade, to speculate, to manage private pools of capital – and as ordinary businesses in a capitalist economy, to fail.”

    MEH – Was it you who said “Just limit the leverage and be done with it?”

  8. Winston Munn says:

    In short, isn’t Volcker simply saying, “Yeah, but it’s different this time”?

  9. cognos says:

    This is so easy to peg: Volker does – not – get – it. I dont find his ideas intelligent or insightful. This is no surprise, he’s 83 years old and hasnt done much for 30 yrs (best 30 yrs of American economy?).

    Why in the world would he make some key contribution, now?

  10. torrie-amos says:

    could be wrong, yet, read as major league pulling back, yes we need something, we need to work together, yeah, then he fades with real ideas that can be implemented, imho, it’s still all about leverage, imho, david merkel said it best yesterday

  11. bsneath says:

    cognos Says: “Volker does – not – get – it….. Why in the world would he make some key contribution, now?”

    Perhaps because, while he has forgotten more than the rest of us will ever know about financial risks, he still has the best mind out there to make the right decisions for the protection of the citizens against the greed of Wall Street. Other than that, I would agree with you.

  12. cognos:
    You think the last 30 years is the best 30 years of the economy? When 15 of those 30 was at best a mirage?

  13. rktbrkr says:

    Adam Smith more than 200 years ago advocated keeping banks small

    very simply “don’t put all society’s eggs into one basket”

    Right now we have most of our eggs in only 4 baskets with another 15 baskets guaranteed immortal life by the US.

    This handful of banks control the Fed which provides them with virtually free money which they lend back to the US at 3% and make enormous risk free profits. Their small and midsize competitors don’t have this same access to free money and are dying weekly, meanwhile taxpayers pay for this rotten system. And the banks lobby the lawmakers to guarantee this system continues and BB gets another 4 years as his (immediate) reward.

    O’B and the Dems have been gutless continuing the Bush status quo with the rotten banksters. The Repubs are successfully shifting the blame for this rotten system and budget deficits onto the back of the Admin – which really deserves it for being dumb & gutless.

  14. flipspiceland says:

    “Governing is o.k., but it can’t really be done. APPEARING to govern however, is the way to win re-elections”.

  15. wunsacon says:

    When Gramm-Clinton defendants say things like (about repealing glass-steagall):

    “I don’t see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn’t signed that bill.”

    remember that all these “solutions” helped us create an even bigger bundle of shit:

    “Watchdog: Bailouts Created More Risk in System”

  16. Joseph Martinez says:

    Volcker goes on to say:
    “To put it simply, in no sense would these capital market institutions be deemed “too big to fail.” What they would be free to do is to innovate, to trade, to speculate, to manage private pools of capital — and as ordinary businesses in a capitalist economy, to fail.”
    Sounds good ….
    “So should the need for a designated agency — preferably the Federal Reserve — charged with reviewing and appraising market developments, identifying sources of weakness and recommending action to deal with the emerging problems.”
    Do we also need to resturcture the Federal Reserve? There is just to much money in the system.

  17. wunsacon says:

    And this: ” Moreover, GLB didn’t deregulate anything. It established the Federal Reserve as a superregulator, overseeing all Financial Services Holding Companies. All activities of financial institutions continued to be regulated on a functional basis by the regulators that had regulated those activities prior to GLB.”

    Yeah, the Fed, apparently beholden to the bank execs and oblivious to fraud and bubbles, is a *greaat* regulator.

  18. KidDynamite says:

    Volcker’s piece was long, but disappointing.. He didn’t say anything of substance! We need to hold management, shareholders and bondholders accountable… EUREKA!!!! As the saying goes… “No sh*t Sherlock!” We (in the blogosphere) have been saying that for 15 months!

  19. km4 says:

    Volcker says although improved regulation and capital requirements are important, structural changes are critical.


    Simon Johnson’s said it in May 2009
    If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.

    Yet nothing has been done….why ?

    Because the Obama admin and our corptocracy infested Congress has NO WILL to change the status quo so the US economy will continue its over-dependence on Financial capitalism ( asset bubbles, ponzi schemes ) and Americans will get more ‘extend and pretend’ and kicking of the can down the road….

  20. km4 says:

    Good, short interview with economist Joe Stiglitz: No position in White House given bankers don’t like him because he speaks truth to power and he’s buds with Larry ‘deluded hubris’ Summers ;)

    Replace Summers with Stigliz and maybe we’ll get some banking reform.

    Until then nothing but more bullshit pablum intermixed with some hopium but vampire squid from hell maintains complete control of Congress and Obama economic team.

  21. hgordon says:

    Why a NYT op-ed ?

  22. km4 says:

    Watchdog: Bailouts created more risk in system

    The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP.

    “Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car,” Barofsky wrote.

    Much of Barofsky’s report focused on the government’s growing role in the housing market, which he said has increased the risk of another housing bubble.

    Over the past year, the federal government has spent hundreds of billions propping up the housing market. About 90 percent of home loans are backed by government controlled entities, mainly Fannie Mae, Freddie Mac and the Federal Housing Administration.

    The Federal Reserve is spending $1.25 trillion to hold down mortgage rates, and millions of homeowners have refinanced at lower rates.

    “The government has stepped in where the private players have gone away,” Barofsky said in an interview. “If we take government resources and replace that market without addressing the serious (underlying) concerns, there really is a risk of” artificially pushing up home prices in the coming years.

    The report warned that these supports mean the government “has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor.”

    so what did the 19 too greedy to fail banks get ?
    $12 Trillion in TARP with no burden

    what do American taxpayers get ?
    the financial burden

    There has never been a bunch of greater and outright corrupt liars and thieves as there has been in the U.S. government in the last 10 years. RIP America as we once knew it….

  23. LLouis says:

    I’m not an expert in economics, I like to read about it especially since the last three years, does any one can tell who could be the Paul Volcker of the 2010′s ?
    The man (or maybe woman) who could take control of the U.S. locomotive economy, take it off its current tracks, drive it through the woods for some time, and finally arriving on a much better path like Paul Volcker did in the 80′s.
    Maybe I didn’t read enough about it, but it doesn’t seem obvious that someone could have the same impact as Volcker had, unless Bernanke is that man and he still has a lot to do…

  24. snapshot,

    re: Q: not that I recall, but for a quick answer to this current conumdrum, I’d go with it..

    I was referring to Archimedes, recently..

    w/this..”…Archimedes was talking about leverage, one of his favorite topics. He said, “Give me a place to stand on, and I will move the Earth.” The Sicilian from Syracuse probably knew more about mechanical leverage than anyone of his era, which was the third century BC, but he didn’t know about financial leverage. Some people are still finding out about financial leverage, particularly on Wall Street, and doing it the hard way…”

  25. snapshot says:

    Mark E Hoffer @ 2;15….Thanks for responding…I always learn something new when you post. I never know what it will be about. But I learn. I appreciate that.

  26. cognos says:

    Who was the guy who said — “15 of the last 30 yrs (of economic growth) have been a mirage”?

    This type of insanity, stupidity, sillyness is rampant and unfortunate. We have had approx 3% of GDP contraction and simultaneous deflation. The latter is very painful… deflation is the main driver of periods like the depression… thankfully the Fed knows this and is working hard to stop prices from declining.

    But it is ONE YEAR of negative economic growth… not 15/30. We have a wonderful 2-3% annual avg real growth rate and should be able to straighten monetary policy out to get back to +2% inflation.

    We are wealthy. Actually, super-wealthy. We have condos, car, computers, food, media, and travel/recreation to levels that are already absurd. We have the problems of an ultra-wealthy society — ultra-low interest rates, govt entitlement spending, wasteful imperial wars, bubble/bust speculation and corrupt govt.

    These are just signs of how wealthy we are… in the coming recovery and return to business cycle growth… its going to get worse. We will shortly be growing nominal GDP at roughly $1T/yr. This is an average of $10,000/yr per household in income growth.

  27. Mannwich says:

    @cognos: I know I shouldn’t, but here goes, against my better judgment. Are you an idiot or do you just play one here at TBP?

    Those items that you mention does not constitute real “wealth” when you factor in that much of it has yet to be paid for. How is this not clear to you?

    We’ve been in a massive credit bubble for at least 30 years, probably longer. Therefore, much of that “wealth” you mention above is an illusion because it’s not been paid for.

  28. snapshot,

    seriously, glad you appreciate it.

    if you like ‘wildcards’, try some of this..

    he covers a lot of ground, at the beginning, but it tightens up toward the end..

  29. clawback says:

    Mannwich, don’t feed the trolls ;-)

  30. mcHAPPY says:

    Like Mannich, I know I shouldn’t but…..


    Two points:

    1) Do you know anything about Paul Volcker at all? The man helped rid the US of stagflation in the 1970′s and his policies and actions lowered inflation from mid-double digits in the early 80′s to around 3-3.5% a few short years later. Yeah, that guy is a douche. He set the stage for what should have been the best 30 years ever only to be destroyed by Greenspan and subsequently BB.

    2) I would love to hook up and go drinking with you some time because anyone who believes the shit you just wrote (11:20am and 2:20pm) must be living one hell of a party. What happens when you have to actually start paying for things? What happens when lenders start to doubt if they will be paid back, and if they do, what will the future payment actually be worth? Having STUFF does not equate true wealth.

  31. Pete from CA says:

    cognos, when I have to decide whether it’s you or Volcker who does not get it I know whom to choose…

    Are you an investment banker or real estate agent by any chance?

  32. Mannwich says:

    @clawback: I know, I know. It’s pointless. I honestly think that like the old HWanger (the new one is much more measured and thoughtful), cognos is merely trying to poke us all here at TBP with a stick just to get a reaction, so I shouldn’t…….it has to be that, right?

  33. Mannwich says:

    @McHappy: Amazing, isn’t it? That whole post by cognos bascially sums the culture here in the U.S. today. If you possess a bunch of shit you don’t need (no matter if it’s paid for or not), you are somehow “wealthy”. He HAS to be fucking with us, because he CAN’T be THAT stupid. I’ve read many of his other points, and although I don’t always agree with him, they’ve usually shown a little more sense than that one.

    Just jack up the credit card. As long as you have more discretionary shit than your neighbor, you’ll be rich.

  34. Mannwich says:

    @McHappy: Amazing, isn’t it? That whole post by cognos bascially sums the culture here in the U.S. today. If you possess a bunch of shit you don’t need (no matter if it’s paid for or not), you are somehow “wealthy”. He HAS to be fucking with us, because he CAN’T be THAT stupid. I’ve read many of his other points, and although I don’t always agree with him, they’ve usually shown a little more sense than that one.

    Just jack up the credit card. As long as you have more discretionary shit than your neighbor, you’ll be rich.

  35. Chz says:

    Can you provide some insight on Neil Barofsky’s quarterly TARP report to Congress?

  36. cognos says:

    Do you guys know that US total “net worth” is roughly $100T? It rises steadily over time. Kinda makes $2T in bonds to China look pretty meaningless, eh? Do we have too much debt for $100T in net worth and $16T in GDP?

    Where, again, is “all this stuff we have not paid for”? That is just a silly concept. One person saves their money… and another person borrows. These two accounts balance (for the most part). Money does not MAGICALLY pay interest. It ONLY pays interest when it is borrowed. Hence, “savings” gets recycled into “borrowing”. And borrowers (outside narrow crisis periods) pay more in interest than losses. There is no 10-yr or 20-yr credit card debt outstanding, there is no world where we have “no debt”… because that is a world with “no savings” right?

    It terms of people criticizing cars, condo, travel, and food… “wealth” is whatever we want it to be. I am not in the “should” school of thinking. If I were I might say we “should” emphasize education, classics, science, and art a little more and video games, casinos, media, and sports a little less. But I fully respect personal choices. The economy is one of individual agents, who get to be wealthy in the way THEY want… not the way YOU might want them to.

    And finally, in terms of Volker — I think you all overstate his role in 1978-83. I think basic “business cycle” had alot to do with things and technology cycle. But hey, I definately agree he whipped the 5-10% inflation we had then. He did it through aggressive, independent monetary policy. Today we have a deflation problem, we should do the same thing — aggressive, independent, monetary policy. But some 83 y.o. guy from yester-year is not the problem.

    And how is it logical, that Volker deserves credit for 25 good years, he “set the stage”, and yet most of the other judgements expressed here seem “month-to-month” in nature? Seems like we have a pretty good 1-yr up trend, and pretty good 20-30 yr trend. We had a bad decade 1999-2009 because of wars, a real-estate bubble, and poor governance. Those problems seem mainly solved.

    Where am I wrong?

  37. clawback says:

    “cognos is merely trying to poke us all here at TBP with a stick just to get a reaction”

    Mannwich, I think so. I used to think it was a Treasury troll (entry-level) doing propaganda, but now I think it’s just petulance. Or Tim Geithner’s cousin. (Or franklin411′s alter ego.)

  38. Winston Munn says:


    Good to keep in mind that debt is nothing but a claim against future productivity. We are living now on the productivity gains of many future years. When the potential future productivity gains equal the total amount of debt, the state of solvency is reached. From that point forward, the only real productivity gains that can occur come from elimination of debt.

  39. solanic says:

    I’ve been wondering about this for weeks so I thought I’d make it my mission in life:

    Why is hardly anyone ensuring the Financial Crisis Investigation Commission does it’s job ???!!!!

    It’s getting no press. There is a pathetic number of Fans in Facebook, followers in Twitter, etc.

    Here’s my naive theory: “Join” their social media feeds believing they will do their job.

    My I-Am-Fucking-Pissed theory: “JOIN” their social media feeds, raise hell in the press and MAKE them do their job.

    This is me:

  40. Winston Munn says:

    Sorry about the quick double post, but to continue my thoughts it is this debt-elimination real productivity gain that prevents bank stimulus from working in a debt-deflation recession. In order for there to be a multiplier effect from bank stimulus there are two necessary conditions: a willingness to lend, and a willingness to borrow.

    It takes many years to to pay down our magnitude of debt. Until the debt-solvency-productivity triangle is back in balance, there can be no sustained debt-driven growth.

  41. cognos says:

    Hmm.. I think my response was lost:

    1) US net worth is approx $100T. We are not overly “in debt”. Kinda makes the $2T the Chinese built up over the last 10-yrs as pretty small, eh?

    2) Savings and debt balance. Money does not MAGICALLY pay interest. You save, you lend it to some (govt, bank, bond) and that money gets borrowed. Borrowers have a very good, very long record of paying interest far in excess of losses. Occassionally there is a crisis period (2008) but there is no “20-yr credit card debt bill” coming due. That mis-understands very basic points about banking, savings, borrowing and lending.

    3) What is means to be WEALTHY is not really for me or you to decide. I dont necessarily believe in micro-managing “shoulds”. Sure, I might say we “should” emphasize education, science, classics, and art a bit more. I might say we “should” emphasize health care, sports, casinos, media alot less. But those are really personal choices. People spend their money the way THEY want, not the way YOU want. And one simply CANNOT argue that condos, cars, food, and entertainment are WEALTH.

    I think those of you who are “dissatisfied” or who see the economy “doing poorly over the last 10-20-30yrs” despite all this wealth, have valid points. But you are expressing them poorly, and your misunderstandings do not help solve the underlying problems.

  42. soloduff says:

    The entire Volcker op-ed cited by Barry deserves close scrutiny. The last para quoted by Barry gives away the game re one leg of the “Volcker Rule”: Volcker says, “keeping banks small . . . . does not really seem feasible . . . .” Reading the rest of the article reveals that Volcker also waffles on the other leg of the Volcker Rule when he heralds Obama’s proposal to “limit” (not “forbid,” etc.) proprietary trading by big finance; and also fails to specify what, precisely, constitutes proprietrary trading subject to “limit.” We need to ascertain (Barry?) exactly how much of a “limit” Wall St. can live with; which in turn will determine whether Obama’s Volcker is to be taken seriously on the score of needed change.

  43. Winnie,

    I appreciate the Vector you’re coming from, though, see this: “…The snapshot theory fails the minute you take a series of snapshots and develop expectations for the next snap shot, because it assumes a continuous containment system, with no jumping. In old economy statistics, it’s called regression. Short-sellers live on this scenario…”
    it’s, about, half-way down the page..

    to your point, we’ve, long since, passed: “It takes many years to to pay down our magnitude of debt.”, in the present tense, the Machine would be flashing “TILT”..

    or, IOW, we’ve entered the realm of “Arithmetic Impossibility”, in re: “Debt Repayment/Future Claims Satisfaction”.

    If We had *Real Leadership, much like 44′s Campaign-promise: “We’ll discuss Health-Care reform on C-SPAN”, We’d take a 3-month Holiday, figure out who’s been slipping the Horse-meat into the Stew, deactivate their Financial Holdings, and re-boot..(as a short-story)

  44. Mannwich says:

    @Winston: I totally agree. Perhaps I should have made my point more clear but that’s sort of what I was implying. Borrowing to the extent that we (and other nations) have has merely stolen from future generations and put off the day of reckoning to another time and/or group of people. The day that time comes will not be a pretty thing to witness. Thanks for adding some clarity to my point.

  45. snapshot says:

    MEH @ 2:42

    I tried to follow…Fundamental equation of unified field theory…Way over the top for me.

    I picked up a few things: The fact that you need to step back – out of a situation to view it….the helixes/ circles – complexity. That our perceptions are colored by our own experiences.

    The fulcrum – economic speciation…where we are headed has catastrophic consequences….. Unless we build that bridge…

    “Effective education reduces the cost of government and increases individual liberty over time.”

    Truly, I was lost through most of it.

  46. cognos says:

    A few basic points:

    1. US “net worth” is roughly $100T. It has grown steadily over time. We are not overly indebted across the board.

    2. Savings and debt balance. Every $1 of “savings” is loaned to someone else as “debt” (govt, bank, loans, bonds). Money does not magically pay interest.

    3. Wealth can be whatever form people want it to be… but it is always in goods and services. Money is not wealth. It is only a means to wealth. I dont really think its productive to say we “shouldnt” use our wealth for condos, cars, media, sports, etc. People do what they want, they seem happy.

    4. There is no “20-yr credit card bill” coming due. Debtors have consistently paid more in interest than losses (outside narrow crisis periods) over time. Credit card debt is quite short-term in its duration. Back in 2000 we had huge surpluses! Issues tend to be cyclical, while fear-mongering by idiots is ever present.

  47. wunsacon says:

    “Talk is cheap. Barbers give it for free with a haircut.”

    Read that in a fortune cookie just now. Seems appropriate for the thread headline.

  48. wunsacon says:

    Cognos, FWIW, you provide some good points, a different point of view, and food for thought, even if I don’t necessarily agree with all of it….

  49. km4 says:

    cognos sounds like a deluded Goldman Sachs automaton ;)

  50. wunsacon says:

    …or, er, a lot of it. I guess I’m saying I wouldn’t want it to be an echo chamber in here. It’s useful to hear other opinions at the very least to challenge our own notions and retest their validity (or change them).

  51. km4 says:

    for Cognos ….the deluded Goldman Sachs automaton

    Inside The Great American Bubble Machine
    Matt Taibbi on how Goldman Sachs has engineered every major market manipulation since the Great Depression

  52. snapshot,

    obviously, it wasn’t /that far/ “over your head”, you picked up/out, quite a few of, the major points..

    that piece is a little ‘sloggy’–happens when covering so much ground–but, as I noted, it tightens up toward the end..

    anyway, with that, if I were you, I wouldn’t worry about ‘swimming in the Deep End’; you, obviously, have the flippers for it..

  53. clawback says:

    “2. Savings and debt balance. Every $1 of “savings” is loaned to someone else as “debt” (govt, bank, loans, bonds). Money does not magically pay interest.”

    cognos, if only this were true…. alas, alas. I’ll grant that (nearly) every dollar of savings is loaned out as debt, but not all debt comes from savings. Surely you mean something else. Over the last 20-30 years, the accumulation of debt in our economy (as a whole) has far outstripped the accumulation of savings, but debt accumulation and future obligations (like Soc Sec. and Medicare) have also come faster than productivity gains would imply is warranted. In other words, under certain conditions you can allow debt to grow faster than savings, but only if the debt is used (on net) to increase productivity. Otherwise you end up in situations where the only solutions are default, inflation and/or a greatly reduced living standard. So, as far as that goes, it IS important whether debt is accumulated for investment or for consumption.

  54. cognos says:

    So clawback… what you are referring to is the role of credit and banking in the money creation process. Whereby, yes… a bank can “loan money” using leverage and they create debt. But remember this ALWAYS also creates savings, as that money was deposited somewhere… as the debtors uses it to pay someone.

    Where is the “debt” that does not come from savings?

  55. cognos says:


    As a society, it is meaningless to “fund” broad future govt obligations. This is absurd. How long do you want to fund them for? 10 years? Why not 100 years? Why not 1,000 years? Well the govt can just put that number of $ in a fake account for you. None of that would change the future tax / spending / interest rate /in- or de-flation dynamic.

    What about funding our future military obligations?
    What about funding our future obligations to congressional secretarys?

    The govt has a fairly reliable income stream and access to credit lines. It does not really need to “pre-fund” things.

    The real problem in govt is — govt waste. The rest is just a distraction. IF the money is not wasted, its good to spend it. Good investments (education, infrastructure, science research) pay off well over time. If it IS wasted, then stop spending. Our govt probably wastes $400B/yr across all departments (incl and espec – medicare and the military). But nobody wants to talk about WASTE…

  56. clawback says:

    “But remember this ALWAYS also creates savings, as that money was deposited somewhere… as the debtors uses it to pay someone.”

    Yes, accounting entries create….well, accounting entries. Sure, call it “savings” if you like, but even still, go one iteration further with your little model. The person the debtor pays with the borrowed funds did not cough up the goods and services he provided ex nihilo. He had to pay something himself, to a third or fourth person — whether for raw materials, labor, etc. He might even be in debt, too. There’s no way of knowing at the outset who is doing the “saving.” Which is precisely the problem. It doesn’t matter how many accounting entries you create, and it doesn’t matter that logic requires them to match up (at least for a while). The problem is that the “savings” isn’t real savings in the economic sense — i.e. forgoing consumption NOW in order to consume/invest more LATER.

    Imagine an island economy. The only economic good is fish. You can save fish for eating later, or you can loan it out to someone who will pay you back in fish (plus fish interest) at a later time, but you can’t “create savings” by the fractional reserve process in a fish economy. Unless, that is, you introduce a paper currency. Imagine playing fish banker with paper fish certificates and fractional reserve lending. You will quickly find out the meaning of real savings vs. “savings” via debt creation.

    Put simply, you are using the word “savings” to describe something else. Or, we are using the term in two, entirely different senses of the word. (You noticed that, right?)

  57. clawback says:

    “As a society, it is meaningless to “fund” broad future govt obligations. This is absurd. How long do you want to fund them for? 10 years? Why not 100 years? Why not 1,000 years?”

    Agreed. I never made this straw-man argument. I’m not sure anyone else did, either. Whose post are you responding to, here?

  58. cognos says:


    You specifically mentioned your concern about “debt accumulation and future obligations (like Soc Sec. and Medicare)” @ 925pm.

    Your analogy on fish/island economy is silly in the face of the massive complex global economy today. Those islanders could save fish, yes. But they could no more save, “future healthcare” or “future tech research” than we can. The only thing this says is — “we need to stock bigger pantries”.

    If a hollywood movie style armageddon is about to happen, maybe. But most things that make us wealthy are services (healthcare, education, leisure). These are impossible to “store”. Even most of our consumption goods are silly to store (technology).

  59. cognos says:

    What this leads to then is pointing at “debt levels” and how many USTs China holds. What non-sense.

    Because storing “money” is meaningless in a crisis, right? If there is a crisis… and everyone has money… then it just causes inflation. Storing “money” is not really helpful for “funding future liabilities” that cannot be stored, like healthcare.

  60. clawback says:

    That’s OK cognos, thanks for trying.

  61. Lugnut says:

    hgordon Says: Why a NYT op-ed ?

    Because they’ll publish political position pieces on behalf of the administration.