Once upon a time American banks supported the economy by financing the growth and development of industry. For the last many decades they’ve had the opposite effect by plowing money into existing assets and loading the economy down with debt. The consequences have been disastrous, economist Michael Hudson told Paul Jay of The Real News Network this week.
When the Industrial Revolution was taking off, bank reformers in England, France and Germany believed industry would develop banking that would serve its needs. “Instead of banking being predatory,” Hudson explained, “as it had been for thousands of years, instead of banks lending against real estate and assets and foreclosing and putting people in debtors prisons, for the first time in history banks were going to begin to make loans to actually create new means of production, to create industry, to finance factories and equipment that weren’t already there.”
For many decades this was the case throughout Europe. Then World War I came, and the relationship between banks and industry reversed.
“You had a reversion to the English-Dutch-American kind of banking that was called merchant banking,” Hudson said. “Banks would make loans to ship goods that are already produced, or they’d make loans against real estate. So today you have 80 percent of bank loans in America and England and Scandinavia are all loans for real estate. So, essentially the function of the financial sector has been simply to load down the economy with debt without helping the economy grow.”
According to Hudson, there is an alternative. “What you really want is for banks … to be able to finance economic growth instead of just eating into growth as an overhead.” This could be done through a government-run bank. “It would make loans for long-term purposes to serve the economy and help the economy grow, which is what governments are supposed to do.”
“That’s not what banks are supposed to do,” Hudson continued. “Banks are supposed to make money. And, unfortunately, they can make money most easily ... by being parasitic, not by being productive.”
For a full transcript of Hudson and Jay’s conversation, click here.