“Too big to fail” might be a necessary maxim in order to keep the banking infrastructure from blowing itself up but there are unintended consequences that could be hurting us, especially when it comes to innovation. Remember - banks create money, not the Fed (or your own central bank wherever you may be). By some measures, banks create over 95% of all the money in our economic system; leaving a tiny fraction to our respective Treasury. And the more the banking system gets concentrated into bigger banks, the more inequitable the situation becomes and the worse off our economy.
Richard Werner can sometimes ride the loopy train (such as when he cautions us against a future of microchips embedded in our bodies) but he is a very good resource when it comes to certain macroeconomic and monetary issues (such as where does money come from). In this particular interview, he makes a number of important points.
The first is that increasing the money supply doesn’t automatically cause inflation, at least not the type of price inflation that people are used to. For example, if banks are creating money by making loans for the purchases of assets (e.g. real estate) then you see asset price inflation but not necessarily consumer price inflation. The latter happens when banks make loans for consumer purchases. The best use of new money is when it’s used for new business creation.
The US has been very good at this in the past but for the past couple of cycles they have not; they have been fueling asset bubbles, instead of investing in economic growth and increasing productivity. It is possible, however, that the Fed raising rates as high and as quickly as they have is intended to starve speculators of excess money and prevent them from putting it into non-productive things (e.g. crypto). However, they cannot force people to make better investment decisions, so that may be magical thinking. And the interest payments that they are now making on government debt must be pretty big given that we are at a short-term rate of 5% with the GDP to debt ratio at 120%. The longer this runs, the higher the interest payments, sowing the seeds of inflation. So, thwarting inflation is not the aim of the Fed no matter what they are saying in public.
The second observation that Werner makes (39 mins into the video) is that Germany has the highest amount of Hidden Champions in the world - SMEs that are a total global leader (top three) in their particular niche. Germany has 1500 Hidden Champions; the US comes second with 320. He also says that Germany has the same absolute amount of exports as China does, despite having a much smaller population, and half of these exports comes from these Hidden Champions. You can only do this if you are very competitive and highly productive. Why are these firms able to successfully implement the latest technology? They get the finance they need from small, local banks (not the big banks). Germany has 1,500 small community banks out of 1,800 overall, most of which are not for profit. They only lend to companies in their footprint area and not lend outside their geographical area. Lots of small banks > lots of high growth.
The US is going in the opposite direction. Every time there is a financial crisis - like the one we are going through now - more and more small banks go out of business and are not replaced. And big banks, like JP Morgan, get to buy the assets of the busted banks for cents on the dollar and eventually drop the assets that they don’t like. There used to be 30,000 banks in the US and now there are 5,000 and declining (over 5,000 banks lost in the last 25 years). We don’t have productive allocations in the US. Instead, we are getting creative accounting, share buybacks, and other ‘clever’ tricks but not what we need for innovation (except in accounting and legal).
In future, when we create a mass collaboration community of any kind, we should heed the warning of leaving investment decisions to central authorities. Instead, these should be micro decisions made at a local level in order to maximize proximity to innovation.
There is an extremely fun film called F is for fake which is basically about a guy who sells fake Picassos and Matisse paintings. If we could make a fake Dollar bill as an art piece so good that nobody could tell its fake, would that make it real?