Bank bailouts and the rentier class

Robert Kuttner has a great column about the “rentier class” and the struggle between “between the claims of the past and the potential of the future”. See responses by Adam Levitin, Mike Konczal, Paul Krugman, Yves Smith and Matt Yglesias.

I want to make an obvious political economy point. The most organized and active agents of the rentier class are, of course, banks. As Konczal points out

[Financial sector] profits are based off milking the bad debts of the housing and credit bubbles while Americans struggling under a crushing debt load. Instead of sharing the losses, the financial sector has locked itself into the profit stream and left the real economy to deal with the mess.

Financial sector lobbying plays an outsized role in tilting policy away from risk-and-loss-sharing arrangements and towards an alchemy of blood from turnips.

But it didn’t have to be this way. Banks, after all, are not only creditors. They are also the economy’s biggest debtors. In theory, bank loyalties ought to be mixed. On the one hand, banks prefer deflationary, zero-forgiveness tight-money policies, to maximize the real value of their assets and of the lending spread from which they draw profits and bonuses. On the other hand, troubled banks are very happy to support loose money and expansionary policy, even at risk of inflation. For bank managers and shareholders, it is bad to have the value of past loans eroded by inflation. But it is much worse to lose their franchises entirely, to have their wealth, prestige, and freedom put at risk in the aftermath of an explicit bank failure. When banks are in trouble, they are perfectly happy to support all manner of expansionary policy, as long as short-term interest rates are kept low. Even a broad-based inflation helps troubled banks twice over, by increasing borrowers incomes and by steepening the yield curve. Increased incomes ensure that loans will be repaid in nominal terms, preventing insolvency due to credit losses. A steep yield curve permits banks to recapitalize themselves via maturity transformation, using deposits to purchase Treasury notes while the central bank promises to hold short rates low for a few years.

But banks’ interests are aligned with those of debtors only to the degree that banks, like debtors, are at risk of real insolvency. When we committed to a policy of “no more Lehmans”, when we made clear via TARP and TGLP and the Fed’s alphabet soup that big banks would have funding on demand and on easy terms, when we modified accounting standards to eliminate the risk that bad loans on the books would translate to failures, when we funded their recapitalization on the sly, we changed banks. We transformed them from nervous debtors into pure rentiers, who see a lot more upside in squeezing borrowers than in eliminating a crippling debt overhang. And since banks are, shall we say, not entirely disenfranchised among policymakers, we increased the difficulty of making policy that includes accommodations between creditors and debtors, accommodations that permit the economy to move forward rather than stare back over its shoulder, nervously and greedily, at a gigantic pile of old debt.

Our problem is not that our banks are still weak, our financial system too fragile. Our problem is that we have made our banks strong and cocky, so they needn’t care about abstractions like lives disrupted, production foregone, human capacities undeveloped. We’d have better policy if banks themselves were at risk of foreclosure when Joe Sixpack still can’t find a job. We should work to put them in that position.


23 Responses to “Bank bailouts and the rentier class”

  1. RichardW writes:

    This analysis seems wide of the mark to me. Where is the evidence that banks are among those pushing for deflation/austerity?

    Even considering only traditional banking activities — in a slump, surely banks holding significant amounts of mortgages and loans worry more about credit risk than inflation / yield curve risk? Even if the government has sworn to protect bank creditors (the meaning of “no more Lehmans”), that doesn’t mean their equity can’t be wiped out.

    And our biggest megabanks (the ones who are “organized and active” in the political system) are even less likely to support monetary or fiscal austerity. These banks earn a very significant portion of their revenues from highly cyclical investment banking activities.

    Brad Delong made the point (in response to a Krguman article) last fall that there is no natural domestic hard money lobby nowadays. I agree. Today’s hard money lobby consists not of rentiers in the usual sense, but an axis of foreign creditors and opportunistic politicians.

  2. Prakash writes:

    I disagree with Richard’s echoing of Brad de Long’s statement. There is a natural hard money lobby, and a very powerful one, retirees.

    Maybe their lobby is enfeebled a little by the fact that their primary expense, medicare is taken care of. But they still are very much in favour of hard money.

  3. JKH writes:


    “The creditor class views anything less than full debt repayment as the collapse of economic civilization.”

    This is absolute drivel. Banks price for expected losses and reserve for unexpected ones.

    Why can’t the blogosphere learn something about banking instead of engaging in this recurring mass socialist defecation? There’s nothing much new in any of these articles.

    Reset capital requirements, and the problem is solved at the fundamental level. Everything else follows from that, functionally.

  4. […] a comment Steve Randy Waldman says: The most organized and active agents of the rentier class are, of course, banks … But […]

  5. […] is Interfluidity: “Robert Kuttner has a great column about the “rentier class” and the struggle between […]

  6. Reverend Moon writes:

    Wouldn’t the experiences of the last 4 years reveal that what you just wrote about pricing and reserves for unexpected losses to be wrong? If it were true there would have been no need to change accounting standards, no need for tarp, or zirp. Banks wouldn’t still be carrying helocs on underwaters on their balance sheets. They wouldn’t have needed to arrest the appropriate resolution of property rights for those who cannot afford those rights anymore, to the detriment of the broader economy. Is the balance sheet recession resolved now that the bad debts have been written off against those loss reserves? Maybe (probably) I don’t understand banking either. My comment is a question as well. What am I missing? Or are you saying that doing something badly is still doing it?

  7. Reverend Moon writes:

    I guess you already answered my question with your remark about capital requirements.

  8. Bob Dobalina writes:

    There can be a calamitously abrupt default (Lehman Brothers) or a careful and beneficial restructuring (General Motors).

    …at which point I knew not to take Kuttner seriously.

  9. Knute Rife writes:

    Not drivel. That line is the message in every “debt is a moral obligation” press release the banks deliver. It may not be what they’ll settle for, and they of course plan for less, but it is definitely their opening position at the bargaining table.

  10. George Vreeland Hill writes:

    President Obama bailed out the banks.
    However, the banks went on to take homes from people in record numbers of foreclosures.
    A large number of those homes are still on the market and empty.
    Many are showing the affects of nonuse.
    The worst thing for a house is to be empty.
    All kinds of things can happen to it from vandallism to natural damage.
    In time, the property will have less value.
    Instead of working with those who are having financial problems due to the economy, the banks just take.
    The banks have been bailed out.
    They were helped with incredible amounts of money.
    Yet they will not help the people.
    They would rather have a house sit there and rot away instead of letting people stay in them to avoid being homeless.
    Where is Obama when it comes to people with little or no money?
    He will help the rich, but not the poor.
    Investment firms are buying houses at well below their values for future sales, thus making big profits.
    The firms visit a house and look for any and everything that needs fixing or an upgrade.
    Even if something is in great shape, they will say it is out of date and needs to be replaced.
    In the end, they get the house cheap.
    Why is this allowed?
    The rich get richer while the poor get, well, you know.
    Greed ruined the economy in the first place.
    Now it is ruining lives.
    The future looks scary right now.
    The people are accepting what is going on instead of rising up.
    We are being taken.
    Our own tax dollars are even being used against us.
    It is time to wake up or forever be a slave of a system that is not on your side.

    George Vreeland Hill

  11. Doc at the Radar Station writes:

    “There is a natural hard money lobby, and a very powerful one, retirees.”

    Yes, that *should* be obvious! Getting older hasn’t changed that much over the generations. You still tend to become more politically conservative and increasingly obsessed with taxes and savings, etc. I have been wondering for over a decade now about the Boomer generation’s journey through the snake of life and it’s disproportionate macroeconomic impact at every stage. I first noticed it with regard to the endless NASDAQ stock watching in 1999 (check out what my retirement is doing!) and the beginning of the housing bubble following (peak earning years). But, the inflation of the 70s also seems to fit the idea of a disproportionate amount of young people starting out on their careers with high marginal propensities to consume/low savings, and a NEED to leave the relatively small homes of their parents and to form new households. Also, as you approach retirement investments become more conservative as well, and money migrates into lower-yielding fixed income, lower risk, etc. If more and more (older) people are stuffing larger quantities of money into low risk/low yield investments shouldn’t this obviously be deflationary? And shouldn’t those folks NOW want a guaranteed return on that relatively low-yielding debt?

  12. Scotto writes:


    There should be a natural hard money lobby, represented by retirees but this is not the case. I’m not going to say that I can account for all of the reasons, but I’ll offer two:

    1) Retiree’s don’t understand the inner workings of our financial system better than anyone else. They don’t want inflation, but they like to see their stock portfolio and home values increase.

    2) Their lobby group AARP is a financial services provider, or sponsor or financial services. Their interests are aligned with the reset of other banking institutions and asset management firms.

    On the topic of banks choosing between higher rates versus lower rates, they really aren’t in the position the article would have you believe. The consumer market and the institutional market are not so tightly connected. Don’t believe me, look at how much LIBOR has dropped vs say 2007 and then compare the interest rate on your credit card in the same two periods.

    Lastly, the article assumes that banks are single minded entities that have a long term view of what’s best for them. They don’t. They are made up of underwriters, asset managers, and providers of other services ranging from consumer credit cards to M&A advisory. Bank(er)s want, money to keep moving and loan defaults low. Given that banks generally have a loan long/ borrow short model, it’s not really surprising that they would advocate policies that would seem inflationary.

  13. […] article kicked off. Krugman at his blog digs out Who Are the Rentiers? Over at Interfluidity, Steve Waldman discusses Too Big To Fail and rentiers. And Asymptosis has a must-read post, Demand Inflation Now, on the […]

  14. hhoran writes:

    I have a problem with the near-exclusive focus on finance and financial industry lobbying. The “political economy” rentier problem is much larger. Look at energy. Look at military suppliers. Look at housing/developer interests. Look at telecom. Look at health care. In each case you see a large sector of the industry where revenue and profit growth are heavily influenced by Washington. In each case you’ve seen major consolidation that can’t be justified by scale economies or other legitimate “market forces” but is clearly driven by “economies of political influence.” The leverage from “Too Big Too Fail” size is just one part of this. In every case you see massive corporate shifts away from innovation and competition towards rent extraction and oligopoly power. These forces always existed, but starting in the 1980s and accelerating greatly after 2000, you see major efforts to strip away marketplace and regulatory constraints, and the steadily growing link between the rent extraction of these very major companies and the financing of (increasingly expensive) incumbent re-election campaigns.
    Non-financial rent-extraction doesn’t raise issues of systematic risk, but the “rentier” question is key to larger “stagnation” and “recalculation” arguments, and of course to basic income distribution issues. You can’t talk about “Finance” (or “Energy” or the others) as homogeneous industries with homogeneous political agendas, as Steve’s post notes. There are lots of pieces of those sectors that remain innovative and don’t rely on rent-extraction or federally supported oligopoly behavior. But those pieces are small relative to the Goldmans and ExxonMobils and Boeings, and those bigger players are at the heart of both the “economic” and “political” issues here.
    America has two political parties. One is totally, fanatically devoted to helping certain large corporate interests protect and expand rent-extractive and oligopoly power, and would openly risk major crises and gut remaining social insurance programs because they feel that the political backlash would not be large enough to harm the larger redistribution agenda. The other party is also totally devoted to helping those same corporate interests protect and expand rent-extractive and oligopoly power, but would like to retain vestiges of social insurance programs and would like to reduce risks of new financial shocks because they fear the resulting backlash might slow down the larger redistribution agenda. Focusing on Wall Street is only touching one part of the “rentier” elephant.

  15. RSJ writes:

    I think there are several things going on here.

    First, the financial sector as a whole is a rentier. We are now delivering 1/3 of the corporate net operating surplus to the financial sector. That may have been manageable when total corporate profits were at an exceptional level, but it is biting now; the financial sector is impeding recovery. It creates an environment in which only declining wage shares and abnormally high overall corporate earnings are compatible with full employment, as a large part of those earnings are effectively taxed away by the financial sector. It is no different than the government imposing a large tax on earnings. All rent-seeking is a type of tax that reduces output and employment.

    About debtors versus creditors, now you are talking about households, not institutions per se. Certainly all public institutions will tend to favor creditors. This *also* impedes recovery and it also creates incentives for assets to be mispriced — as creditors who make bad investment choices are not punished. The mispricing of assets has second round effects on the economy. I view the Kuttner piece as being primarily about households, not banks. Ideally, the purpose of the capital markets is to price assets, not to time shift the wealth of savers. The latter is an unpredictable side-effect. As soon as the second goal dominates the first, you will see efforts to manipulate asset prices in order to protect the wealth of the powerful, and this has harmful effects on the capital allocation and employment.

    There is rent-seeking and there is the debtor-creditor divide. In principle, the two are different, although both are harmful to the economy. They overlap in this specific instance because the most visible creditors that are being protected are bank bond holders, and the most visible debtors are the households who owe money to banks.

  16. JKH writes:
  17. RSJ writes:


    Did you also notice how bank bondholders were missing in his 90/10 analysis?

  18. JKH writes:


    I did see that. It’s an important real world complication. But with or without it, I can’t find coherence in his story.

  19. RSJ writes:

    I think Mosler’s story is “coherent” in the sense that is part of a self-consistent logical model. But the model doesn’t resemble reality.

    Specifically, he argues that banks be money printing devices: as long as they lend in conformance to FDIC guidelines, then there will be no losses. In that case, capital requirements serve only as an interest rate management device.

    Personally, I’m not sure whether he really believes that there will be no losses, or whether the government should pick up the losses (and as the losses are paid for by new money creation, “tax payer” money is not at risk), or whether the losses should be ignored and the law of large numbers will make them disappear in some sense. Different comments of his support all three views.

    But whichever of the three interpretations holds, this is what he means when he says that banks are a “public private” partnership, and an “instrument of the government” for managing the term structure of interest rates. They merely lend money out according to FDIC credit models based off of zero liquidity costs, and anything that would cause them to increase rates charged to borrowers — e.g. capital requirements — should be managed solely by considerations of its affect on aggregate demand management rather than with a view towards controlling financial sector rent-seeking.

    It all makes sense in a banker utopia type of world. I’m not sure whether Mosler believes we live in this world — perhaps we *do* — or whether he thinks policy should be made as if we did live in this world. The view is coherent, but I’ve always been shocked that he has so many supporters.

  20. JKH writes:

    I’d agree and say his entire system is nearly coherent; it’s actually quite interesting.

    But the piece I’m referring to there specifically is the technical specification around private (equity) capital.

    My concern is consistent with a broader one about MMT more generally – which is its tendency to consolidate financial accounting at the highest possible level while dismissing the value of management accounting compartmentalization. In this case, it’s the equity account. Elsewhere, it may be the treasury account at the central bank, or the social security trust fund, etc.

    Part of the attraction for some followers may be the mystery of what is never said completely.

    Unfortunately, that can also breed zombie, faith-based parroting of revolutionary phraseology.

  21. vimothy writes:

    “Personally, I’m not sure whether he really believes that there will be no losses, or whether the government should pick up the losses (and as the losses are paid for by new money creation, “tax payer” money is not at risk), or whether the losses should be ignored and the law of large numbers will make them disappear in some sense.”

    The second of these, surely. Warren Mosler thinks that the government is both the principal borrower *and* principal lender in the economy.

  22. JKH writes:


    My delayed (sorry) response to:

    (comments closed there)

    “I think the game that you are imagining is one in which the firm can constantly update its price based on realized demand. In that game, you are absolutely right, there’d never be any point in hanging out on the horizontal line. If I know precisely what expenditure supply curve I’m experiencing, I’ll always price on the hyperbola. That’ll give me more revenue than any other point. I lose nothing, if I drop my price to the hyperbola, because I already know the realized goods demand / expenditure supply, and I choose the EBIT maximizing price.”

    That’s pretty much what I was thinking using continuous time as a simplifying conceptual device. But maybe what I was thinking doesn’t exactly depend on continuous pricing as a response to continuous time risk – see below.

    “In this second game, there is essentially no volatility. Or, more precisely, the expenditure supply is volatile, but by the time I set my price, it is in my information set. So from a decision-making perspective it is a known quantity, certain. And my best choice absent uncertainty is to always price on the hyperbola.”

    That’s a robust interpretation of continuous time risk combined with continuous pricing mechanics – but again, my conclusion about pricing strategy may not depend on a perfect continuous time pricing function in response to continuous time risk.

    “But if I have to fix a price when all I know is the expected expenditure supply curve, the price I choose will be defined by the intersection between expected expenditure supply and the ladle-shaped curve. Once my price is chosen, I’ve defined a rectangle of outcomes, and I await an uncertain quantity of blue syrup to be poured into that rectangle whose boundaries I cannot change.”

    Hmm … I understand that’s what you’re saying about the effect of discontinuity and related uncertainty on pricing strategy, but I’m still not sure why that needs to be the case – I’m not sure I see the downside of pricing on the hyperbola even with risk. Conversely, I don’t see the advantage of pricing on the kink versus the hyperbola. I don’t see what can go so wrong in pricing on the hyperbola in either continuous or discrete time – unless the expenditure supply curve becomes backward bending, as I described above. So I’m still missing something here, because I’m starting to repeat my core point.

    “In continuous time, the optimal strategy for a firm is, as you suggest, to always price on the hyperbola, but I’d argue that in general, it doesn’t have sufficient information to do so.”

    I agree it faces constraints in continuous information consolidation and risk management that impede continuous time pricing strategies.

    “If, in response to a temporary spike in goods demand / reduction of expenditure supply it drops to the hyperbola, and then there is a burst in order flow, it has lost a precious revenue opportunity.”

    This stumps me.

    First, I believe you mean “temporary spike in goods demand/ increase of expenditure supply”. And I assume you mean by “burst in order flow” the same thing as the first two. So I assume all three of these things mean a shift of the expenditure supply curve to the right.

    A shift in the expenditure supply curve to the right can occur in continuous time or as deviation from expectation in discrete time. I see no substantive economic difference between these two events (which is my motivation for simplifying to continuous time).

    In that context, I don’t see how the firm has lost a revenue opportunity due to a “burst in order flow” or a shift (continuous or discrete) of the expenditure supply curve to the right. The substantive question for me is what the effect is of a right shift in the expenditure supply curve in the two different scenarios – pricing on the hyperbola and pricing on the flat portion of the ladle. On that question, if anything I seem to come to the opposite conclusion than you. If there is a spike in expenditure supply, the firm that prices continuously (or discretely) on the hyperbola gets the benefit of higher EBIT as it slides down the hyperbola (continuously or discretely), whereas the firm that fixes its price on the ladle handle gets stopped out at the intersection of the handle with the dipper, unless it also resets its price higher (down the hyperbola).

    So, when combined with my earlier comments, I see hyperbola pricing being beneficial for either leftward or rightward shifts of the expenditure supply curve, in continuous or discrete time, with continuous or discrete pricing. The only exception I can think of is leftward shift where the expenditure supply curve bends backward and reverses its slope direction.

    I assumed continuous time as a conceptual device to remove noisy partitioning of discrete time periods. But there’s a distinction between continuous time for risk measurement, and continuous time for pricing strategy. A firm can measure risk discretely (with expectation and volatility) or absorb it into the present continuously and seamlessly, as you describe. But whether it acknowledges risk discretely or continuously, it has the choice of adopting discrete pricing strategies. And it can do this on either the hyperbola or the ladle.

    The question is which curve offers the better pricing strategy for a given pattern of repricing frequency (whether continuous, or discrete “delta hedging”).

    And I’d still say that the hyperbolic pricing is superior in all cases, continuous or discrete, UNLESS the firm fears a backward bending expenditure supply event, whether that event occurs in continuous time or as a deviation from discrete expectation. So I still come out at the same conclusion about geometry as before.

    I guess what I’m saying is that I don’t see how the difference between the continuous game and the discrete game changes the logic for the choice of where to set the price. That said, you did describe my initial continuous time conceptualization of it pretty accurately.

    Apart from this sticking point, I really like what you’ve done with this post overall. The irony for me is that I’ve never been attracted to supply/demand graphs in economics, whereas your attraction to that intuition was a good part of your motivation for the post. The double irony for me then is that I was quite attracted to what you’ve done in terms of representing the supply and demand for money flows that correspond to the conventional physical supply demand graphs, rather than the conventional graphs themselves. It seems like a slice of monetary economics that I don’t recall being depicted this way. And it uses some common terminology about the supply and demand for money in a very precise way – specifically the supply and demand for the flows of money that reflect nominal GDP. That precision is a refreshing break from the vagaries of the monetarists’ vocabulary that make reading them on the internet nearly unbearable.

  23. Jim writes:

    Only academics could have such a silly debate.

    The banks were in that position of risk of foreclosure. TARP bailed them out, guaranteeing stagflation until all the debt and real estate is repriced. A fool could have seen that. Formal bankruptcy would have repriced the lot in months. That is the real price of TARP; a lost decade.

    In what entitled universe can the Big Four have junk bond ratings as measured by CDS and record profits, and questionable title to their worthless mortgages?

    What a mess when you bail out the rich and connected. Good grief.