Policy Research in Macroeconomics

Financial repression, Matt Stoller version

By Jeremy Smith

I am really not sure how I had missed it in my research, but I have only just turned up an excellent piece by Matt Stoller unmasking “financial repression” as a meme for the rentier class.  It appeared in Naked Capitalism on 28th December 2011.  28th December? Maybe that’s why I missed it! It is well worth revisiting, however, adding as it does to Paul Krugman’s critique of yesterday – and my Open Democracy article (dare I repeat) of recent weeks.  He – like me more recently – was stirred to write his piece due to the amazingly broad definition of financial repression given by our old ‘friends’ Reinhart and Sbrancia in their paper “the liquidation of government debt” (2011):

“Financial repression includes directed lending to government by captive domestic audiences (such as pension funds), explicit or implicit caps on interest rates, regulation of cross-border capital movements, and (generally) a tighter connection between government and banks.”

Stoller responded:

“In other words, financial repression means doing things rentiers hate, like preventing them from moving their capital anywhere in the world at a moment’s notice, stopping them from engaging in predatory lending and usury, directing investment to national priorities (like public investment, war, health care and education, a safety net, etc), and regulating banks so they don’t become casinos. {C}{C}{C}

 Keynes called the process of reducing the return on capital “the euthenasia of the rentier and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.”

As we’ll see, rentiers don’t like this one bit; they prefer to retain their income streams and their place in the social hierarchy without sacrifice or risk on their part.  It’s why they’ve dubbed reasonable restrictions on what they perceive as their right to a riskless profit as “repression”.

He points out that private investment was if anything higher in the classical (Bretton Woods) era of “financial repression”, and concludes:

“A set of institutions that enforce versions of capital controls, interest rate caps, strong regulation, and some directed lending are necessary to live in a democracy.  And that’s why the financiers want to brand it financial repression.  They want you to enlist in their world view, that constraining finance is bad for society as a whole, when it is really bad for rentiers who do not actually know how to manage real risk and use a taxpayer backstop to make their bonds whole.  The record of the last few years is that more, not fewer, restrictions on financial speculation are needed.  Of course, rather than the term “financial repression”, I prefer a more quaint expression – the rule of law.”

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