Read the article at http://www.bbc.co.uk/news/business-20617088 and scroll down to Option 3. So the Treasury and the Bank are looking at this (nervously no doubt), but if nervous about inflation why are they not looking at the 2nd half of monetary reform – preventing commercial banks from creating 97% of our money in the act of often foolish lending?
Answer – because the commercial banks won’t like it as it will over time reduce the size of their balance sheets and hence their profits.
Since 1884 the Electoral Reform Society, (initially under its former name of the Proportional Representation Society), has campaigned for the Single Transferable Vote (STV), a system which is not only fairly proportional but equally if not more importantly, allows the voter a real chance to influence who is elected , not just which party. Recently however ERS has downgraded its campaign for STV in favour of other constitutional reforms, in spite of the fact that its new Articles of Association retain promotion of STV as the principal object of the society. Ironically, in recent decades our political system has become ever more dysfunctional, and the case for STV has thereby been strengthened.
Although the three main parties in parliament still attract most of the votes, none of them represents the interests of the vast majority of people in Britain. None of them have even suggested that rising inequality is something that needs to be reversed; the watchword has been ‘let them eat credit’. The banking system which should be helping to oil the wheels of the economy, has instead become an instrument used by usurers to enslave the majority of us in debt. None of the main parties will even discuss the remedies available. Ring fencing? – rearranging the deck chairs on the Titanic!
In his book ‘The Triumph of the Political Class’, Peter Oborne explains such deficiencies in terms of a political class that has become divorced from everyone outside the Westminster bubble.
“A new type of government has emerged in Britain over the last twenty five years. The long tradition of integrity and duty that characterised British public life for much of the nineteenth and twentieth centuries has been abandoned and replaced by a form of crony capitalism. Casual corruption, venality, nepotism and mendacity are all on the rise. The distinction between private interest and public good has been lost, and the independence of our great institutions – parliament, the judiciary, the civil service – has come under attack. The effect on British Democracy has been dire.”
That book was written before the 2010 General Election. Tories would no doubt claim that all this is being corrected. Sorry; I do not buy this!
Oborne was not very generous to all those grass roots party workers of all parties whose main or only motivation was the public good as they see it. The problem is that increasingly parliamentary candidates for the main parties are increasingly drawn from those who have made politics their profession. Even those who are still ‘pure’ when first elected face many pressures to follow the party line, and gradually the good of the people tends to get replaced by the good of the party.
If the three main parties have let us down so badly, why do enough people vote for them? Part of the answer is that most are very badly informed by lazy, over-centralised, and corrupt media who mostly print or air the propaganda that those with the longest purses provide. Unfortunately the BBC is little better. There are many stories in the Grauniad for example that the BBC would not cover in a million years.
The other reason for support for the main parties is that voters, at general elections at least, feel a vote for any other party would be a wasted vote. Whereas any proportional system would result in fewer wasted votes and more chance of newer smaller parties gaining representation, voters may be disappointed at the performance of those they elect. As soon as any party secures significant representation in parliament monied interests move in and corrupt the party machine. And in a parliament elected by a list system it is the party machine that commands loyalty.
To avoid this MPs must be loyal to their constituents – not the party machine. For this to happen voters need to be able to choose WHO they elect not just which party prevails. Only STV delivers this.
Such a reform is of course anathema to the Political Class. We have no levers at present to get them to reform the voting system for parliament, but what about local government? There has been much rhetoric about localism, can we argue that we need STV for local elections on that account? There is a good case. Local government should be called local administration. Local authorities have many duties but little discretion. The danger here is incompetence and corruption. In practice too many people stand for election in order to further the interests of their party, as an apprenticeship for a parliamentary career (though no longer the best way in), and to further their own interests. Far from councillors holding officers to account, what happens in the leader plus cabinet model (perhaps the most common model), is that the leader and the chief executive get together and make the decisions. The rest of the cabinet rubber stamp it and the rest of council don’t get a look in. What is needed is independent minded councillors able to hold officers to account. Again only STV can deliver this.
So much for the argument, but how will the Political Class react? If STV were adopted for local government MPs would not be directly affected, so wouldn’t they listen to the merits of the argument? Some clue can be gleaned from what happened to Tory historian Lord Blake’s Bill introduced in the Lords in the 1980s. This Bill would have allowed a local council to adopt STV if it wished, but even this was too much for the government of the time. It went through the Lords without a division but the Tory spokesperson made it clear that it would not be given time in the Commons. Is it likely that an ever more corrupt future government would behave differently? Such a reform might give the plebs ideas above their station. If public opinion had been solidly behind Lord Blake things might have been different, but it was beneath the radar.
So our job is to get the public with us, so that when an opportunity occurs we are more than half way there. In the run up to the 1997 election Charter 88 did not succeed in this and put too much reliance on lobbying, and when Labour won an absolute majority the important items in the Charter 88 agenda were soon abandoned. Once again in the AV referendum, the public had not been prepared, and so were not able to discount the barrage of lies from the No campaign. We have to work at a local level educating the public. ERS’s job should be to co-ordinate and facilitate this effort, and not lay down the law from on high. Many will need training. Not all will want to travel to London for this. Much could be done online.
We should not dismiss the possibility of an opportunity for reform quite soon. There is no way the economy will be sorted out by 2015. Steady growth will not resume and there could be another banking crash. The main three parties have no answers, though others have. ERS members have plumped for a campaign for STV for local elections, and I think this is right in that it is less confrontational than attacking Westminster directly, and if STV for parliament does come onto the agenda our education campaign can easily be redirected.
At the society’s AGM in November five motions in favour of STV for local elections were passed by over 90%. All were supported by council. One of the resolutions was a special resolution DIRECTING council to take specific actions – and yet nothing seems to be happening. It is all very unsatisfactory.
Banking: What’s to be Done?
Nothing concentrates the mind like the thought of losing a great deal of cash- what other explanation could there be for drawing in a large group of people to talk about banking on a chilly February evening?
At a well attended public meeting on Banking at St Nicholas Church, Weymouth, Molly Scott Cato, Professor of Strategy and Sustainability at the University of Roehampton, and The Green Party’s economics spokesperson gave a fascination talk on Rethinking Finance. She first described of the problems of the banking system, and the origins of the banking crisis. She then went on cover some of the possibilities remedies, none of which the government has taken up.
Main points:
Only the green party is arguing for full separation of retail from investment banking
Big Bang and the loss of political control: reverse this rather than ‘regulation’
Local and mutual forms of lending are thriving – as per the stuff later on about local bonds etc.
She explained how establishment figures had sounded the need for change. For example governor of the bank of England, Mervyn King has said, “Of all the many ways of organising banking, the worst is the one we have today.” He and others are not being listened to; the government’s one ‘big idea’ – ring fencing of investment banking from bread and butter high street banking will not solve the problems.
The system agreed at the Bretton Woods conference in 1944, which involved financial restraint such as credit controls and exchange controls, had worked well. True, you couldn’t take much money abroad and there were mortgage queues, but growth was steady and people had basic needs met. The system had broken down in the 1970s, and credit and exchange controls had been progressively weakened culmination in the UK with Mrs Thatcher’s Big Bang in 1986. The result has been a massive increase in the financial assets globally from 1.5 times GDP to 4.5 times GDP, matched by a huge increase in the wealth and power of those who make money out of money. Debt has massively increased.
The lubrication of a fully functioning economy is the most basic role of banking, but it is incompatible with the role as a commodity in international speculation.
As a result of the crash government borrowing ballooned from August 2008 to May 2009 and has only very gradually decreased since – not noticeably faster under the coalition than under Labour.
Molly described the emergence role of Citizens’ Audit which has picked up on the concept of ‘odious debt’, demanded transparency and focus on the needs of citizens rather than financiers.
She went on to show how the money supply had grown very much faster than GDP, and banks now produce 97% of our money in the act of granting ‘loans’. Banks have played a vital part in the growth of debt. Their priority is to make profit by expanding their balance sheets, rather than to promote a healthy economy. As well as causing the crash, excessive debt (not just government debt) enslaves the vast majority of us.(1) One remedy proposed by Green Party members and others (such as (Professor Werner at Southampton) is basically to restore some of the former controls, and in particular to limit banks’ lending for speculation in real estate, which causes ‘bubbles’.
At Bretton Woods, British economist J. M. Keynes had argued for a new international currency for settling international payments imbalances. However US treasury official Harry Dexter White had insisted on a system of fixed exchange rates linked to the dollar which in turn was linked to gold. The Americans were in a position to call the shots, and this made the dollar the principle reserve currency and was very advantageous to American borrowers.(2)
As President of the European Commission, Jacques Delors’ motivation for pushing the European project and working towards a common currency was to challenge US domination.
Molly then turned to a number of initiatives to reduce dependence on the big banks and find local financing and banking solutions:
- Local Bonds for financing local projects such as renewable energy projects – gets the project stated and producers better return for investors than through the banks.
- Ecotricity’s Eco Bonds
- Mutual Home Ownership
- Peer to Peer Lending
- Local Currencies
After a break for tea, coffee and home made cakes, a lively discussion ensued covering everything from LETS (trading goods and services without money), to monetary reform.
One question that came up was whether the state or the Bank of England should over the creation of money from the banks. Some asked, ‘Can you trust government’, to which others, ‘Do you prefer to trust banks? There is a well worked out scheme whereby the bank of England would create money free of debt and give it to the Treasury, and in return commercial banks would be prohibited from creating money. This is promoted in the UK by Positive Money www.positivemoney.org .
It was also pointed out that Adair Turner and Martin Wolf had both come out in favour of ‘helicopter money’ as a way out of the current recession. This requires the Bank of England creating money and giving it to government.(3)
Molly was thanked for coming from Stroud to give us a very interesting talk.
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Notes to editor:
1. There are two kinds of evidence for supporting the view that excessive debt caused the crash:
First the argument from history. In the preface to their book ‘This time is different: Eight Centuries of Financial Folly’, Reinhart and Rogoff write “If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.”
Secondly several heterodox (=heretical) economists predicted the crash based on theory especially based on Hyman Minsky’s Financial Instability Hypothesis.
2. Under the Bretton Woods system the US could not devalue. Harry Dexter White had intended that the US always run a surplus. With the expense of the Vietnam War the US could not sustain this and Nixon had to float the dollar. This started a chain of events, one of which was general deregulation, though right wing economists and Thatcher played a big part in this.
3. ‘Helicopter Money’ is advocated as a replacement for Quantitative Easing which has involved the Bank of England buying bonds mainly from banks. The argument is that this drives up the price of bonds, thus driving down the yield and interest rates. In practice it has probably only helped banks. The danger of ‘helicopter money’ is inflation, but it is argued that while banks are rebuilding their balance sheets rather than lending, this would not happen, but why not finish the job and prevent commercial banks creating money in future?
This is a reaction to to the paper by Paul McCulley and Zoltan Pozsar entitled, ‘Helicopter Money: Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation’, found at, http://www.interdependence.org/wp-content/uploads/2013/01/Helicopter_Money_Final1.pdf
The authors describe the situation facing fiscal and monetary authorities in a situation of private sector deleveraging (i.e. recession or near recession). Base interest rates have been reduced as far as possible; Quantitative Easing (QE) has been tried (several times) with questionable results. Something else is needed. QE involves the central bank issuing new money to purchase bonds (mainly from commercial banks). The main objective has not been to help banks with liquidity but to drive up the price of bonds; hence pushing down the yield and reducing the price of credit. This is not costless to the Treasury because when things get better and the central bank starts selling the bonds, the price will fall and the central bank will make a loss. As (in Britain at least) the central bank is owned by the government, this flows through as reduced dividends. This might seem a small price to pay if the result was to get the economy going, but in Britain at least, this is not happening.
The authors argue that this is because although QE can reduce the price of credit, it cannot increase demand for credit, and the private sector is on balance saving; there is a lack of willing borrowers. Therefore some fiscal stimulus is required. But fiscal stimulus on its own is politically difficult, it implies greater deficits leading to the danger of high interest rates and higher taxes later. Therefore the authors conclude that there must be fiscal monetary co-operation in the form of fiscal stimulus funded by new money – ‘helicopter money’.
How can ‘helicopter money’ be provided in a way that there is no direct cost to the public purse? There are two ways. The first is for the treasury to issue money by fiat, just as the US treasury issued ‘Greenbacks’ during the American Civil War; the authors do not consider this possibility. Instead they envisage the central bank would issue money to government in exchange for a non transferable loan. As they point out there is no point in a central bank charging interest on such a loan because it would come back to the treasury in the form of profits.
What is the downside? Some claim that it would lead to high inflation; others including Bernanke argue that this is not a danger in a recession.
So much for the theory; what is the practice? Some would argue that there is unsatisfied demand for credit in the UK; businesses cannot borrow. That seems to be true for SMEs but that is partly because the big banks cannot be bothered to build relationships with them. The answer to this is more competition and local banks, but lack of demand for credit is probably the main problem. Houses are not selling; people are drawing in their horns; and the government’s claims that more real jobs are being created is at best tendentious. But has ‘helicopter money’ been tried? Yes it has; in 2008 the Australian government acted decisively on the advice of Treasury Secretary Ken Henry – “Go early, Go hard, Go households” ( http://www.henrythornton.com/article.asp?article_id=5482). According to Prof. Steve Keen of the University of Western Sydney, $960 was sent to every Australian over 18 who had a tax return for the previous year. Keen commented, “Though many other factors differentiate these two countries—notably Australia’s position as a commodity producing supplier to China—the outcomes on unemployment imply that the Australian measures more successful than the American “money multiplier” approach.”
Of course any government in receipt of ‘helicopter money’ has options other than handouts to tax payers; for example, support for infrastructure projects, including green technologies. These also should stimulate demand.
But when demand is restored won’t the ‘helicopter money’ cause runaway inflation? It need not if monetary policy works. At present the main instrument of monetary policy in a leveraging environment is interest rates. Those who are fearful of runaway inflation forget that 97% of our money has been created by commercial banks in the act of extending a loan. Banks have not used this power responsibly; they could be prevented from doing so, thus making them the financial intermediaries that most people assume they are. Money creation could be left to the central bank.
The way this would work is that current (chequeing) accounts, which are currently on commercial banks’ balance sheets would be transferred to the central bank’s balance sheet, but would be operated by the commercial banks. That way transaction money flows always involve money moving from one central bank account to another and only the central bank could create or destroy money. This is Full Reserve banking British style. It has many other benefits, see: http://www.positivemoney.org/.
And the downside? Investment banks would not make so much profit, but does this matter except to their shareholders? What do they contribute to the economy? Has the treasury looked at this?
Most of us may think we are free, but are in fact human livestock see:
An agreement to inter alia create an international corporate police force to override national sovereignty.
see: http://www.democracynow.org/2012/6/14/breaking_08_pledge_leaked_trade_doc
and : http://www.marketoracle.co.uk/Article35265.html?all=true
sign the petition at: http://act.watchdog.net/petitions/472?n=6044102.z29KJ2
