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Open Letter to Canon Giles Fraser

November 14, 2012

Dear Canon Fraser


God and Mammon

I am responding to an article posted at on 7th November, to which you contributed. I will also respond online.


I appreciate that you probably will not find time from your parish duties to respond to this, but if you do may I suggest you use email.


I do not believe that it is enough to blame the bankers. That would be to let politicians, and we as citizens, off the hook. We all bear some responsibility. The Robin Hood Tax is a good idea, but is not sufficient. I think there is more the Church could do, and the appointment of an exceptionally financially literate Archbishop is perhaps a good time to make a start.


The greedy, the reckless, and the amoral will always be attracted to ways of making ‘easy money’. The main mission of the modern corporation is to make money for shareholders, and that is the prime legal duty of directors. Corporations have acquired all the rights of human beings. In this context the State has a duty to be vigilant, to identify abuses and to regulate effectively. The record has been patchy, partly because corporations (helped by neoliberal economic dogma, unsupported by evidence) have exerted an undue influence.


How does this apply to banks? Banks have changed in the last few decades. Between 1963 and 2007 the total assets of UK banks increased from one half of GDP to five times GDP. This has been accompanied by a huge increase in debt (not just sovereign debt which is a small fraction of this). This has been the result of the relaxation of controls on bank lending during the 1970s, culminating in Mrs Thatcher’s Big Bang. In order to make these loans banks have created money as credit – 97% of our money in fact.


In a speech to a meeting organised by Occupy Economics, in the Friends Meeting House, Euston Road, on 29th October, Andrew Haldane, Executive Director, Financial Stability, Bank of England, acknowledged that “once bank assets exceed annual GDP in size, they begin to act as a drag on growth.” He also mentioned J.K.Galbraith’s claim that the asset price boom has been a major cause of rising inequality in the US. However he failed to draw the conclusion that bank assets are in aggregate far too large. Banks make their money (in the ‘good’ times) not by charging outrageous rates of interest but by increasing the volume of lending – especially secured lending. Although no orthodox economists foresaw the crash, several heretical economists did, based on the excessive build up of debt.


Before the crash, mortgages were being offered at I think six or seven times annual salary – a near unsupportable burden. You could argue that house buyers don’t have to accept such mortgages. The trouble is that house prices had been increasing much faster than consumer prices, the increase being fuelled by easy mortgage terms. How else could first time buyers get onto the ladder? I believe that lenders have some responsibility to apply restraint. If houses are to be more affordable we need more of them and government needs to address this by discouraging land hoarding.


In this context the Church could do well to think about what in the 21st century constitutes usury. It has in past times referred to any lending at interest; more recently it has applied only to lending at excessive interest rates. Perhaps it should apply to any loan which places too great a burden on the borrower?

Although Haldane is to be commended for engaging with the Occupy movement, I was less impressed with his assurance that all the issues were being addressed. There appeared to be nothing new in the remedies he mentioned. He says,

“In the UK, we are already three steps along this road, with the introduction of a Financial Policy Committee (or FPC) housed at the Bank of England from last year. Its remit is to keep the system safe and sound while supporting lending and growth. Right now, the FPC is playing its part in trying to cushion the effects of the credit squeeze I mentioned, by freeing up banks’ capital and liquidity reserves to enable loans to be made to companies and households.


If these sound like small steps for mankind, then they are giant ones for regulators. This is the first time in the Bank’s 318-year history that it has attempted such “macro-prudential” regulation. Of course, it is impossible for the FPC or anyone else to eliminate mini-booms and mini-busts in credit. But the FPC can legitimately aim to head-off the maxi-booms, such as the pre-crisis one, and the maxi-busts, the like of which we are currently experiencing.


That should be good for medium-term growth, by preventing a build-up of excessive leverage. And because financial booms and busts are inherently inequitable, it ought also to be good for the distribution of this growth across society.”

However there is no reference to what instruments will be used to conduct “macro-prudential” regulation, and the only ones that I am aware of as being contemplated by the Bank, are wholly inadequate. There are well argued solutions that have been put forward by ‘heretics’, but they have been summarily dismissed or totally ignored by the establishment (e.g. by the Independent Commission on Banking). These are:

  1. A return to the sort of direct credit controls in force between 1944 and the 1970s – advocated by Richard Werner. These have also been successfully applied more recently in some Asian economies.
  2. Full Reserve Banking, currently advocated by the campaign group Positive Money and others. This would hand the monopoly of money creation to the Treasury or to central banks who would then give it to the Treasury. This has not been the use in Western economies since before the Middle ages. However in August this year the IMF released for distribution a Working paper entitled: ‘The Chicago Plan Revisited’. The authors summarise their paper as follows:

“At the height of the Great Depression a number of leading U.S. economists advanced a proposal for monetary reform that became known as the Chicago Plan. It envisaged the separation of the monetary and credit functions of the banking system, by requiring 100% reserve backing for deposits. Irving Fisher (1936) claimed the following advantages for this plan: (1) Much better control of a major source of business cycle fluctuations, sudden increases and contractions of bank credit and of the supply of bank-created money. (2) Complete elimination of bank runs. (3) Dramatic reduction of the (net) public debt. (4) Dramatic reduction of private debt, as money creation no longer requires simultaneous debt creation. We study these claims by embedding a comprehensive and carefully calibrated model of the banking system in a DSGE model of the U.S. economy. We find support for all four of Fisher’s claims. Furthermore, output gains approach 10 percent, and steady state inflation can drop to zero without posing problems for the conduct of monetary policy.”

I am not aware of any central bank or Treasury picking up on this work. Why not?


It is not for the Church to prescribe, but I would have thought it could pose some fairly pointed questions:

  • If Economics is the social science it claims to be, what business has it excommunicating the heretics? Of course that is not the language used. Heretics are called heterodox, but they are not published in the ‘best’ journals and are ignored whenever possible.
  • Adair Turner, Chairman of the Financial Services Authority, is happy to acknowledge that in the more developed economies – the US, Europe, and Japan – the period of financial repression between 1945 and the early 1970s was one of significant and relatively stable growth, comparing well with the subsequent 30 years of increased financial activity and financial liberalisation. What then, is the evidence that the bloated and unregulated system we now have, has produced any net benefit to the economy?
  • Why are the claims of the IMF paper being ignored? Why aren’t Bank of England and Treasury economists crawling all over it?


The first two chapters of the IMF paper are accessible to the layman and possibly worth a read. There is reference to usury.


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