12 August 2011

Ten-Point Stabilisation Plan

Spurred on by my recent realisation that I am better qualified for the job than Christine Lagarde, I have put together a modest proposal to resolve the turmoil in the global financial markets. Please send it around, discuss it with your friends, and most importantly: improve upon it.

The most obvious feature of the current crisis in the Eurozone, and the longer-term crisis over the rebalancing of power in the global economy between east and west, is the way that it is happening in a political vacuum. The sense of failure of politicians to manage these historic developments risks exposing us all to an extended period of chaotic change during which the vulnerable suffer.

This short statement is a summary of what it would mean for politicians to act in the interests of their electors to protect them against financial instability. It begins by listing the assumptions that are framing, and limiting in an unhelpful way, the present debate. It then moves on to propose 10 specific actions which need to be taken; further explanation for these actions and greater detail is provided in the following notes.

Failed Assumptions

The most striking feature of the present crisis is the limited range of policy options that are included in the discussion. The most constructive actions are being ruled as ‘impossible’ because of a number of mistaken assumptions which should now be abandoned. These include:

• That markets are efficient while politicians are not;
• That the problem of finance is essentially technical rather than political;
• That politicians should not have a role in managing the flow of money and credit within and between national economies.

Our proposal rests on the understanding that we need politicians to take strong and wide-ranging action to support the interests of their citizens rather than responding to the increasingly incoherent and inconsistent demands of a range of financial interests.

10-point Stabilisation Plan

1. The announcement by the finance ministers of the world’s leading economies of a six-month moratorium period during which all trade in their currencies and their bonds will be suspended.
2. During the period of moratorium, the negotiation of a global international agreement to create an agreed system of political control over finance.
3. The creation of a new reserve currency instrument, not linked to any single national economy.
4. The linkage of the new reserve instrument to carbon dioxide emissions.
5. The reintroduction of national democratic control over currencies, with a system of negotiated exchange between currencies.
6. The reintroduction by national governments of strict reserve requirements on their national banks and a parallel system of rationing of consumer credit.
7. The creation of public banks to provide a safe haven for citizens’ deposits and with lending designed to facilitate the transition to a sustainable economy.
8. The creation of an independent body to undertake the monitoring of country’s sovereign debts and the rating of their credit-worthiness. The majority of the membership of this Global Audit Committee should be comprised of academics and laypeople, rather than those who work in the finance sector.
9. The creation of national Audit Committees to evaluate the process by which current debt was acquired; where this debt was acquired by a process that was not in the interests of the citizens of the country it would be possible to repudiate that debt.
10. The elimination of secondary markets trading in the debt of nation-states and the establishment of a global body to register all derivative instruments on the basis of their ability to increase social and/or environmental welfare.

Notes on the Plan

1. At present politicians are finding it impossible to act because of fear of the immediate response from the financial markets. The moratorium would give them the space to consider a policy proposal.
2. Following the last period of international financial instability in the 1930s, which ultimately led to the Second World War, a global agreement to govern international finance was signed at Bretton Woods. It was gradually abandoned following the US’s unilateral decision to cut the link between its currency and gold in 1971, however, the role of the dollar as the global reserve currency, which depended on the link with gold, has continued. The story is told by Paul Davidson in ‘Reforming the World’s International Money’.
3. The role of the dollar as a national currency of the world’s largest economy, as well as the international numeraire, is a key cause of the instability in the global financial system. Such a call was made in UNCTAD’s Trade and Development Report 2009. Earlier this year the IMF proposed that its Special Drawing Rights might play such a role (Enhancing International Monetary Stability—A Role for the SDR?), however the lack of neutrality and representativeness of the IMF undermines its credibility in making such a proposal.
4. This linkage, first suggested by Richard Douthwaite in The Ecology of Money, would enable the new reserve currency to also introduce an ecological limit on the global economy, in contrast to the current emphasis on a return to rapid economic growth whatever the environmental consequences. A discussion of the proposal can be found in Molly Scott Cato’s paper ‘A New Financial Architecture based on a Global Carbon Standard’.
5. The fact that the Chinese currency the Renbinmi is under political management by the state has attracted attention in recent discussions, but less has been made of the fact that until the 1980s most western economies also managed their currencies. The history of exchange controls in the UK between 1939 and 1979 is described in an article by Brandon Hugget in the National Archives.
6. The financial crisis of 2007/8 was clear evidence of the failure of the Basel process for determining the capital requirements for banks, which is unsurprising given the domination of the financial interest in these negotiations. Simon Johnson, former Chief Economist at the IMF, has made this case in an article ‘Capital Failure’ published in the New York Times. Since as was made clear following the crisis, the citizens of nation-states are the ultimate guarantors, it should be the role of their democratic representatives to ensure that banks do not take on more liabilities than they are able to support.
7. Such a bank could operate in a way similar to the Banco do Brasil, which is state-controlled and uses credit to support the interests of the citizens of the country, while also providing a place for them to invest their savings.
8. Such a body would replace the increasingly discredited credit-rating agencies. It has long been apparent that these agencies have fundamental conflicts of interest, since they profit from the very system that they are established to monitor. They have also faced criticism for their failure to accurately assess the risk faced by banks as a result of the range of ‘exotic’ financial products before, during and since the financial crisis of 2008. Such a crucial role as assessing the costs national governments should pay for their borrowing should be undertaken in a democratic and transparent way. President of the EU Commission Jose Manuel Barroso is one leading European politician to have challenged the role of these US-based institutions; German Chancellor Angela Merkel another.
9. The prototype for such and Audit Committee is that established by President Correa following his election as President of Ecuador in 2005. In spite of the country’s oil wealth poverty was widespread because 50% of national income was being spent on servicing foreign debt. The Audit Committee was established to investigate who the creditors were and how they had persuaded governments to take on the debt. Eventually, it found that some 70% of the debt was illegitimate and the creditors were forced to sell at reductions of around 90%. Audit Committees have now been established in Greece and Ireland.
10. Such a proposal would help to democratise this centre of power in the global economy. During the process of registration, the onus will lie on the product’s originator to demonstrate that it is beneficial and there is no alternative way of achieving the same purpose. The root cause of the financial crisis was the deliberate obfuscation on the part of financiers of the riskiness of the activities. Under this proposal, only those derived investments which can be demonstrated to have a social value, say by spreading risks over a wider group of people, would be permitted.
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20 comments:

  1. Are you serious?

    1) Suspension of currency trading would render the division of labour impossible, quickly causing global famine. Suspension of government bond trading would push lending costs through the roof, bankrupting all world governments and ending the welfare state for good (as a libertarian this is something I would support, but not in the way designed above).

    2) Political control over finance has been tried and hasn't worked. Please type "USSR" into your wiki for more info.

    3) A cracking idea, assuming you mean a return to the gold standard?

    4) Why? Any particular reason based on economic sense or is it just some sort of whim? Why not base currency on the amount of Mickey Mouse souvenirs Disney sell?

    5) We already have a "negotiated exchange between currencies", it's called the Forex market. But you're banning that in point 1, so I'm a bit lost?

    6) If we implement point 3, we already have that one. Please brush up on your monetary history, I'd suggest starting with Rothard's "What has government done to our money?".

    7) Same as point 6.

    8) Again, please refer to point 3. A gold standard would lead to a sustainable monetary system, protecting consumers' money deposits. An "independent body" would be superfluous.

    9) Yet again, we'd get to that ideal if we had a gold standard. Governments accrue debt to pay for welfare and warfare states. Governments establish welfare and warfare states to stay in power politically and no other reason; the mass of men are ruined by both.

    10) Errrr what's the problem with secondary markets? Will you shut down Ebay too? What about Autotrader? And regarding derivatives, you seem to miss the point of markets completely. Private individuals cannot profit unless they're providing something their peers want; derivatives wouldn't exist unless they led to an “increase social and/or environmental welfare”. The only institution that can take people's money without providing a corresponding good or service is the state - it's why liberalism (the "market") is not only more economically viable, but also more ethical than socialism.


    I really, really worry where the world is headed if these types’ of views are taken seriously. I ask – nay, plead – with anybody who takes these views seriously to read some liberal literature. Start with Hayek then Rothbard and then go for the juggler with von Mises.

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  2. Tim Worstall's view of this stabilisation plan:

    http://www.adamsmith.org/blog/economics/finally,-a-truly-stupid-proposal-about-the-economy/

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  3. I am curious as to how people in the UK are going to buy food from the coutries we import it from if we ban all trade in foreign exchange or do you just mean take the current spot prices and enforce them by law.

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  4. Good job, Molly: you have clearly generated the right kind of enemies!
    >'Austrians' are exactly those who got us into this nightmare - they are hardly well-qualified to tell us how to get out of it... If only Polanyi had ruled the world this last 40 years, rather than Hayek...
    >Tim Worstall is the ultimate paid right-wing flakker, aiming continually to cause trouble for left and green bloggers / academics / thinktanks, etc.: Wear his incomprehension as a badge of pride.
    As for the content of the plan: I like most of it a lot. I was pleased especially to see item 7, which is close to current Green Party policy, about which as I recall you had a few reservations at the time I got it voted through, M. ... ;-)

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  5. If you ban the trading of national debt, the people who lend you the money are taking a bigger risk, because they are locked into the deal and can't sell it on to someone else. More risk means they will only borrow at higher rates. This would cost the country billions!
    Secondary trading makes borrowing cheaper, not more expensive.
    I sincerely hope these ridiculous socialist policies never get near any kind of real power.

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  6. In response to Lee and maybe Tim, I think there are a number of other factors to consider before trashinn this suggestion. The trouble with Hayet and Neo-Liberal thinking is that while it considers the economic numbers it completely ignores the social distribution, ecological impacts and long term viability of the market. Market instability is primarily the consequence of traders who have no other considerations to make other than economic short termism, more often than not their own bonuses, and are not regulated by any political restraint.

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  7. On point one that Lee makes, are we not seeing bond prices going up everywhere anyway and driving all other benefits and values in to a black hole trying to keep them low? Stopping speculative currency trading is more likely to stop instability - it is not trading for productive resources that needs to be stopped, although it needs dramatic transformation to an ecological concern. More fundamentally, 15% of Americans are now receiving emergency food aid and 3bn people in the world are struggling to get enough calorific intake or are starving. We already have widespread famine and social disruption in the Middle East, across Europe, Africa and many other areas of the world, largely as a result of running the world economy on unregulated trade - ironically the most successful nations economically presently are those that have the most state planning - Russia, China and India (I am not arguing for that though)

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  8. On point two - political control - oh that we had it! The giving away of the right to create money to the private federal reserve and other private banks has meant that governments the world over have precious little control over the economy, more's the pity. Whereas once they could invest in the good of a nation, now they have to borrow at untenable rates to do this. I agree that they have overdone this, particularly by military spending to maintain global advantage. However, generally welfare spending has helped generate successful economies. Can a government stop the markets wrecking their coffers and democratic desires, having to advocate imposing IMF or World Bank austerity? No. As you say Lee in your point 3, the IMF is not democratic and serves the interest of the financial feral elite.

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  9. Point 3 - probably not the gold standard but either a basket of currencies or something more ecological like carbon. At present the system is chaos with a mixture of floating and fixed currencies and one country's currency, the dollar, being the king pin is compatible with global justice or security of anything (as you say and I agree).
    Point 4 - Why? Precisely as Ms Scott Cato suggests, for ecological sustainability. The market does not really value ecology at all, it desires growth insatiably, capitalism can't stand any boundary to it's expansion and this flies in the face of limitations. Yes, the market does to some degree put a cost on finite resources but not in a way that stops them being exploited. Economy is a subset of ecology and needs to be put back in its righful place rather than running roughshod over other factors. There is no intergenerational consideration.

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  10. Point 5 - I'm really not sure Forex is negotiated, it is imposed by vested national and private interests, backed up by military domination or power. Do the world Americas amicably agree with the Chinese on currency values? Does it make any good sense?
    Point 6 - Not much to say except what our government has done with our money is firstly give up all right to create it - ironically the keystone of much of the early American independence ideas - and secondly to allow a small bunch of financial players to escape any form of wider social responsibility by extracting hundreds of billions of pounds and then actually promoting the idea that these people are wealth creators rather than thieves. This fundamentally is my trouble with libertarian and free market thinking - there is no social or ecological contract whatsoever. The private yachts rise in the water while the small boats turn over and sink.

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  11. Point 7 - I don't know anything about this example but it sounds a lot better than what we have now.
    Point 8 - The gold standard didn't work before. South America and Africa and much of Asia were chained in slavery. I wouldn't totally rule it out - it would at least provide some solid ground, but I don't think it is the right answer. It is not the most important commodity and we could live without it. I can understand you not wanting another committee to oversee something, but given the tendency to have systems hijacked by power and fraud it is probably necessary.

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  12. Point 9 - I don't think governments support education, health care, support for the sick and other things to curry support. That is a cynical way of viewing things. They do it for a sense of general well-being of society and trying to provide some form of access to choice and opportunity for all. My experience of living in countries with limited welfare states is a brutal indifference between the rich and poor, run by profit and fear as in the American health system, or the Indian system where incredible wealth runs alongside mass poverty and illiteracy. Pre welfare state in this country, the mass of people could not get a pair of spectacles, their teeth seen to or have education. The mass of men and women are ruined where there is no welfare state. Give me Norway anyday.

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  13. Point 10 - It seems perfectly reasonable that financial investments have a social good. The trading in financial products that were worthless were well known as 'liar loans', 'Ninja loans', (borrowers had not income, job or assets), 'toxic waste' or 'neutron loans'. It is no surprise there were riots in Britain - why not when it is every person for themselves in a libertarian, market led world view?

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  14. i think that our money problems stem not from what backs it essentially but who controls it. if a new gold backed global reserve currency was controlled by the same elite bankers who currently have our economic system over a barrel and to whose moods we are perpetually subordinate, then expect bubbles, booms and busts to be a permanent feature of any system designed to replaced the crumbling edifice of 21st century neo-liberal capitalism. the recent credit boom, with fraudulent activity a rampant feature it its orchestration, has demonstrated the uneconomic and ultimately political nature of the crisis. a total lack of will to prevent poisonous special interest from controlling the monetary regime.

    if gold standard was to return, the idea is that it imposes discipline on the money suppliers, be they bankers or governments. but the 1920s had one of the biggest credit bubbles in history on the gold standard. also, throughout history we have seen gold ratios changed arbitrarily to increase the money supply, so discipline is a fallacy. finally, just for molly, who is the world's 3rd largest holder of gold? the IMF, your favourite institution :-).

    if gold standards worked then they would still be around today, they have been tried and have failed.

    i like molly's ideas in the general sense, especially the theme of bringing monetary regimes in line with environmental sustainability, however, we need to ensure that the replacement is controlled by the people and checks and balances are in place so that it cannot be subjected to capture.

    the debate needs to be kickstarted, and Molly should be applauded for playing her part. sadly, i fear her views will not be heard by enough people until we see more disintegration of the current system which is inevitable. however, at least starting discussions like this prepare us with solutions for a new world when the time comes.

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  15. "Our proposal rests on the understanding that we need politicians to take strong and wide-ranging action to support the interests of their citizens rather than responding to the increasingly incoherent and inconsistent demands of a range of financial interests."

    The expenses saga must have come as a bit of a shock, then?

    Politicians will always be under lobbying pressure from companies large enough to employ people specifically for that purpose - it's an inevitable side-effect of the economies of scale. These companies can offer donations, future employment for ministers, current employment for constituents, and favourable press, the lifeblood of politics. Getting politicians to favour citizens over businesses is unlikely, frankly, whatever currencies and eco-taxes you invent.

    On the other hand, citizens can only put pressure on politicians part-time, as they have to feed themselves first. Heck, less than 50% of registered voters could be bothered to turn up at the last election, so it seems the citizens aren't interested.

    And that's before you even get into whether the interests of the citizens are any less coherent or consistent than those of the 'financial interests'.

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  16. Good start! An alternative to Point 1 could be a Tobin tax on international financial transactions to slow down speculative transfers-at two rates, one for genuine trade and a much higher tax for speculation. Am I wrong in seeing the international financial system as being now more of a casino?

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  17. Niels said...

    "Politicians will always be under lobbying pressure from companies large enough to employ people specifically for that purpose - it's an inevitable side-effect of the economies of scale."

    Sadly this is true, and is truer the more power politicians have which is what is being proposed here.

    However, you might see it as choosing between the lesser of two evils perhaps. Politicians are democratically accountable at least and the expenses, as angry as it made me is peanuts compared to the billions made by the bankers.

    Personally I have a slightly better picture of politicians, having experience of some very good people around where I live.

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  18. I could do with some more explanation of point 1 please.

    If bond trading ceases how to government fund their deficits? Must their deficits immediately reduce to zero?

    Is monerary reform needed too so governments can created money for public works, but the purchasing power of their currency should be able to reduce if they print too much money.

    If currency trading is suspended how can international trade be done? or are exchange rates fixed?

    You are right to raise these radical suggestions. The current solutions are not even working and they are not in citizens interests - though amazingly most people don't realize that yet.

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  19. @ronanpeter "her views will not be heard by enough people until we see more disintegration of the current system which is inevitable"

    Unless the occupy movement takes them on board...

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