Losing Bank Candidates Jostle for Influence

Back in November when the glitzy (by banking standards) Mark Carney was appointed to head up the Bank of England to general acclaim my suspicions were immediately aroused. Although the discussion was all about the radical way he had managed the Bank of Canada the reality is that he is a banker's banker. By contrast several of those who were unsuccessful in the competition have recently proposed some challenging and interesting new measures.

Earlier in the week Paul Tucker, the considerably less glitzy current deputy-governer, floated the idea of introducing negative interest rates to discourage saving and get money out of the banks and into the real economy. The idea is that banks would be charged for holding balances at the Bank of England. If taken up this will be another painful policy as far as pensioners and those who live from savings income are concerned. Interestingly, it tallies with the policy of 'demurrage' suggested by Silvio Gesell in the 1930s and taken up in the design of several local currencies including the Chimegauer. Here, customers are charged for holding the currency, a design feature again intended to encourage circulation rather than hoarding.

Alex Hern at the New Statesman suggests that this might be just an attempt to talk down the value of the pound and therefore be the next move in the currency competition between the world's leading economies. Given the implicit assault on the value of sterling that resulted from the AAA downgrade this seems unnecessary and unlikely, although the suggestion from Tucker that he is open to the idea of further QE, again effectively downgrading the value of UK debt and of sterling, adds weight to the case. The graphic indicates the value accorded to sterling by the markets since the early days of 2007 and makes clear how the currency has suffered as a result of the credit crunch, and relative to other currencies.

Meanwhile Adair Turner, the other leading candidate about whose glitziness or otherwise I refuse to comment, has been putting forward some interesting ideas to the Cass Business School. In a lengthy presentation including some fascinating slides,Turner makes clear that the monetary system is broken and that radical change is necessary. Perhaps the most disturbing slides is that illustrated here, using Bank of England data to plot the percentage change year-on-year in lending. Amongst other policy proposals, Turner considers the possibility of the ending of the fractional reserve system and the requirement of a 100% reserve.

Turner begins his presentation with the following quotation from Milton Friedman (1948):

'Under the proposal, government expenditures would be financed entirely by tax revenues or the creation of money, that is, the issue of non-interest bearing securities... The chief function of the

monetary authority [would be] the creation of money to meet government deficits and the retirement of money when the government has a surplus.'

He also demonstrates how the failure to resolve monetary policy in Japan was the primary cause of the lost decades of economic recession. This brings me to the preferred candidate for the post of bank governor: Richard Werner, whose experience of Japan and invention of the policy of quantitative easing him would have provided him with ample qualifications had it been a fair fight.

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Scottish Revenge Served Cold After 300 Years

Scholars of the history of money will recall the very special role played by Scots in the financial system of Britain and its empire. There is, of course, the story of these many Scottish men who acted as colonial administrators in both finance and accounting roles. But earlier still there was the part played by William Paterson and his ill-feared Darien adventure, that bankrupted Scotland and forced the 1707 unification. Paterson had earlier been the prime mover behind the privatisation of England's national debt through the establishment of the Bank of England.

What sweet revenge it would be, then, if at this very time when 300 years of running a state through debt has reached its inevitable conclusion of bankruptcy Scotland were to cut itself free and emancipate itself from debt-base money through the establishment of its own Public Bank. This was the proposal made by Ellen Brown at a presentation to RSA Scotland last November.

If the independence vote looks anywhere close to being a 'yes' then you can be sure that there will be a mad scramble for assets, both land and cash, and desperate attempts to ensure that control of Scottish resources are not allowed to pass into the grubby hands of Scottish citizens. Controlling the Banking system will be crucial to this endeavour. To prevent this and ensure that Scottish independence can live up to its name Ralph Leishman proposed concrete proposals for a Scottish Investment Bank on the model of the state-owned Bank of North Dakota.

According to Brown:

'North Dakota is currently the only US state to own its own depository bank. The BND was founded in 1919 by the Norwegian and other immigrants, determined, through their Non-Partisan League, to stop Wall Street money men foreclosing on their farms. . . All state revenues much be deposited with the BND by law.  . . The bank offer cheap credit lines to state and local government agencies. There are low-interest loans for designated project finance. The BND underwrites municipal bonds, funds disaster relief and supports student loans. . . For the past ten years it has been paying a dividend to the state, with a quite small population, of some $30m a year.'

Although it is hard to grasp this from our vantage-point at the heart of global capital, around 40% of the world's banking is publicly owned, with the newly emerging economies of Brazil, Russia, India and China resisting urges to privatise the issue of credit in their economies.

While the miasma of confusion about what banking is and what banks are for continues to confuse radical commentators south of the border, in Scotland the discussion of such issues as public banking in the pages of the country's national newspaper is a hint of the great opportunities for freedom offered by Scottish independence.
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Has Capitalism Been Overthrown?

The general acclaim that greeted the announcement of Mark Carney as the new Governor of the Bank of England immediately roused my suspicions. Surely somebody could have raised a peep of disagreement with the fact that he is the greatest central banker the world has ever seen and second in credentials to only the Messiah himself? What could explain this universal fawning, I wondered, while I listened to the regaling of his impressive cv. My mind stumbled over one crucial fact: he has worked for Goldman Sachs. Carney has worked for the global financial corporation in Tokyo, New York and London.

I have told the sad tale of the takeover of the US Treasury Department by Goldman Sachs in an earlier post: a story that culminates in the move of Tim Geithner from Goldman to the Treasury. This safe pair of hands could cover the hole in my otherwise flawless theory: the fact that Ben Bernanke has not worked for Goldman Sachs. But on the upside Mario Draghi served his time there, before taking over the European Central Bank, serving as vice-chairman between 2002 and 2005. The revolving door between Goldman Sachs and the world's central banks is no secret, providing material for a Bloomberg blog last year. The implications of the fact that global finance is now running national monetary policies across the world receives little critical comment, however.

My own candidate for the job, Professor Richard Werner of Southampton University - the man who invented quantitative easing - was probably not surprised that his phone remained silent yesterday. After all, he has suggested that we allow the bank to produce enough cash to buy back our debts and end the Age of Austerity. Whose political interests would that serve? He is also unfashionably German. As when Sven-Göran Eriksson took over as England manager there were some quaint comments about Carney being the first 'foreign' governor, as though nation-states have any nostalgic import for these masters of money who only really identify with the offshore fantasy island labelled 'Cash' and resembling the Big Rock Candy Mountain for those who can gain access.

Perhaps I am just being naive here. Was there ever a time when capitalism meant a large number of small companies competing for investment capital as well as for customers? Was there ever a time when governments played a role for their citizens rather than being operatives of Central Bank Inc.? (Leo Panitch tells an interesting tale of the state-finance relationship.) In Marx's day the many-tentacled banking machines travelled under the name of Rothschild. Perhaps we should celebrate the democratic widening of the global economy demonstrated by the fact that the bankers governments are serving today are at least not all members of the same family.
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Adair Turner Makes Play for Job as Governor

At last a crack appears in the establishment position over the national debt. Following the statement from the Office for Budget Responsibility that the country is bankrupt, last night Adair Turner, former head of the employers' organisation and now boss of the financial regulator the FSA, came out arguing the case for the Bank to take the necessary steps to eliminate the national debt. He has effectively conceded one of the key planks of the arguments of those who seek monetary reform: if you have maintained the control of your currency, as we did by resisting the push to join the Euro, then you can print as much money as you need to eliminate your unpayable debts. The limit on this is faith in your currency and your national economy.

This is, of course, a deeply political point. It continues the theme of earlier posts that the decision to accept our level of indebtedness is political rather than economic. Turner's proposal is relatively limited. He appears to be arguing about the government debt that was bought from companies through the quantitative easing programme, and that the Bank is cautiously holding onto rather than cancelling. In my article 'Who owes whom?' I quantify this as around 25% of our national debt. It is important to note that Turner is suggesting this as a means of reviving the economy and stimulating growth. He is not conceding the monetary reformers central demand: that the creation of money should be exercised by the state in the public interest rather than by the banks for private profit.

This is clearly a move by Turner to establish himself as the radical and creative candidate to succeed Mervyn King as Governor of the Bank of England. Perhaps King would like to follow this policy but lacks Turner's political nous. The contest within capitalism is now clearly between those who are using the debt crisis to bear down on the power of working people and shift the balance of ownership towards the wealthy, and those who would seek a more workable form of social contract. To those of us who consider that capitalism is inherently an unjust and unsustainable form of organisation this is still something of a sideshow.  We also need to keep our focus on how the massive financial readjustments themselves transfer value between rich and poor - whose assets will be protected? Those of the banks or those of the pensioners?
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Renew Calls for Citizens' Audit

For a while now I have been blogging about the importance of a Citizens' Audit. The role of such an audit would be to settle the issue of how we acquired the debts that have left us so vulnerable that the Director of the government's Office for Budget Responsibility has apparently recent claimed that 'Britain is Bust'. At least as important, however, is to question how is the financial crisis and recession redistributing wealth?

The Bank of England  has recently addressed this question in a report on the distributional consequences of their policy of quantitative easing. This policy is often referred to as 'printing money', but in fact it is anything but. Printed money would have to be spent on real output, and hence would inevitably provide some stimulus to the real economy. QE, by contrast, has consisted of the creating of credit in the government's account at the Bank of England, with which it has bought government gilts, or IOUs.

This has fed money into the financial economy and resulted in a boost for financial institutions and traded stocks. As the bank concludes: 'By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds'. This is illustrated in the figure, where you can see clearly the fall in the value of stocks as a result of the credit crunch in 2008, which is reversed as the policy of quantitative easing starts to take effect from March 2009 onwards.

Had we not bought our own debt presumably we would look even more bust than Robert Chote thinks we do already. Hence the QE policy has reduced the cost of national borrowing, keeping the rates of interest charged by our foreign creditors low. The Bank has also kept its own base rate at a historic low of 0.5%, reducing the earnings of those who live from savings, especially the elderly.

What has most incensed the citizens of the UK is that the financiers who caused the financial crisis that has bankrupted the country as still profiting, whereas those who work or have saved are losing the value of their assets and their incomes. The Bank concedes this accepting that 'holdings are heavily skewed with the top 5% of households holding 40% of these assets', i.e. the assets that have increased in value as a result of QE.

These matters are the result of political and policy decisions and yet these decisions are not the subject of political debate. Instead of buying gilts, money could be created by government and used to fund green infrastructure, insulating the homes of the pensioners whose income is now so reduced that they cannot afford to pay their fuel bills, perhaps. The calls for a Citizens' Audit are precisely to enable us to have the information necessary to make these decisions as we should do in a democracy - together and in service of the interests of the majority rather than the wealthy minority.
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Money system of last resort

In a system that relies on debt to create money, as capitalist money systems do, there is always a temptation for individual banks to take imprudent risks and be unable to repay their creditors. Because greed tempts bankers to destabilise their own business, and a run on the bank leading to bank collapse would undermine faith in the whole system, capitalist economies have a 'lender of last resort'.

The lender of last resort in the UK economy is the Bank of England. When banks hit sticky times they turn to the Old Lady for a shot in the arm, and she must oblige. This is exactly what happened last year, when banks had massively over-borrowed, they were loaned vast sums by the Bank.

You may be left asking where this money came from: who were the creditors? The answer is that, because there was no one left to lend money, the government itself acted as what we might think of as the 'borrower of last resort'.* When all else fails, a government can decide to create money by political fiat - the quantitative easing policy. And who do they borrow money from? The answer, I'm afraid, is you and me - and we are now being asked to pay this back through spending cuts, higher taxes and more work.

Leaving aside the question of whether the UK is really capable of paying back this level of debt without unacceptable suffering and civil unrest, let us consider for a while longer the concept of a borrower of last resort. When demand in the economy is so low that we are in a self-reinforcing downward spiral, as we are now, a capitalist economy requires the government to step in and borrow, just as it would expect the central bank to step in and lend to banks. So rather than cuts and austerity in the public sector we need to see borrowing and investment.

So far I have only considered the last resort in a financial sense, but what about the ecological crisis we are facing: the ultimate situation of last resort. Surely it is time for the government to act as borrower of last resort and produce a massive spending package to create the infrastructure and home renovation projects we need to achieve the carbon reduction targets that are now enshrined in law? Mad as it may seem, if you insist on creating money as debt, that is the only way that we are ever going to be able to buy ourselves a future.

*Thanks to Richard Douthwaite for this useful thought - and so many others. Tweet

Mr. Bean to Explain Quantitative Easing Policy

This is one of those moments - like when Tom Lehrer gave up satire to commemorate the award of the Nobel Peace Prize to Henry Kissinger - when you feel that all comedians should retire because the whole universe has been created by an almighty stand-up comedian. Not so much intelligent designer as cosmic joker.

Yes, the deputy-director of the bank of England is really called Mr. Bean and he really is undertaking a national tour to convince us of the seriousness of the policy of Quantitative Easing. The BBC managed to post an online story about this with every sign of a straight face:

'Mr Bean is in Leeds on the first leg of a tour of the UK, attempting to explain what the Bank calls its "conventional unconventional" measure to counter the recession. Armed with a box of explanatory pamphlets, optimistically entitled Quantitative Easing Explained, he is on a single-handed mission to the world of gilt yields, money velocity and commercial paper to the people.'

Excuse me - I am loving this so much I can't type straight for fits of hysterical laughing.

It is good enough that the bank have admitted that money was always created from thin air, that the whole time they have been creating money as debt - at huge cost to citizens and the planet - it was completely unncessary. That has given me great satisfaction. But that they leave the task of explaining this policy in the hands of Mr Bean is just a delight too far.

Indications are that the public are unconvinced - questioning why the money is not reaching the small businesses it was apparently created for. The explanation is simple: the vast majority of the thin-air money has been used to buy up national and corporate debt and not sent to small businesses that are strapped for ready cash.

According to the BBC, 'Mr Bean hopes to work out if the bank's policy of pumping billions into the economy is beginning to ease the severity of the recession.' It's just as well they only have Mr. Bean on the case. Anybody with a slightly straighter picture of reality would quickly grasp that this was never the intention. Bankers and corporations have seen their share of the cash; businesspeople and taxpayers will just be paying the tab. Tweet

Gilty Secrets of the Treasury

For those whose interest in what the hell the government is up to with our monetary policy continues, I offer the Debt and Reserves (as if!) Management Report 2009/10 from the government's Debt Management Agency. I bet that looked like a cushy number when the tender went out.

There are some great data and graphics indicating the horrendous debt situation we are in. The report also informs us that the some of the auctions of government debt have had ‘largeer than average tails’ as a result of ‘volatile gilt market conditions’. A helpful note informs us that ‘the tail is the yield at the lowest accepted price less the yield at the average accepted price’, in other words the debt is getting harder to shift. This is confirmed by the admission that there was an ‘uncovered’ auction on 25th March, i.e. some of the debt remained unsold. (This is illustrated in the second reproduced graphic.)

Here is how the report describes the introduction of quantitative easing:

On 19 January 2009, the Government established the Asset Purchase Facility (APF) to enable the Bank of England to ease credit conditions in corporate debt markets by making purchases of private sector assets. On 5 March 2009, the Monetary Policy Committee of the Bank of England (MPC) announced its decision to use the APF for monetary policy purposes by purchasing £75 billion of assets (the majority of which would be gilts) in the following three months financed by the provision of central bank reserves. The asset purchases are designed to influence the quantity of broad money as a supplement to setting the level of the Base Rate.

In February Mervyn King got the wind up about the buying back of our own debt and wrote to the Chancellor to require that ‘It should not alter its issuance strategy as a result of the transactions undertaken through the Asset Purchase Facility for monetary policy purposes.’ The Chancellor maintained that the objectives of monetary policy had remained the same, and that these remained ‘to minimise, over the long-term, the costs of meeting the Government’s financing needs, taking into account risk, whilst ensuring that debt management policy is consistent with the aims of monetary policy’.

I'm afraid I can only bear so much of this deliberately obfuscatory prose. It does nothing to change my view that we need to have an up-front and just negotiation about how the debt is removed from the economy, together with a revision to the money-creation system that makes a similar bust impossible in future.

Yesterday, the Treasury Select Committee criticised the Treasury for focusing the money created through the QE policy on managing the monetary aspect of the problem, rather than supporting the real economy, which was the justification for the policy and the reason the Bank of England agreed to it. So far of the money created £2.8bn. has been spent on corporate debts, compared with £51bn. used to buy up government debt. Tweet

Capitalist rollercoaster

Generally in economics 'long-term trends' are anything but. I was recently in a supervision session with a colleague who was describing an econometrics method used to 'explain' the behaviour of stock-market investors. It works with long data series, but these are minutes of investment decisions! So in a day you can create a really long-term trend!

For a discipline that makes great play of the differences between short, medium and long terms, economics is remarkably poor at analysing the long run. Perhaps that is because, as Keynes so eloquently noted, in the long run we are all dead. This is not a very helpful attitude for our grandchildren or the planet they hope to inherit.

In view of this prevalent short-termism what joy it was to find the long-term trend of UK (English) interest rates on the Guardian website. I would be interested to hear others' interpretations of what we can learn from these.

What immediately captures attention is that in the early phase of the life of the Bank of England interest rates are almost completely static. Is this an image we should hold in mind when thinking of the steady-state economy? A stable long-term interest rate suggests a lasting agreement about the return that the holders of capital may demand. This seems to suggest that, prior to 1800, there was little evidence of struggle over the value in the economy.

The trend becomes increasingly haywire from 1800 onwards, as industrial capitalism began in England and conquered the world. For the past 200 years we have been living on this rollercoaster with its endless economic and social conflict. The solution is not to return to the earlier phase of stable interest rates relying on an agreement that the rich man should stay in his castle and the poor man at his gate.

Surely a more fruitful solution would be to challenge the concept of interest itself. What gives a rich person the right to become richer merely because they have wealth to begin with? Removing the ability of money to store value through time would radically change the way we behave as economic actors--it is surely a prerequisite for any steady-state economy. Tweet

Bush is laughing all the way

George W. Bush has been the most successful president of the US I can remember. He came to office with specific objectives, aiming to serve a tiny kleptocratic minority of US citizens, and he has done this with huge success. His role of the fool has been a skilful ruse to distract us from a ruthless and highly effective economic and political manoeuvre.

Let's consider the three sectors of the US economy whre the wealthy earn their money: banking, arms, and oil. We'll start with the most obvious: arms. When Bush came to power I would never have believed that the US, still suffering the hangover from Vietnam, would willingly engage in not one, but two lasting military commitments. The profiteering this enables for arms companies is clear. Major success number one for the Bush Presidency.

In the case of oil, the Bush administration worked closed via its networks in the industry to hold back policy to tackle climate change. And of course the wars in Iraq and Afghanistan have both interrupted oil supplies, thus pushing up price and increasing the profits for Bush's cronies.

And now finance. What an extraordinary state of affairs that the the law-makers of the foremost democracy in the world can vote to extort $700bn. from middle-income Americans to bail out Bush's banking chums. As I understand it, this deal comes down to passing a bag of gold to Paulsen, who can then give it to financial institutions in return for worthless assets. There is no suggestion that the US public will take corresponding ownership or control in any of these banks, which are just going to enjoy a gargantuan free lunch.

Hats off to Dubya. While we laughed, he just single-mindedly achieved everything he came into office to do and more. This only proves that it isn't the spin that matters; it really is the substance.

Meanwhile we should not be so smug on this side of the Atlantic. With typical British deceit, the Bank of England is playing a similar game but without any discussion by democratic representatives. Behind the cover of the Mandelson gossip yesterday The Bank agreed to accept much weaker collateral (for which read worthless assets) at its credit window. Tweet

Prince of Darkness Returns

I have been wondering for a while what Mandelson has been up to. Along with Kenneth Clarke - and we've certainly been seeing a fair bit of him on our TV screens - he has been identified as a key member of the Bilderberg Group. Will Hutton has referred to this shadowy bunch as the 'high priests of capitalism'. so we might expect them to have been rather busy recently.

Mandelson has taken a few blows in his time, most recently when the trade talks, the Doha round which had been billed as the round for the poor nations, collapsed during the summer. Globalisation is really about money, but in order to make the extortion of resources from the world's poor seem more decent it has to have trade as well. The terms of trade need to be fixed so that the rich countries will always win the game. It was that which the more powerful of the producer nations refused to accept in Geneva in July, and so the talks collapsed.

And now the financial side has fallen apart as well. No wonder we need dear Peter back in the Cabinet. Some speedy restitching of the global capitalist pact must be achieved without delay. No chance this time of a transparent international negotiation, or a fair balancing of the needs of all the world's people. This will be Bretton Woods on the back of a fag packet and behind closed doors.

So I'm not taken in by the drivel about Labour patching up its quarrels. We long since reached the Cat's Cradle world of Gore Vidal, where the politicians allow us a meaningless choice between policy platforms that are only cosmetically different. Who do you vote for if you don't want capitalism at all? If you're tired of a world where children are allowed to starve so that we can have plasma TVs? Where middle-income taxpayers in this country are subsidising the Bank of England's decision to buy the worthless assets of the morally as well as financial bank-rupt? By the way, this is not a rhetorical question. Tweet

Our national bank lies in ruins

The Bank of England is actually misnamed. This name suggests a bank that works for the benefit of the citizens of England. This is not its role; rather it works to support the interests of global capital. The creation of money, a fundamental requirement of a complex economy, is not under political control.

Leaving aside the fact that only England's interests are named - an anachronism that should surely be changed as part of a plan for the Bank's future - what would we propose as a new structure for an institution that has so clearly failed to protect the interests of the majority of our people?

In evidence that this is the case I offer the fact that the Bank has lowered interest rates without requiring the banks it lends money to to pass those lower rates on to customers. Instead retail and corporate bankers alike are charging higher rates on money they lend, and using the difference to inflate profits.

This is obviously greedy and immoral - but it will also prevent the positive impact of cheaper money from easing the operation of the real economy. Shareholders will continue to extract maximum value, but businesses which cannot afford credit will fold, and jobs will be lost.

We have private banks, being supported by a privatised national bank, working in the private interest. When times were good banks made the profits; now times are bad the public is expected to bear the loss. Vast sums are being added to the national debt - our children will be working to pay back money created to be put into the pockets of present-day shareholders.

When the Bank of England accepts worthless assets in return for government bonds this is the consequence. We might support such a policy to prevent the collapse of our banks, but only if we take ownership and control of the banks as part of the deal. The high-street megaliths could be broken up into a series of regional, mutual banks with members of the community sitting on the boards and all surpluses reinvested in community projects.

The current crisis is the consequence of allowing banks to operate outside political control. The global financial system is crumbling, our national bank is in ruins: it is time we proposed a nationalisation of the whole money-creation system. Tweet

Political, not banking, crisis

The world's central banks have made it easier for the world's commercial banks to increase the amount of debt circulating around the world economy. They began by concertedly reducing interest rates, making it cheaper for commercial banks to lend money. This had little effect, so yesterday they acted together to actively create new money.

It is not clear how this money was 'created' but it was probably by the selling of government bonds, in other words increasing the value of the public debt that we will have to pay off through taxation. Since there is no asset to balance this debt the central banks are guilty of just the sort of monetary inflation that the government says is impossible when policemen want a pay rise. Such action is defensible, it seems, when it is financial investors who want a pay rise.

Is it the fact that the word 'inject' is always used about the creation of debt-money by central banks in this way that leads journalists to use the metaphor of a drug pusher, encouraging debt-addicted banks to go back for another fix? To me the more appropriate metaphor is that of the weak parent.

The role of the central bank is to ensure what the jargon calls 'fiscal probity', which means not lending in an irresponsible way. But how could banks judge what is responsible or not when lending to people to gamble on the future value of unplanted cocoa crops is acceptable? No clear boundaries here. And when the unruly children see their playfully created 'financial instruments' blow up in their faces they are not punished or even reprimanded but simply payed off and allowed to continue. No tough love in the world of banking.


Since the reserve ratio (the proportion between bank lending and assets of real value held in the banks) was abandoned, central banks have only required that commercial banks act with prudence. The purchase of junk assets, such as mortgages held by people with no incomes to pay them back, is a clear example of imprudent behaviour. But do the central banks punish banks for this? Of course not, they just enable this sort of lending to continue.

Central banks, and the governments they answer to, are in an uneviable situation of their own making. Following the ending of credit and exchange controls, the deregulation of financial markets, and the ceding of control of monetary policy to banks by governments, political control over money has been abnegated. The role of politicians was to ensure a money system that served the real economy and our interests as citizens. The role of banks was to maximise profits for shareholders. If things are as bad as they currently seem, and the whole monetary system fails, this will be a disaster for us all.

To see what happened when Argentina experienced a 'credit crunch' see my article.

For more on the creation of money see Richard Douthwaite's excellent (and short!) book The Ecology of Money.

Or you could buy Market, Schmarket where this is covered in Chapter 6. Tweet

Dramatic Demise of King

Journalists who are referring to the appearance of Mervyn King before the Treasury Select Committee later today as 'theatre' are for once not over-dramatising. His inevitable humiliation by the bankers can be seen as the culmination of the second act of a tragedy we all share in. The end of the first act was the appearance outside No. 11 of Chancellor Norman Lamont in 1992.



The ashen hero, brought low by his hubris, enacted a classic moment from Greek tragedy. He had overestimated his power and faced humiliation. His efforts to prove that the British government was in control of the British currency in fact proved the reverse: since financial deregulation and the globlisation of currency trading the large players in the markets are more powerful than governments.



So what can we expect to happen to Mervyn King today? He appears to have become a victim of his own economic theories, failing to see that phrases such as 'moral hazard' have always been merely fig-leaves to cover the political manoeuvrings of the dominant forces of capitalism. It is the owners of capital who really control the economy not the espoused objective and neutral forces of the market. When King refused to allow the banks the extra money they demanded surely his fate was sealed.



The agent provacateur of this drama appears to be another former Chancellor, Kenneth Clarke, who has been sharing his avuncular opinions across the range of media outlets. Views on why him, and what his game is, would be welcome.



Meanwhile focus on the need to change the 'tripartite' regulatory system is misplaced. Rather we need a system where politicians have the courage to take back political control over the monetary system, and to replace money creation by banks, as debt, with a system where government spends money into circulation for the public benefit. A truly creative solution would link this to carbon rationing and both a business and individual carbon trading system. Tweet

Robbing hoods

The fact that, as a national economy, we operate with a large and growing level of debt is now accepted as being unproblematic. Yet, as well as being a way of mortgaging our future, the national debt is another mechanism for transferring money from poor to rich. The government borrows money by selling bonds in itself, i.e. a promise to pay the purchaser the sum they invested plus an interest payment at some specified future date. The interest on the bond is paid from taxation income. Since the creation of the Bank of England in 1694 it has operated as a manager of the government’s debt, which it has managed to the advantage of its rich investors. The Bank’s website quaintly states that ‘the public’ were invited to subscribe, although we can imagine how many butchers and seamstresses contributed to the £1.2 million initial capital stock. To the poor debt represents fear and loss of control; to the rich it is an opportunity to use their money to make more. Government debt is the ideal form, since there is no risk involved and if all else fails you can claim you own the country!

Criticism of the national debt is a common thread in radical economics. For poor countries national debts force them to engage with an unfair trading system to generate enough foreign currency earnings to pay the interest. They are tied into a system of debt-bondage with which the rich countries replaced their more unsightly imperialist policies. The national debts of rich countries are less immediately troubling, since if you have a reserve currency at your disposal you can accrue as much debt as you need. In this setting the debts are rather a pump that operates to transfer money from the poor to the rich, since the earnings on government bonds are paid for through taxation of those who have to work because they do not have enough money to live by making investments, including in bonds. Hence the national debt of the UK is making the rich richer and the poor poorer just as the national debt of Tanzania or Peru is.

Shelley identified this fraud nearly 200 years ago when he wrote, in 1820, that ‘the public debt is a system for transferring income from the labouring segment of the population to those who’ had money to lend to government and would thus accrue interest, and who profited from government expenditure in wars. He related this process to the debasement of currency through the printing of paper money, noting that once a real link with gold is broken: the system of money creation thus enables those with power to use money to extract labour from others: ‘to increase the labours of the poor and those luxuries of the rich which they supply . . . to augment indefinitely the proportion of those who enjoy the profit of the labour of others as compared with those who exercise this labour.’ His radical conclusion is that the consequences of this new system, which we would now have the benefit of calling ‘capitalism’, ‘have been the establishment of a new aristocracy, which has its basis in fraud as the old one has its basis in force’. Tweet