Lending for Spending?

At first sight the 'new' policy announced at the Mansion House last night is incomprehensible. Banks, whose job is to create money to lend to companies, are to be loaned money at low rates of interest to lend money to companies. This bizarre and pointless piece of choreography appears to ignore the fact that banks have the ability to create their own money without the Bank of England's involvement, and that what limits their lending is the absence of companies seeking loans which they, as profit-making institutions, consider worth the risk. Following the previous policies of quantitative easing, Project Merlin and the Loan Guarantee Scheme, this new policy indicates not only the continuing desperation of Chancellor and Governor but their stubborn insistence that private-sector solutions growing out of monetary policy will solve our problems.

The reason for the impasse is more ideological than economic. Those with power are just refusing to accept that monetary policy is not, and never was, a private affair. The 2008 crisis made clear that the citizens of a country stand behind their banks and that a banking crisis, unless dealt with early and in a way that allows banks to make losses, will become a sovereign debt crisis. In the UK case, we went even further than this, taking control of some of our largest banks, which have in reality been transferred to the public sector. As such, they could be used to send money directly into the economy, not via banks that are too nervous to lend, but directly to fund green infrastructure projects or other transitional public investment. What stops this from happening is the destructive ideological mantra that says the private sector should grow while the public sector shrinks. This is maintained not because it is working, or because it would make our country a better place, but rather because it is an article of faith for free-market believers.

This foundation of economic policy on inappropriate ideology also prevents the Chancellor from insulating us against the problems of the Eurozone. While little can be done to reduce the impact of Euroland recession on our exports, this could be compensated by increased effective demand at home if the Chancellor used his control of our national currency to intervene positively in the economy. This is why economists across the political spectrum fought to maintain our national currency. Similarly, because we own some of our largest banks we can also insulate national monetary policy from the turbulence in the European banking system, at least to the extent that it derives from the internal contradictions of a currency area of which we are not a part.

We do not need to be suffering from the death spiral, which is largely of the Chancellor's making. We could be using the opportunity of the bursting of the credit bubble to acknowledge the role of the government in monetary policy and to use that to shift the economic energy in our country away from finance and speculation and towards investment in a transition to a real green economy. The opportunity is there; it is only the ideological blinkers worn by our politicians that prevent it from being grasped.
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George Makes King Mad

Proof that the economic crisis is still, fundamentally, a monetary crisis came during the Chancellor's speech to the conference yesterday, when he announced that he would be experimenting with another novel policy, which the policy advisors have decided to call 'credit easing'. This represents a worrying incursion by the Treasury into the realms of monetary policy traditionally reserved for the Bank of England.

You may have noticed the media pressure in recent weeks from 'financial commentators' attempting to force Mervyn King, governer of said bank and therefore the chap in charge of the nation's monetary policy, to resort to another round of quantitative easing, a policy that the media usually refer to as 'printing money' but which has actually consisted of the bank buying up a lot of corporate debt, thus making it easier for the corporates to take on more debt. Since that is the way that this form of capitalism considers appropriate to create money it is a novel but predictable response to a squeeze on credit.

It seems that King and his eight wise men of the Monetary Policy Committee (for such they are - no sign of skirt in the room when such decisions are made) have refused to put more money into the economy in this way, and so the Chancellor has found a way around this block by inventing a system of government guarantees of corporate IOUs, allowing them to issue bonds and get the liquidity flowing. Few details have been given yet, but it appears that the process of creating money through issue bonds is being privatised, with corporations now being allowed to create money in this way.

The Treasury will guarantee this process, which appears to mean the we, as taxpayers, will become entangled in the securitisation corporate debts that was the process that led to the credit crunch in the first place. With bank debts looking so dodgey, only debt backed by our obligation to work is acceptable. The problem is we have no say over who is allowed to create this debt, how they bundle and sell it, and what it is invested in. These deeply political decisions have been privatised and devolved to corporates.
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I must confess that the arcane niceties of what is referred to in textbooks as 'open market operations' baffles my mind, but the political economy of this seems clear: the debt crisis has resulted in the sucking of money - liquidity - out of the economy at all levels. Everybody is clamouring for investment, whether in hospitals or from the corporate sector: it is a political decision that money will be allowed to be created in the private sector while the public sector will continue to be starved of cash.
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Banking Mad

Holmes and Watson pursue an errant banker

So the Vickers Commission has reported and made its bland recommendations. In view of the apocalyptic views expressed about the behaviour of the banking sector by Bank of England Governer Mervyn King earlier this year the proposals seem mild indeed. More telling is the eight years that the banks have been given to wheedle, wangle, and reorganise their business to avoid the legislative changes that are proposed having any potential to curb their room for manoeuvre.

Given the devastating consequences of the banks' nefarious practices over the past 30 years the only conceivable response is one of rage. But while rage seems to me quite appropriate, and proposals along the lines of a national audit committee to repudiate much of the debt that is presently destroying our society may be a way of channelling this rage, there is also a need to engage in the debate about the future shape of the banking sector in the UK.

My Green House colleague Thomas Lines has done this with admirable grace and restraint (not to mention some wit) in his recent report The Dog that Didn't Bark. As its subtitle indicates it provides useful historical background to the present limited debate by analysing 'when banking crises did not occur and what we can learn from that'.

Lines reaches some rather unexpected conclusions. If I may risk mixing his extended metaphor (over which he himself is quite scrupulous) he finds that the focus on competition between banks is a red herring. During the nearly three decades following the end of the Second World War when there were no significant banking crises, British banks were not very competitive and operated more like an informal cartel. This was elitist and resulted in the rationing of credit, but it did achieve stable banking.

Interbank lending was also rare during this period. It was the interconnectedness of banks, as much as their size, Lines argues, that left them so vulnerable in the period leading up to the 2008 crash. Its origin lay in the laziness of bankers, who sought easy profits without effort:

'An uncharitable way to describe inter-bank lending would be as lazy banking, since the wholesale markets make it possible to build up a bank's assets without the hard work of developing a customer deposit base.'

The report recommends that banks return to their function within a stable economy: that of unglamorous utility banking, providing a haven for savings and a source of reasonably priced loans. A key recommendation is one that finds a comfortable home on a blog on the theme of Gaian Economics:

'Ecological theory suggests that a system will be most resilient when it is divided into compartments to protect it from external dangers. The banking system should be set up in this modular way too, without financial interconnectedness between banks. For this reason we proposed severe restrictions on interbank lending and derivatives trading, and a reintroduction of exchange controls designed, among other things, to sharply reduce international flows of money between banks.'
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The King's Speech

You can tell that there is a major adaptation afoot when the Governer of the central bank of the country where capitalist finance is based starts to make interesting speeches. Do not be put off by the title, Global imbalances: The perspective of the Bank of England is radical stuff - heady, the FT calls it. Like King's speech to the Buttonwood gathering in New York this new statement is steeped in nostalgia for the era before Big Bang, when there was some degree of political control over financial interests, and bankers could not destroy the livelihoods of other citizens.


King expresses concern about the 'large and persistent current account deficits' being run by the UK and US 'while emerging market economies, in particular in Asia and among oil exporters, have been running current account surpluses.' This situation of imbalance in current accounts - the very situation that the Bretton Woods system was designed to avoid - results in instability and, potentially, conflict. The graphic shows how successful the Bretton Woods system was, and the mayhem that was evident before and after.

This paper must surely have been used to inform discussions amongst G20 finance ministers in Paris last weekend. The meeting agreed a resolution but the fundamental disagreement between China and the others over the desirability of total free movement of currencies and the need to address current account imbalances was apparent.

Mervyn King appears to agree with the Chinese. As illustrated in the second graphic from his paper, he associates free currency movement and financial instability:

'financial crises have been a hallmark of the current incarnation of the international monetary and financial system (IMFS),with the reappearance of global financial instability coinciding with the rapid increase in capital mobility.'

His conclusion is that finance ministers need to use a much wider range of tools than just interest rates. They should take back a positive management role in monetary policy, controlling capital flows, and encouraging an increase in saving rather than spending, as well as considering a revision of the 'role and governance of the international financial institutions'.
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Follow the money

Any intelligent observer who was paying attention must have learned since 2008 that the money system is the trick that facilitates the control of the global economy in the interests of a tiny but powerful minority. So when any proposals are made to change the way that money-banking system works we should pay great attention.

On Tuesday Mervyn King, the Governer of the Bank of England and therefore the man responsible for both banking in the UK, monetary policy and the pound sterling itself, gave a speech in New York (aka Capitalism Inc. HQ) where he said explicitly that 'Of all the many ways of organising banking, the worst is the one we have today.' (Full text available here.) This is the clearest indication yet that capitalism is in the course of a major adaptation: the key to who will gain and who will lose will be in the design of the money system that will emerge.

King's central point in terms of critique seems to be similar to that made by my good friend Mary Mellor in her book The Future of Money, namely that it is simply unfair that a system so unstable as that of fractional reserve banking should be guaranteed by the public so that, in the now familiar cliche, the losses are socialised while the profits are privatised.

According to Robert Peston's summary of the speech, King argued that the hastily agreed Basel III accords are insufficient guarantee for publics who still stand behind their banks. For those do not spend their time watching the pin-stripes, Basel is the place where international bankers go to decide amongst themselves what is the least they can agree to tinker with their business model to keep the world's politicians happy (again: note the location).

What Mervyn King was arguing for, in the heart of the banking beast, was the abolition of banking as we know it. He proposed two alternative models. The first is already the subject of wide debate and would require a complete separation of retail and investment banking. The second is more interesting and known as 'limited purpose banking'. It works on the insurance model inherent within mutual approaches to finance and, as far as I can understand, leads to a situation where we really are ‘all in it together’, since the risks between capital and personal investments are pooled, with businesses and households sharing risks, but within different kinds of 'banks', operating with different degrees of risk.

Mervyn King places his hope in the Independent Commission on Banking, whose members are all well-steeped in the capitalist money and banking system, and are sure to recommend an adaptation that does nothing to change the status quo in terms of the sharing of economic power within global capital. Perhaps it is time to launch our own People's Commission on Banking in response. This could propose that the creation of money should be in the public, not the private sector, thus solving all King's problems at a stroke. I propose Mary Mellor for Chair. 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