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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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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How to Solve the Eurozone Crisis

Inter-war Germany may not be the place you would look first for advice on tackling tricky financial issues, but on the other hand somebody did manage to move the country from the situation where you needed a wheelbarrow to buy a loaf of bread to the country that could afford to spend so much on arms that it could rapidly conquer the whole continent. That man was Hjalmar Schact: he was not a magician but rather a financial expert who was not in hock to financiers. That is a rare commodity and one we are in desperate need of just now.

What a coincidence, then, that I spent yesterday at a conference with Professor Richard Werner of Southampton University. A modest, self-effacing man, he has nonetheless managed to persuade the Telegraph's City correspondent to suggest something like the Schact Plan to solve the Eurozone crisis. The solution is simple: create enough money through quantitative easing to buy back the bad assets. According to Hurley, Werner then suggests that governments should stop selling bonds but rather 'fund themselves through loan contracts from banks in their countries', which strikes me as rather odd when the more obvious proposal would be simply to continue to issue money as public credit. 

What Richard does not tell us is what backed up the creation of vast amounts of new German money that Schact created. That is a point I covered in my book Market, Schmarket back in 2006. I like this better now, because it reminds us of the importance of land. Effectively, Schacht used the German land and its wealth as collateral:

‘Once confidence in a currency is so severely damaged the only feasible response is to create a new currency, which was a process managed by the Finance Minister Hjalmar Schacht. In November 1923 he created a new parallel currency called the Rentenmark; to create confidence it was backed by land, in this case the most solid asset of the German economy. The Rentenmarks allowed economic transactions to take place within the economy, although they were not legal tender, had no fixed relation to the Reichsmark they replaced, and could not be used for international payments. This made the Rentenmarks speculation proof. Bizarrely, much of the speculation against the currency that had destroyed it had actually been funded by loans from German banks. In The Magic of Money Schacht explains how the Reichsbank made loans to support the speculation against the German currency. Thus the government, which has always been blamed for economic mismanagement and for printing too much paper money, was not primarily responsible for the inflation. By 1924 the Rentenmark and Reichsmark were being treated equally and the Rentenmark could be withdrawn. The lessons of the German hyperinflation are twofold: first, that financial speculators’ only motive is to make profits and that they are unconcerned about the social and political consequences of their speculative activity; but, nonetheless, governments can use political power to control this speculation if they wish, exposing the myth of powerlessness.’

It just so happens that we are looking for an independent and skilful financial expert for a rather important job just now. I have suggested to Richard that he put together an application for the top job at the Bank of England. If he is agreeable we could start an interesting campaign, especially as the man who invented quantitative easing has much stronger credentials than most of the current front-runners.
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