Fiat Luxemburg

I am spending the weekend in Berlin as part of an expert group exploring creative and just responses to the financial crisis, funded by the Rosa Luxemburg Foundation. As a Green, this is an interesting experience for me: finding out where the radical left are on the issues of the day. Most encouragingly many amongst their number are recognising the ecological crisis as the defining issue of our times and considering how this might be taken into their worldview and political platform.

The most stimulating contributions have been from the Greek delegates, two of whom are contributing to the policy of the Greek left coalition Syriza. Greece is portrayed as a laboratory for the next phase of rapacious neoliberalism, with the debt crisis being used to facilitate the fire sale of valuable national assets, including the large amounts of land that is owned by the state in Greece. In such a situation default can seem like a liberation. As charmingly argued by Sergio Tzotzes from the University of Crete, 'The sinking of the titanic was an unexpected liberation for the lobsters in the kitchen of the luxury liner.'

As the first default under EU rules, it is important that we study the conditions that were placed on Greece, which were notoriously draconian. Greece defaulted to the extent of €105bn on an original debt of €360, but new loans of €130bn were taken on, meaning that Greece was immediately in trouble again. Worryingly, these agreements have not been passed democratically by parliament but rather signed off by ministers. As the price of this restructuring there was a devaluation of pensions and savings of 90%. This was a default on the private debt, leaving the public debt unaffected. The default was governed by British and Luxemburg law, which is creditor friendly, and the terms imposed by the EU were more savage than have traditionally been imposed by the IMF in similar situations.

My own contribution to the seminar was about moving towards a diversity of forms of money operating at different levels with different objectives and under different forms of control. I think it fair to say that my proposal was roundly condemned. Marxist theory says that money is a commodity like any other and that it is the productive economic that is primary: money will follow decisions made about production. To me this directly contradicts the evidence of recent years and undermines attempts to tackle the way money enables the tiny minority who control money to use this power to also control the key productive and consumption resources.

The Left feels like a rump of something that was once exciting and dynamic. I am surprised by their friendliness to somebody who is basically an interloper but I do find them labouring with some dogmatic ideas that hold back creative thought, especially in terms of solutions. It is important to remember, though, that while it is the machinations of the neoliberals that have brought us to this mess, it is the weakness of the organised left that has allowed them to get away with it. I am not nostalgic for the 1970s but I do recognise that it was the withering of the Left since those years that has permitted the downgrading of my job and attacks on our public sector.
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Is the US About to Default?

There was just too much going on in the IMF report I blogged about yesterday to cover it all. However, one of the most interesting paragraphs is the following:
'The third advantage of the Chicago Plan is a dramatic reduction of (net) government debt. The overall outstanding liabilities of today’s U.S. financial system, including the shadow banking system, are far larger than currently outstanding U.S. Treasury liabilities. Because under the Chicago Plan banks have to borrow reserves from the treasury to fully back these large liabilities, the government acquires a very large asset vis-à-vis banks, and government debt net of this asset becomes highly negative. Governments could leave the separate gross positions outstanding, or they could buy back government bonds from banks against the cancellation of treasury credit. Fisher had the second option in mind, based on the situation of the 1930s, when banks held the major portion of outstanding government debt. But today most U.S. government debt is held outside U.S. banks, so that the first option is the more relevant one. The effect on net debt is of course the same, it drops dramatically.'

The report also suggested a buy-back of private debt, the other side of the debt coin that is holding back the global economy.

What is the explanation for this extraordinary change of heart, if not yet of policy? Could it be that the US acknowledges that its debt, both public and private, is simply unpayable? However great the temptation to return to the lure of further borrowing, eventually states as well as individuals must adjut that they are bankrupt. But the US has grown rich on producing debt that has been bought by other countries, and those at the top of the pile have grown the richest, fastest. There must surely be a price to be paid rather than letting the financiers and those who have gambled with them slope off to their mansions in the Hamptons.

In an earlier paper I suggested that a default of the largest sovereign debtors was inevitable. I proposed that the price the world might extract would be to implement a new global currency regime that uses carbon as backing for the global trading currency. This would allow a fresh start but would limit the consumption of all countries to a level that is environmentally sustainable and will allow us to avoid frying the planet.

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IMF Study Supports Public Money Creation

My post earlier this month reporting that Adair Turner, one of the front runners for the post of Governer of the Bank of England, has suggested that the financial assets the Bank bought in return for its quantitatively eased money should be simply cancelled felt fairly shocking at the time. Around the same time my attention was brought to a paper emanating from the IMF that has the even more surprising proposal that we should return to an effective 100% reserve on the creation of credit. In layman's terms this removes from banks the power to create money and reduces their role to re-lending money that has been deposited with them.

The paper is couched in terms of a re-examination of the proposal from Henry Simmons of Chicago University and later summarised by Irving Fisher in 1936 and is thus called The Chicago Plan Revisited. The report has two authors, a Czech economist named Jaromir Benes who works for the Reserve Bank of New Zealand and Michael Kumhof who is a staffer at the IMF. While the report states clearly that its findings do not represent the policy of the Fund it has been approved for publication.

The authors summarise the Chicago Plan as follows:

'The key feature of this plan was that it called for the separation of the monetary and credit functions of the banking system, first by requiring 100% backing of deposits by government-issued money, and second by ensuring that the financing of new bank credit can only take place through earnings that have been retained in the form of government-issued money, or through the borrowing of existing government-issued money from non-banks, but not through the creation of new deposits, ex nihilo, by banks.'

Fisher argued that such a policy would remove the ability of banks to introduce instability into the monetary system. More crucially in view of the highly damaging consequences of the massive public debts being carried by a number of developed economies, the Plan would allow for the elimination of these debts, since money would be created by public authorities rather than borrowed from banks with interest, which creates a corresponding debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt'. Fisher forecast a similar reduction in private debt.

The authors of this report test Fisher's theories using an econometric model. Their conclusions are striking: 'We find strong support for all four of Fisher’s claims, with the potential for much smoother business cycles, no possibility of bank runs, a large reduction of debt levels across the economy, and a replacement of that debt by debt-free government-issued money.' They suggest that banks would continue to exercise their role of allocating money between lenders and borrowers and providing high-street banking functions, but they would lose the role of creating money.

The authors write that 'We take it as self-evident that if these claims can be verified, the Chicago Plan would indeed represent a highly desirable policy'. Since their modelling suggests that the claims can be verified in terms of the current economic crisis we must await further policy moves from the IMF with interest, and the kind that doesn't bring debt crises in its wake.
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Dispatch from Austerlitz

The award of the Nobel Peace Prize to the European Union is a timely reminder of the central role that this much-maligned organisation has played in all our lives. If we have spent our lives in comfort, alienating decadence even, and without having to fight for our birth-right, then much of the credit for that must go to the founding fathers who found a way to ensure that we had more to gain from standing together than by falling apart.

But the economic crisis that was caused by finance and has shown the current generation up for the political pygmies they are has frightening echoes of the crisis of the 1930s that led us into the last great European, and then global, war. During the 1930s, as brilliantly described by Karl Polanyi, the gold standard was the strait-jacket that strangled domestic economies while allowing the financiers to grow rich. This time around that role is being taken by the Euro and the Eurocrisis is allowing them to grow rich while the people of Europe are impoverished.

The Czech economy is doing pretty well by the standards of some of those with whom it joined the EU. The Czechs had the good sense to hold onto control of their currency the Koruna. It trades at around 35 to the pound and this allows the Czechs to maintain a fairly significant manufacturing sector. This small Central European country has more reason than most to fear the spectre of European war. In the Jakubske church in Brno, the city I visit most regularly, there is a series of dates painted onto the ceiling to commemorate dates when the people of the city needed to seek refuge. My Czech friends laugh when I say that my country has not be invaded since 1066; they can recall 60 invasions the last of which was the cost of 'peace in our time' for Chamberlain.

A few miles away is the battlefield of Austerlitz, site of Napoleon's most famous victory. My visit to the battle site was appropriately undertaken under thick fog, similar no doubt to the fog that enabled Napoleon to disguise his attack on the Pratzen heights and overwhelm a superior force. The greatest danger I faced was from a rally race that was most inappropriately staged by the battle memorial. The battle lies at the heart of Tolstoy's War and Peace, where it is a staging-post to the glorious victory of the Russians in 1812. The following century it was the Somme, which reminds us again of the exceptionality of what really has been peace in our time for the past 70 years.

If you travel to the south of France by train you will leave Paris from the station named for this battle; it matches our own Waterloo station, named to commemorate the place in Belgium where the English army halted Napoleon's continental rampage. These stations remind us of the century or so of conflict that ended in 1945. Between the cultural exchanges, the creations of pan-European institutions, and the mutual guarantee of economic security, the EU can and should be rewarded for underpinning peace in most of Europe for most of the past century.

This is why the Peace Prize comes at a timely moment. Because the current European obsession with the single market is putting the unity of nations in jeopardy. When David Cameron calls for a negotiation so that we can improve our relative situation he ignores the fact that our gain will be another's loss. His question 'What does Britain get back from Europe?' Is the wrong one. The project of peace in Europe is one we all gain from jointly, that cannot be counted in terms of a million here or there on farm subsidies. I have two sons and a daughter of fighting age and what I most want from Europe is to be assured that they will not be called to fight on her soil.
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Putney Debates Round II

Readers of this blog will recall an earlier post when I called for a revival of the Putney Debates, the heated discussions that took place in St. Mary's Church Putney at the end of the English Revolution, usually referred to as the English Civil War. My energy was diverted in different directions but Occupy have taken up this idea and organised an excellent series of events under the banner of the New Putney Debates.

The series begins on 26 October and runs through into November. It touches on all the key themes of the original Putney debates: the need to question patterns of land ownership and the right to own land, questions of power and how it should be shared in what is now a purportedly democratic system, and the issue of equality. On Sunday 28th October there will be a reading of Caryl Churchill's 1976 play A Light Shining in Buckinghamshire in St. Mary's Church. According to the programme, 'The second half of the play focuses on the conflict within the New Model Army between the senior officers (the Grandees) and the Agitators, who stood for the interests of the ordinary men and women.¨This part will have a special poignancy for many of us with a long history of political involvement.

The question of the power of religious institutions, so central to the debates in 1647, has been left out of this series, which seems to me a pity. While the issue of institutional religion may be a marginal one for many political activists the question of the exclusion of spiritual values from public debate seems to me overdue for revival. At the Green House conference on the future of green politics last weekend a workshop on this theme was led by Satish Kumar, who spoke to the theme 'Soil, soul and spirituality'. There was general support for the idea of spiritual motivation as central to human community, and the need to harness this as part of the project of saving the planet.
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Osborne Offers Dodgey Deal on Employment Rights

A surprising article from the Financial Times identifies 'cash upfront on the road to serfdom'. It describes how plans announced by George Osborne offer employees the chance to sell their birthright for a mess of pottage, or in this case to voluntarily relinquish their employment rights in exchange for shares in the company they work for. This is taking the idea of self-exploitation to new depths.

This is surely unlikely to be legal, and a letter from an employment lawyer in the same edition of the paper suggests that this is more ineptitude on the part of Osborne, or what he calls a 'car crash of a policy'. His argument relies on the precedence on European law, however, and the defence we have from European human rights and employment law is clearly the target of the 'renegotiation' with the EU that Cameron is calling for. Tweet

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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