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post-autistic economics review
Issue no. 39, 1 Oct 2006 back issues at www.paecon.net
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In this issue:
-The Future of Economic Policy Making
by Left-of-Center Governments in Latin America
Juan Carlos Moreno-Brid and Igor Paunovic (United Nations, Mexico) .........2
- Latin America: The End of an Era
Mark Weisbrot (Center for Economic and Policy Research, USA) ...............................8
- Will Computers Really Decentralize the Economy?
Ian Fletcher (USA) .........................................................................................26
- Is New Labour’s ‘ Third Way ’ new or just hot air in old bottles?
Grazia Ietto-Gillies (London South Bank University, UK) ......................................31
- A Solution to the Alleged Inconsistency in the Neoclassical
Theory of Markets: Reply to Guerrien's Reply
Deirdre McCloskey (University of Illinois at Chicago, USA) ...................................48
Opinion
- Keynes without Debt
Ron Morrison (UK) ...........................................................................................51
-The Dream of Creativeness as Outcome of Political Economy
Margaret Legum (SANE, South Africa) ................................................................54
Opinion
Keynes Without Debt
Ron Morrison (UK)
As the power of 'free market' Capitalism – or more precisely, the power of money, takes even deeper root in our 21st century, so also does the human vice of greed undermine our societies. Where once there were standards of behaviour and conduct whereby the democratic process would maintain some crude balance between self-interest and social responsibility, now our governments, ably abetted by a burgeoning 'middle class' seem intent upon dividing the world into 'haves' with even more and 'have-nots' with ever less. Such injustice is the fellow traveller of discontent, generating terrorism and disruption.
The challenge is to humanise the present style of capitalist system. We must recognise the social cost – not only in the obvious sense of the have-nots becoming poorer, but also the ever higher price being paid by the haves in terms of their own much vaunted lifestyles. If the wider infrastructure of society continues to deteriorate, there will be no green and pleasant environment to enjoy.
To this end there exists a practical and specific proposal to consider, which might be called Keynes without Debt. It embraces the economic principles of John Maynard Keynes. Currently unfashionable in the rarefied atmosphere of the neo-classical academicians who espouse the euphemistically styled free market, it was Keynesian principles which pulled the West out of the depression of the thirties and which helped Europe recover from the ravages of WW2.
As war developed into peace and the targets of full employment were achieved, so also began to grow once again the power of money. In the 1980's a new economic theory developed – that of deregulating the money business in the expectation that the market place would produce economic equilibrium. Much faith was invested in Adam Smith's 'invisible hand' - a much misquoted euphemism of the 'I'm alright Jack' fraternity. Hypnotised by this delightful simplicity, and encouraged by a body of bankers and financiers who were obviously extremely influential and financially successful, the politicians of the era – principally Thatcher and Reagan – committed the West to a world run by money as the prime mover of all other policy.
Not everyone was convinced of the long term effects of this, but the money lobby condemned spiralling taxation and the cost of government borrowing as becoming unsustainable and out of hand. The pro Keynes lobby were unable to marshal a counter argument - it was perfectly true that debt – both personal and National, was indeed beginning to spiral and Keynes' theories had never really got to grips with the role of the money system in the economic drama.
Keynes eschewed abstract mathematical theories based on apocryphal assumptions. He produced more practical theories than any of his fellow economists and he dealt with the real world and its problems. He firmly believed that government's job was to intervene where the free market broke down in social terms. However, he never really got down to the nitty-grittys of the money system - government remained obliged to borrow from the banking system in order to intervene effectively; and this implied increased taxation or an escalating National Debt.
Of course Keynes' General Theory was published in 1936 when currencies were still linked to the Gold Standard - indeed the US dollar was still linked to gold up until the early seventies. Keynes died in 1946, long before 100% fiat[1] currencies became the norm. At that time half the money supply in the UK was spent into existence debt free by the state and the other half was chequebook credit. It is not therefore altogether surprising that he felt constrained by traditional monetary theory and found it hard to look beyond bank borrowing to finance public expenditure. The concept of Keynes without Debt addresses our current domestic crisis of rescuing our obsolete Public Services without increasing taxation or cranking up the National Debt.
Now, fifty yeas on, bank credit supplies virtually all our everyday means of exchange, and this brings into sharp focus the simple fact that modern money is no longer constrained by outmoded intrinsic values. It is pure fiat and simply a glorified accounting system. Keynes did see money in this light when he conceived his International Payments Union (Bancor). Very briefly this was an international currency unit to be administered by the UN whereby all countries were encouraged to maintain a balance of payments and avoid excessive debt. Countries in surplus saw their balances reduced by the application of negative interest and those in debt had to pay interest or devalue.
Unfortunately for the developing world the Americans dominated the post war Bretton Woods Conference and were not prepared to permit the mighty dollar to play second fiddle to anyone or anything – no matter how good the logic. Even then they knew that whoever controlled the world's currencies also controlled the political power. However, the detail is not the point here, what is important is the principle – that money is now an accounting system which can be administered in such a manner as to optimise a declared objective.
Modern monetary reform is about displacing the current economic paradigm of 'what can be afforded' with 'what we have the capacity to undertake'. It is a unique situation that for governments the term 'affordability' in terms of money is a non word. All new money emanates from government either as cash or as credit authorised under the Banking Acts. The value of the money in our pockets and bank accounts is a function of good government acting responsibly to maintain its value. Nonetheless, the financial establishment (now over a quarter of the UK GDP)[2] reckons that it knows best how much our government can afford to spend on public services and infrastructure.
Governments have issued debt free finance for donkeys years and spent it into circulation interest free. It can be done again, given the political will. The evolution of credit this past fifty years has expelled this source and replaced our means of exchange with private, interest bearing debt. If government can issue Gilts and Bonds they can issue credit to finance the rebuilding of creaking national infrastructures. When government once again assumes its constitutional responsibility to issue the National currency and then lends it to the banking system to re-lend as intermediaries then we can reduce the tax burden and finance essential public services. Nowadays Wall Street and the roads in London’s City are not paved with gold but with paper and computer chips. The money supply is all to do with business and maximising shareholder value – nothing to do with benefiting the community. It is the road out of a mixed economy into a frightening new world order where money buys power, both political and military. We need an alternative route. It's sign posted - Keynes Without Debt.
[1] Financial Intermediaries – enterprises holding other people's money to make loans – were 27.6% of GDP in 1998. Abstract of National Statistics.
SUGGESTED CITATION:
Ron Morrison, “Keynes without Debt”,post-autistic economics review, issue no. 39, 1 October 2006, article 6, pp. 51-53, http://www.paecon.net/PAEReview/issue39Morrisont39.htm
Reprinted from the Scots Independent Newspaper May 2008
Financial Independence
There have always been those who make a lot of money from manipulating the financial system, but never so many as today. Thirty years ago the choice of a career was significant, but now it’s often seen as little more than a means to an end – just show us the money.
We produce acres of newsprint and listen to media dominated by financial data and markets. The world economy hinges on the forecasts and actions of a handful of bankers - and the financial interests of those who appoint them. Governments are constrained by budgets rather than the human resources they represent. Ordinary folk spend more time worrying about their debts and financial affairs than doing useful work or enjoying themselves. Money is King.
Over recent months The Federal Reserve has poured hundreds of billions into US financial markets – also called bailing out the banking system. Likewise the Bank of England has poured tens of billions into Northern Rock and opened a virtually infinite ‘line of credit’ to all the major clearing banks in the UK – all to keep our fragile money system from collapsing.
This is the system which sold 125% mortgages to borrowers on income multiples of six and seven times, didn’t bother to check income declarations and required no deposit. When credit is churned out like that then prices keep rising until the crunch comes. This is the same system which lends credit to hedge funds which buy up financial products on such a scale that the prices just keep on rising – until the crunch comes. it is bank credit which funds the private equity firms which buy up real companies, break them up and sell off the bits for a quick turn. It’s the same credit which funded the conversion of erstwhile Building Societies, the privatisations of the eighties and all the other financial wheezes – the latest being Scottish Water which will now be more efficient and competitive. In fact the only change is that tomorrow half a dozen new firms will produce bills for the same water, flowing through the same pipes maintained by the same Scottish Water employees. It follows the pattern of all the other utilities – a free gift to all the new ‘ competing’ power suppliers but the same gas & electricity flowing through the same conduits….. and like all the competing train operators running on the State subsidised rail network.
What does all this produce? Nothing but £100 billion more financial credit each year – that’s £346 million a day more financial air to inflate the bubbles constituting the Financial Sector – now thirty per cent of all UK earnings. Interesting too that there’s no new bank credit needed to abolish Council Tax so The Treasury describes replacing it with Income Tax as an ‘expensive fiasco’. We already collect 75% of local authority revenues this way – why should collecting the other 25% cost a penny more? Indeed abolishing the expensive process of collecting rates locally should be a worthwhile economy.
The State is constantly broke. They tell us only ‘private sector finance’ can fund new build State assets and all our public services survive in the shadow of the Treasury guillotine, so they invent PFI. This generates yet more bank credit, predicated upon the hapless taxpayer paying off the debt over thirty years. Yet this same State can fork out all these billions to the banking system, and £25 billion for Trident - not to mention £2bn a year to run it. It can afford military adventures and murder in Iraq and Afghanistan. We have become a client State of the White House Mafioso – another politically corrupt administration in obscene debt to the rest of the World but not giving a jot provided the money flows to the right people.
Government should be protecting us from self-interested moneygrubbers - not subsidising them, yet the gullible public nods its collective head to all this and listens to fairy stories about keeping the financial markets stable and inflation below 3%. It has taken some time, but the rest of the world has finally rumbled the con – the pound is following the dollar down the Swaney. Today all these imports and your holidays abroad will cost 20% more than yesterday and tomorrow probably another 20%, because there’s no sign of anyone stepping in to stop the rot. Why should they - the financial speculators make as much on the currency falling as rising …
You can fool all of the people etc. but you can’t manage an economy or a Nation by manipulating its payment system. As an accountant I was dumbstruck by the Thatcherite deregulation of the banking system. As a businessman I am nothing short of amazed how long the productive population has remained oblivious to the parasites of W all Street and The City sucking them dry. I don’t mind people gambling with their own money, but using mine, pocketing the winnings and then asking me for more when it occasionally goes pear-shaped is a bit much.
Corrupting the payments system has effectively destroyed the real economy; we are left weakened and undermined. We have been gullible and have assumed our government to be competent and responsible. It has been anything but - and there appears no prospect of change until the last billionaire fat cats and tax exiles abandon the sinking ship. Take a look at www.scottishmonetaryreform.org and see an example of what our Party Think-tank should be contemplating.
I became a Scottish Nationalist because I believed it was the only way we could save ourselves from this financial disease. There is simply no point in political Independence without financial independence. Our party leaders must take this on board and work out how we can reincarnate a responsible banking and payment system. I have a dreadful suspicion that many of the principles which drew old Nationalists to the Cause may be in the process of being dumped for short term political expediency, The prospect of a mirror image of the financial status quo but moved to Edinburgh will spark a New Clearance rather than a New Enlightenment.
A new set of values for society, finance and foreign policy should be the focus of the next election and we should not be frightened to say so.
(Ron Morrison is a retired accountant and businessman and a former member of the SNP Finance & Taxation Committee)
Also reprinted from the Scots Independent of August 2008 -
FAQ about 'New Banking' - refers to Banking & Society PowerPoint Presentations
Will the Newbank Charter protect my ordinary savings & deposits?
Yes –,. as Newbanks cease to depend upon each other & the markets for funds (apart from the Clearing Process) the State will guarantee deposits 100%. But it will NOT bail –out a failing bank by providing taxpayers’ money to bolster its capital or other liabilities.
Can a Newbank still go bust? Yes, but as an intermediary it does not have access to your money as an asset, other than to lend it to another customer. If a Newbank loan goes bad it will be a charge against its profits (i.e. the shareholders as at present) and if the Newbank’s capital & reserves are insufficient the bank will become insolvent. The purpose of Regulation will be to encourage prudent lending and moral hazard. It would be a criminal offence to use customers’ deposits to underwrite or subsidise shareholders’ obligations – with sanctions extending beyond the normal limitations of limited liability. An advantages of the Newbank arrangement is that there can be no chain reaction to a bank going down; there can be no sudden drying up of credit due to financial gridlock. The State will underwrite the deposits of normal customers – although there may be limits imposed.
Would such restrictions not close down the availability of medium/high risk lending?
Yes – banks would be discouraged from high risk business which would be left to specialist firms attracting funds with a high risk profile & return. Medium risk business would be written on appropriate terms. The overarching principle being that banks per se were perceived as safe.
Can Newbanks lend out credit in excess of customer deposits?
Not directly – the Central Bank is the sole source of all new money (both cash & credit) and Newbanks will require to tender for tranches of the National Credit as and when they deems necessary.
Will I receive interest on my deposits?
It is unlikely that interest will be paid on current accounts, indeed there will probably be a charge for providing this facility. Interest will be paid on savings or term accounts - probably at two basic rates. A low rate for under three month access and higher rates for locking in money for longer periods. Devices like instant access savings accounts are likely to disappear. It is likely however that there will be opportunities to invest in a Newbank in return for a higher return but also higher risk – i.e. these will be share accounts having various degrees of preference to risk ratios as well as ordinary shares.
Will Newbanks be able to offer customers other financial services like insurance, share dealing etc?
No. Their Charter restricts then to retail banking and managing the payments system.
Will Newbanks continue to offer credit card and normal personal & business overdraft facilities?
Yes, They will charge a margin of interest over what they themselves pay to customers and the Central Bank. The Central Bank will continue to fix base rates.
What about long term loans & mortgages?
Yes, but under the new regulations these contracts will not be sold on into the money markets or to other banks but tendered to the Central Bank as securities for further tranches of State Credit. Depending upon the risk or nature of the contracts the Central Bank may offer a risky bank less than 100% replacement credit.
What does the State do with these mortgage securities?
They produce a stream of revenue to the State which will underwrite the tranches of new National Credit to the banks. If a major drop should occur in house prices relative to these securities they are already underwritten by the State and do not affect the commercial viability of the Newbanks
Will the Newbank charter contribute towards any reduction in private & public debt?
Yes. Central Bank policy will be to cap present debt levels. New money is constantly in demand and will be available to Newbanks– i.e. money over & above that provided as replacement for securitised debt contracts. Newbanks will credit the account of the Central Bank with the value of all new money issued to them in this manner – be it in the form of cash or credit. This new money will not be loaned into circulation but spent by Government in the form of payment for new public assets. Thus any addition to aggregate money supply will not be debt but money backed by physical asset creation. This will reduce both private and public debt yet still finance public investment.
Will loans between banks still be permitted?
Yes, but generally restricted to the overnight clearing operations. As a matter of principle inter-bank lending will be regulated to avoid potential financial chain r
Unimaginable amounts of public money went into rescuing the banks, but precious little into what really happened. The governing elite dispenses the usual anodyne clichés - ‘lessons have been learned’ and ‘it’s time to move forward’ - but we must not permit them to get away with reinstating this flawed and volatile system under the guise of returning to ‘normality’.
It is unacceptable that ‘Public Inquiries’ into ‘unfortunate events’ occur only following significant public pressure. Even when grudgingly conceded they are inevitably chaired by a prominent member of the Establishment who forthwith nominates other members of the same Establishment to pontificate upon these events. On the rare occasion when an outsider is invited to submit a dissenting view this is inevitably dismissed as ‘fringe’. At best it warrants a minority report at odds with the overwhelming body of evidence from industry experts and high profile public personalities. Have you heard even a whisper of a Public Inquiry into this monumental banking scandal? In short the Westminster Establishment operates within the same parameters of ‘self-regulation’ and pocket lining as does its paymaster - the banking system.
Nothing new here then. We always seem to end up with a leadership which uses democracy as a platform to advance their own agendas – not ours. Just look at the millions who spoke out against the Iraq war – it made not an iota of difference. And now it is equally obvious that the banking system is operated exclusively in the interests of bankers and this same Establishment. Are our memories so short? Is apathy so universal? Is the human condition such that we can do no better?
We must focus our dissent upon the Paymasters who keep this Establishment in powerful office, and the money system they administer. Most of us understand money in the context of our personal lives and household budgets, and equally transparent is how legitimate fortunes are made (and sometimes lost) in running business like manufacturing, retailing and construction etc. and we appreciate the employment they create. But the glass clouds over w hen it comes to banks – how do they manage to lend all the billions they don’t have? Why does the State delegate the entire National money system to private companies - licensing them to create as much credit as they deem appropriate? Is this in the National interest? Can this ‘notional’ money ever be a stable and reliable means of exchanging our real goods and services?
The Queen’s image on our banknotes and coins suggests that money is a Constitutional responsibility. Not so, only three pence in the pound is cash – everything else is now bank credit – In effect the State has privatised this Constitutional obligation and handed it over to the banks.
Both cash and bank credit are regarded equally as money, and this is certainly convenient – no one would suggest otherwise. However what we should be thinking about is a world where the State creates the credit and the banks distribute it - just as the State creates cash and issues it to the banks to put it into circulation. This infers no change in customer relationships with banks – but it would transform public investment and curb abuse..
The Present Arrangement The Future
The commercial banks decide the sustainable volume of the National Credit – based purely upon maximising profit. Additionally they borrow from one another to finance investment banking activity, money market speculation etc - everywhere that retail credit creation is disallowed.
97% of all money is debt (notional money) entering circulation purely against criteria of profitable repayment and against no specific asset creation.
Government, the ultimate source and sole guarantor of the entire money system, currently borrows from the private banks. Ridiculous. Bank credit is habitually issued at three to four times the rate of economic growth (GDP). Credit enters and exits the system without regard to under or over employment, the balance of payments or indeed any macro-economic criteria
Banks exercise sole discretion over the purpose & availability of loans, They regard credit money as their own. Now we all know it is not their own – it is the National Credit.
Light touch regulation is good for ‘asset bubbles’ & short term bank profits - and bad for financial stability & inflation. The Central Bank, accountable to the Constitution, becomes the arbiter of how much money is appropriate to serve the domestic & commercial needs of the nation. It will be illegal for banks to ‘create’ credit – in future all ‘new’ money will source exclusively from the State. All else will be counterfeiting.
All new money entering circulation will be in step with public asset creation. Public debt will be capped at present levels and progressively repaid.
Banks will require to attract real money from savers with realistic interest rates.
As banks require new or additional money they will apply for it from the Central Bank. The government’s seigniorage a/c will be credited – precisely as at present when new cash is issued. Thus all new money will be spent into circulation when government draws a cheque on the seigniorage a/c.
A clear distinction is to be drawn between credit sought for genuine investment and that more aptly described as gambling or speculation – or stoking up inflation.
New regulation will oversee banks as financial intermediaries – attracting real money from depositors for re-lending.
The public perception is that governments nationalised the banks because letting them go bust was ‘not an option’. The result has been that gambling debts and executive bonuses (many based on fraud & deception) - have been paid from public funds. The government plans to further reward the banking system by encouraging it to refloat on the stock market at the earliest opportunity – thus putting the gravy train back on the rails and back to business as usual. Nationalisation was the preferred Establishment solution, calling ‘time out’ whilst the long suffering taxpayer put Humpty Dumpty back together again. Was there any alternative?
Ask why insolvent banks were not put into receivership like any other failed commercial enterprise. The accountants in conjunction with the Public Audit Office would simply have hived off the ongoing retail banking & domestic mortgage functions and sold off any residual assets to the highest bidder. The State would have guaranteed domestic deposits and the payments system. The accountants would have written off the bad loans and offered sympathy to the army of money market parasites claiming to be creditors - save for a one way ticket to Las Vegas and Gambleland. The public purse would have saved a fortune, the real economy would hardly have missed a beat, We could all have enjoyed the benefits of a return to Constitutional money - and the transparent money management system that implies..
Unionists say that the RBS & HBOS debacle would have brought an independent Scotland to its knees and only the strength of the Union was capable of nationalising the banking system. Agreed, there would have been no option but to liquidate and reconstruct – and in so doing we would have demonstrated to the world how to put their financial houses in order.
Of course all this has been submitted to the Treasury Select Committee – not only recently but regularly ever since Mrs Thatcher’s Big Bang. But no one at the Westminster Establishment wanted to know – they didn’t even re-arrange the deckchairs…
Endnote:
Interviewed on Business Daily on 10 June 2009 (BBC World Service, Prof Jeffrey Myron (Senior Lecturer in Economics Harvard University) agreed that bailing out the banks was a mistake and that they should have been bankrupted or put into administration.
The banks are already repaying the government loans and the banking system will soon be back to business as usual, he said. Little will change in the longer term and the cosy relationship of Wall Street & Washington will continue. There was no need to bailout these gambling debts. Prof Myron concluded that it was the politicians who put the wind up the public and manipulated public opinion with dire warnings of depression if the government failed to step in.
This crisis is already almost forgotten and those who naively thought it would spell a return to honest money have been sadly disabused. With bank borrowing between ½% to 2 % and lending at 4% on selected mortgages and up to16% on overdrafts and credit cards the banking monopoly won’t take long to soak their customers and repay the taxpayer…..
The moneylenders will continue to rule the world for as long asl public apathy permits dishonest politicians to stay in office.
Join the Building Societies Members Association and join us in the campaign to preserve our remaining Mutuals and real money
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