The time has come for some fairly radical reframing of economic policy if not just the UK but the world at large is to survive the challenges that face it.
There are at least three such challenges. The first comes from the bursting of another credit bubble with all the risks that we are becoming increasingly used to after the collapses of 2008 in primarily Anglo Saxon housing markets and in 2012 of Eurozone debt markets. The emerging markets are the likely risk here.
The second comes from the collapse of major corporations, whether they be banks or entities wiped out by officially sanctioned corruption. VW is just leading the pack here.
And third there is something more powerful, which is the combination of threats giving rise to mass migration, whether they be war or climate change.
The unique fact is that right now all three are at risk of happening together. This is a combination of circumstances of such power that unless new thinking both happens and is acted upon we are in deep trouble.
What I can say, for certain, is that markets have no answer to these macro problems, however good they are and will be at creating micro solutions and opportunities within them. We know already, from experience, that the first two challenges are only capable of being dealt with by government action. The third cannot in any sense at all have a market solution: it is, by definition, an externality as far as the market is concerned.
So, the first proposition in creating any solution is that the state is fundamental.
It is then important to note that the reaction of all the active agents who might suffer as a consequence of these challenges is to seek a safe haven. That is tangible in the case of migrants: they need somewhere safe for them, and most especially their children. In my opinion no one should ever doubt the determination of a frightened parent seeking security for their child: there is no more powerful emotional force. The challenge that this creates should not be, and cannot be, understated and has hardly begun. It worries me, but it is not something I can do anything about in itself. I am not an expert in that issue.
What I can suggest is something different, and that is the change in thinking needed to tackle the first two crises. I happen to think the means to deal with the third will flow as a consequence, and yet the logic of all three is the same. It is that there is in a time of crisis a quest for security.
In that case the second proposition in creating any solution is that safe havens are needed.
Put these two ideas together and you come to the third, key, proposition which is that it is the role of the state to provide safe havens in a time of crisis.
And now move this beyond the tangibly obvious fact that this applies to refugees and migrants and realise that it will not just be those people who are seeking new homes in the crisis to come and realise that what will also be needed are new safe havens for capital as well. When credit bubbles boom, when companies and markets collapse and when banks are in peril then capital also looks for a place to go to whether the storm. And the only place to go is the state.
This realisation creates my fourth understanding, which is that in a time of crisis it is the job of the state to create a safe haven for financial capital.
It is this fourth element of the propositions I am making that is, I think, simply not appreciated at present. If governments are to provide capital with a safe place to weather the storm (and nothing and no one else will, which means that barring the deeply destructive destruction of that capital there is no other option available) then those governments big enough to do this (for which purposes means a relatively selected number) need a plan to do so.
The plan is severalfold (with a considerable number of nuances to add in due course). Please forgive any apparent metaphors making apparent reference to a human migrant crisis: they are necessary simply because the needs are in many ways similar.
The first, and fundamental, element of any such safe haven strategy is to provide a means of passage. It will be necessary to arrange, as far as possible, for the orderly passage of capital from where it does not want to be to where it might arrive. This is not easy. What it requires is that panic is avoided and the transition is not flight, but an ordered flow. In markets that means that protective mechanisms to ensure that companies do not collapse with all their capital disappearing with them must be put in place. This may be painful: the state will, in effect, and whether it likes it or not, underpin the collapse of some companies and allow an ordered exit of private ownership after a serious reduction in the value of equity stakes but long before they are eliminated entirely. And this will apply to bond as well as equity owners. The necessary powers to take control in this way, without any legal right of recourse from the private equity owners involved, must be designed now. The precedents exist from 2008. We must learn from them, very quickly, whilst strongly resisting mechanisms like TTIP that are so dangerous in challenging this right of the state to intervene to preserve value because of the residual right it gives to capital to claim undue compensation.
Second, the state has to provide an alternative secure place of abode for capital. In essence it only has one, and that is gilts or treasury bonds. Perversely these are in short supply right now precisely because so many are owned by the state. Much as I am associated with the idea of People's Quantitative Easing the possibility of there being a need for more, and not fewer, gilts in issue is now a very real one. But, and I stress the point, the resale of existing bonds may not be the answer as all have positive rates of interest attached to them. I am not at all sure that there is any need for this right now. With all major gilt issuers in the world now offering interest rates of less than 2% in nominal terms, and often (but not always) close to zero in real terms there is no point in the new bonds that might need to be issued to the world's refugee capital having a positive interest rate paid upon it. The option of near enough zero nominal (and so effective negative real) interest rates has to be considered as a policy option, as does the option of planning for nominal negative rates. The state cannot be expected to pay for a flood of capital it did not anticipate receiving, and for which it has to find a use. Investors do instead have to accept the very real possibility that the best option available to them in seeking a safe store of value (which is what capital is for its owner ) might involve a cost and not a reward.
Third, this capital has to be subject to state scrutiny. One of the major contributors to the crises in the world has been increasing inequality. It is this that has, at least, in part created the situation we are now in and a safe haven policy for capital cannot be offered without that issue of inequality being addressed. Capital of unknown provenance cannot be permitted to stay in a safe haven system: title must be proven and verified and the fact that the capital was accumulated in a properly taxed fashion must be evidenced in due course. The risk of forfeiture must exist if neither can be shown to be true. The state cannot harbour the assets of those who seek to undermine it.
Fourth, the capital must then be regulated with regard to future flows. The whole reason for providing a safe haven strategy is to prevent the harm caused by unregulated and panic driven flows. Reasonable, accountable and controlled, flows of capital are, of course desirable. But free flows have the ability to create panic and disruption. So capital controls are a necessary part of this process of providing safe havens: those who do make such provision cannot then be subject to the threat of instability because the capital to which they have provided the ultimate favour of delivering secure value then decides to renege on the deal by threatening to exit to secure favours. The risk that flows will be unregulated again cannot be tolerated.
Fifth, this capital has to earn its keep. If that is not by way of tax on income (for there may not be any) then wealth taxation has to be looked at as a way for it to make this contribution to society. The right balance between wealth taxation and negative effective interest rates has to be considered, but the fact that reallocation of wealth is to happen must be explicitly stated. The current disparities in wealth are incompatible with stable societies and so must be reduced.
And, last, the capital has to be put to use. Let me be unambiguous about this: some will have to be used to fund current government deficits, which will have to necessarily be run to manage the physical consequences of the human tragedies developing around the world, and whether or not those subject to their effects stay where they are or move. No country can be isolated from those impacts. The current cost of dealing with conflict and climate change are real and need to be paid for. There is capital to do this, and if some has to be subjected to tax to ensure that this process of change can be undertaken in an orderly fashion then so be it: that is part of the safe haven policy of providing a secure home for capital in the sense that it is the best available to preserve its future value, which might otherwise not exist. Governments should not then back off from these costs, or the new forms of taxation that they might require to deliver financial stability.
The second use of capital is quite clearly investment, whether it be in the development of housing, agriculture, energy supply, transport and other systems and the new private sector activity required to support these systems. If ever there was a time for National Investment Banks this is it.
This, then, is a safe haven strategy. Its aim is to quite explicitly provide a home for the world's capital when it goes into flight mode, as it might. But, in the process the aim is to make that capital useful, regulated, controlled, taxed, more equitable and fundamentally useful at a time when it could otherwise be destructive if permitted to flow freely in a vain quest for value. We cannot afford that risk of unregulated capital without a safe haven when the world faces so many other issues simultaneously.
What we need is to organise around such a plan for safe havens for the world's capital now. There may be little time to do so. And doing so may be the only way to pay for the safe havens the world's people need.
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Isnt this what the government bond market is? And won’t negative interest rates when they inevitably arrive simply be a nominal wealth tax?
Negative interest rate may not be a high enough tax rate
So in the end the rentier must accept that he should count himself lucky not to lose the lot as the inflated asset prices on which he has gambled come a crashing down and under the hand of government the remnant fortunes are deployed to build some real wealth.
Yes
The markets already provide products with risk ratings ranging from ‘not for widows and orphans’ to ‘low-risk’ – the markets view of the safest options for keeping your capital ( cash in bank, gold, government bonds, that sort of thing ).
Suppose then an owner of capital compares the risks of the safe end of the market with the new safe capital havens just described and chooses the safe end of the market as the fees and taxes are lower. What do you plan to do? Outlaw the safe end of the market.
Just thinking about how that would work would drive a man to blow the lot on a punting spree.
To describe that view as naive is the politest thing I can think to say
You’ve rather swerved the question. The rich have their own ideas already about what is a safe place for their capital that differ from this haven idea of yours that for practical purposes incurs a tax charge. The question is would you achieve your goal by compulsion and outlaw other safe places for capital?
We could reduce the Deposit Protection Compensation Limit back to the old figure and see how the market reacts – that would be interesting in itself. The rich might even come voluntarily, offering to pay a charge to have a higher compensation limit just for them.
There is no compulsion in what I wrote. Where did you find it?
I don’t think any compulsion is needed: there will only be gilts as safe havens. It is down to government to agree how to co-ordinate on this. If you call that anti-competitive I really don’t care
I made no claim that you wrote advocating compulsion. It was an enquiry. I was asking if you would outlaw any of the types of very low risk places to leave your capital that are already provided by the market.
Actually we can improve one model as follows:
Reduce the Deposit Protection Compensation Limit to 16k ( an arbitrary number but it’s the current cut-off for means-tested benefit claims, so the State could save money if it at least guarantees that amount ).
Abolish the fees banks have to pay for the FSCS.
Replace with a voluntary charge on deposits over 16k ( a bit like PPI but for owners of capital ) – so when making the deposit the customer is asked if they want to protect their deposit for a fee payable to the Treasury ( say 0.3%, again arbitrary but the best fund management charges are around 0.33%, I think ).
People should in theory pay willingly for reasons given by Nile lower down. Or not if they don’t value what the State provides.
So if the bank or institution goes under – if you’ve taken out protection, you get your money back, if not then you would get nothing back from having the protection of the State.
Your quaint belief that systemic failure can be insured against is just that, quaint
And absurd
That’s interesting and positive; treasuries and gilts have been a rent exacted on the taxpayer, benefitting offshore holders who themselves pay little or no tax.
But negative interest rates impose a rent on them.
Also: I see no reason why a risk-free rate should be a positive, or even zero rate. Someone pays to keep the institutions of the state – laws enforcing rights of property, courts to arbitrate them, police and a militia to provide protection – even that, the absolute minimum of ‘service’ to preserve a haven for your capital, does not exist for free. Surely even the most dogmatic among libertarians would see that as a service that should charge the beneficiaries a fee.
If I am not mistaken, MMT and scaremongering about the US debt ceiling has clearly pointed out that no one needs to pay the state to do anything. The state pays itself by its sovereign capacity to create and issue money.
That’s too simplistic
It assumes payment is only in cash
There is no meaning to such a payment without an economic substance to the transaction
Safe havens? Start digging?
If you simply implemented a rule that said that any banking transaction from a tax haven in your currency is not to be processed by the banks or any bank or financial institution that has a clearing account with your banks – on pain of having their banking licence in your currency withdrawn then tax havens would all instantly fold.
The currency of a nation is a transitive monopoly by virtue of the banking licences it operates. Use that monopoly to end tax haven use in your own currency.
Shortly after the 2008 crash capital tended to flow into the US$. Later the £ was seen as a safe haven too. The National debt (so-called) of these countries is largely created by overseas buyers wanting to buy treasury bonds or gilts.
The influx of capital then pushes up the dollar and the pound and causes problems for UK and US industry, which loses its export markets as it is priced out. If governments are sensible and willingly deficit spend the proceeds of bond sales back into the economy to restore aggregate demand there isn’t any real problem. But as we know we have a government which is far from sensible on the question of the deficit. To say otherwise is to be branded a “deficit denier”.
The problem of the deficit isn’t so much that government runs out of money and has to find somewhere to borrow it, as is the popular perception. It is that the government has to handle the problem of overseas capital holders wanting to park their money in £ denominated securities in the UK. If they didn’t want this the pound would fall leading to both a lower external deficit (trade) and a lower internal deficit (govt budget).
You have pointed out one of the mechanisms by which productive investment is displaced by rent-seeking.
However, much depends on the government issuing debt: if it is merely an unending shortfall in current spending, both the government and the bondholders are collaborating in exacting rents upon the taxpayer.
If, however, the government in question does something productive with the money created by issuing debt – infrastructure, education, basic research, the investments underpinning productive commercial investment – then the transaction is productive and value-creating.
Governments can, if they wish, turn the destructive impulses of rent seekers to productive ends.
I hoped your conclusion was what I was saying
Nile,
We can only use the accusation of rent seeking if the rate of expected return on any bonds is positive in real. That’s quite rare. It’s in government’s power to set any rate they choose for interest rates both in the short and longer terms. It would be more straightforward if gilts were phased out and replaced by longer term reserve deposit accounts. The Govt would then simply offer whatever interest rate it wished to pay on these deposits in much the same way as a High St Bank offers offers interest on deposit accounts to its customers.
The distinction between capital and current spending is also problematic. It doesn’t conveniently separate into capital spending which is good, and current spending which is not so good. If Govt builds a hospital that can be classed as capital spending. The Govt owns the building which has a valuation. But, then the hospital needs to be staffed, serviced and maintained. There is no point having an an empty building! But that staffing has to be largely classed as current. Education can be thought of as an investment but as Govt can’t own the people who end up with that education they can’t be included on a balance sheet!
All we can do is try to explain why governments need to run a deficit. It is simply to accommodate the desire of users of the currency to net save. At present those savers are largely the central banks of the big exporters. Domestically, there is a situation of desaving which can’t go on indefinitely. There’ll be a crisis soon which will certainly put a stop to it!
“the first proposition in creating any solution is that the state is fundamental.”
So true. However one has only to look at the calibre of politican our electoral system throws up to realise it’s not going to be easy.
Also previous politicans will need to be held to account for the abuse of the power entrusted to them.
Wow! On first read, this idea blows any suggestion that your’re not a political economist to be reckoned with completely out of the water, Richard.
I admit to not being any sort of economist but the idea as explained made absolute sense to me. What worries me though is that the “household” economics model put forward by our leaders and betters will prevent them from reading the whole piece; certainly, it looks far too long to hold DC’s attention!
I admit by the time I finished it the dog was demanding a walk
So he stopped me editing it down….
And thanks
This is Communism or Marxism. You say you are a Quaker or something, but whatever your true belief is, your views certainly do not seem to be those of a Christian. You idolise the state and you constantly champion for all of its machinations and confiscations. Shame on you and all of your Communist and Marxist allies. Fortunately for the good people of this land, your man Corbyn has as much chance as Mickey Mouse of ever becoming prime minister.
The Quakers seem quite happy with me
The rest of what you say is not worth commenting upon
Brian,
The criticism from the left would be that Keynesians and post Keynesians are too intent on helping out the Capitalists to fix their ailing system! They lack the insight to understand the contradictions they’ve created so need a helping hand to prevent Marx being proved right!
If you’ve ever a moment or two to spare you could reflect on how all capitalist enterprises rely on the health of monetary and financial system provided by government. The State if you prefer. When government gets it right the capitalists can make their profits, and the workers can make both the goods and services that we all need and earn decent wages for themselves into the bargain. They don’t need tax credits, housing and other social benefits when they are in that happy position.
Well the Quakers are welcome to you sir. I read on the Internet that they are heretics with fewer than one million followers in the whole world, so I guess they need all the followers they can get. The good people of this land will always prefer Capitalism over your Corbynism and Communism.
Quakers do I am sure have considerably fewer than 1 million followers
17,000 or so in the UK
Heretics if you wish, but most who have ever thrown the charge have been shown to be acting in self interest. I suspect God (however understood) would not in any way recognise heresy
So I suggest you are deeply confused
Perhaps the Neoliberal Genie is out of the bottle (to misquote from Colin Crouch), and the elite are perfectly happy with revolving doors?
Same as it ever was. David Byrne, I think.
You are going to have to dumb down for me. Is not the British banking system already a safe harbour for deposits and investments in the British Pound which have no accounting in terms of “provenance”? In which case, you are really going to have an uphill battle in convincing the likes of Osborne that your policies are worth pursuing. The Socialist Corbyn would undoubtedly see the merits of all your machinations but it would not suit the corporatists or indeed the bankers, so how are you going to convince them that to park their money in a decent way in a NIB would benefit them even though the markets are already showing signs as you have pointed out in previous articles, of imminent collapse in which they will lose not only the “deposit” but any “return”. They will, because of their very nature wait until the last minute, which will be too late, before considering your proposition. There is also still the problem of the existing depository of “untaxed wealth” being harboured within our banking system. You can convince me easily enough, because I am not greedy, but those whose God is wealth? I imagine Stiglitz and Wren-Lewis and Picketty would likely all be on board but what about Pettifor, Mazzucato and Nesvetailova? Have they expressed similar approaches (they will be the ones trying to convince McDonnell)
The job of a responsible opposition is to have a plan
This is a plan
Others may like it, or not
I stress, it is no-one’s but mine
The idea that government debt is a safe haven for capital, and we don’t produce enough of it, is not new. Some of us have been talking about it for years. Here, for example: http://www.pieria.co.uk/articles/weird_is_normal. Or here: http://theweek.com/articles/455261/americas-greatest-export-debt
In 2012, the Bank for International Settlements proposed that government should see itself as primary provider of safe assets to the financial system, and should issue debt freely to meet investor demand for safe assets. This followed on from the observation of Yale’s Professor Gary Gorton, among others, that only government can produce genuinely safe assets (and not all governments, either – in fact strictly speaking only reserve currency issuers can), and that when the private sector attempts to create safe assets things can go very badly wrong indeed. The 2008 crisis was principally a massive failure of private sector “safe assets”. FT Alphaville’s Cardiff Garcia and Izabella Kaminska have both written extensively about this.
Admittedly, the BIS didn’t want government actually to spend the proceeds of that borrowing. It envisaged government running primary surpluses to ensure it could always meet its obligations, while producing huge amounts of debt. The interest rate on all this borrowing would, of course, be zero, or perhaps even negative as you suggest, since government would have no need to issue it so could charge whatever it liked. If government actually used the money, though, the interest rate would need to be higher, since there would be risk involved.
I wrote about all of this in this post: http://www.coppolacomment.com/2013/01/when-governments-become-banks.html. Please note the points I raise about the ordering of society.
Following this post, Simon Wren-Lewis and I discussed how to meet the BIS’s requirement for safety while allowing governments to use the money productively, and we concluded that putting the money in a sovereign wealth fund that would invest in infrastructure and R&D, and take equity stakes in innovative companies, would work. This is where the suggestion I made in the FT of a leveraged sovereign wealth fund came from.
In short, Richard, welcome to my world. At last. But you will acknowledge that I thought of this first, won’t you?
Oh come on Frances: stop playing silly pettiness. For a start the Green New Deal Group got to all this way before you did – with me as a principle (but far from sole) author
I’d engage with the issues but your ego and your distorted view of the facts have got very seriously in the way
So I won’t bother to welcome you to my world, in which PQE is a special case
But I will note you have ignored all the safe haven issues I actually write about as it seems you are still locked in the last crisis
I’m not “playing silly pettiness”, Richard. I’m simply pointing out that many people other than you have discussed the need for government to provide a safe haven for capital, and for a long time. Including, but certainly not limited to, me. If you are gong to write this up as a serious proposal, you should acknowledge the work of others. Not to do so makes you look pompous and arrogant. No-one is the sole author of anything. We all stand upon the shoulders of others.
I am making no such claim!
I wrote a blog. That’s all. If you honestly think I have to reference any blog you might have written in the process, sorry, but that’s absurd. This is not peer reviewed journal writing. To be candid, I probably haven’t read what you wrote anyway: sorry, it’s a fact
And I first wrote about the role of bonds as safe haven investments in 2003, just for the record.
“If ever there was a time for National Investment Banks this is it”.
Quite – and if Britain is in first (selfishly) we’ll benefit even more.
“The current cost of dealing with conflict and climate change are real and need to be paid for.”
They do indeed, but the recent closure of Redcar suggested to be on the grounds of higher than world energy costs, implies we are shooting ourselves in the foot.
All indicates that PQE is desperately required.
“strongly resisting mechanisms like TTIP that are so dangerous in challenging this right of the state to intervene to preserve value because of the residual right it gives to capital to claim undue compensation.”
Agreed again and there was a reassuring demo in Berlin recently, but is the UK governement on board?