It is a long time since I first wrote about the merits, as I saw them, of local authority bonds as the basis for local investment and, as importantly, local savings and pensions. That campaigning journey began in February 2003 with a New Economics Foundation publication entitled People's Pensions. The idea has been revisited since, including in a 2010 publication called Making Pensions Work. Both were co-authored with Colin Hines.
I think it fair to say that the idea got a warm reception at the COSLA conference yesterday. I won't reiterate the detail. The major point I made was on reframing this issue.
The reality is that there are savings in every community. And as I have long argued, many savings are literally wasted. Banks do not need deposits to lend. Pension saving in second hand bits of paper - which is a fair description of what most shares are - adds nothing to real economic activity. But a local authority that provides a bond mechanism for local saving does something quite different. What it does is keep local money in the local community to provide local employment to create local assets that underpin local services for the benefit of local people, now and in the future, who have in turn provided the local money to deliver this local outcome.
In the process they exploit what might appropriately be called, in economic terms, the local multiplier. Especially in areas of need the more money that can be kept circulating within, rather escaping out of, the local economy the more likely it is that local economic regeneration will occur.
In this way local bonds have to be seen as local investment, and not local borrowing.
Local councils are not when doing this going cap in hand to communities for funds they could otherwise get from the Public Works Loan Board, who provide most local authority capital funding right now. They are instead providing a local savings service to provide a local regeneration opportunity in which, I would suggest, it is vital that local people are involved as decision makers.
I would stress that I am not saying local authority bonds solve all local authority funding issues because they clearly do not. But let me contextualise this. Theresa May offered 5,000 new council houses a year this week. Proportionately that would put 400 of those in Scotland. I am not saying that is insignificant. I am saying that this only scratches the surface of need. And that, for starters, doing more on this is a perfect use for local authority bond finance.
There will be other more adventurous uses too: energy is the obvious next sector.
After that local investment funds may be possible.
But appropriate first steps are required.
My suggestion yesterday was that there is a wall of savings money needing a decent home right now and that local authorities could house that money to provide the housing local people need. It's a partnership made for Ayrshire to Aberdeen, and the Borders to Orkney, in my opinion.
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A report by Sheffield Hallam University (‘Profits Before Volume’) has pointed out that far from the issue being lack of land, it is the investment and return led behaviour of the top house building companies that is holding back new house starts.
Basically they are concentrating on building fewer homes in higher value areas to boost record profits and reward investors (shareholders). Lower value areas – or should we say those areas that deliver less profit because of more realistic pricing – are being left out.
So although we are told by the Neo-libs that State intervention disrupts markets – here we have evidence that the market itself cannot really function properly because it is the drive for excess profit is distorting the market and that means that housing need is not being met more broadly.
I welcome your idea – especially if that investment were aimed at the lower value areas with the only caveat being that it was understood that the returns were maybe lower and longer drawn out.
Thanks
And your caveats fully noted
You’re welcome.
Here’s a direct link if you wish to delve more deeply:
https://www.google.co.uk/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwiY04WlydnWAhVMDsAKHTjyAgcQFggmMAA&url=https%3A%2F%2Fwww4.shu.ac.uk%2Fresearch%2Fcresr%2Fsites%2Fshu.ac.uk%2Ffiles%2Fprofits-before-volume-housebuilders-crisis-housing-supply.pdf&usg=AOvVaw1bQb2lNHYaf2qDBB1jRMeH
Thanks
I clearly see the potential for utilising ‘spare’ cash (savings which are currently making real terms negative returns) The positive influence of the locality factor (literal and metaphorical ‘ownership’) could /should have very positive feed back gains
I’m not confident that local councils have councillors or officers (I mean enough of them generally) with the right acumen, skill set, mindset to make this work across the board.
If they did you wouldn’t need to be writing this particular blog entry. Because it’s screamingly obvious to me that as in many things change and progress comes bottom-up.
I’m not knocking the gist of the proposal I’m concerned that too many people won’t ‘get it’. And it will be very difficult to get across. In part because…
…Local councils have become ‘them’ rather than representatives and agents for ‘us’. A long time ago. An entrenched attitude that infects both us and them.
Then we need training
“Then we need training”
Yes. Lots of it . There is no financial training in the national curriculum. Lots of stuff for a world that no longer exists, but no training for the cannon fodder of a consumer society.
And , Yes. That’s what you are doing. We need to clone you, and others like you.
(Or we need an independent ‘college’ which provides a platform offering education in rational economics.
I like analogies so….. what is needed is a ‘new testament’. The old testament serves as a foundation reference (those who ignore the lessons of history are doomed to repeat its mistakes).
The lesson to be learned from the religious new testament is that a ‘church’ can easily become another hidebound establishment. Jesus didn’t instruct his disciples to become architects and masons. He told them to spread the word.
Would this be reinventing a wheel that already exists but I don’t know where it is?
I’m not aware that this exists
Heresy is it, then? The problems are already well-documented, bad pay, long hours etc.
Bill Kruse,
“Heresy is it, then?”
If I’m understanding your comment ….Yes, heresy if you want to call it that.
If the choice is heresy or patently false bullshit give me heresy any day.
PS. I’ve long wondered why Trades Unions don’t invest in social housing for their members. A few enlightened employers saw the wisdom of that long ago. Trades Unions never picked up that baton. They did famously speculate/invest in the fine art market at one stage. I ask you !
Hi Richard, Do you think a Local Authority Bond could be constructed to fund environmental enhancements; building more biodiverse and resilient ecosystems that provide the community with various ‘goods and services’ like flood alleviation, air quality improvements, recreation space etc?
Regards
Gary
In due course, yes
These make so much sense. I would most definitely invest in local bonds so long as I knew where the money was going – ironic since I have no idea where my savings are directed just now by the parasitic city of London banks.
Be nice too if there were a network of local community-run banks to put these funds in.
Agreed
I would like to encourage this
This sounds like an idea which is crying out to be revived.
What rates of return do you envisage the bonds paying, and what mechanism would be provided for local investors who wanted to buy or sell once the bonds had been launched ?
One point of contention you might find being raised by certain ‘regulars’ is identifying how the capital amount borrowed by the Authority might be repaid if it is spent on illiquid assets such as housing, recreation spaces or air quality improvements, as your correspondent suggests. But I would imagine this could be reclaimed via taxation ?
I think bonds should be long term
And it should be assumed they roll over
Why not simply have money created by government authority but not by banks, and not as debt? Money could be backed by the use to which it’s put, so money created for speculative purposes would need to be taxed out of existence to avoid inflation, but money created proportionate to need and backed with appropriate asset creation wouldn’t. Nor would there need to be interest on it, as there’d be no opportunity cost involved and no risk either (as in reality there isn’t now anyway).
All money is debt
There is no other money unless you want to return to something akin to the gold standard as Positive Money do, with the consequences that followed in the20s and 30s that would surely happen again
So no way will I go there
What’s owed with fiat currency? What’s the debt repayment to be in if I say I want to cash in my pounds sterling? Further, if money must be backed by debt, then could it not be asset-backed, and understood to be so, the assets in question being those it’s (proportionately) created to build?
I think you know the answers to all those questions Bill: I have explained them so many times here
An interesting proposal.
If the bonds are to be ‘long term’, how would an investor ‘sell’ their particular holding in the bond if they needed to use the cash they had invested before the bond matured ? Or are we saying that once the initial cash is invested, the holder of the bond is locked in until the bond matures ? (I think we call that a seconderery market)
And if the latter is to be the case, how would these investors extract their cash at the maturity of the old bond if they did not want to invest in the new bond ?
Great to talk this through
I would suggest that there is a need for a secondary market
But note that many investors are used to losing term commitment now – it’s the only way they do make any return
And pension funds are in that market
Richard Murphy says:
October 6 2017 at 11:58 am
“I’m not aware that this exists.”
I think we might need it to.
Ideas need to achieve critical mass acceptance.
Or escape velocity.
Or take off speed. (unless the wind direction is just right, AND strong enough to to provide lift.)
Interesting question. I think local authority borrowing has been tainted ever since Hammersmith Council swaps case. Authorities are seen as easy targets for investment banks.
And then you have the Tower Hamlets problem. What central government would sit back and allow a local authority such autonomy when it would use funds to promote IS for example..?
Oh come on
The lessons of Hammersmith were learned a long time ago
And Tower Hamlets too, come to that
What you’re saying is lessons must never be learned, and that’s daft
“local investment, and not local borrowing”
Quite.
There are, I understand Crossrail, bonds. I presume Local Authorities are actually allowed to “issue” bonds – I thought there was some doubt? But as long as they are, what on earth are they waiting for?
Housing would surely be a sure fire guaranteed return – regardless of any government guarantee. Though logic would dictate that (directed/ authorised) bonds were guaranteed.
There are a few councils who have ‘ ratings’. One of them is Cornwall, (See http://www.progressivepulse.org/economics/los-lobos-the-wolves/) which has had to pick up the toxic loans entered into a while ago by its original, smaller, probably naive, constituent councils. I’d like to see their interest rates annulled – particularly as some of them seem to be from the state owned RBS…
In the end local authority bonds are pretty much the handmaidens of local banking!
Local authorities are allowed to issue bonds
Why don’t they? Because Thatcher tried to destroy the market and the legacy has remained
Plus the fact that so many councillors have accepted that it’s not their job to do anything
“Plus the fact that so many councillors have accepted that it’s not their job to do anything”
OooooH! Bitch bitch bitch.!! Scratch YOUR eyes out dearie!
Bloody do do things! All the time. Approve cuts and implement central government dictat without question, scrupulously! Rubber stamp every little thing the plastic pseudo tycoon CEO presents us with. Eat thousands of (bloody) potted meat sandwiches and ghastly ‘volovon thingies’ and other foreign muck. It’s no bloody picnic , pal. harumph!
And another thing: have you the slightest idea how long it takes to fill in those expenses forms? HHm!
And all the thanks you get…..well. Really!
Sad to say I think it’s a fair call. Would I stand for election? Er…. I certainly haven’t so far, but I did once stand as a definite paper candidate. Green in a farming community! That’s as close as I’ve been so far.
Thanks, that’s really interesting and has given me ideas ….
Richard…
Gary Mantle asks “Hi Richard, Do you think a Local Authority Bond could be constructed to fund environmental enhancements;…..etc”
RM replies: In due course, yes.
I thought ,’ What a silly question of course that’s the sort of thing you’d finance….then I thought, AH! having seen your response.
Some of that stuff is kind of nice, but where’s the financial return going to come from? Citizens buying bonds are making a financial investment…they will be looking for a financial return. Nice green facilities don’t really cut it do they?
I know precisely where I’d start (subject to some due diligence of course, with established technology but unproven results as yet) but I wonder what you would consider as suitable pilot project types.
Insulation mixed with smart metering
Solar
Double glazing
Wind
Tidal
All pay
And revenue sharing models are possible
This may sound, & indeed be, a really silly comment but why couldn’t Councils or, indeed, Housing Associations get funding via peer:peer lending sites such as Zopa?
Yes….
But the rate would be much lower in a formal bond structure
“then we need training’, as Andy Crowe points out lots of it. And along with that much more accountability. There is no guarantee the Councils would spend it on what the constituents need rather than for the election requirements of the Council.
As I pointed out on the previous COSLA article, Aberdeen issued a bond which had a clause that was intended to have the political effect of telling voters, if you vote for an Independent Scotland then this will be paid back in 6 months, you will pay for it from your rates.
That Council then intended to use the money for a town centre refurbishment not agreed by the constituents, and had previously turned down a £50 million gift for a town centre plan.
So,I’m certain the Councils will be positive about going for bond issues however there are few controls and accountability on how they spend it.
Your cynicism is not appealing
First, I strongly recommend that there be increased accountability in the system and said so at COSLA
Second, so did others
Third, there are models that show this works
Fourth, you ignore democracy
Fifth, I think your reporting deeply biased
I do not dispute mucus takes will happen
But I would suggest your model of cynicism is much more likely to lead to abuse
“I do not dispute mucus takes will happen”
Is that when something you disapprove of makes you ‘so angry you could spit’? 🙂
And a sensible question. If you buy something where or when it’s cheap, then sell it where or when it’s commanding a better price (for a profit), Is that the definition of ‘arbitrage’?
Or is arbitrage something more complicated than that?
Thst’d the defitnion of predictive text going awry on an iPad
Dealing in the sense you define is OK
Arbitrage as I usually use the term is playing off regulation in ways not intended by regulators
re Arbitrage.
The key word in technical definitions seems to be ‘simultaneous’ buying and selling. So my posited definition is not right.
Arbitrage seems to be designed to pick up on quirks and/or mispricing. I think I now understand the pejorative tone in the common usage.
It would be the wrong word to use in the context I was wanting to use it. Thanks for your reply.
Why would the rate be lower in a bond structure?
Because of the level of guarantee provided
What is the guarantee? That the local authority won’t go bust (because it’s backed by central government)? What if the local authority decides to not pay the bond holder? Is there some downside other than no-one else buying the bonds again?
Has a UK authority gone bust?
Does housing usually lead to people going bust?
Or energy these days, come to that?
And why shouldn’t there be a secondary market?