Is the second global financial crisis in four years breaking? I am quite sure it is. At best (and I mean this is the best scenario we can hope for) there will now be a realisation that the Euro does not work; much Euro denominated debt is near worthless (Spain's has to be - how can it repay when over 40% of its young people are out of work? - it's a tautological impossibility) and double dip recession is inevitable. That's the best scenario we're in.
The worst is nothing is done about that realisation of the economic reality we face and bank balance sheets meltdown as bond values plummet leaving banks facing such enormous drains on their asset worth that they're moved into insolvency and can no longer put notes in their cash point machines. Then we're just, at best, three days from social break down as that's the average food stock most of us have in our food cupboards.
That means the time for thinking is short: we had a month last time until the first bank (Northern Rock) failed and a year until the entire system nearly fell ove after Lehman. This time it will be shorter: we know how these things work now. That we means we need a plan, and soon.
So here is my plan:
1) Get the printing presses working creating money - billions of it - now. You may think that sounds crass - but I mean it. We cannot afford runs on banks: the cash to prevent them has to be available. If it isn't we could have a crisis.
2) Prepare for quantitative easing now, or better still: let's cut the crap out of the middle of QE and simply let governments borrow from their central banks, which is all QE really is. I know the EU forbids that: someone had better get their head round some pretty urgent changes to some rules in the EU very soon if we're going to have anything left to argue about.
3) Either way, we have to make sure banks are both liquid in the short instance and more importantly solvent in the long term. That's going to mean two things. The first is that big loans from government are going to have to be made to these banks to keep them solvent - but loans, I stress - not the bung that QE represented last time if that can be avoided.
4) Then existing shareholders of those banks are going to be wiped out: that's the deal this time; nothing more or less. After that governments are going to have to replace the capital of these banks with new share investment. That's done through nationalisation. Let's not beat around the bush. It's the likely outcome for most banks this time round. And because the problem is systemic those whio do not agree may simply have to be brought under state control anyway; like it or not. We can'[t have some bankers holding out through Dubai this time to hold us all to ransom thereafter.
5) Long term banking reform will be essential: never again must we let this scenario recur. The intent to do this must be announced and planning for it - much broader based planning than that done to date, must begin. The important thing about that is to make clear we're not going to put Humpty Dumpty back on the wall again: this time all the King's horses and all the king's men are going to do something more constructive with their time and cash than restore something that's broken to its perch.
6) All the above has to be done by EU too - state of emergency has to be appreciated there by Germany in particular: no one can sit around this time and think "I'm all right Jack / Hans / Jacques". This is a systemic failure. If they fail to appreciate that then we're in deeper trouble.
7) With banking under state control then trading in sovereign debt can be also brought under control: the phased deleveraging becomes possible as losses then begin to equal gains as mutuality has been created in the market.
8) It has to be made clear that the banks that are nationalised will remain under public control for a considerable period. There must be no silly game as in 2009 of pretending they should remain in the market with an aim of being refloated imminently.
9) The banks should be split in tow - whether nationalised or not. Investment banking has to be split from main street banking and lending from main street banks to investment banks should not be allowed.
10) Main street banks should be used to refloat the UK economy - building new models of investment on German lines where a mix of equity and loans has to be provided to ensure business and their banks have common long term goals.
11) The use of tax havens by nationalised banks should be banned. All payments to tax havens should be subject to tax withholding to prevent cash being moved into their feral environment.
12) The special rights of the City of London should be abolished.
13) Coordinated capital controls to stop attacks on currencies should be set up.
14) A financial transaction tax is needed - including a Spahn clause to seriously penalise speculation.
15) Tax on financial speculation should be higher than that on trading profits and income from work.
16) As banks are unravelled and debt with it consolidation will be required.
17) Credit controls for consumer debt are needed - especially for credit card and related types of debt to limit excess borrowing and associated risk.
18) Stiff controls on door step and other secondary lending and loan sharking are essential.
19) Sate banks have to offer the equivalent of 'social fund' loans to those on benefits and low incomes to cover short term crises with repayment direct from benefits over reasonable periods at low interest rates to ensure financial access for all at low rates.
20) That will do for now - I have no doubt refinement will be needed over the next few days though.
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Mind if I give folk a few pointers of what they might do about survival on a personal level? http://www.economania.co.uk/uk-preppers.htm Written a while ago obviously but getting more pertinent by the hour. I declare I have no shares in Spam!
BB
“split in tow”?
poss typo alert
Thanks
Sorry
Haste!
And a book to write as well
Dear Nick
You must be a new reader. If you wish to correct every Murphy typo you will not get much else done each day.
Sincerely
Carol
Ow!
Painful
But true
🙂
Come on though – you try writing as mush as I do a day without typos
Dear Richard – you just keep on ploughing your excellent furrow! Recall the comment of George lll, when someone delivered the opinion that General Wolfe – the capturer of the Hieghts of Abraham and the whole of Qubec – was mad. The King said “Well, I wish he would bite a few more of my Generals!” Better your spot-on analysis, with all its typos, than the elegantly phrased and delivered, grammatically flawless, tosh one hears on the mainstream news.
Andrew Dickie
actually that is far from true. One of the easiest ways of distinguishing the old right from the new is that while someone like A N Wilson may write beautiful sentences the neo-liberals prefer cold, hard, facts. Often, in fact usually, the ‘facts’ may turn out to be untrue but they are delivered coldly & crisply. The neo-liberals see beauty as as much of a pointless affront to reason as compassion or empathy or, indeed, foresight.
Why waste time writing an epigram when the sense can be more quickly delivered in a soundbite ?
“I’ve been busy all day on a poem. In the morning I put in a comma. This afternoon I took it out again” Oscar Wilde.
William – Don’t want to flog a minor point, but I was actually referring to the stuff we hear on the news, rather than the written material (where I entirely agree with you – beauty does indeed seem to be an optional extra, your “pointless affront to reason”). These commentators mainly trot out the accepted line, like newsreaders on North Korean TV. And could anything have beaten the “Crisis, what crisis?” appearance of William Hague, and the “Mr Bean” appearance of Vince Cable with his “Don’t worry, there are senior Ministers in charge, of which I am one”, with Cable then going on to refer to the UK as being an “oasis of calm” in the midst of the US and Eurozone upheavals? One thinks of the person who jumps off the Empire State Building, and says “OK, so far!” as they pass the 20th floor!
I have been listening to Ellen Brown talking about her book web of debt on youtube.
It is interesting as she describes how the bank of Pennsylvania was in effect nationalised at one time and loaned 90% of its assets at 5% interest and the used 5% of its money to fund community projects. It worked very well as it was effectively making continuous profits for the benefit of the community with out causing inflationary bubbles.
Ellen Brown also describes how governments can give themselves loans to get the economy moving again, by creating their own money, so this is in agreement with your advice.
The out of control spiral of debt caused by the creation of money by private banks is described as well. Nationalisation would definitely be better, as profits could be channelled into projects or research, or social services and health.
It would be already taxed, as such.
Do we actually need investment banks and hedge funds? or credit rating agencies? And isn’t it true that these vast debts are largely insurances taken out by the banks against defaults? I suppose what I’m asking is what would happen if we just abandoned casino banking altogether… and put banks back to being a service industry facilitating overdrafts, mortgages, current accounts, savings and so on? Naive perhaps but I can’t really see what investment bankers do that is good for the overwhelming majority of people.
The problem is that this requires Cameron and Osborne to nationalise stuff!
I am thinking that often when a company fails it is bought for a symbolic £1, as the new owners take. On the liabilities. Is it reasonable for the Govt to do this, just to keep domestic cash flowing- ie something to buy food with?
The govt then keeps high st banking going. Now here is what my untrained (in the dismal science ) mind is thinking. The govt does not need to bail out- the post nationalisation bank runs sensibly at no risk. This stops high street collapse. To my mind QE is not needed: the bank is cycling wages in to purchases out. Why I see this as a good thing is that it keeps our essential imports- food and power- coming in, because sellers know the money will be paid (govt backed banks) but without the need for public money to be put in. After all this is how the economy works in normal times wages in, purchases made, shop buys goods and so on. By not printing money/QE we avoid devaluation.
This then allows the ‘bank’ to look at its problems. What it needs. To do is work out how to cover those accounts in credit. It can look at the best way to recoup its loans, and how it will allow ‘savings’ withdrawls. You allow money to cycle through current accounts, but ignore the howls of the Daily Mail as savings withdrawls are frozen. You then restructure the debts so you cover costs/savings, but forgo profit, thus making it easier to repay the bank.
I hope you know what the effects of your plan will be. Such authoritarianism would otherwise be ourageous. But I suppose you do. Such an empathetic person as you would not presume to plan other people’s affairs unless he did.
This plan is about liberation and opportunity for the 99%
Instead of the 1%
I know which side I’m on
I guess I can tell which side you’re on too
By saying your plan is “about” liberating the 99%, I take it you mean it is intended to liberate them. But just because a policy is intended to have some effect does not mean it will have that effect. I doubt you really do know what effects your proposed prohibitions and compulsions will have. And, given this ignorance, it is outrageous to promote so many restrictions on people entering into voluntary transactions.
It is also a rather cheap argumnetative tactic, on which you seem to depend heavily, to suggest that those as disagree with you are people of inferior morality.
It is also a rather cheap argumentative tactic, on which you are solely relying, to suggest that I am ignorant
Actually Richard it does not take much to conclude that your comments above are ignorant. As stated by Jamie you have not thought out your plan, it holds little to no merit or understanding of economic effect in critical financial markets. Just one thought if you print all this money and thereby devalue the Pound against other currencies and increased inflation, increase to 3% and 4% is not bad and not a problem however the more you increase money supply the weaker the currency gets and the higher inflation goes. In the times we are in we cannot afford increased inflation the default on mortgages alone would increase too quickly and cause yet another property crash. Lets say we ignore the homeless because of your plan then and the Pound gets weaker allowing our manufactures to export more – what manufacturers? we have killed off the manufacturing base in the UK which high salaries, high tax rates and government interference, it is cheaper to manufacture in the far east so lets drive out the minimal manufacturing we have left.
Net result is weaker Pound with no benefits, homeless all on social security costing a fortune and been paid with newly printed paper, rents going even higher because people cannot afford to buy, huge increase in wages to cope with weaker Pound because we produce noting any longer and buy in almost everything. You plan has no merit and I know you could do better. It is unlikely you will allow this post on your blog and that is OK you read it, hopefully, and it was intended for you anyway.
Ah, your own prescription worked so well – and as ever you stick to it even when the evidence proves you wrong
On the other hand the Keynesian solution as the golden age of capitalism…
Is it ignorant to think alternatively? No, far from it: in the current climate it’s the only intelligent action available
I’m not claiming to be 100% right
Buit I know your model has utterly failed – and has to be binned
Actually Richard I have not suggested a model so you cannot know it has failed. I have only pointed out that your suggestions will not work and history proves it.
Please read Raf Manji, my comment and what I’ve actually written on quantitative easing
To say I’m not putting forward something different is absurd
Richard you are not really addressing the posts.
You said my model had failed but I did not put forward a model and therefore you could not know or suppose it had failed as you do not know what it is.
The comments I am speaking of are the ones above not on some other page but specifically your 20 point plan and there is nothing new or reasonable for the future of a very sick economy in all 20 points. There is however ample proof that point 1 is immediately such a serious problem and negates all other points.
You do not refute my assertions that printing money will have the effect I mentioned so I take it you agree with that and that leads me to wondering if you have an argument for implementing your plan?
No your only reasonable conclusion is that I think it’s a waste of time engaging with you
Why on earth should I take anything you say seriously when you won’t even admit who you are
isn;t that the ultimate in cowardice – the same cowardice that pervades all your comments – and the organisation you claim to have worked for for so long?
Please stop wasting my time
Why did you not post my last reply, the one in which I pointed out that the accusation of ignorance was simply a general point about the inability of anyone — even the best informed authoritarian — to predict the effects of their interventions and not, therefore, something you should have taken personally?
But you are an empathetic man, so I suppose you have some very caring reason for not posting it.
I did not post it because I have little time for trolls
And you’re definitely proving to be one
Next it’s the spam button….
I think a lot of your ideas here RM are crackers, ( I am not into long academic arguments) but as on taxation at least you are opening out the issues for debate which is exactly what is needed. I really think you have a misplaced faith in Governments and State control. On the other hand I am admirer of Germany for the way it runs its Government and Economy and its State does intervene a lot. Sorry Lefties but if you want a materialistic succesful economy you need a proper environment for entrepreneurs and a puritan work ethic workforce. On other hand I prefer the cultures of Greece and Ireland! It’s the old, old dichotomy.
I’m talking about creating the environment entrepreneurs and a work ethic needs
Banking is the enemy of both
We’re on the same side
I would argue a work ethic is at the heart of proper Marxist philosophy. “from each according to his ability”
Yes, when workers own their own capital goods they will have all the incentive they need to perform to the best of their ability. We just need to cut out the middlemen – the owners of land and capital – so that labour receives full reward.
Interesting post!
Point 19 – “Sate banks”? State banks, yes.
Regards,
DANNY
REALLY- PRINT MONEY are you quite insane? Zimbabwe did that. Nationalize the banks fully? Oh dear. Actually is this piece written tongue in cheek ? It must be no one in their right mind can suggest this in particular a tax adviser and accountant. NO thought has been given to the medium and long term effect of such actions. It is a complete nonsense and does not need refining it need abolishing. This cannot have been written by Richard Murphy.
Oh it was
And it was quick
But it was was wise
And serious
As serious as your comments show how far from reality you are – and that of the best you can do is refer to Zimbabwe, candidly how stupid or desperate you are
Live with it: neoliberalism has failed
This is not no-liberalism which by the way may have failed but so has communism, money market manipulation and money supply manipulation, high interest rates and over taxation as well as State interference in a free market, over regulation, under regulation and the manipulation of personal tax for political gain. A new way must be found none of this left wing nonsense and none of the hands off approach either. However printing money is without doubt going to fail there is not a case showing it to be successful so why do it now when we are in such a mess?
No evidence it has worked?
Look at the markets this morning
I suspect the consequences of printing money depend entirely on who it is doing the metaphorical printing, the government interest-free or the banks at interest. Zimbabwe, IIRC, is a different case altogether as the inflation was ignited by speculators shorting the currency.
BB
Zimbabwe, has a point but also:
Germany (20’s)
Hungary (40’s)
North Korea (Constantly)
Argentina (70’s 80’s and 90’s)
China (40’s)
Austria (20’s)
All with disasterous effects. This has nothing to do with neoliberalism this has to do with an economic policy that is not going to unsettle the whole economy.
Isnt your last comment in breach of your own rule 2?
Yes – and 4-5% inflation instead of 2% is not that – so respectfully, stop being stupid, because that’s precisely what you are being
Perhaps you should say that then rather than toss a spur of the moment comment out there. Proves you do not think out your plans, just as you said in a conference in Norway once. In any event I think Ex IMF shows why it wouldnt work.
You said competative tax markets are the road to Somalia, I think you might be wrong, the road to Somalia is the downward spiral that printing money causes. Lets watch what happens with the States shall we? Looks like QE3 should start soon.
What on earth are you talking about?
Utterly incomprehnsible
If I had been an IMF adviser within the last 30 years I don’t think I would be advertising the fact. There was a time before that when the IMF did some good – like studying the deleterious effects of transfer pricing. In the meantime it has done nothing but harm to those countries which in desperation have sought its help.
I understand 97% of money is debt-money and the rest cash money.
If debt deleveraging was allowed to happen by the market forces, we would experience severe money supply contraction, insolvent banks and severe dislocations in the utility functions of banking and money.
The state would nationalize overtly or covertly (probably already). That is why other countries have tanks outside banks or military banks.
It is not hard to speculate we would have overall deflation in the value of assets, possibly housing (absent other support). Unfortunately as now things which are needed in demand or inelastic (living expenses) would inflate as capital ‘smart’ money is trying to make money from this by speculation.
We will eventually adjust via debt deflation or via inflation, to reduce debt burden (if wages rise) otherwise we will hit an inflationary depression.
The MPC/BOE are walking the tightrope, they wish to retain the current model,hoping devaluation and inflation and some growth rides to the rescue. Its a plan – i hope it works, but we need emergency plans if this proves not the case as i suspect. If it works we will have a very unstable concentrated wealth structure and its attendant problems.
IMHO we need full structural reform, legal seperation, an end to the too big too fail, a protected utility function.
We need much increased capital requirement to match bank risks in the current climate, it should involve massive rights issues and debt to equity swaps and or debt write offs. Distributions (dividends and excessive bonus and pay) are not a good idea, whilst we have such instability.
Who is allowed to create money should be re-examined. Some would say a huge mis-allocation of this created capital has occurred to cause this problem, how did this happen? Were the conflicts of interest managed properly? Have the banks been relatively clean? The FSA? The role of the EU and our own government.
Debt seems to be the problem.
I suspect we have a monster to tame.
Proposed solutions or your acceptance of the current plan would be welcome.
It seems to me that that the central banking system (including the global and state treasuries and regulators from the IMF downwards) already in effect act as implicit guarantors for every non-equity owed-wealth liability of every ‘approved’ financial institution, and that that role should be made explicit. The central banking system should act as borrower/lender of first or default recourse for banks. This would eliminate (the need for) inter-bank owed-wealth, and would eliminate bank liquidity as a macro-economic factor.
In order to moderate the risk implicit in such a facility, the central banking system should itself commission all valuation and auditing standards and processes conservatively on behalf of bank creditors (rather than allowing financial professionals free reign in their own self-serving interests), and should follow the precautionary principle in regulating financial innovation (i.e. financial innovation should be prohibited unless specifically approved, as opposed to permitted unless specifically prohibited). Indeed, the vast majority of financial innovation should be outlawed in favour of simple inflation-linked current-accounting.
If a given bank became insolvent on that very conservative basis, the central banking system should assume full ownership and control as insolvency administrator, with an undiminished responsibility for the non-equity liabilities of that financial institution. All deferred remuneration for the executives held in reserve (i.e. for risk to ‘flush through the system’) should be returned to the insolvency administrator. All deferred dividends for the shareholders held in reserve (i.e. for risk to ‘flush through the system’) should be returned to the insolvency administrator. As required, the central banking system could re-finance that financial institution and (re-)privatise it when market conditions were appropriate.
Thus:
1. Bank non-equity liabilities (i.e. ‘deposits’) would be protected.
2. Banks would stay in business (although shareholder equity would be wiped out).
3. Many/most senior bankers would be sacked without bonuses or compensation.
4. The global finance system would be re-engineered to support the real economy (rather than to support financial professionals free reign in their own self-serving interests).