Vince Cable is right on this:
Vince Cable has warned Britain's banks that the economic recovery is “being imperilled” by a “yawning mismatch” between demands for finance from small business and the banks' reluctance to lend, reports the FT.
Like it or not, and the anti-debt phobics now seem to think all credit a bad thing, we cannot get out of the recession without making more credit available to small business, and the fact is it's not available at present.
No amount of 'credit easing' by Osborne will change that when his instruments for delivery will be the self same banks who are not lending now. All he's actually doing is offering them an opportunity to offload debt onto the Bank of England at low rates so they can lend on at exceptionally high rates to boost their profits and balance sheets again before the next crash hits as the inevitable consequence of his austerity policies.
The only viable solution to this now in the short term (which is what is needed) is the one Vince has also outlined - which is taking control of RBS, in full, for the benefit of the state. That's something I was advocating in 2008. It's a shame Labour didn't listen then.
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Not a chance. When the Thatcher Cabinet did their MTFS monetarism in the early 1980s, they rejected Friedman’s idea to control the money supply (whatever his definition of it at the time) because they would have been forced to ‘technocratically’ take control of the lending of banks. This was too much like Labour’s policy of nationalisation of the banking sector under Foot, so the Tories stuck at trying – and failing – to monitor monetary targets from the Bank of England. And then they went back to watching the exchange rate. To think that Orange Book Liberals and Thatcherite Conservatives have a plan in this area is just the political confidence fairy of their supporters. Turning Japanese, I think we’re turning Japanese, I really think so…
This seems the only sensible thing to do. Any measure of lending to private business shows the banks not lending and just building up their balance sheets, and as you say pocketing the profit from QE rather than passing it into the proper economy where jobs and wealth are created. Both Labour and the Coalition seem paralysed by fear and a lack of desire to make a decisive intervention in the state owned bank(s) as if somehow this will upset the delicate balance of capitalism. What the politicians fail to have noticed, or are conveniently ignoring because they have so many friends in the city, is that the economy is in real trouble and things are not going to get any better just by continuing to cut public spending.
Asking politicians to be credit officers is such an obviously bad idea that I am suprised it keeps being brought up.
Letting the government lend at subsidised rates to SMEs is voter bribery, and it will end in tears when those companies go on to default because their credit risks were underpriced. How about we stop recommending that RBS become a formal conduit for the government of the time to bribe the electorate at the expense of us all.
Well banks are, and have been, doing a lousy job of it
Why shouldn’t others do better?
You pit dogma in the way
I believe in freeing people to act
Really this isnt dogma, its empirical fact. Look at the massive losses attributable to the US government from their GSEs because credit was misspriced due to political intervention.
The cold, hard, fact is that borrowers are a credit risk. If there is a 1% chance of you defaulting on your loan, you need to pay the bank 1% credit risk on top of the banks own funding costs (currently ~4% for 3 year money). Therefore, the loan needs to carry ~7-9% interest for the bank to cover its expected losses, cost of funding, and make money. The reality is most companies are closer to a 10% default risk which means loan rates of 15%+
Most people balk at that sort of number, so pre-crisis banks found ways to hide the cost (mostly from fee income). But the cost was always there. Lending at below those rates is loss-making, and effectively voter-bribery if done because of political intervention.
The banks’ sin was to lend too much, too chearply – but here we are berating them to lend more.
Your approach appears remarkably confused
Do you think anyone meets your high standards?
I’m all got nationalising RBS…in fact, I think ALL banks should be nationalised in the public interest. Australia did it very successfully for years.
However, why doesn’t the government just cut out the middle-man and create the money it needs itself? Of course, we’ll get all the phoney arguments about hyper-inflation if we pursue this, but they conveniently forget that, when you loan from a bank, you are effectively paying for services twice over by having to pay the money you borrowed back plus interest! Creating your own credit cuts out the interest payments and ultimately makes public services cheaper!
Government created money now, I say!! 🙂
Here’s Ellen Brown on the subject of public banking while we’re on the subject.
I think the publicly owned banks should create money as the private banks do now, but not using the criterion (assuming they’re being responsible about it) of whether or not the ‘borrowers’ will be able to pay it back but rather whether they’re going to be devaluing the currency or not by what they do with the money.
These wouldn’t be loans, you understand, they’d be outright understood money creation, there’d be no paying back of the principle and no interest either. This would be adding to the economy, growing the money supply.
To elucidate, you know the vision we share of bank managers as Captain Mainwearing? I think that vision and principle should endure into the era of publicly owned banks creating money into the economy as above but the good Captain, instead of asking himself whether the ‘borrowers’ are good for the loan, should ask himself, are these people going to use this money productively in proper proportion or are they going to squander it? Are they going to use the money to build a pub, or perhaps a series of pubs depending on the amounts involved, in sensible locations and at sensible values (so you wouldn’t have someone asking for a billion pounds to be created for pub-building and then simply building a teeny one in the middle of nowhere and pocketing the rest) or are they simply going to go to the pub with it and, ah, pee it away? The former would expand the money supply while not devaluing it (desirable) and the latter would simply devalue the currency (undesirable). The good Captain would continue to have great social responsibility in making these judgements. Privately-owned banks could lend but on a full reserve basis (see how they like that). Everyone would be taxed at appropriate levels (and Richard et al are far better at working those out than me) to ensure that there was a functioning state to care for the community.
I have been studying a lot of documentaries/literature recommended by the British Monetary Reform Group “Positive Money.” It includes the book “Where does money come from” – which is ratified by the a member of the monetary policy committee at the Bank of England, and an academic at UCL.
It backs up all that Positive Money say about our monetary system, which is that 97% of our money supply is created as loans to the economy through industry and mortgages. 2/3rds of our money supply enters through house loans. It means that we pay a subsidy to the banks for the mere use of money, through interest paid on 97% of all transactions. It forces the money supply to keep on having to grow because the interest is added to the loan but not created by the bank, so the economy is forced to constantly borrow more and more money to cover the compound interest. James Robertsons free chapter online “Managing the Money Supply” explains this better than I can.
This would not be too serious if the banks acted like government and spent all of the profits back into infrastructure and public and industrial needs. They do not, they use it to give themselves bonuses and bet on the casino derivatives which caused the financial crisis.
It would be a good idea to nationalise RBS, especially as we all contributed to the bailout through taxation. This would ensure credit for business and the recycling of the profits which prevents the national debt from growing.
Positive Money say that government should nationalise the money supply, not the banks, as having control over the creation of money as well as lending can lead to corruption of government in the same way as it has corrupted the private banks. This does seem to lend itself to the “Separation of Duties Principle.” So I am not totally sure about nationalising banks permanently. What do other people think?
t
I suggest http://www.jamesrobertson.com/book/managing the moneysupplypdf.
Also wrote a longer article for the New Economics Foundation. Clear and informative.
Positive Money apparently think the Monetary Policy Committee is in some way independent of government and can therefore be trusted to manage the money supply without political bias. They are wrong on two counts:
1) the MPC is certainly not independent of government: its members are political appointees and it is a part of the Bank of England which is wholly owned by the government.
2) the MPC’s record on managing inflation is abysmal and its recent actions (especially QE) have been primarily designed to protect government from the consequences of wrong policies.
Central bank independence is a fiction, and therefore so is the “independence” of the MPC. For that reason I think Positive Money’s proposals are very dangerous. I’m not a big fan of banks controlling the money supply but I don’t think the MPC controlling it is any improvement, frankly.
Also, Sandra, you need to understand a bit more about what actually caused the financial crisis. Derivatives were not the primary cause of the crisis. Ordinary bank lending was, on both sides of the Atlantic – particularly mortgages. None of the UK banks that failed did so because of derivatives: they failed because of excessive risk in their mortgage and corporate lending books, and in RBS’s case because of an idiotic acquisition. It is not only wrong, it is extremely dangerous to blame investment banking and fancy instruments alone for the crisis. Ordinary bank lending is not “safe”, it is a risky activity, and you are just as likely to lose your savings if banks give mortgages and corporate loans to people and businesses that can’t afford it as if banks “bet” your savings on the international financial casino. Please don’t perpetuate the myth of “safe” retail banking and “risky” investment banking. It isn’t true and it is leading to some very, very silly and dangerous policy decisions.
Frances
I agree re the MPC – this is a charade and a dangerous one. Such decisions belong to governments alone.
I also agree re the source of the crisis – BUT you ignore the fact that opacity made the risk in that lending harder to identify and attribute – and in that sense the whole shadow banking system massively increased the risk. The origin was onshore in conventional banking. But investment banking was to blame for leeting the risk grow out of control.
Richard
At the very heart of the crisis is land. Mortgages are primarily loans on land. House price inflation is land price inflation. The vast majority of loans are backed by land as collateral. When you loosen the credit reins you get land price inflation. When the boom busts it’s because land prices fall. Collect all land rent for public benefit and you’d never have another serious banking crisis – because land prices would tend to zero and banks would have to assess risk properly. This would mean local banks, smaller banks, which if they fail don’t bring down the whole economy with them.
Richard,
I’m certainly not suggesting that the shadow banking network didn’t play a part – it did of course, in inflating risks to enormous proportions and exporting American mortgage default exposure all over the world. And part of the problem was panic, which caused the interbank markets to freeze and caught central banks napping – that was the proximate cause of Northern Rock’s failure, of course. If subprime and dodgy corporate lending alone had been the problem the financial crisis would have been nowhere near as serious. I’m simply noting that it is dangerously misleading to suggest, as Sandra does, that it was derivatives alone that caused the crisis. All forms of banking had become excessively risky, regulation was ineffective, and as you say opacity – and, I would argue, deliberate concealment of the real risks – meant that although a financial crisis could have been (and was) predicted, the extent and depth of it was almost impossible to forecast. I don’t think we’ve seen the last of it yet.
Again, we seem to be agreeing
Carol,
At the very heart of the crisis was FRAUD. The true extent of the mortgage origination and securitisation fraud in the US is still unknown but it is set fair to be the largest fraud in corporate history. And it is that fraud that was propagated worldwide through the international investment banking network, was inflated to massive proportions through the use of derivatives, and very nearly brought down the global financial system.
I presume you are arguing for 100% LVT? That might be a good way of controlling house price inflation, but please explain how it would prevent a similar fraud happening in future?
Frances, under Positive Money proposals, the power to create money would not be handed to the BoE as it currently exists. That’s not the case. That’s what the Bank of England Act (http://www.positivemoney.org.uk/wp-content/uploads/2012/02/Bank-of-England-Creation-of-Currency-Bill-Smaller.pdf or in plain English: http://www.positivemoney.org.uk/wp-content/uploads/2012/02/Full-Reserve-Banking-in-Plain-English1.pdf)) is designed to address. This is dealt with in Part 3. Disclosure and transparency will be greatly improved — part 3 section 8, with minutes of all meetings recorded and monthly decisions and individual votes openly published on the web.
The last few decades show that we cannot trust profit-seeking banks with the power to create money. Their incentives stack up firmly on the side of always lending more money, and therefore always increasing the money supply, regardless of the needs of the economy as a whole.
Elected politicians are unlikely to do much better. The temptation the government to increase the money supply in order to pay for things like high speed rail and university tuition fees is likely to be great, which would result in money being created without any reference to the needs of the wider economy.
If the person or organisation making the decision to create more money also stands to benefit personally from the creation of that money – as do profit-seeking bankers and vote-seeking politicians – then decisions over the supply of money to the economy will be taken on the basis of the benefit to the decision maker, rather than the benefit to the economy as whole.
So if we can’t trust profit-seeking bankers or vote-seeking politicians, then we must find a neutral, independent body who have no misaligned incentives and who do not benefit personally from increasing the money supply.
Under Positive Money proposals the Bank of England’s existing Monetary Policy Committee will become responsible for making decisions on how much new money should be injected into the economy in each period of time.
They will stop making decisions to raise or lower the base interest rate and will instead make a decision to increase or reduce the money supply.
The MPC will be politically independent and neutral. This is very important, as it prevents harmful political ‘tinkering’ with the economy. It is important that the MPC cannot be overruled by politicians, whose decisions will be swayed by
political matters rather than the long-term health of the economy. It is also important that the MPC is sheltered from conflicts of interest, and lobbyists for
the financial sector.
The Monetary Policy Committee will also still be subject to all the rules regarding transparency of its decisions, and the amount of the authorised increase in the money supply will be made publicly known.
Note that they will not be creating as much money as the government needs to fulfil its election manifesto promises — the needs of the government will not be considered. As discussed in the section ‘Guarding Against Inflation’, suggestions that this reform would cause a ‘Zimbabwe situation’ have no basis in reality.
As I have noted – this is fundamentally anti-democratic and therefore in my opinion wholly unacceptable as a proposal
We can’t have two governments
So this proposal falls flat on its face
@Richard – I disagree that ‘such decisions belong to government and government alone’. If you give the power to create money to politicians it will be abused just as badly as it has been by the banks.
The only thing you can do to get some sort of stability in the money supply is separate the decision making power over:
1. How much money is created (for the good of the economy as a whole), and
2. How that money is spent.
When you combine those two decisions, you end up with such a great conflict of interest that you’re guaranteed to have too much money created. It’s been tried and tested, both with banks and with government.
The reason the MPC has been so lousy up until now is that they actually have next to zero control over money supply. With the system set up at the moment, their attempts to control inflation are like trying to control the speed of a car on the motorway by running behind it with a piece of string.
The important thing is that for the first time in history, we need complete transparency over how much money is being created, and by whom. Instead of having banks create money and pump it into the housing bubble completley unchecked, we need some kind of safeguard.
It doesn’t neccessarily have to be the MPC. We could have some ‘Citizen’s Money Creation Oversight Assembly’ or whatever, but they need to be free of conflicts of interest, not banks, and above all not trying to win the next election.
I’m a democrat
ANy other option but democratic control is, and should be anathema
That means this can only rest with government
And no – I don’t want a duplicate parliament for that purpose. One is enough
Any other argument is anti-democratic and utterly unacceptable in my opinion
Bobidio; “So if we can’t trust profit-seeking bankers or vote-seeking politicians, then we must find a neutral, independent body who have no misaligned incentives and who do not benefit personally from increasing the money supply.”
Then we’d be using something like a nationwide set up of individuals like the version of Captain Mainwairing I speak of above. That description would fit them. You know what I’m reminded of here? The druids. Think of what bank managers used to have to do, the provincial ones. Financially speaking, they’d have to be shepherds to their flock, familiarising themselves with everyone in their neighbourhood and lending to them wisely; not too much too him, he’ll go off the rails with it, more then enough for her, she’s a live-wire, she’ll make good use of it; and so on. From the very little I know of the druids they acted as shepherds to the broader comunity but I have no idea of what if any economic function they performed; anybody have any idea? The Romans worked very hard to wipe them out together with any memory of them too so that is a fair measure of how important they were. Maybe they had an economic significance lost to us, living as we are in what’s essentially still shaped in the manner of the culture the Romans imposed on us. Perhaps we need to re-examine our past to find the way forwards here.
Bobidlo,
Yes, I have a copy of that proposed Bill already. I can’t really see how replacing the Chancellor of the Exchequer with the Treasury Select Committee for appointment and oversight of the MPC removes it from political control. Our political system is broken too.
Ah
What replaces democracy then?
A better one, or something else?
And what’t the definition of a better democracy?
Control of campaign funding is key of course – but what else?
@Frances Coppola, you say “That [LVT] might be a good way of controlling house price inflation, but please explain how it would prevent a similar fraud happening in future?”.
I have already given the answer: “… because land prices would tend to zero and banks would have to assess risk properly”.
We have had plenty of house price boom/busts in the past which heralded recessions, nothing to do with sub-prime lending. It’s true, of course, that the current crisis is far more serious because of the fraud element. If we ever get out of the mess we may not see its like again, but we will surely see house price booms where more and more money is funnelled into sterile (or toxic) activity – unless we remove the incentive for literal rent-seeking.
I did not actually mean to imply that the shadow banking system was the only cause of the crisis. I allowed the syntax of my argument to lead from one point to another – I said in my first paragraph that the that banks create money for profit which gives them the opportunity to gamble with that profit instead of ploughing it into say, public services, roads and infrastructure like governments would.
Deregulation exacerbated this as when the Glas Steagal Act was removed they could move toxic loans onto unsuspecting institutions with triple a ratings.
I enjoyed the argument over the choice of government/monetary policy committee, I think it might need some more thought. I can see the point about the democratic deficit created by an unelected policy committee, and agree, but I can also see the conflict of interest when a government fully controls the money supply near an election. I am a democrat, but could civil servants have a technocratic input?
Carol,
Maybe I’m being dim, but I don’t see how 100% LVT can prevent banks lending to people they know can’t afford it, selling people mortgages they know to be inappropriate for them, failing to complete paperwork, forging signatures, lying to regulators and shredding essential documents. I also don’t see how LVT in the American “originate to distribute” model can ensure that knowledge of risk is passed on from originators to securitisers and from thence on into the financial marketplace. I don’t see how LVT can possibly substitute for end-to-end regulation and supervision of banking activities.
I’d want a good look at the books before I nationalised RBS. I don’t doubt some very nasty surprises are buried there. I agree we need a publicly-owned bank but, ah, maybe not that one.
@Richard – separation of powers is a crucial part of a functioning democracy; consider the separation between the legislative, judiciary and exective. There’s a strong argument (put forward by Stephen Zarlenga, for example) that the power to create money is so fundamental to society that it should be seen as a the fourth branch of government, and given the same protections from electioneering politicians as the judiciary is.
Of course, if we genuinely had a democratic system that worked in the best interests of society, then I’d be happy to see our representatives responsible for creating money, but what we have is a setup where the top brass of one of two political parties generally ignore the public and do whatever makes sense to their own ideology. I think maybe you have too much faith in ‘democratic control’.
And don’t forget that even if the power to create money is outsourced to an independent, transparent and accountable body, as we would like to see, Parliament can also vote to abolish that body and take that power back to the government.
However, I guess we should distinguish between:
1. The 650 elected representatives vote and decide on whether the money supply should be increased and decreased,
and
2. George Osborne (or Gordon Brown, or Ed Balls) decides whether the money supply should be increased or decreased.
I’m absolutely against the second option. The first option could work but if the ruling party has a decent majority, then it’s pretty much the same as option 2.
EDIT: I meant: I think you maybe have too much faith in the idea that we have any ‘democratic control’ under the current political system.
I’m realistic – I know the issues
The judiciary is an elite frequently (although not always) opposing social justice
I do not share your faith
Sandra might like to read more about the subject of how much interest we have to pay banks for money creation and its effect on prices; a good woman to go to for that is Margrit Kennedy who’s written extensively on the subject.
The first step to having a public debate about the purpose of the bailed-out banks, is to admit that the status quo isn’t working. UK Financial Investments have the mandate to “create and protect” taxpayer value as shareholder, but at “arms-length” from the Government. Osborne is always quick to stand behind UKFI’s “arms-length” mandate – so let’s challenge it.
The Government epetition “UKFI is not Fit For Purpose” demands a debate about what “taxpayer value” really means. Please sign it at http://epetitions.direct.gov.uk/petitions/28557.
It’s Not a Credit Crunch; It’s a Money Crunch!
The phrase credit crunch is being used again by the media to describe the freeze in lending that can occur at the tipping point of economic bubbles. This is however misleading, because it perpetuates the myth that “credit” is somehow fundamentally different from money. Using this phrase allows the public to carry on believing the false notion that there is an essentially fixed pool of money out there and the only problem is the banks willingness to lend it out. The truth is, credit is money. Due to the magic of fractional reserve banking, virtually every pound we spend is money that has been lent into existence. This is true even if we have no borrowings ourselves. During a so called credit crunch, there is an aggregate preference for paying back loans over taking out new ones. This shrinks the amount of money in the economy. The opposite of lending money into existence occurs, that is to say we have paying back money out of existence. The fraction of people, or even politicians, that are aware of this fact, is frighteningly small.
A shrinking money supply has a host of unpleasant side effects, as anyone who lived through the great depression would testify. During the period 1929—1933 the money supply fell by a third.
More on this here: http://www.positivemoney.org.uk/2011/08/its-not-a-credit-crunch-its-a-money-crunch/
It’s also worth nothing that banks will always prefer mortgage lending and speculation over lending to businesses.
1. If you lend for a mortgage, you have a nice big house that can be repossessed if the loan goes bad. If you lend to set up a web design firm, for example, most of that money will be spent on salaries, so you have very little to repossess.
2. The average small business loan is significantly less than the average mortgage loan, but the admin for business lending is so much higher than simply self-certifying your income for a mortgage. So mortgages allow banks to lend greater amounts more quickly, with less admin costs.
3. The Basel Accords make it roughly 3 times more ‘expensive’ (in terms of capital) to lend to a business than to lend to a property.
That’s such a huge systematic bias, and it’s a massive problem for capitalism as a whole, because the whole idea is that banks are supposed to take spare money from people who don’t need it and get it to the businesses and entrepreneurs that do. If our main banks have lost interest in doing that, then we can pretty much say goodbye to making any economic progress.
@Ben Dyson, “It’s also worth nothing that banks will always prefer mortgage lending and speculation over lending to businesses. ”
I’m sorry I missed your talk for the Coalition for Economic Justice (CEJ), Ben. The CEJ was set up as an umbrella group for UK LVT campaigners but it has always embraced the ‘positive money’ narrative. Money and land are intimately linked and both need control. So far as I can make out, the only economist who recognised this clearly in the past was the Austrian Silvio Gesell.
Richard, I note your concern about giving power to the MPC, if the proposals by Positive Money were to be followed. Ben Dyson’s comparison with the senior judiciary is probably the closest we have.
Surely we must be able to find ten or twelve independent, suitably qualified individuals, some of whose appointments the government could oversee, if necessary, who would represent our country’s best interests both at home and internationally? For the same reasons applicable to senior judges, the remuneration would have to be set at a high level so that lobbying would be eliminated.
This could only be an improvement on the opaque and manipulated system we have now.
I doubt it
I always worry when people think there are better mechanisms than democracy
Why not just appoint a government from the ranks of, say, the army next?
This would be under the umbrella of democracy. In the end we have to put trust in these individuals, just as we do in an airline pilot or train driver.
Only if the chance of conflicts of interest are very low
We don’t need more fiascos of the sort seen at HMRC
Politicans don’t have to behave like train drivers or pilots. Pilots and drivers are in the vehicle with the rest of us; where we go, they go. If it crashes into a mountain they get creamed too. Politicans are more realistically in a different vehicle altogether, one they share more with their fellow politicians from other countries than with the electorate. They can and do profit by directing many of the rest of us to fly into metaphotical mountains, (witness workfare – does anyone seriously doubt that there’s enormous rewards for the politicians involved in providing an unending stream of free workers for big businesses?) and frequently they do, making it folly in my view to vote at all as it legitimises their selfish and antisocial actions.
There are those that suggest publicly run, government owned banks cannot work! This article suggest otherwise!
http://atimes.com/atimes/Global_Economy/NC10Dj03.html
… and that’s the one I screwed up the link to above 🙁
The bank of North Dakota seems to work as a socialist bank….
http://www.huffingtonpost.com/2010/02/16/bank-of-north-dakotasocia_n_463522.html
Spoils all the neoliberal theories, doesn’t it
They say it shouldn’t work
And yet it’s stunningly successful
Life just shouldn’t be that unkind to neoliberals
Ellen Brown’s site “Web of Debt” is well worth exploring to get information on debt free money and public banking.
The National Girobank was so successful in this country, Thatcher privatised it! As I understand it, the old Post Office Bank was rather successful as well!
Public banking in Australia and Canada was very successful and, as already mentioned, the Bank of North Dakota has a wonderful public banking system!
Of course, as North Dakota has oil, so it is sugested its success is down to this oil, rather than its banking system, yet there are there are other, apparently, oil rich states in the US who are doing badly in the US since the credit crunch where North Dakota is thriving!.
There is no real evidence that public banking does not work! All the available evidence seems to point to the opposite! 🙂
Giro was a useful bank – pioneering in some ways
But it was crippled in those days by only being able to use the Post Office
That would not be the case now
Privatising successful publicly-owned banks seems to be the banks way of subsuming the competition. Public banking works so well it presents a real threat to the private banks near monopoly on money creation, that’s why it tends to get nobbled every time, like the Giro bank here and Australia’s big public bank (forget the name, sorry) which was privatised in, um, the mid-90s if I recall. They get away with this because very few people understand what’s really going on in banking. I suspect very few people are really capable of understanding what goes on in banking, which casts doubt on any assertion that democracy is any kind of sensible way forward. If people can’t understand issues, how can they vote on them? The answer is they can’t and they shouldn’t be expected to.