The realisation that we are facing another financial melt down is dawning on people who have been in denial for a long time.
HSBC is staying in Lndon because the quality if UK bail outs is much higher than those available elsewhere.
Sir John Vickers, whose report on UK banking was too timid and allowed action far too late now says British banks are vulnerable again.
And they are. To losses dating back to 2008, still nit recognised. To losses on new loans since then. To losses from QE funded speculation. From exposure to emerging markets. To excess capacity in sectors like shipping. To the London propery market which is vastly over valued and where too much of the wrong type of property is being built. I could go on.
It is entirely plausible that the capital integrity of one or more banks will be tested to breaking point.
This can be corrected: we know now that banks can be recapitalised by governments. But never again must control of the banks impacted stay with bankers. Gordon Brown and Alistair Darling failed the UK badly by letting bankers keep control of banks last time.
Nationalisation must mean nationalisation if it happens again. And for the long term, leading to fundamental reforms of the sector. Surely we can all agree on that?
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Wouldn’t it concentrate the banks’ mind rather more if we said that if ‘Our Country’ (as Mr Cameron always calls it) needs to subsidise the banks again this would call into question their right to money creation?
Only banks can create money
Quite. I thought it might be salutary if the Clearing Banks thought that the Central Bank might be tasked with taking over their role.
“Only banks can create money”
How much longer will the Faustian Pact with the Lombards continue?
Abenomics has broken this, surely?
Banks need not be privately owned
But they are still needed to make money
It would be good to see a clearly articulated alternative banking plan being actively promoted before the next banking crisis, one which will put in place a decentralised community banking system for the real economy, with local cooperative/mutual ownership structures to minimise the chance of future re-privatisation.
If bailed out banks are left in the hands of private shareholders or the state itself, structured in such a way to easily allow a return to private ownership, the cycle will just keep repeating itself when the next group of nice but dims get into government.
Are you advocating the nationalisation of one bank, or the nationalisation of the entire banking system?
You appear to be advocating the latter in this post, but I would appreciate clarification if I have misunderstood.
I am advocating that any stake taken be kept as a strategic holding to create change
Surely we can all agree on that?
Except of course for the champagne socialists.
Thanks, Richard. I wondered why they were staying. I doubt they’d get much assistance if they moved to Hong Kong, as threatened.
I imagine we will wait in vain for this inconvenient truth to be reported in the media alongside the gleeful acceptance that somehow George got it right again with his bribes to the big banks.
“Gordon Brown and Alistair Darling failed the UK badly by letting bankers keep control of banks last time.”
I’m glad to hear you emphasise this point. I was disgusted with the glib statements of Darling a few years ago when he maintained the ‘banks were in better shape’ (a no risk statement given 2008!) whilst advertising his book that deals with his tenure.
I’ve just been reading about the introduction of ‘Contingent Bonds’ which seem to be a new ‘financial instrument’ which pay high interest rates (7%) but in the event of a failure cease to be a bank liability and become shareholder equity.
Surely it is now time for a national debate about the logic of austerity economics.
The theory is that we need to “pay” for whatever comes along and to do this we have either to increase taxes or to further reduce public expenditure. We cannot increase borrowing and we cannot print money (even though we have).
So if one accepts this how do we 1)deal with another banking crisis, 2) engage in a major military exercise, 3) manage a nuclear reactor malfunction, 4) react to natural events such as flooding or foot and mouth contagions.
According to the theory we can do none of these things without making the vast majority of the population poorer and then ony in the longer term when the deficit has been eliminated; even though we have the manpower, the technology and the infrastructure necessary to respond, and people are dying, we can’t because we do not have the “money”.
How can sensible people accept this as a long term strategy?
There is no logic to austerity economics
But I do agree – we need to broadcast why that is true
I’m engaged in a small broadcasting effort but keep getting confused about how to respond to questions about the cumulative national debt. It is an important question as arguably it is the root cause of the austerity logic being sustainable. I remember Cooper turning to Corbyn at the end of one of the leadership debates and saying with great emotion something along the lines of: ‘But it isn’t fair to lie about the effects of the debt on future generations’
As I understand it MMTers argue it is not an issue as it represents private sector saving and though it could influence confidence (presumably only of those who accept the austerity paradigm?) it shouldn’t. However, occasional reference to it being a potential concern, e.g. in the Keynsian argument put forward by Skideslsky (http://www.newstatesman.com/politics/economy/2016/01/optimism-error) makes me realise I don’t understand enough to answer the question confidently. Richard can you help?
– What is an undesirable level or composition of national debt and why?
Obviously if it is going up when the economy is doing well that would not be a good thing and I think your book suggests that QE artificially inflates the figure as it includes money the government owes to itself. I presume there must be some kind of ideal relationship between the its productive potential and the costs of servicing it . Is there some neat simple way to answer a question about national debt that takes all of these issues into account?
Might others start?
I am in a bit of a rush
Katy-the whole issue of public debt is a minefield and the meme of neo-liberals is that we are ‘burdening future generations.’ This is not true if we look at history: national Debt hasn’t been paid off since it officially started in 1694 and in America (other than 1831 under Andrew Jackson who paid it off for one year) national Debt has not been paid off since 1791-and we note that these countries have not collapsed/defaulted.
Bill Mitchell (MMT) puts it well (in my view):
‘But surely, you will say, there is a dam — the debt and the big stock of unfunded superannuation (pension) liabilities. Yes, these are public liabilities but then governments can always meet their liabilities without recourse to income. While they don’t express it that way, that is what history tells us.
The idea that borrowing ‘takes money from the pockets of future taxpayers’ is nonsensical. The funds to pay for the bonds originate in the government net spending in the first place.
The deficits add to bank reserves and non-government entities decide that it is in their best interests to hold the net increment in wealth in the form of government bonds rather than reserves (manifested in bank deposits). So the government is really borrowing their own spending back!
Clearly, deficits now are in part helping the current generation with income transfers and the like. But they also facilitate public education, public health and other infrastructure which provide massive benefits into the future for the current generation and their children.
Once you understand that then the idea that there is a future burden will make you laugh.
Further, the interest payments are incomes to the bond holders who presumably enjoy the return on their saving. Most will have children who will benefit from those payments.
When it is time for the government to relinquish a particular debt instrument and pay interest it just credits the relevant bank account and rips up the IOU record. The future generation has no less real options available to them as a consequence.
Whether future taxation is higher or lower is not conditioned by the deficits that the government has run in the past. It may be that the deficits will drive the economy into a solid growth path (they should if they are large enough and persistent enough).
As incomes rise, tax revenue rises. The government may form the view that private spending is growing to quickly relative to the real capacity of the economy to meet that nominal spending growth with new goods and services. The government can then raise taxes to stifle demand and prevent inflation.
In doing so it is not providing itself with any extra revenue to help it pay its debt back. It is just adjusting aggregate demand to ensure the economy maintains price stability.’ (See: http://bilbo.economicoutlook.net/blog/?p=28597
What obfuscates things is the way this ‘debt’ is processed:
1.Treasury sells gilts to private banks (pension/insurance firms)
2. This creates a deposit at Treasury account at Central bank
3.Central bank buys treasuries from private banks to replenish reserves they lose when Treasuries are bought (bank reserves move over to treasury account)
4. Central bank ends up with the treasuries and the treasury has money in its account which is what it wanted in the first place.
So a convoluted procedure takes place to ‘disguise’ the fact that the Government has all the money it needs using accounting tricks which then convey to the public that the Government has no money except what it gets from the private sector ignoring the fact that the private sector wouldn’t have any money with out the Government issuing it….
The real burden on future generations is austerity-youth unemployment/skills and training/health care/responding to environmental issues/job security/mental health implications of long working hours and poor pay/housing bubbles that create intergenerational inequality-these are the things that cause the real social and financial costs.
Tha Economist Frank Newman has written that it makes better sense to call debt ‘national credit’ (see: http://www.youtube.com/watch?v=Ae7PO-j7TIc)
Another meme is that “we’ll end up like Greece”-this can’t happen (unless we choose it!) as we have our own currency whereas the ECB controls the currency of the Eurozone and spends more time propping up the banks that lent to Greece so we have 3 Million people without health care-that’s real intergenerational damage that it will take many years to recover from and imposes real costs on society.
If the UK had debts denominated in Dollars (or Yen/Euros) then that WOULD be a real debt as it can’t issue dollars
Hope I haven’t made any mistakes here Richard! Thought I’d give it a go despite my being on the steep part of the learning curve myself.
Keith this is because Labour has not yet FULLY challenged the Neo-liberal memes such as:
“We’ve maxed out on our credit card”
“We’re living beyond our means”
“We can’t afford it”
” There’s no money”
All these memes reinforce the fallacy of composition that the Government is a Household and, more importantly, do this by providing easily comprehensible analogies with peoples every day experience of debt.
Labour is still failing to challenge this and it. The problem for Labour is that if they were to tell people that the Government is the money issuer and all this nonsense of ‘debt’ having to go through secondary markets (creating an entirely parasitic industry of corporate welfare) people wouldn’t believe them as the myths have already had a 40 year impetus. Bernie Sanders is facing this problem despite getting advice from Stephanie Kelton (MMT economist)-there are certain things he can’t say -changing linguistic usage is a slow process.
thanks again Simon, I assume you know who I am – one of the Sunday night Famous Five 🙂
Aha-I thought it might have been you but wasn’t 100% sure!
“Only banks can create money” and the government of course.
The government does so via a bank
Once a bank is nationalised it becomes a public bank and like public banks worldwide (25% of banking) should be made to work in the pubic interest and not be driven by profit maximisation as was RBS, as the government wanted to sell it soonest.
The UK lacks a national infrastructure bank or local public banks and its lack of diversity makes it less robust and useful to the real economy.
Public banking is 40% of German banking and their local public banks, the Sparkasse, increased lending to SMEs during the last crisis as they provide committed money and are willing to nurse businesses through bad times.
Despite all this, public banking is profitable, certainly over the long term, and all profits go back to the community.
There is a conference on public banking in Manchester this Saturday featuring some of the leading thinkers on banking reform. Details here
https://www.eventbrite.co.uk/e/public-banking-banking-in-the-public-interest-tickets-20773078838?aff=ebrowse
Rather than this being a part of comments, I’d really appreciate it if you could bring this conference to light in your blog as it needs support. You are aware of the stature of the speakers and I’m sure many of your followers would be very interested. It has been put on by private individuals and has no marketing budget.
Marie-due to the monetarism of the ECB and negative interest rates, the Sparkasse type banks are being badly hit in the Eurozone as Bill Mitchell points out today:
“The deposit flight is also being motivated by the negative interest rates, which means that the smaller banks which do not speculate in derivative products but provide loans to the common folk, are now finding their ‘business model’ to be unworkable.”
What a mess!
Unfortunately if we have to bail banks out again they still will not be held to accout or regulated. We have a chancelor who’s family busines has not paid tax in over 7 years so what does that tell you about where his priorities are?
One of your commenters posted a link to a documentary called the Four Horsemen (it’s on yourtube)which was very interesting but also quite sad. We will never have justice or equality while we have a Tory government.
With a Chancellor and a Government committed to achieving a Government surplus within the next four years from a base in which the Government is heavily in the red the question has to be posed as to where the money will come from if the banks need to be bailed out again? After all, taking the rhetoric of this bunch of chancers at their word, it would not be reasonable to lumber future generations with more debt.
Further austerity to pay off private sector debt and maintain bonuses would not only kill off any and all public spending it would most likely tank the economy and render the current structure and process that passes itself off as democratic Government effectively redundant. With interest rates in some instances heading into negative territory and kites being flown about about bail ins and abolishing cash options for other mechanisms, beyond wages following interest rates, seem limited.
Options on the back of a privatised postage stamp to 11 Downing Street.
And where is the Labour Party’s response to all this? I’m beginning to despair of ever hearing a robust and fearless attack on this government’s stupidity and venality.
Quite.
Problem is the people in the Labour Party who could be doing this are having to spend so much time fighting the rearguard action of the entryists who infiltrated the party in the 1980’same and 90’s. Having to watch your back all the time whilst waste of space self styled grandees like Mandleson, Kinnock, Blunkett, Straw et al and their acolytes in parties within parties like Progress costantly breif against you via their tame puppet journalists in places like the Guardian does not leave a great deal of time and energy for doing anything positive.
Corbyn is a nice bloke but unfortunately is trying to reconcile the irreconcilable. You cannot serve two masters. If we are to progress away from the failed neo liberal and neoconservative dead end than those parts and individuals within the Labour Party who remain committed to that cul de sac need to be ejected as they are a luxury that everyone else, never mind the party itself, cannot afford. Otherwise another vehicle will by necessity have to be found.
It really is up to them whether they wish to remain a relevance or not.
If you follow Professor Richard Werner, you will see he says the ECB is doing everything to make life for smaller, local banks as difficult as possible and many are having to consolidate. Yet it was these banks that didn’t get involved in financial gambling and didn’t need to be rescued.
Yet the ECB does everything it can to protect the large private banks. The efforts to save the Deutsche Bank, the largest private bank in Germany, with derivative exposures of 20 x German GDP, or 5 x Eurozone GDP, a bank that has become too big to bail, are overwhelming.
The ECB is a truly appalling central bank
All central banks are truly appalling!
It would not be too contentious to say that they are the greatest threat to democracy ever becoming a reality. They are the ultimate non-democratic back stop to protect the existing financial elite from any form of political democratic facade threatening their dominance.
However, the future of central bank driven financialised capitalism is by no means guaranteed.
“When a non-viable economic architecture is maintained through authoritarianism and brute political will, its collapse is postponed. But when it comes it is very fast and very painful.”
The quote was in reference to the collapse of Communism in the Soviet Union, in answer to a question asked of Yanis Varoufakis: Are we experiencing the beginning of the end of the EU?
https://www.quora.com/profile/Yanis-Varoufakis-1/session/74/?share=e1a979af
Part of the answer to Katy’s question – a few feet up above! – on burdening future generations with repayment of the debt of current borrowing, is interest free debt. If the govenment already owns it why should it be paying somebody else to borrow its own money? It is a ludicrous fiction.
That’s where Richard’s idea of not rolling over Quantitative Easing for Banks when the next lot matures in September is so good. QE sets a precedent for effective interest free debt – and it already exists. So make that same money the foundation for the National Infrastructure Bank and then the state needs gradually to create more of it.
Obviously until the pension system is overhauled a significant proportion of money will probably remain interest bearing (but there is a lot of scope for this to completely replace PFI and therefore became more of a ‘goods’ payment system and less of a financial transaction.)
On a language note I’d always prefer that the Islamic system of ‘profit sharing’ were the basis of borrowing rather than ‘interest’. It emphasises the joint endeavour and responsibility rather than cold, come what may interest extraction.