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https://twitter.com/positivemoneyuk/status/1358700847828377600?s=21
Hat tip to Peter May, at Progressive Pulse.
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Excellent! Clear explanation, annoying melody!
Ah, music and politics? Very powerful stuff. Let me see; I think the Conservative theme tune should be ‘Send in the Clowns’, written by Stephen Sondheim. Lyrics below, and they do fit; well on the whole, rather well – right down to the last three lines, which nail it (Barbara Streisand sang the best remembered version):
Isn’t it rich
Aren’t we a pair
Me here at last on the ground
You in mid-air
Send in the clowns
Isn’t it bliss
Don’t you approve
One who keeps tearing around
One who can’t move
Where are the clowns?
Send in the clowns
Just when I stopped opening doors
Finally knowing the one that I wanted was yours
Making my entrance again with my usual flair
Sure of my lines
No one is there
Don’t you love farce
My fault I fear
I thought that you’d want what I want
Sorry my dear
But where are the clowns
There ought to be clowns
Quick send in the clowns
What a surprise
Who could foresee?
I’ve come to feel about you what you felt about me
Why only now when I see that you’ve drifted away
What a surprise, what a cliché
Isn’t it rich, isn’t it queer
Losing my timing this late in my career
And where are the clowns
Quick send in the clowns
Don’t bother they’re here.
This is my favourite version
https://www.youtube.com/watch?v=yvZex3Qf7QQ
You either think Judi Dench murdered it or you love it
It was a brilliant Prom. Sondheim was there.
This was the joyous finale https://www.youtube.com/watch?v=1f-IRZM1MAU
Very good
Also, the Guardian today has an article advocating greater central bank intervention in big problem areas – like climate crisis.
https://www.theguardian.com/business/2021/feb/10/central-banks-arent-what-they-used-to-be-and-the-better-for-it?CMP=Share_AndroidApp_Other
Good
Nice and concise. However, it would be even better if they could include a quick counter to some of the immediate knee-jerk responses, such as “but you can’t just keep printing money” or “look at Zimbabwe/Weimar Republic/etc.”
Yes, it might leave the impression with some that we can “print” without limit and all have everything we want. I think that there needs to be a corollary that when the economy is running at full capacity money needs to be drained by taxation and bond issuance.
Of course, trying to get that included risks destroying the clarity of the piece “as is”….. always a tricky balance.
Agreed
2 minutes is very limited….which is why my videos are much longer
Richard C,
They did do that a few years back,
https://positivemoney.org/2015/12/hyperinflation-how-the-wrong-lessons-were-learned-from-weimar-and-zimbabwe-a-history-of-pqe-part-2-of-8/
It is cleverly written. Nelson Merentes would like it too.
Please forgive this irrelevant aside.
‘The Scotsman’ yesterday reported this: “Malcolm Offord, the founder of private equity firm Badenoch & Co, has donated £147,500 to the Conservatives, according to the Electoral Commission’s website.
Party sources claim he has secured a coveted endorsement from the former party leader’s candidate committee that will be included on the cover letter of ballot papers for the regional list selection process that is due to be sent to Scottish Conservative members. The endorsements are a closely-held party secret due to concerns around potential negative press and are viewed as a guide to the membership as to who to vote for.
[Ruth] Davidson is understood to be rubber-stamping the decisions made by internal party officials, with the system initially viewed as a potential route into Holyrood for those not chosen to stand in constituencies.”
This kind of relationship between donations and and political parties has been termed “cronyism”; which nowadays provides no more than some sense of a minor social solecism that can safely be ignored. Of course it can; there is no connection between the two decisions. Fine. The problem is that these reports continue to happen in political parties, and nothing ever happens….
We should rather think of this kind of donation activity as very similar to the patterns of activity that followed from the growing award of ‘indulgences’ by the Church in pre-Reformation Europe. It is forgotten that in 1517 Martin Luther wrote his ‘Ninety-five Theses’, not initially to declare the Reformation, but as a specific intellectual and theological challenge to the activities of the Dominican friar Johann Tetzel, whom Luther considered was preaching that the forgiveness of sins would automatically follow the purchase of a letter of ‘indulgence’ (the commutation of obligation through monetary payment, while still progressing to salvation).
What followed? The Reformation.
We just need a new Theses
Amen to that!
John – and others who may be interested – Sarah Chayes’ excellent book ‘Thieves of State’ draws the same parallel, extending it much further to directly link various forms of religious extremism to systemic corruption in a complete reinterpretation of global security. You might find it worth a look.
I watched an interesting but also awful documentary (the media treatment of the whole thing was disgusting) about the Madeleine McCann disappearance on Netflix the other day and they interviewed the ex- head of the child protection agency Jim Gamble.
Gamble basically said the same as is being said here – that there is enough money to tackle pedophile rings and child abduction (he said that the money invested in just this issue was peanuts) – we just want to have to do it and commit to it and fund it right and the dark net etc., would be over.
Like everything else then?
We fail ourselves by by our lack of imagination but also, an inability to just …………look and find out. Until we start doing that as a society, we are condemned to expect less not more or better.
Ah Pilgrim, a man after my own heart, your last paragraph is so spot on.
This quote from a former ‘Moonie’ cult leader will probably go down in history as one of ‘the great quotes’:-
” I wanted to prove to them I wasn’t brainwashed, but on the fifth day, as soon as I allowed the thought that Moon was a liar into my consciousness it was like a house of cards falling down. I was horrified.”
https://www.theguardian.com/world/2012/sep/03/moonie-cult-leader
Or my own saying :-
“He who is content to be spoon fed bullshit has only one person to blame when becoming sick”
I’d like to be provocative and reverse the argument!
My argument comes indirectly from mulling over the concept of constitutional democracy and the bizarre historical situation where in the United States you have many Republican Party politicians who don’t really appear to understand what they’re doing in the Capitol building when really they should be at Mar-a-Largo in Florida where the court of the “Donald Trump Kiss My Ass and Damn Constitutional Democracy Party” (to put it crudely) currently resides!
Of course, I wish to include the British in this bizarre situation or mental condition, well a lot of English and Welsh and some Northern Ireland voters really, who appear also like Republican Party politicians to be courtiers in the LIP system, Lots of Ignorance Party, who don’t appear to understand the importance of genuine constitutional democracy. This is now coming to light with what can only be described as the lingering on of a Cronyist System whereby the Royal Family, for example, is still able to tweak laws in their financial interests! Exactly really what Donald Trump wants to do for himself, his family and other super-rich cronies!
OK so where’s the connection with money creation?
It’s the realisation that I’ve put too much emphasis on Christine Desan saying it’s the collective power of citizens to impose tribute (mainly taxation) upon themselves that creates the best “safe-asset” money instrument. See page 8 on her paper “The Monetary Structure of Economic Activity”:-
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3557233
This, of course, is Richard’s government makes the best debt retirement promise. But it’s not just this, Christine Desan is also stressing that the exercise of this collective power takes place under a system that’s called Parliamentary Democracy or Constitutional Democracy. It’s under this system that laws are made that determine money creation including the very important one just mentioned of imposing taxation (tribute) upon ourselves to make “safe-asset” money for our collective and individual use. Desan I think is arguing this institutionalising of collective and democratic decision making power must come first before good “safe-asset” money can be made.
“Constitutional law deals with the fundamental principles by which the government exercises its authority. In some instances, these principles grant specific powers to the government, such as the power to tax and spend for the welfare of the population.”
https://en.wikipedia.org/wiki/Constitutional_law
For examples of this see points 6 and 7 of Peter May’s excellent recent post:-
http://www.progressivepulse.org/economics/seven-reasons-why-we-never-tax-and-spend
So what can we conclude from all of this? Well that money is a product of Constitutional Money Theory, or Collective Money Theory, or Democratic Money Theory, whatever term you prefer and that the Magic Money Tree Theory is actually a fantasy belief of the ignorant who don’t understand constitutional or parliamentary democracy and think money just magically popped into existence to serve markets.
Of course, as MMTer’s know the ignorant who hold this belief can never supply a coherent and logical explanation as to how the “pop-up” money is created. Indeed these ignorati get most upset if you press them for the explanation. Lurking I think behind their emotion, however, is really the simple fact they associate constitutional or parliamentary democracy with government and government is amongst other things a powerful constraint on their self-interest and lack of understanding of the importance of the Golden Rule, symbiotic behaviour, whatever you care to call it.
This may be a truly dumb question, but why would people resist the MMT argument? Im excluding those economists and commentators for whom it is driven by quasi religious beliefs, and the majority of the public for whom the household budget metaphor is deeply embedded and makes intuitive sense.
Using the ‘follow the money’ principle, Im assuming that the main resistance comes from the banking sector and their associates, who in the current model have a strong grip over money creation and as a result are able to extract substantial profits from it, notably in property lending. If the government were for example to engage in serious green QE, perhaps through green and regional banks set up for the purpose, that could be a threat to the current banks. Though having said that, the existing banks have shown little or no interest in green and regional banking.
Thoughts or explanations? The hostility to MMT, even just as an explanation of how current economies work is remarkable
It has never paid a person to understand that for which their employment requires tat they feign ignorance.
I am quite sure banks do know that MMT accurately describes what goes on in banks, just as I am quite sure HM Treasury does. But it pays them to deny this. Banks and HMT wish it to be thought that money is scarce. It is not, of course. But they wish it to be thought so. And so the lying continues.
@ Robin Stafford
“This may be a truly dumb question, but why would people resist the MMT argument?”
I don’t think this is a dumb question. As I’ve just argued there are only two theories of money creation. The first is the Magic Money Theory where it just “pops” into existence. This is the one most people live by. My employee just “popped” money into my bank account what is there to worry about my employer took care of where it came from.
Then there’s the other one the government legislated it into to existence and as part of this legislation licensed it out to be created by private banks as well creating it itself. This theory is called Modern Money Theory. The problem is the word “Modern” isn’t quite right because consent to paying tribute (later mainly in the form of money based taxation) to a government or sovereign to meet a society or nation’s collective need has been going on for hundreds of years, hardly a ‘modern’ act. Often that consent has been abused (Magna Carta) and continues to be contested if not abused. This is where you arrive at if you do any serious drilling down from your bank account to discover how money got to be there.
So if the word “Modern” is not quite right in the acronym MMT what is?
Christine Dean provides a clue in her paper “Money as a Legal Institution” on page 3 where she uses the phrase “collective and continuing consensus.”
https://modernmoneynetwork.org/sites/default/files/biblio/Money%20as%20a%20Legal%20Institution.pdf
Isn’t there a shorter word for this like “mutual” and isn’t it just exactly this that has lain behind the creation of money for hundreds of years not least because tribute turned monetary taxation makes money the “safest-asset” for longest life expectancy, a very useful tool or technology? See page 8 of another key Christine Desan paper “The Monetary Structure of Economic Activity”:-
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3557233
Doesn’t “Modern Money Theory” therefore become more intelligible and acceptable (“The Joy of Tax”) for those who are bothered to understand the world they live in better if it’s called “Mutual Money Theory”?
I like that, a lot…..
Robin,
Actually that is a very good question,
You are right in that the banks make very good profits from the status quo and will this resist all attempts to stop that profit flow. As Richard says they banks would say it is better they have the reins on money creation and not some politician….heaven forbid! Besides they will also say, as they did before 2008,that they understand the risks of “creating money”(not that they call it that ,its just lending to you and me) No one likes the term money creation it seems, I wonder why?. So I use it all the time! Lending for mortgages is really in essence what they do, it is lazy lending and reaps big profits, it also give the banks the added security on taking the house should there be default. Banks do not want to take risks in lending, which is fair enough, but the scale of mortgage lending(money creation) means we have an unstable, expensive property market and hence an very large risky banking sector latched onto it.
The Germans for instance did not tallow this to happen ,they cap land prices, rentals and the few large banks don’t to tend lend mortgages domestically. They never suffered a property crash or a domestic banking crash for the smaller local banks. Prof Richard Werner is campaigning for such banks in the UK, or for public investment banks as you mention and for banks that are not allowed to create money to for non productive lending….i.e property and shares. So maybe the old fashioned building societies should be brought back if you like.
The second issue is that they also have a strangle hold on the payments system. They erect barriers to new competitors and new fintech companies trying to compete. To have their high risk based lending tied to the need for a stable and efficient payments system is a great weak spot and the banks know that too….hence they get to twist politicians arms to get bailouts and other subsidies; like very low cost deposit insurance, ,lender of last resort facilities and all sorts of other treats the BoE and govt bestow on them.
So we need to address how we get a safe payments system in place as well as curtail the banks dominating
our money creation. That is a a double effort to overcome, but it is doable, despite what a banker will tell you. A national Digital currency is one way, with 100% safe bank accounts with direct access to central bank reserves ,which we cannot access currently.
While I was helping Positive Money a few years back we had the ex whistle blower from HBOS (Paul Moore)join the campaign, he gave talks around the country . As head risk officer at HBOS he saw the immense trouble brewing before the 2008 crash. He says that the banks generally have no conception of the wider impact of their behaviour. All they worry about is salaries and bonuses as well as shareholder dividends, it is a very short sighted industry. He said that banks never consider as a sector what would happen if it all failed….,until it did.
https://www.youtube.com/watch?v=Sn_tP87QDnU&feature=player_embedded
Our govt allows this to happen, mainly because they are in awe of banks and bankers and don’t understand the first thing about money. My MP (a shadow front bencher btw)said to me when I spoke to her at her office about this, that “it all made her head spin”. Even Gordon Brown was praising the banks in his Mansion House speech in 2007 ,which he surely must regret now. Then we have the revolving door issue where the likes Tony Blair and Georg Osborne (and all the ex Chancellors if you look them up) now work for the finance sector once they leave office, is it any wonder the banks maintain the substantial power they have.
Sorry for the ramble, this is such a big topic,. I have spent years studying and campaigning on it and feel I could write a book.
Go in then……
In my experience, those working in bond and money markets recognise basic MMT to be “a statement of the bleedin’ obvious”. (By basic, I mean acknowledgement that money is added by government spending and drained by bond sales and taxation and that deficits do not have to be financed by tax or borrowing.)
Indeed, bank employees or shareholders would probably better off if monetary policy were run through the lens of MMT. (Perhaps we might hit our inflation target and get rates back above zero because zero rates are horrible for banks). Rational opposition comes in two flavours…
(1) It is strictly personal! – rich folk are terrified of wealth redistribution. While, MMT does not strictly imply anything about redistribution the assumption (probably correctly) is that if draining of money is done through taxation it will end up redistributing. (When I said rational… I meant rational, not unselfish!)
(2) Fears of inflation. Do we have the institutional and political set up to drain through higher taxes and bonds sales (implying higher interest rates)? William McChesney Martin famously said “The Federal Reserve is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.” The thinking is that a Central Bank, one step removed from day-to-day politics has a better chance of tightening policy at the right moment. (Again, rich old folk are far more concerned about inflation that unemployment – as I said, rational not unselfish)
What bemuses me is that those that are not rich should be taken in by such self-serving views.
Richard,
Good advice, there are plenty of good books on money, maybe there is room for another. Drawing on different sources is never a bad thing. And we learn a we go. The best thing we can do is keep asking the big questions, can we do it better? This blog is brilliant at doing this, so thanks to you.
The banks are at the forefront of the consumer smartphone/digitisation of the financial sector. They are paying people to take their apps. They are closing branches as quickly as they can, and removing direct human contact wherever it is possible. They want a cashless, digital money society, at which point they will sit at the very centre of the economic information web. They will have a consumer knowledge advantage over everyone, and are already proven to be too big to fail; at that point they will be best placed to exploit and profit from surveillance capitalism.
John W
To be a bit of a devils advocate; I can see a potential ‘surveillance capitalism’ aspect to the bank’s behaviour though Im not entirely convinced that the banks have the intelligence or sufficient data to play that role with consumers. They’ve been pretty useless at cross-selling products to consumers and are overwhelmingly about trading and property lending these days. (Im a big fan of the concept though, see also Faroohar’s Do No Evil and Cathy O’Neill’s Weapons of Maths Destruction)
On the corporate and small business front, the closing down of branches has meant that they have very poor intelligence on potential customers. Financial information alone is not enough. The Captain Mainwarings who met their customers and visited the premises played a useful role in intelligence gathering and making lending decisions. Industry expertise that they used to have in regional or district offices has been got rid of. Its a strategic issue for the country as the capability to get money to SMEs does not exist.
A couple of exceptions that prove the rule; Handelsbank of Sweden has built a network of branches in the UK based specifically around building local knowledge of an area and their customers and businesses. Also the Bank of England’s little known network of ‘agents’ provides significant input to the Bank’s deliberations, on what is really happening in the economy rather than what the wonks are speculating.
It all reinforces the case for a strong regionally based, green orientated, state funded bank to fill the void that the banks will not fill. And/or using legislation to get the banks back to doing what they should be doing.
I recall those managers of old
But always the brightest
Some were snobs
But overall, the system worked much better than now
Mr Stafford,
Thank you for that. Actually, I agree with you, including your scepticism of their understanding of surveillance capitalism. The conclusion I draw from that, however is that there are better equipped people than the bankers, and one way or another (by direct or indirect means) they will absorb the banks into surveillance capitalism. The opportunities are too big to pass (surveillance capitalism, like nature, abhors a vacuum).
I also agree about missing new customers; but what I see in commercial High Street banks, with the pursuit of digitisation and the closure of branches, is a mindset in banking that classically follows the large-scale corporate world emphasis on cutting costs to make profirs – because it is the easy way to produce profits, at least short term; especially when they run out of easy, low risk bonus-generating sources of income/fees in a Covid, Brexit, post-Crash world they do not understand.
Thanks Vince and Helen
It was a bit of a rhetorical question. I’ve worked with pretty much all sectors of finance as my clients (Including the Bank of England…) over my career so have seen them from the inside. I’m fairly well read on MMT, Positive Money and of course Richard’s blog, so your answers make sense to me as an explanation. Nevertheless, it did seem to be a question that had not been asked directly.
It points to where change really needs to happen – the malign influence and control that certain elements of the City have over governments of whatever colour and the economy as a whole.
Robin,
I think I knew you knew, but it was rather cathartic writing a reply, : )
Paul Moore says that money creation was never discussed at senior level at his bank, I doubt it is at any bank. We now have traders who watch central banks to second guess what they will do, I really think they get MMT but they just use the knowledge to make better profits, hardly putting it to good use.
We do need critical mass understanding of MMT ,so we must just keep plugging away at it. Though I am getting weary of economic pieces in the media saying MMT will lead to us to disaster or end in hyperinflation. When, as Bill Mitchell puts it, MMT is descriptive not prescriptive. What the critics always fail to see is that it is like saying the instruction booklet for your chain saw will likely cause you to chop an arm off. But If you read it well enough it may just help prevent you doing just that. The City meddles in stuff it has no wider conception of, it is a law unto itself
It was a good response Vince which hopefully others found useful too
Having worked a lot (but far from exclusively) with City organisations a few things I learnt:
– many so called bank managers could not read a balance sheet
– as community they are stunningly ignorant about what goes on in a ‘real’ business, outside the M25. Not least the fund managers
– they themselves are remarkably operational inefficient and weakly managed. They get away with it because of their high margins
Its not to say that they were that great, but the old network of branches and managers did at least mean that they had some idea about what went on outside the M25. Or even just the boundaries of the City. They’ve destroyed their ‘nervous system’.
As for MMT, just getting a basic understanding of money creation would be enough to start with. How it is created by banks (easier to understand) and then how it is created by the government (gets more political). Then one can move onto what one can do as a result.
On a slight tangent, this interview with Mariana Mazzucato is worth a watch.
https://novaramedia.com/2021/02/09/can-capitalism-solve-its-crises-interview-with-mariana-mazzucato/
Vinnie,
She is a tour de force. End result is, as she says,where the public sector leads the private sector follow, …just we can’t tell the private sector that their money and riches came from somewhere else other than their own genius. The issue is getting the private sector to go in the right direction, they will duly follow and make a profit out of any given lead,but they do have to be driven in the right direction in the first place, otherwise it will be just overall mayhem.
The way I see it is to go back to the 1970’s.
Lots of things were happening – war torn Europe and Asia had got back onto its feet and were now seriously challenging the staid and well endowed economies of the U.S. and the UK; an ill advised involvement in the middle East meant that the cheap oil negotiated by Roosevelt for the West at the end of WWII went up in price and caused inflation but a significant thing for me was Nixon’s abolition of the Gold Standard.
It was not the abolition of the Gold Standard itself (I’m no expert on it at all) but what replaced it. It was floating currencies wasn’t it determined by private ‘free’ markets?
My view is that what the world financial systems saw was an opportunity through floating currency rates to retard Government spending and create gaps and shortages that private credit money production could fill – at interest of course and other fees. It essentially de-sovereignised Government money. It was the cuckoo in the nest. And leads to this idea that money is something that Government has no control over and adds to the resistance to MMT. Was it an an opportunistic tactic to deal with the global competition and maintain growth or was it a genuine conspiracy to push out Government investment? Either way, I think that we can agree that the effect on sovereign currency producing nations has been corrosive.
The money markets blackmail Governments by creating artificial currency value crises to keep them constrained.
That malign influence to punish sovereign Governments for spending their own money on their own citizens still exists and it puts people off MMT (and explains why if MMT were to become a reality, the ability of private markets to punish Governments doing the right thing needs to be addressed assertively).
Hmmmm…due to commitments to meetings probably unable to address all that tight now
But I am nit convinced floating rates are the issue, but it is an interesting angle that what should be a positive ( as I think floating rates to be) can be spun as a negative
I think it is like everything else Richard – it’s the use to which an idea is put – not the idea itself if you see what I mean – its mis-application that I am raising.
And I must confess I haven’t got a clue how to replace an exchange rate mechanism with another.
I could not resist the urge to get my tuppence worth in on this one. I think Helen has proposed the correct terminology with “Constitutional Money Theory”. “Mutual Money Theory” is an aspiration and a particular category within the broader envelope of CMT. CMT is the right formulation for me as it encapsulates the relationship between money and power. Money functions within a framework of political power, constitution and law.
I say “mutual money” is an aspiration because it does not exist except in localised pockets – such as the Bristol Pound economy. I have been having a very interesting and thought provoking debate with Peter May on Progressive Pulse about the Bristol Pound. Local currencies are important as a basis for creating what I call “independence mindedness” – not “independence” as that requires a changed constitutional framework (as Scotland is seeking). Independence mindedness emerging from local currencies is a training ground where ordinary folk can rediscover the true nature of money. It is a precondition for the evolution of a constitution based on subsidiarity.
However we cannot create “mutual money” from a spontaneous scaling up and networking of local currencies – there has to be a role for sovereign money to support the whole new framework. This is the creation of a decentralised system of governance and a decentralised monetary and banking system – both adopting the principle of subsidiarity. But this is not going to happen without a deliberate design of a new monetary system in which sovereign money functions as the foundation for decentralised money.
I have been putting together an outline of such a system as a proposal for Scotland’s future. The “Credit Risk Insurance Fund (CRIF)” which I have mentioned in a couple of earlier posts is one element in this decentralised monetary and banking system. Happy to share it with anyone who would like to take a look – its an outline, not a thesis – a couple of pages, not the thickness of The Bible. Email me at jim.osborne@tak21.com if you are interested
Whilst the notion of a “Magic Money Tree” is a useful metaphor it has a serious downside – it implies money is a “thing” which can be harvested. It, therefore, doesn’t allow us to escape from the dominant, orthodox view of what money is. We should, therefore, seek a better meme. Any suggestions?
Jim,
Magic money fountain?, can be turned on and off, but does look spectacular when it is working. Or maybe something more mundane like a magic money tap or magic money reversible valve…though granted not as visually appealing.
Water is a good analogy to money, both bring things to life.
To quote Felix Martin,. we live like fish in the sea of money. We hardly notice it, it is just there all around us. We only notice it when it is gone and we flop around like dying fish.
Vince – I really do think the money/water analogy is extremely helpful….but I think about it a slightly different way –
a flow of water is an energy flow – money is energy. I was out walking on one of the beautiful beaches we have here on the Isle of Bute this afternoon and I had my camera with me as always and I filmed a small stream running into the sea. What struck me was the details of the flow of the water – flowing fast in narrow streams, areas of slack water, areas of turbulence where the stream’s flow met the incoming waves of the sea. And it struck me quite powerfully that the variation in the flow of the burn was created by the contours of the surface over which it flowed. So, energy must have shaped that surface and the surface then shaped the energy flow – it works as a dialectical duality. So take this analogy and apply it to money – which is a flow of transferable credit – its flow is created by the surface which it flows over – the shape of the underlying social relations – but those social relations were themselves shaped by the energy that is money. Money is a function of power and power is a function of money. Power defines the purpose of money and the purpose of money reproduces the power.
I just got to your mention of Bute and thought ‘lucky Jim’
Jim Osbourne.
If you like the water analogy try this video by J D Alt.
It really helped me get my head around MMT.
https://www.bing.com/videos/search?q=thr+Millennial%27s+Money+video&view=detail&mid=40C8E798E3F5F161A71340C8E798E3F5F161A713&FORM=VIRE&PC=SANSAAND&ssp=1&safesearch=Moderate&setlang=en-gb
Just in case there are some folk who think a “Credit Risk Insurance Fund” is a barmy idea, I will say this…..we already have government backed credit risk insurance at the moment – it is the government guarantee given to banks for providing covid-19 emergency loans to business. Some of these loans have 80% insurance cover , and others 100%
insurance cover. It just goes to show how vital credit risk insurance by the government is. Trouble is it is only being used as a temporary patch up.
One question that doesn’t seem to have been addressed (other than by Richard, who is ahead of the curve as usual) is what happens to the collateral assets in the event of a default by a borrower?
There is no legal or moral basis for the lending bank to take it – they suffer no loss because they have insurance with the government. In a normal insurance scenario, when a pay out is made by an insurer for a loss (say a stolen car) if the asset is recovered the insurer gets ownership of it – it doesn’t revert to the insured owner who suffered the theft. So in the case of state credit insurance the assets must revert to the state….and it is here that Richard has been ahead of the curve with his proposal for a “National Wealth Fund”. Essentially this is what my CRIF proposal involves – it is a mechanism whereby the state takes a stake in private assets. This could be by retaining a shareholding, by partnering a private enterprise in an “Equity Direct Partnership (EDP)”,or possibly transferring the assets into co-operative ownership.
It’s not barmy at all.
Mr Osborne,
I understand your sound intention, but I seem to recall (?) that before the Crash the banks were trying to insure their risks; which simply drew insurance into the reach of the plague in 2007. I stand to be corrected. Actually, philosophically it is difficult to define a ‘bank’. This can only become more and more difficult through conceptual and technological development of modern ‘money’ products.
It was an extraordinary achievement for a John Law (1705) or much later Mitchell Innes (c.1913) to come up with the conceptual understanding they had of money, given the distortions of the established claims of coinage and bullion as representing ‘real’ value; and in what the public placed its trust in the period they wrote. MMT was, I supect intellectually liberated, and facilitated in its efforts to tackle public confusion about the nature of ‘money’, by the contemporary technological innovation of the keyboard in money creation. The chameleon quality of keystroke reality takes us into a different kind of Heraclitean world, at which point we are even now only hovering on the edge of an intrinsically volatile, abstract, metaphysical new monetary reality.
John….the crash in 2008 was really caused in the Shadow banking sector I think rather than normal retail banking and was connected to the way credit risk was distributed through securitisation. This was the product of lending banks offloading their credit risk by securitisation into CDOs CDSs etc…..credit risk was treated as a commodity. If the state provides the credit risk insurance instead of the private financial sector then this credit market evaporates – credit is no longer a permitted commodity that can be traded. This I think is key to reconciling financial stability with adaptability. It is the trading of private debt (credit risk) that is problematic – the trading of government debt is trading in liquidity so I don’t think this presents the same systemic risk – if trading in government bonds freezes up and reduces liquidity then QE can be exercised by the government/central bank to provide the liquidity.
I appreciate that, but the banks then were not neatly pigeon-holed by sector (as followed from Big Bang); and look what happened to the ‘retail banks’. As far as the Credit Default Swaps are concerned, I think some of the more arcane activities also strayed into the insurance world with unfortunate results. The barriers were permeable; at least that is how I recall it.
Jim,
The thing about the 2008 crash was that retail and investment banks as well as the derivative based financial dealers and insurance sector all were interlocked with various asset mixes and covering insurance bets . As Tim Geithner says in his book on the crisis, banks on both sides of the so called ring fence failed. Even Paul Moore in the video I linked says that retail banks caused mayhem by issuing way too many subprime type mortgages in the UK. We had to bailout HBOS,RBS,Lloyds, Northern Rock,Bradford and Bingley, which were all high street banks, Barclays only survived because it carried out a hugely suspect deal with the Qatari Wealth fund.In the USA real estate lenders and big banks Freddie Mac, Fannie Mae,Wachovia and Washington Mutual all went down. The CDOs,CDSs that evolved also were based on….. the mortgage market. Those mortgages originated from retail banks lending money. It certainly leveraged the risk even further,and in the end US banks were lending liar loans just to provide assets for the financial wizards to sell on (and then bet against.)
Most bank led booms are based on mortgages, Japan suffered from this same issue in the 90s. Real estate in Tokyo was the highest cost in the world. Sweden suffered the same fate in the 90s too and had to redesign its banking sector. Irelands housing boom created the Irish tiger economy, but that shattered too as the big 3 banks collapsed and left Ireland bankrupt. So called shadow banks are a worry but we don’t even have a safe or stable retail banking sector. Its too big and too keen to lend mortgages. We need a wholesale reform of the system, not more Basel led papering over the cracks.
My only beef with MMT is that it is weak on solutions for banking reform.
I appreciate that, but the banks then were not neatly pigeon-holed by sector (as followed from Big Bang – that was part of the problem); and look what happened to the ‘retail banks’. Credit Default Swaps were among the poorly understood arcane activities, which also strayed into the insurance world, with unfortunate results. The barriers were permeable; at least that is how I recall it. I am not convinced sufficient has been done to reform the underlying system; indeed I am a little surprised if I sense a little complacency here. I have no confidence in the wisdom of the British financial sector; hubris, yes – even now – wisdom? No, they are still seduced by what mathematics can do for them, and there are lots of naive or vain Cathy O’Neill’s willing to produce gee-whiz equations detached from reality; just like the economists, but using real mathematicians.
@Jim Osborne
I’ve now got it…
That is a really excellent point!
I think I suggested similarly http://www.progressivepulse.org/economics/a-new-role-for-the-bank-of-england
Thank you Mr May: “Marshall Auerback …. suggests that Central Banks are in effect really insurers to private banks.”
The point I have been trying to make was that it is very difficult to define “banking”; and the Crash demonstrated that it had become difficult to distinguish between insurence and banking, because integrated banks had turned to the insurance market to unload their risks. I accept nobody seems very interested in this issue, but I shall stick with it.
Peter,
Yes a central bank charging “penalty rates” as Bagehot recommended is a solid idea. Trouble is the central banks did not do that in the last crisis. They gave banks emergency loans at almost zero. There was no penalty rate.
Warren Buffet bailed Goldman Sachs out at that time with a 10 % return for his investment…now that’s a penalty rate!
Yes Peter there is great similarity in what we are saying. One of the issues I have been yo-yoing about on in the process of formulating my “Outline of a New Scottish Banking and Financial System” is what the credit risk insurance premium should be. I have yo-yoed between a variable rate based on risk assessment by the CRIF (I propose this as a separate institution from the Central Bank but still within the governmental financial institutions nexus) and a fixed rate linked to the Gilts Rate. At the moment the pendulum has swung back to the fixed rate proposal. In this scenario I would envisage the Central Bank suspending a bank’s licence if they keep mucking up their lending and having to repeatedly resort to the credit insurance. The levying of the credit risk premium (CRP) is not designed to “raise funds” to meet CRIF liabilities – it has Central Bank financing to deal with that. The key point for me is that the CRIF supervises debt restructuring to prevent bankruptcies amongst borrowers but in the event of default the collateral assets connected to the loan are taken over by the CRIF and this then allows a transfer of these assets to other forms of enterprise who demonstrate a capacity and a plan to use these assets productively…..this arrangement is very like Richard’s proosed National Wealth Fund ….probably an enhancement of the NWF concept in fact.
If I may say, Jim O is saying more clearly the point I was making above on floating money exchanges – it is how the utility of a certain type of market mechanism is used/abused by the those in the market, not necessarily the mechanism itself that is the problem.
According to Satyajit Das, derivatives as designed were meant to be a bit of a sideshow to ‘normal’ investment. What transpired was that they became the ‘main event’ – a main driver of financial turnover and eventually the system’s downfall.
The sale of mortgage backed securities became more risky and prima facie illegal really once the market began to turn a blind eye to the fact that all the really good mortgages got used up and eventually the more riskier ones were being portrayed as strong long term investment grades. This was made worse by predatory lending to households who had no hope of affording their mortgages once the teaser rates had ended.
There is no doubt in my mind that these markets need to be regulated more.
As to my point about those needing to be convinced about MMT because they worry that money markets will punish states who invest properly in their commons, I suggest that there needs to be answer because that is what I am hearing out here.
PSR – I think the solution is actually easier than regulation of the secondary banking markets. It is to provide government credit risk insurance to the primary banking sector so that bank failures are prevented and distressed loans can be restructured under supervision to prevent bankruptcies of borrowers. However the secondary market should be left to its own devices without any recourse to government support and if any secondary market institution fails then it be left to fail. Zero, or at most the most basic level of secondary market regulation would be all that is required. Simple rules make the best solutions if you ask me.
Jim
An aside – apologies for not reading your paper, as yet
Richard
Jim – well, what you are saying to me about the secondary market as you call it is a form or regulation – that is to say, if you fail, you really do fail and you take the consequences: financial, legal and prison too if necessary. Them’s the rules. I’d love it if it was like that.
I haven’t argued for complex regulation Jim. Just because I say ‘regulation’ does not mean it has to be complex. The secondary market is complex enough which allows bankers to get away with all sorts of things as they are.
For example, for CDS’ – they should just be banned – the moral hazard with these (a temptation to bring about the misfortune you are betting on happening) as well as that they are making money out of other people’s disasters is just not on when you consider the dearth of manufacturing jobs that could be created in the Green sector and the lack of investment in the commons.
Anyhow, I like your posts which are very interesting I must say.
Vince – I agree with you about MMT being weak on banking reform. I have argued before with a few MMTers that MMT is partly a set of fundamental tenets which are true but that a lot of it is an empirical superstructure built on the foundations. This part of MMT is descriptive – it describes the Anglo-American banking system so the orthodox MMT narrative advocates money creation within this type of banking system without considering what alternative banking systems might look like. MMT pretends to be “politically neutral” but it can’t be because unless it considers issues of power, the social value of money and the purpose of money it by default advocates the continuing hegemony of the banking/financial elite. My dissatisfaction with the limitations of MMT as we know it is what prompted me to embark on a project to see if an alternative banking and monetary system can be designed to deliver a different social and political “vision”. I believe I have broken the back of this challenge and it involves just a couple of rule changes to transform it. (1) prohibit the trading of private debt (2) allow simple interest only. (1) eliminates the secondary debt markets and provides credit risk insurance fro he primary banking sector only (1+2) reduce the risk of credit default, foreclosure and transfer of collateral assets to banks, thereby closing off one of the conduits to growing wealth inequality.
I would also tend to agree with you on that
I am not neutral on banking reform
That does not mean MMT is wrong. It says what banks do, not how and why and in what form they should do it
I agree – the foundations of MMT are not wrong but MMT doesn’t address the bigger issue of system design, power relations and the purpose of money…..the “superstructure” is an empiricist description which just seems to assume that the banking system we have is the “natural order” of things…which it isn’t – we can choose a better design for different purpose(s).
“(1) prohibit the trading of private debt”
I think I understand why you wish to do this, but I suspect it is dangerous. I accept that Government is best placed to call the tune, but at the same time Governments only too often make catastrophic mistakes. Helen Schofield’s blogs reminded readers of the history; the history includes the disaster of Restoration government’s monetary blunders, corrected in terms viable at the time by the formation of the Bank of England – a “public-private partnership” (Martin, ‘Money’; Ch.7, p.117) that represented society interests outside the sovereign decision making circle. Martin makes much of the ingenious reaction of the Irish public to solve the problem theselves given the money starvation following the Irish bank closure conflict in 1970 that the government struggled to deal with. I think you may be venturing too far.
The point is that Government is the best medium to deliver monetary policy, but it holds that as a trust for the community, and it is the community alone (not the government) that gifts the right of control over ‘value’ (the monetary standard) that ensures success. The community must have the capacity to act independently (which it will do quite naturally) if it discovers its faith in government is misplaced. I deliberately choose anthropological terms – this is at root a deeper matter of values, obligations and redemption – a fundamental matter of morality and the ties of community.
Jim,
What you say sounds good in theory, but it so remarkable how banks get round the rules,whatever you put in front of them. That is you can get anything substantial approved. We have had stricter lending rules in the past during the 60s ,but it didn’t work as banks are good at get arounds. Besides the politicians and regulators soon take their eye off the ball.
We do need very simple rules though, yours look the type we need,with as little wriggle room as possible. I think the current Basel regs run to something like 400 pages and the US banking regs to a 1000. As one observer noted, no one person can possibly grasp how all that works. Richard Werner advocates not allowing banks to use fractional reserve lending for mortgages or shares. I would agree, plus we need 100% safe money deposit accounts that banks cannot touch. If they want to invest depositors money they should spell out what the lending goes to and offer the requisite interest rate to reflect the risk. Better still Kotlikoff advocates limited purpose banking, whereby risky deposits actually take the form of shares that can go up and down in value without the bank having to declare default or insolvency as they currently do when they make too many losses.
I was maybe being a bit hard on MMT re banking reform. It s not necessarily that it is weak on that, it is that we have over the centuries allowed a situation where we stopped govts creating our money and relied on banks to do it for us instead. To the point the majority now believe that this is the only way it can happen. MMT shows us the way out of this problem in that we can be much harder on bank activities and the economy will not suffer as a consequence. A smaller, simpler banking sector in the UK has to be a good thing, however we get there
Therein lies the problem with regulation and the City. Where you have sectors and industries with very low, anti-social ethical standards, no amount of regulation will solve the problem. As ethics tends to zero, regulation tends to infinity if you like. Their attitude is to see regulation as something to evade and exploit and they can afford to employ teams of accounts and lawyers to help them do it. Every so often they get caught and invariably get the mildest tap on the wrist with senior executives getting away scot free. Eg with Libor. They are not wrong when they complain about excessive regulation but it is wholly self inflicted.
Other sectors show similar patterns of behaviour – construction and the fossil fuel industry for instance. Aerospace generally does not want to kill its customers, but Boeing is an example of what happens when an historically responsible organisation has its culture undermined by a new generation of management. In my experience, any sector that complains repeatedly about regulation is probably suspect. The companies and sectors that you rarely hear from tend to value the setting of a level playing field with clear standards to work to. And yes there are some legitimate constraints about bureaucracy. Companies with high ethical standards tend to self regulate.
Hence by and large, serious business has been very happy to work with regulations set by EU bodies applying across Europe and often beyond. The ones that are not tend to be the shysters – the tax evading end of the City being a case in point.
To John who says…”the community alone (not the government) that gifts the right of control over ‘value’ (the monetary standard) that ensures success.”
This is true but what does “community” mean John? It is not some idealised entity — it is a network of power relationships. In our current “community” the banking interest exercises hegemonic power so that power is used to define the monetary standard. Money is power sand power is money. What I propose is not dangerous — it is part of a design which wrests power from banking interests and subjects banks to the power of democracy.
To Vince…..so far you have only seen my proposal for state credit risk insurance (a “CRIF”) – you have not yet seen the rest of my redesign proposal. there is zero wriggle room in it because it is designed to constrain what private banks can do and facilitate banking diversity and the formation of mutual and local banks. The credit risk insurance is mandatory and to reinforce this there is no deposit guarantee provision – so banks who try to dodge the rules just expose their depositors to risk – a big incentive for such depositors to move their deposits to mutual or local banks where they face lower risk. Private banks might ofer higher rates of interest on deposits but then have to change more interest on their loans – the mutual and local banks will out compete them. The private banks will just have to toe the line.
To Robin – “no amount of regulation will solve the problem” – indeed that is the case but “no regulation” will solve it either – thus simple, smart regulations are the solution – no thujmping great book of regs as thick as The Bible – they could be fitted on a page…well maybe two.
If anyone would like to see the full outline proposals I am designing you can contact me by email at jim.osborne@talk21.com. Richard already has a copy of the latest version (last updated yesterday – Feb 12th)
Mr Osborne,
I do not disagree; “In our current ‘community’ the banking interest exercises hegemonic power” – why would I disagree? The problem is that while Government is better placed to do a better job (it would be hard to do worse than we have suffered, especially after the GFC), I am uneasy at the seductive thought that hegemonic power in the hands of Government will necessarily be better. Vigilence is critical, and I lack confidence we have sufficient vigilance to check overpowerful Government, just as I have zero confidence in the respect either for ‘community’ or liberty of the private vested interests, not least in the financial sector. I do not believe that it is possible to ‘majic’ that dual public-private problem away; it is rather how we deal with it. The problem is that the” network of power relationships” of community tends to be publicly over-represented by powerful vested interests, not the real ‘community’ interest. The elusive nature of that community does not mean it does not exist, nor is it abstract.
We tend to expect that political parties will provide the solution to community representation, but they don’t. David Hume was right to dismiss them as mere representations of factionalism; and I would add that they are all – all of them – subject to wholesale, permanent ‘entryism’; they are routinely taken over by narrow vested interested groups, and always serve the interest group of the controlling entrusts at any given time. They only exceptionally rarely, and for short periods only are capable of serving the community interest..
So how do we deal with it?
‘Magic’ not ‘majic’; where did that come from?