Brian Davey (Nottingham, Strategy for Losers): Green New Deals are clearly the new big idea. Governments need to spend to avert the worse kind of slump and it makes sense for their expenditure to focus on renewables and energy efficiency. At the same time the finance system needs greater regulation.
This is instantaneously the new conventional wisdom. The beginnings of an alliance created by the New Economics Foundation (NEF) for a Green New Deal appears to be pushing at an open door. The United Nations Environment Programme are calling, apparently, for something similar.
But are these ideas radical enough for the problems that we face? The NEF alliance has created a draft programme about the banking crisis, peak oil and climate change that is effectively relating the finance and money system to the limits to growth. However it leaves out that key idea and its implications for the banking and finance system.
The significance of peak oil and climate change is that the economy can no longer grow - or grow non destructively - because the energy system cannot sustain growth any more. One half of the demand for energy in the economy is the result of the growth process - it is used to build infrastructure, buildings and machinery. But it is increasingly costly to get hold of fresh carbon energy. Even with new technologies of extraction the energy cost for acquiring oil and gas is rising. Oil and gas can be replaced with coal but coal is more climate toxic and even if pumping coal derived CO2 underground can be made to work effectively at low cost...if.... nevertheless "carbon capture and storage" is still 15 years and more away from generalisation. The emissions of a coal renaissance in the meantime will be disastrous for the climate system. Climate scientists warn we may already be in the early stages of a self reinforcing avalanche to disastrously higher temperatures.
This has implications in the finance and banking sector too. If the energy system cannot sustain more non destructive growth then we need a different kind of money and finance sector. 97 per cent of the money in circulation are bank deposits which were created by the banks when they lent money. Only 3 per cent is notes and coin. Lending money into circulation, with the expectation that it will be repaid with interest, pre-supposes that there is extra output that the banking sector can share when they get those interest payments. If, on the other hand, the economy shrinks, then some repayment and interest payments will not be possible and the banks will lose more money. They will become "de-capitalised" again. Depositors will get scared and we will be in the throws of another banking crisis - with yet more taxpayers money shovelled into a black hole in order to prevent the collapse of the finance system.
None of the Green New Deals address this fundamental problem. The NEF New Deal suggest that there *might* need to be a global jubilee of debt cancellation, an extraordinary amnesty for debtors. However, during energy descent, an economy with a debt based money system would face the need to do this again and again....
....Or it would happen again and again if the banks could be induced to lend and companies to borrow. However, in energy descent that appears to be rather unlikely using current lending models. The risks and challenges of a transition to the different economic structure needed at this time are so great that conventional debt finance is not going to be very useful anyway. There will be no "return to normal".
Because of climate change and peak oil risks in the real economy are going to be much higher. Thus capital providers will need to spread risks. But they will also want to have a deep knowledge of what they are investing in and with whom they are investing. That means a personal and deep knowledge between capital providers and capital users in real relationships. They will also want to feel they can rely on state backing. That is nothing like the global securitisation and innovation trash that we have seen over the last decades.
What we need instead are financial institutions with some responsibility to local communities and real relationships where investors share risks with project developers by funding though taking equity stakes. That means sharing in gains but sharing in any losses too. This is the alternative to a debt relationship which attempts to foist all the risks on borrowers while lenders kid themselves that the risks are low because there have insurance against credit default in derivatives markets.
In all of that there will be a place for financial intermediation between savers and people involved in productive capital investment. But the financial system cannot and will not be anything like the existing banking or shadow banking system. The creation of money is too important to be left in the hands of bankers. They have amply demonstrated that they cannot be trusted to create the money on which we all depend. The current crisis was created on the back of an asset price speculative bubble and had virtually nothing to do with productive investment at all.
In conclusion. let's go back to first principles. We are all dependent on money for transactions as a collective arrangement that is the core to exchange relations within society. As such the money system can be described as a social and cultural commons - no one person or institution invented it or created it. It has been the result of a historical process in which all of society participates. Yet this commons, which should be managed as such, in the interests of all, has been privatised and run in the interests of private corporations. The people who run the banks know that because they are running a commons as their private fiefdom they have the rest of us, as taxpayers, over a barrel. They have to be rescued because otherwise all our arrangements for meeting our most basic needs will collapse.
There is thus a structural fault in the system - a commons is not being managed as a commons, it is being managed privately. The real solution, the one that gets to the root of the problem, is the one that makes the process of money creation a matter for an accountable public body to fulfill in the interests of everyone in society equally. That means forbidding to the banks or any private individual or institution the right to create money. A public body should do this, creating only so much money at the economy needs, and then either giving this money into circulation to everyone equally or making the available money to other accountable public bodies like elected governments to spend into circulation.
Comments
Brian,
I wholly agree with your financial localism agenda. But I am not sure about the way you get there. Take this:
"Lending money into circulation, with the expectation that it will be repaid with interest, pre-supposes that there is extra output that the banking sector can share when they get those interest payments."
Does it really? Take this very hypothertical case - as a not very skilled student, i borrow money on the expectation that I will be arning more later. I am impatient to have a bit more to spend -- some of it even on the very self-improvement that will make my future earnings higher than they are today. Later, when I am earning more, I will have replaced someone in the workforce who might be earning even more, or, eventually retiring and not earning. In other words, this notion of borrowing against future earning power does not presuppose economic growth in a steady state, but just the existence of different generations with different productive potentials.
Even this minimal transfer of consumption through time will require some sort of banking function, no? The interest payment can be thought of as covering the odds that someone in the system will in fact not be able to repay -- it is a price worth paying for impatience; it is the cost of judging credit-worthiness imperfectly.
((This is not to say that I agree with you that much bank lending is predicated on overall growth. I am just saying that a steady-state, even sustainable economy, will still have a banking/finance function.))
Tony
Tony,
Thanks for your response. My reply, in turn is that:
(a) I wasn't arguing against financial intermediation as such just against the way in which banks have the right to create money against interest. The problem, as I see it is that this creates a system that will pretty much go into a downward collapse spiral during contraction/energy descent. The existing money system has a tendency to turn what might otherwise be an orderly retreat into a rout. In a retreat mobilising savings for investment (eg to build wind turbines) is a worthy process and institutions will still be needed to do this. Call them banks if you like. But remove from them the right to create money.
(b) Your reply is "hypothetical", as you say. Economists are fond of "hypothetical" situations - models based on assumptions which are often not very realistic (eg perfect knowledge and information in markets). I think if you want to argue this as a substantive point then it's down to you to give evidence to show that facts match your hypothesis.
(c) On different assumptions things might look very different. Your idea that banks could lend profitably on the back of people getting better off as they get older begs the question. What you say may have been true for the last one hundred years but with peak oil and climate change will it be true for the next hundred? A 20 year old may be less well paid than a 40 year old and, 20 years from now, that same younger person may be better off at 40 than their 20 year old offspring. Lets say the differential is an additional 30% more income between the 40 and 20 year olds at both points in time. If, however, the aggregate economy has contracted by 30% in the intervening 20 years because of peak oil and gas then, in absolute terms, there's may be no gain for an individual as they get older - incomes in general may have contracted so the greater age and experience may merely help the person getting older to hold their income stable as incomes in general, at each age group, fall. (They may move up incremental scales as these pay scales in general are falling). At 40 they may have no additional income available to share with the banking system.
A more extreme set of assumptions may be that the person loses their job and goes down to a lower paid job or keeps their job and but finds that incremental scales may flatten. It depends on your view of what will happen in the economy. I rather think that a lot of management hierarchies of specialist bureaucracies will collapse in the trend to re-localisation as holistic solutions requires generalists - and the many highly paid super skilled specialists will find their skills redundant - this will tend to flatten management structures, hence lower differentials and lower promotion gradients in incomes as people get older.
(d) My argument is not based on assumptions and hypotheses it is based on an observation of what does happen. Every day you can read in the newspapers that the recession will now have a reverse effect back into the banking system as greater banking losses. That's not really different from what I wrote when I said that, unless the economy is expanding the banks will be in trouble because they must share in an expansion that their customers are experiencing. If their customers incomes are stagnating or are contracting then the bank customers will find it difficult or impossible to pay back debts with interest. What's more the observable situation is that this, in turn, leads to a downward spiral in regard to bank lending and thus further deposit money creation.
When the banks create the debts and money they do not simultaneously create the money needed to pay the interest on their loans. If the loans are to be paid back with interest then, to make that possible, either there has to be more money subsequently created (= more debts) or the velocity of circulation of money has to increase (=same stock of money performing more transactions).
However creating more bank money involves more lending to create it which implies that economic conditions are conducive to lending = people and
companies confident about the future = personal and aggregate expansion.
Alternatively, if the velocity of circulation is to speed up the same condition applies. People hang onto money as a store of value, and are reluctant to spend it, in a period of contraction, so the velocity of circulation falls because liquidity preference rises during stagnation/contraction.
In either circumstances unless growth is occurring the money available to service debts shrivels because the banks stop lending and demand repayments which means that the money supply falls and the velocity of circulation falls. The contraction into the real economy is turned into a collapse by the financial economy when it passes over critical limits and bankrupcies of banks occur....
That's not a hypothetical - one can see it happening here and now....
Interesting stuff and thanks for bringing the NEF to my attention.
In return I'd like to publicise a new report from UNESCO; Links between Biological and Cultural Diversity: http://unesdoc.unesco.org/images/0015/001592/159255E.pdf
Quite attracted to the idea of promoting Cornish culture and protecting its environment at the same time.
The Cornish Democrat
Brian,
I still think that the ditinction that classical economics makes between real and monetary is conceptually very useful.
As you concede towards the end of your post, there are two variables at play here - the money supply and the velocity of circulation. It is true _by_definition_ that the money supply times the velocity of circulation is equal to the money GNP. This identity does not care who makes the money; it arguably hardly cares, in the long run, what the velocity of circulation is --- the money level of GNP is what eventually adjusts, and that happens either through the number of transactions or through their average price (the price level).
This is definitional stuff and has nothing to do with the level of resource depletion. Bankers will certainly find it riskier to lend in a contracting world economy, but you can bet that they will; that they will charge interest; and that some will make money.
The policy questions relating to the environment touch financial questions, but I do not think they touch them in quite the direct way you suggest. They touch finance through the proper structuring of long term incentives, and this, it is clear, will need regulation of finance.
Policy questions around localism also touch finance -- currency areas give the groups who are party to them convenient collective powers. for example, everyone inside the group can, in a single action, change all the prices that those outside the group see -- this is the exchange rate.
Those inside the group can regulate---even ban---lending, and so stop the money creation you do not like. In all these cases, the currency seems to me to be a useful, and simple, social mechanism.
The hard piece of any of this is creating a group with the political will to take control of its destiny---and this gets no easier as spread the wonders of a world of overlapping and multiple identities.
So again, there are lots of your conclusions I like---I just don't think the currency is a way into a substantive argument for them.
Tony
Here's a good piece by Krugman on a bay-sitting co-op that issues a local currency. It's from 1998, mid Asian crisis, but still very relevant.
It has some pretty compelling examples of the benefits of credit creation---and in a purely local-currency setting.
Tony
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