banking https://www.opendemocracy.net/taxonomy/term/5731/all cached version 04/07/2018 18:43:31 en Transforming finance can help to tackle the biggest problems of society https://www.opendemocracy.net/transformation/chris-hewett/transforming-finance-can-help-to-tackle-biggest-problems-of-society <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>The current financial system is part of the problem, not part of the solution. So what’s to be done?</p> </div> </div> </div> <p><img src="//cdn.opendemocracy.net/files/Jem2cropped_0.jpg" alt="" width="460" /></p><p class="image-caption">Credit: <a href="http://www.hedgethink.com/market-view/cashless-society/">http://www.hedgethink.com/market-view/cashless-society/</a>. All rights reserved.</p> <p>It is seven years since the <a href="https://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%9308">financial crash of 2008</a> and the global recession it triggered—along with the rescue of the banking system. While some reforms have been made to regulation since that time, the financial sector still looks and behaves in a remarkably similar way. </p> <p><span>That’s why it’s incapable of addressing the challenges that face economies today—whether it’s failing to provide the trillions of dollars of investment that are required to prevent climate change, or giving access to finance on fair terms for innovative businesses, or creating a housing market that enables everyone to own or rent a home that’s affordable.</span></p> <p><span>On all these challenges the current financial system is part of the problem, not part of the solution. So what’s to be done? Here are three priorities and a concrete suggestion on how to act together to put them into practice.</span></p> <p><strong>From property bubble to affordable homes</strong></p> <p><span>What changes are needed in the housing finance system to transform the real estate market from an asset bubble that fuels speculation into a means of providing enough funding to guarantee everyone a home? Perhaps the most obvious area in which the existing system has influenced ordinary people’s lives is the role it has played in driving up house prices far faster than average wages.</span></p> <p><span>Analysis by the UK housing charity Shelter </span><a href="http://england.shelter.org.uk/__data/assets/pdf_file/0004/1076926/2015_02_26_Affordability_for_first_time_buyers_-_FINAL.pdf">recently found</a><span> that since 1969, house prices for first time buyers have increased by 48 times, far out-pacing incomes which have only grown 29 times. The received wisdom is that this is a simple issue of supply and demand: build more houses and the market will sort itself out. But the truth is more complex. As a group called </span><a href="http://positivemoney.org/">Positive Money</a><span> has pointed out, the role played by </span><a href="http://positivemoney.org/2012/09/infographics-why-are-house-prices-so-high/">huge increases in mortgage credit</a><span> is potentially far more significant.</span></p> <p><span>Although the severity of this issue differs across countries, the recent </span><a href="http://press.princeton.edu/titles/10546.html">analysis published by Lord Adair Turner</a><span> on the role of debt in the financial system is clear: property lending is one of the major causes of instability in the system as a whole. If policymakers can find equitable ways to reduce the flow of credit into the property market in order to stem price inflation among existing homes, </span><em>and at the same time</em><span> steer new investment into housing that’s affordable, then the social and economic dividends will be huge.</span></p> <p><span>Throw in the amount of investment that’s required to increase the energy efficiency of existing homes and the environmental benefits are also very clear. It will take a combination of monetary policy intervention, a revival of state investment in the housing sector, and some truly innovative ways to structure finance to swing the balance of power back towards the users of the homes and away from land owners and capital providers. So how might this be accomplished?</span></p> <p><strong>Banking for the real economy</strong></p> <p><span>It’s clear that major structural reforms are required in the banking sector to equalize the balance of power between users and providers. In Britain and many other countries, overly-centralised banking systems have neglected small businesses and provided insufficient ‘</span><a href="http://marianamazzucato.com/innovate-uk.pdf">patient capital’</a><span> for long term investment in innovation or for infrastructure. Groups that represent small businesses that were bankrupted by mis-selling or neglect by the major banks tell </span><a href="http://www.smealliance.org/">angry and heartbreaking stories</a><span> of lives ruined and jobs and homes that were lost as a result.</span></p> <p><span>The City of London, Wall Street and other centres of global finance make decisions on the basis of their own profits, not their ability to allocate capital effectively to those who really need it. </span><a href="https://www.amazon.co.uk/Capital-Twenty-First-Century-Thomas-Piketty/dp/067443000X?ie=UTF8&amp;*Version*=1&amp;*entries*=0">Thomas Piketty</a><span>, </span><a href="http://www.johnkay.com/2015/06/15/other-peoples-money-introduction">John Kay</a><span> and others have shown how disastrous this economic model has been for inequality. Others such as </span><a href="https://www.london.edu/faculty-and-research/faculty/profiles/jenkins-r#.VxZ1SZMrJR0">Professor Robert Jenkins</a><span>, a former member of the Bank of England Financial Policy Committee, have shown how unstable the big banks are, and how much they still rely on implicit state subsidies because they are seen as ‘too big to fail.’ This devastating </span><a href="https://www.youtube.com/watch?v=p5s5pzKL1Po">20 minute speech</a><span> from Jenkins also includes the ever lengthening </span><a href="http://www.finance-watch.org/component/content/article/81-blog/1186-jenkins-bank-misdeeds">list of misdeeds</a><span> that have been laid at the door of big finance </span><em>after</em><span> the crisis of 2008.</span></p> <p><span>As David Shirreff argues—a former finance and business reporter at The Economist—it may be time to </span><a href="http://www.mhpbooks.com/books/break-up-the-banks/">Break up the Banks</a><span>. But it doesn’t have to be this way. Numerous think tanks on the </span><a href="http://www.civitas.org.uk/publications/street-cred/">right</a><span> and the </span><a href="http://www.demos.co.uk/project/community-chest/">left</a><span> have followed the lead of the </span><a href="http://www.neweconomics.org/issues/entry/banking-finance1">New Economics Foundation</a><span> in advocating for ‘</span><a href="http://www.neweconomics.org/publications/entry/stakeholder-banks">stakeholder banks</a><span>’ which are either mutually owned or have representation from the local economy on their boards. They already exist in Germany and Switzerland, for example, and have proven themselves to be much more suited to the task of providing finance for the real economy. The </span><a href="https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/pushing-boundaries/#.VxZ085MrJR0">growth of peer to peer lending</a><span> is another promising route.</span></p> <p><strong>Patient capital for the transition to a low carbon economy</strong></p> <p><span>Thirdly, is mainstream finance really ‘going green,’ or are much more far reaching changes required before the trillions of dollars that are needed start to flow into low carbon infrastructure and technology? Preventing catastrophic climate change will be impossible without these investments. Yet analysis from the </span><a href="http://www.carbontracker.org/">Carbon Tracker</a><span> shows that the financial value of fossil fuel companies </span><a href="https://www.opendemocracy.net/transformation/james-k-rowe/puzzle-of-low-oil-prices-has-race-to-beat-carbon-bubble-already-started">is based on extracting their entire reserves from the ground</a><span>, which would make runaway climate change a certainty.</span></p> <p><span>While there is growing interest in this analysis and the beginnings of divestment away from coal, the vast majority of transactions on global stock markets are carried out for short term gain. Until the regulatory framework of capital markets turns them away from speculation and back into vehicles for productive investment in healthy and sustainable alternatives, low carbon finance will always be at risk.&nbsp;</span></p> <p><span>There’s also an inbuilt bias in the financial system towards large projects under centralised control. Put simply, mega banks and pension funds aren’t interested in lending to small, community-owned ventures in renewables, though they can become interested in offshore wind or carbon capture. Investing in the energy efficiency of buildings is also a perennial ‘Cinderella’ in the investment world. The complexity of aggregating so many small investments to save a lot of carbon is not something that’s attractive in a real estate market that’s based around making returns from rising asset prices.</span></p> <p><span>In responding to these challenges, the good news is that since 2008, civil society groups working on financial reform have quietly built the capacity to offer a wider range of workable alternatives. </span><a href="https://shareaction.org/">Share Action</a><span>, for example, has fostered a new wave of shareholder activism to promote social and environmental goals in companies in which ordinary people have a stake via their pension funds.</span></p> <p><a href="http://www.finance-watch.org/">Finance Watch</a><span> has fought a lobbying battle with vested interests in Brussels over the post crisis regulation of the financial services sector in the European Union, while the </span><a href="http://www.neweconomics.org/teams/entry/finance-business">New Economics Foundation</a><span> has produced a whole body of research that shows how stakeholder banks and other small, local financial institutions are better at serving the interests of business and the community, as well as increasing the resilience of the financial system as a whole.</span></p> <p><a href="http://positivemoney.org/">Positive Money</a><span> is building </span><a href="http://www.qe4people.eu/">a network of activists across Europe</a><span> to organize and advocate for fundamental changes to monetary policy so that it meets the needs of society. And the </span><a href="http://financeinnovationlab.org/">Finance Innovation Lab</a><span> supports new business models in finance that have a social or environmental purpose at their core. Through incubation and policy advocacy, the Lab has helped an alternative financial sector begin to flourish in the UK. In the US meanwhile, a group called </span><a href="https://www.bettermarkets.com/">Better Markets</a><span> is challenging vested interests in the financial sector by organizing in Washington DC, while in Australia, </span><a href="http://www.marketforces.org.au/">Market Forces</a><span> concentrates on how the financial system can address climate issues with more success.</span></p> <p><span>Finally, here’s a concrete suggestion on how to use these capacities collectively. Since 2013, UK civil society groups focused on financial reform have been collaborating together in the </span><a href="http://transformingfinance.org.uk/">Transforming Finance Network</a><span>, which is holding a major event in London on May 11 to bring together all this thinking, research and innovation and to look for common ways forward in creating a system that addresses the challenges laid out above. Speakers include </span><a href="https://ineteconomics.org/community/experts/aturner">Lord Turner</a><span> and </span><a href="http://marianamazzucato.com/">Professor Mariana Mazzucato</a><span>. You can find out more about the conference </span><a href="http://www.crowdfunder.co.uk/transforming-finance-2016-follow-the-money/?">here</a><span>.</span></p> <p><span>After the crisis of 2008 there was a golden opportunity to transform the financial system, but the political will was absent, along with the capacity in civil society to understand the issues and add weight to campaigns. But this is less and less the case. The goal now is very clear:</span><em> </em><span>transforming finance is essential for transforming society. Let’s not allow another opportunity to go to waste.</span></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/transformation/jem-bendell/what-happens-to-democracy-in-cashless-society">What happens to democracy in a cashless society?</a> </div> <div class="field-item even"> <a href="/transformation/michael-edwards/money-in-terms-of-social-change-it%E2%80%99s-both-%E2%80%98beauty-and-beast%E2%80%99">Money: in terms of social change, it’s both ‘beauty and the beast’</a> </div> <div class="field-item odd"> <a href="/transformation/charlotte-millar/how-to-stop-competing-and-start-building-community">How to stop competing and start building community</a> </div> </div> </div> </fieldset> <div class="field field-rights"> <div class="field-label">Rights:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> CC by NC 4.0 </div> </div> </div> Transformation Transformation financial crisis finance banking Chris Hewett The role of money Economics Tue, 26 Apr 2016 00:00:00 +0000 Chris Hewett 101606 at https://www.opendemocracy.net Does money grow on trees? https://www.opendemocracy.net/ourkingdom/dora-meade/does-money-grow-on-trees <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>The debate about the banks' power to create money is becoming much more mainstream. After the recent event, Does Money Grow on Trees?, parliament is scheduled to debate the issue for the first time in 170 years.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/moneytrs.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/535628/moneytrs.jpg" alt="" title="" width="460" height="307" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Flickr/Doug88888. Some rights reserved.</span></span></span></p><p><em>‘Why have we given our greatest social creation – money - over to private, profit seeking companies?</em>’</p><p>This was a question posed by Martin Wolf, chief economics commentator of the <em>Financial Times</em>, at the beginning of the event <em>Does Money Grow on Trees?</em> organised by Positive Money and the Institute of Chartered Accountants for England and Wales (ICAEW). Over 100 people turned out to discuss what Wolf described as the ‘fascinating intellectual questions’ associated with permanently taking power to create money away from banks and giving it to the state. </p> <p>As Ben Dyson, founder of Positive Money has explained in a <a href="https://www.opendemocracy.net/ourkingdom/ben-dyson/why-we-can%E2%80%99t-leave-power-to-create-money-in-hands-of-banks-or-regulators">previous article for Open Democracy</a>, banks currently create 97% of the money in our system when they issue loans. Positive Money, a campaign and research organisation set-up in 2009, argues that leaving the power to create money in the hands of the financial institutions that caused the economic crisis is a mistake – and one that not enough people understand. Results of a recent <a href="http://www.positivemoney.org/2014/08/7-10-mps-dont-know-creates-money-uk/">Dodds Monitoring poll</a> show that only 1 in 10 MPs accurately understand where money comes from. Positive Money highlights the causal relationship between the current monetary system and instability in the economy, high house prices and increasing inequality, arguing that without an understanding of money creation our MPs are ill-equipped to prevent another financial crisis. </p> <p>Since the Bank of England published a <a href="http://www.bankofengland.co.uk/publications/Pages/news/2014/054.aspx">paper</a> earlier this year confirming that banks create money when they issue loans many more voices have joined the money creation debate. Perhaps one of the most prominent voices has been that of Martin Wolf. In April 2014, <a href="http://www.ft.com/cms/s/0/7f000b18-ca44-11e3-bb92-00144feabdc0.html#axzz3I6Ztd3mF">Wolf described</a> banks’ ability to create money as ‘a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector.” </p> <p>Wolf joined the <em>Financial Times</em> in 1987 from the World Bank and became an associate editor ten years later. Widely considered to be one of the world’s most influential economic writers, he is a highly respected member of the economic establishment. By his own acknowledgement, that makes him a surprise ally of the Positive Money campaign: “When I am viewed as a wild-eyed radical you know something very strange is going on in the world”. Nevertheless, he has contributed significant column inches: writing two articles in the past year as well as dedicating a chapter of his new book ‘<em>The Shifts and The Shocks’</em> to the subject. </p> <p>Accompanying Wolf at the ICAEW was a panel made up of Ben Dyson, founder of Positive Money, Alderman Alison Gowman, Michael Izza, Executive Director of ICAEW and Frosti Sigurjónsson, Member of Parliament for Iceland.</p> <p>Making it clear from the outset he was unwilling to tie himself ‘entirely to the mast’ of eliminating the current system of fractional reserve banking, Martin Wolf addressed the key objections to full reserve banking head on noting that, whilst these objections clearly raise important issues, they could all be handled. Threading throughout Wolf’s talk was the contention that the dangers posed by transitioning to a new system do not pose a greater threat than the dangers inherent in our current system. </p> <p>This point resonated with Frosti Sigurjónsson. The severity of Iceland’s financial meltdown has meant politicians are seriously looking for alternatives to the current banking system and studying the role that fractional reserve banking played in the financial crisis. Frosti was hopeful that, for Iceland, now is the time for alternative banking models, having realised whilst ‘we cannot contain the volcanoes, we can contain the banking system’. </p> <p>The challenges facing the Positive Money campaign were the subject of much discussion over the course of the evening. This radical a proposal presents a huge challenge to the status quo and would encounter a large amount of resistance, Alderman Alison Gowman was quick to point out. Sigurjonsson questioned whether proposals to strip banks of the power to create money should be seen as ‘radical’ or if it is the current system, which gives banks the power to create money out of thin air, that is the radical option.&nbsp; These ideas have the best chance of being implemented, Wolf argued, ‘when, not if’ the next financial crisis hits.</p> <p>Shocked by the timidity of politicians in the wake of the financial crisis, Wolf expressed concern that this generation was ‘depressed but accepting’ about the fundamental problems caused by the financial sector. Wolf observed that since WWII there has been a steady decline in political engagement and a general detachment to the idea of the state as a collective. The rallying cry, although at times tentative, from the chief economics commentator of the <em>Financial Times</em> seemed to be – demand more. Our economic system can serve us better and we need to ensure that it does so. </p> <p>Whilst the barriers to change were acknowledged during the evening, the event signified the impressive space this debate now occupies. In the heart of the square mile, the room at ICAEW was packed with journalists, economists, academics and politicians discussing these ‘radical’ ideas. Positive Money’s support base has more than doubled in the last year and the debate is gaining traction around the world. </p> <p>On Thursday 20 November the backbench debate <em>Money Creation and Society</em> is <a href="http://www.positivemoney.org/2014/11/uk-parliament-debate-money-creation-first-time-170-years/">scheduled to take place</a> in the UK Parliament. This will be the first time in 170 years Parliament has debated money creation and another significant breakthrough in the campaign for monetary reform.&nbsp;&nbsp; </p> <p>&nbsp;</p> <p>ABOUT POSITIVE MONEY</p> <p><em>Positive Money is a movement to democratise money and banking so that it works&nbsp;for&nbsp;society and not against it. Founded in 2010, we work to raise awareness and understanding of the fact that most of the UK’s money is created by banks as they issue loans. www.positivemoney.org</em></p> uk openEconomy uk banking money Dora Meade Tue, 18 Nov 2014 00:11:11 +0000 Dora Meade 87858 at https://www.opendemocracy.net ‘Divest!’: a minute to hold banks to account on fossil fuels https://www.opendemocracy.net/ourkingdom/charlotte-webster/%E2%80%98divest%E2%80%99-minute-to-hold-banks-to-account-on-fossil-fuels <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>If banks won't pull investment from fossil fuels, perhaps it's time to try another route.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/moneymopve.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/535628/moneymopve.jpg" alt="" title="" width="460" height="307" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Image: MoveYourMoneyUK</span></span></span></p><p>Move Your Money has launched ‘<a href="http://www.moveyourmoney.org.uk/divest">Divest</a>!’ a campaign targeting Britain’s big 5 banks - some of the world’s biggest fossil fuel supporters. £66bn was poured into dirty energy in 2012 alone. Our ask to banks is simple: commit to stopping your support of oil, gas, coal and fracking developments. If you don’t divest, we will leave you. Asking customers to sign a letter to their bank online, we are pressuring banks to wake up to the fact that it’s no longer acceptable to finance climate change. To act <a href="http://www.moveyourmoney.org.uk/divest">takes under a minute</a>.</p> <p>Importantly, we call on them to act within three months. If we don’t see a commitment to a divestment plan, customers have pledged to walk out on their banks by February 2015. Very much inspired by the Market Forces campaign in Australia, which has seen much success in shining a light on the role of banks in coal mining, and following on from 350.org’s institutional divestment campaign, there are five key reasons ‘Divest!’ is a crucial campaign for us all.</p> <ol><li><strong>1.&nbsp;&nbsp;&nbsp; </strong><strong>Empowerment</strong></li></ol> <p>For too long we have felt removed from our money. This lack of connection, caused by a lack of both transparency and coherent approach to investment, has left us feeling disempowered. The recent Great British Money Survey showed that our confidence about how to handle money is at an all time low, feeling disempowered by financial institutions and a debt based economy we’ve been left in a quandary about how and where to invest. This results in a damaging disconnectedness with money. ‘Divest!’ cuts to the chase and enables people to voice one of their biggest concerns. Not only that, but it highlights that we’re not trapped into a relationship with a bank and that there are other options that better reflect our values.</p> <ol><li><strong>2.&nbsp;&nbsp;&nbsp; </strong><strong>Climate change and fossil fuels</strong></li></ol> <p>The divestment campaign, started by Bill McKibben and 350.org, has really been game changing for the climate movement. It’s put maths into the debate and, crucially, enabled us to see the financial risk of continued investment in an overvalued asset. A five times overvalued investment to be exact. As a result we’ve seen a whole swathe of local governments, universities, church groups and of course Rockefeller commit to exiting their funds from the energy of the past to focus on a cleaner, more prosperous future. The tide is turning on the fossil fuel industry who, for the first time in history, are struggling to silence the truth with media and lobbying power. ‘Divest!’ cuts through the noise as confident direct action, enabling individuals to feel part of this growing movement.</p> <ol><li><strong>3.&nbsp;&nbsp;&nbsp; </strong><strong>Simplicity</strong></li></ol> <p class="ListParagraphCxSpLast">The issue with much of finance, and indeed acting on climate change, has been a perception of complexity. Complexity in understanding both the challenge and the solution. The former borrowing from the future, the latter very much an issue of the present. However, it is in fact very simple. There is no debate, with science and economics in agreement that fossil fuels should go. And those institutions lagging behind, well, you will lose your following. Banks, you will lose your customers. ‘Divest!’ makes it simple to act.</p> <ol><li><strong>4.&nbsp;&nbsp;&nbsp; </strong><strong>Demonstrating demand for change</strong></li></ol> <p>39% of Brits are concerned that their money is going into fossil fuels (from <a href="http://blog.abundancegeneration.com/tag/great-british-money-survey-report">The Great British Money Survey</a>). 36% want their banks to stop supporting fossil fuels. That’s more people than use Facebook everyday. ‘Divest!’ highlights the scale of this demand directly to the banks. Perhaps most importantly, it empowers those pressing for change inside these institutions with evidence that taking a new direction is indeed the correct course.</p> <ol><li><strong>5.&nbsp;&nbsp;&nbsp; </strong><strong>Providing alternatives</strong></li></ol> <p class="ListParagraphCxSpMiddle">Like it or not, your money is either in the ‘old model’—supporting fossil fuels and causing climate change—or it’s not. You’re one side of the line or the other. You may work tirelessly campaigning, or do your recycling, but where your money is being put to work is, ultimately, what counts. And as we know, change is about the diversion of every single coin. With ‘Divest!’, Move Your Money is providing cleaner banking and alternative finance options, so you can put your money to work in the ‘win win’ economy, where not only will you see a healthy return, but your money will be doing good for the planet too. Money is changing all the time. So, be open minded about what you do with it. In the meantime, as we show demand for change, our hope is we see increasing innovation in clean finance. With fossil free money we will truly have a prosperous society.</p> <p class="ListParagraphCxSpMiddle">&nbsp;</p> <p class="ListParagraphCxSpMiddle">Sign the letter to your bank and put them on notice: </p> <p class="ListParagraphCxSpLast"><a href="http://www.moveyourmoney.org.uk/divest">www.moveyourmoney.org.uk/divest</a></p> uk uk banking Charlotte Webster Tue, 04 Nov 2014 00:20:01 +0000 Charlotte Webster 87407 at https://www.opendemocracy.net "It's going to blow up one day" https://www.opendemocracy.net/oliver-huitson/its-going-to-blow-up-one-day <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>Marc Bauder's<em>&nbsp;Master of the Universe</em>&nbsp;runs like a sociological narrative of high finance as experienced by one man, former investment banker Rainer Voss. <em>Film review.</em></p> </div> </div> </div> <p>Shot mostly from an abandoned trading floor and consisting of mainly Voss speaking, interspersed with occasional news footage, it lacks the scope of a film like <em><a href="http://www.imdb.com/title/tt1645089/">Inside Job</a></em> but it does give a very human account of the crazy days of global finance - an era that refuses to die.</p> <p>Voss talks of the atmosphere at the banks as like being in "the army": conformity is strongly instilled, asking questions is frowned upon and 'politics' is an almost forbidden topic of conversation. It brought to mind <a href="http://www.opendemocracy.net/ourkingdom/geoffrey-heptonstall/can-you-manage-this">a recent article</a> by Geoffrey Heptonstall:</p> <p><em>"There is no virtue in questioning the way things are done. Individuals are such a nuisance where the corporate will is the supreme governance."</em></p><p><em><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/539191/Master of the Universe.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/539191/Master of the Universe.jpg" alt="" title="" width="400" height="225" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'></span></span><br /></em></p> <p>HBOS' head of regulatory risk, Paul Moore, for instance, was sacked in 2004 for what he describes as asking too many questions and challenging the management over risky practices. In 2008 the bank ran into severe difficulties and was eventually merged with Lloyds TSB, as well as requiring a taxpayer bailout of <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9968122/MPs-report-to-slam-HBOS-management-over-30bn-bailout.html">around £30bn</a>.</p> <p>Many of the bankers on astronomic salaries would have been simple accountants if they had arrived 5 years earlier or later, Voss argues, suggesting many of those 'masters of the universe' who feel they are truly worth such colossal sums are simply in the right place at the right time. On the products sold, the film cuts to footage from a Senate hearing in the US where Goldman's executives faced a grilling for pushing products to their customers that they described themselves as "shitty". Voss explains that his bank couldn't sell the products they created to BMW or Siemens, because big firms used similar economic modelling to the banks themselves, but municipalities on the other hand did not - they were sold to because they didn't have the knowledge and modelling that the banks had.</p> <p><em>"Are the clients aware of what they're buying?"</em><span>&nbsp;</span></p> <p><em>Voss: "No. That's the whole scandal. (I don't want that to be recorded)."</em></p> <p><span>One of the cornerstones of free market theory is that in perfect markets all participants enjoy 'perfect knowledge' and that prices are indicative of that knowledge. Clearly the reality was very different, and huge profits were made selling products to buyers on the basis of their relative ignorance. </span><em>Laissez-faire</em><span> regulation is rationalised on the basis that the two market counterparties--buyer and seller--are best placed to judge the risks of the transaction and hence government should 'get out the way'. Clearly, at least one of the parties here, the buyer, was not well placed to judge the risks involved, and the other, the seller, was ultimately protected from risk by the state in various ways (not least multi-billion pound bailouts) and the mismatch between their short term salaries and bonuses and the long term effects of their trades. Voss goes on to describe the "lemming" mentality of bankers and their buyers--municipalities in this instance--and says "it's only human", and he's right, but the lemming is a far cry from the 'rational agent' of orthodox doctrine. Products have become so complex, with so many consultants and lawyers involved, that very few of those either buying or selling the products really understand them, he argues.</span></p> <p>On the social value of much financial activity, Adair Turner's "<a href="http://www.theguardian.com/business/2009/aug/27/fsa-bonus-city-banks-tax">socially useless</a>" description seems apt. Twenty years ago, Voss says, the average holding time for shares was four years. Today it's 22 seconds. Banking is increasingly detached from its traditional core role of supplying credit whilst share purchasers have become increasingly detached from the notion of 'investment'; most trading is pure speculation.</p> <p>The pressure on bank executives for ever bigger profits is immense, their bosses attitude is "I don't care how you do it", he says, a force which pushes those involved "in the direction of illegality". The sort of environment in which this sort of practice can continue must by nature be detached, to some degree, from everyday society. This goes beyond just the hyper-conformity and militaristic discipline, but includes a social world largely sealed off from reality: their children go to the same schools, bank owned creches, and they mix in the same social circle. He talks of a real "disconnection from social processes", mirroring the increasingly large disconnect between the financial economy and the real economy post-08. At a recent Civitas event in London that I attended, a young Goldmans employee seemed completely baffled at the notion that the UK economy was in anything other than great shape: it's not just that finance is decoupled from the real economy, its that many of its employees aren't even aware of such a disconnect.</p> <p>On the global meltdown, Voss describes the situation as banks "holding a gun to politicians heads", despite the crisis really being "in the private sector", and talks of the enormous profits made on Greek bonds. Asked 'where's next', he replies "France", at which point it's "game over", "it's going to blow up one day, either politically or financially". So far, the power of the financial lobby has ensured the crises have been largely political, with unrest across the globe as the price of keeping the financial world afloat and million dollar bonuses flowing freely. Only Iceland took a different route, that of financial detonation. For the rest of us, "there is no way this is going to have a happy ending".</p> <p>The film is nicely shot and maintains its bleak, sterile feel throughout, but it remains personal snapshot and the viewer is restricted to Voss' account, an account which sees deregulation as blameless, banking as largely void of criminal conduct, and he is reluctant throughout to address the questions of what really went wrong, if anything. </p><p>The strongest emotion that shines through is nostalgia: Voss misses that life, that world. As a window into the life of a single investment banker and the culture in which he thrived, the film is impressive, but it's a pity Voss was not pressed on some of the bigger questions which could have provided a slightly more contextualised vehicle for his highly watchable reminiscence.</p><p><strong><strong><a href="http://opencitydocsfest.com/films/master-universe">Master of the Universe</a> will have its UK premiere at the <a href="https://www.ica.org.uk/whats-on/open-city-docs-fest-master-universe">Institute of Contemporary Art</a><em> </em>in London at 18:30 on 20 June.&nbsp;</strong><span>Rainer Voss (the "Master" himself) will be present at the screening and there will be a post-show discussion between him and Alasdair King (Senior Lecturer, Film Studies at QMUL).</span><span>&nbsp;Get&nbsp;</span><a href="https://uk.patronbase.com/_ICA/Seats/NumSeats?prod_id=2D&amp;perf_id=1&amp;section_id=M&amp;seat_type_id=S">tickets here</a><span>.&nbsp;</span></strong></p><p><strong>openDemocracy is an&nbsp;<a href="http://opencitydocsfest.com/">Open City Docs Fest</a>&nbsp;media partner.</strong></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-read-on"> <div class="field-label"> 'Read On' Sidebox:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <p><a href="https://opendemocracy.net/opencitydocs"><img src="//cdn.opendemocracy.net/files/OCDF logo BLACK (1).jpg" alt="" /></a></p><p>Browse more of our <a href="https://opendemocracy.net/opencitydocs">Open City Documentary Festival</a> coverage.</p> </div> </div> </div> <div class="field field-sidebox"> <div class="field-label"> Sidebox:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <p><a href="https://www.youtube.com/watch?v=OIUPWWwEclc">Trailer: Master of the Universe</a></p> </div> </div> </div> <div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/can-europe-make-it/alex-sakalis/judgment-in-hungary">Judgment in Hungary</a> </div> <div class="field-item even"> <a href="/mick-cs%C3%A1ky/why-open-city-docs-fest-is-so-important">Why the Open City Docs Fest is so important</a> </div> <div class="field-item odd"> <a href="/avi-mograbi-opendemocracy/once-i-entered-garden-foretaste-of-2014-open-city-docs-documentary-film-fe">Once I Entered a Garden: a foretaste of the 2014 Open City Docs documentary film festival, with Israeli filmmaker, Avi Mograbi</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> Germany </div> </div> </div> uk Germany Open City Docs Fest financial crisis banking documentary review Oliver Huitson Thu, 05 Jun 2014 08:15:27 +0000 Oliver Huitson 83442 at https://www.opendemocracy.net Why we can’t leave the power to create money in the hands of banks or regulators https://www.opendemocracy.net/ourkingdom/ben-dyson/why-we-can%E2%80%99t-leave-power-to-create-money-in-hands-of-banks-or-regulators <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>We cannot rely on failed regulators to prevent banks from abusing the power to create money, as Ann Pettifor <a href="http://www.opendemocracy.net/ourkingdom/ann-pettifor/why-i-disagree-with-positive-money-and-martin-wolf">suggests</a>. </p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/money.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/money.jpg" alt="" title="" width="400" height="267" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Flickr/Doug88888</span></span></span></p><p>If you or I printed our own money at home, we'd find the police kicking the door down in the middle of the night. But there's a collection of private companies that have a licence to 'print' money electronically. These companies are known as 'banks', and they create 97% of the money in our economy. </p> <p>Banks create money when they make loans. Those numbers that you see when you check your bank balance are simply electronic digits in the bank’s computer systems. As the Bank of England <a href="http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf">explains</a>: </p> <p>"Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money." </p> <p>Banks would like us to think they’re busy collecting money from savers and then lending it to small businesses, helping entrepreneurs to create jobs and grow the economy. But this is a fairy tale. Most bank-created money goes directly into the property market, pushing house prices out of reach. Much of the remainder goes to the financial sector, fuelling trading, speculation and the 'socially useless' activity that former Financial Services Authority chairman Adair Turner highlighted. As little as 13% of bank lending goes to businesses outside the financial sector. Whatever they'd like us to believe, banks are not busy supporting the nation’s entrepreneurs. </p> <p>In the hands of reckless banks, this power to create money led to the financial crisis and the recession that followed. Since that crisis there's been a growing call for changes to the way that money is created, particularly from <a href="http://www.positivemoney.org/">Positive Money</a>. This debate reached new levels recently with the Financial Times’ chief economics commentator, Martin Wolf, <a href="http://www.ft.com/cms/s/0/7f000b18-ca44-11e3-bb92-00144feabdc0.html">arguing</a> that we should "strip banks of their power to create money". </p> <p>Positive Money argues that we should take the power to create money away from the banks that caused the financial crisis, and transfer that power to a democratic, transparent and accountable body working in the public interest. The new body could be the Bank of England’s Monetary Policy Committee, or a completely new organisation. Its members must be independent of both profit-seeking banks and vote-seeking politicians, and be able to take a long-term, non-political view and consider the interests of society as a whole. </p> <p>The committee would look at the health of the economy and decide how much new money should be created. They would then transfer the newly-created money to the government, who could use it to increase spending on public services or to reduce taxes. It could even give every citizen an equal share, to be spent as they wish. </p> <p>The important thing is that newly-created money would be spent into the real (i.e. non-financial) economy, rather than being pumped by banks into property bubbles and financial markets. This would do far more to create jobs and improve the economy than the bank loans ever could. Banks would still be able to make loans, but rather than creating the money they lend, they'd actually have to get money from savers first. If there was ever a significant shortage of finance for business, the Bank of England would be able to create new money which banks could borrow to finance business loans, ensuring that the real economy would be better supported than in the current system. </p> <p>These changes (more detail <a href="http://positivemoney.org/our-proposals">here</a>) would mean that we were no longer dependent on banks to create the money our economy runs on. Not everyone is in favour of these changes, however. Ann Pettifor <a href="http://www.opendemocracy.net/ourkingdom/ann-pettifor/why-i-disagree-with-positive-money-and-martin-wolf">writes</a> that these ideas are "deeply flawed" and would lead to "a shortage of money, high unemployment and low economic activity". </p> <p>Pettifor argues that "the idea that society can set up a single 'independent' committee of men to make far-reaching decisions about the quantity of money needed by a nation of sixty four million people, all engaged in varied and complex activities, is bordering on authoritarian". </p> <p>Instead, she argues that we should leave banks with the power to create money, but use regulations to make them put the money they create into productive parts of the economy rather than bubbles and financial markets. But regulation is also set by a committee - a committee that is far less transparent, accountable or in the public eye than the existing Monetary Policy Committee. Such a committee would have to decide whether the current levels of mortgage lending are appropriate or excessive. They would need to adjust the regulation they set to encourage more lending to businesses. When they find that the regulation isn't working as intended, they'd need to adjust it again. And ultimately they'd be trying to protect banks from their own biases and recklessness. This approach would place much more control in the hands of a committee – a situation that Pettifor finds to be ‘authoritarian’. </p> <p>More worryingly, Pettifor's proposal relies on a committee of regulators outsmarting the big banks. In contrast, our approach recognises that banks have the resources to run rings around regulators and that they will make stupid mistakes regardless. For that reason, we believe they can’t be trusted with something as powerful as the ability to create money. Leaving them with this power would mean that the taxpayer would once again be on the hook for bank failures. Profits would be privatised, but losses would be socialised. In other words, nothing would change. </p> <p>More fundamentally, the idea that we can simply patch up the current system with better regulation ignores a much bigger problem. The problem is not just how newly created money is used; it's also a question of how the money is created. Pettifor's proposal still leaves us with a system where new money is only created if people go further into debt (because banks create money when they make loans). To grow the economy, we need households and businesses to borrow even more (or to run down their savings). In contrast, our proposals would allow the Bank of England to create </p> <p>money 'debt free', which could be spent into the economy (by the elected government) without anyone else having to go further into debt. Some of the new money could be used by people to pay off existing debts. This offers the greatest hope for reducing the amount of debt in society. </p> <p>Ultimately, if we leave banks with the ability to create money, we leave them with the power to shape society. </p><p>&nbsp;</p><p><em><strong><span>Liked this piece? Please donate to OurKingdom </span><a href="http://www.opendemocracy.net/ourkingdom/donate"><span>here </span></a><span>to help keep us producing independent journalism. Thank you.</span></strong></em></p> uk openEconomy uk money banking Ben Dyson Sun, 18 May 2014 23:11:11 +0000 Ben Dyson 82873 at https://www.opendemocracy.net Just Money, introduction https://www.opendemocracy.net/ourkingdom/ann-pettifor/just-money-introduction <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>In this exclusive extract from <em><a href="http://commonwealth-publishing.com/2014/02/12/just-money/">Just Money: How Society Can Break the Despotic Power of Finance</a> </em>Ann Pettifor describes how orthodox economics and finance have promoted a profoundly inadequate account of money. Change is necessary and possible. But it will come only through a revolution in the general public’s understanding.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/justmoney.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/justmoney.JPG" alt="" title="" width="400" height="359" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'></span></span></p><p><em>“Modern finance is generally incomprehensible to ordinary men and women … The level of comprehension of many bankers and regulators is not significantly higher. It was probably designed that way. Like the wolf in the fairy tale: </em></p> <p><em>&nbsp;“All the better to fleece you with.”</em></p> <p>&nbsp;Satyajit Das[1].</p><p>&nbsp;</p> <p>The global finance sector today exercises extraordinary power over society. The sector dominates economic policy making, undermines democratic decision-making, has financialised all sectors of the economy, and has made vast profits, often at the expense of both governments and the productive sector. </p> <p>Yet even as finance capital eludes and defies governments, and as legislators bow to the sector’s demands to cut public services in the name of ‘austerity’, finance has become more, not less, dependent on the state and on taxpayer support. Despite its detachment from the real economy and from state regulation, the global finance sector has succeeded in capturing, effectively looting, and then subordinating governments and their taxpayers to the interests of financiers. </p> <p>Geoffrey Ingham, the Cambridge sociologist describes the power the sector now wields as ‘despotic’[2]. </p> <p>In this short book, I will briefly outline how society can begin to unpick the knots of jargon and gibberish that finance has used to immobilise the rest of us, and how society can break the power of despotic finance. I will argue that while the finance sector abuses the monetary system for private profit, the system is also potentially a great public good. Our monetary system has evolved over centuries as a public infrastructural resource - just as the sanitation system was developed as a public good. Managed well, our monetary system could enable society to do what we can do. And as a public good our monetary system, like our sanitation system, could, and should be, just – and serve all citizens, not only a wealthy elite. </p> <p><strong>Challenging taboos about money</strong></p> <p>I have two overriding objectives. First, to challenge and nail the argument that ‘there is no money’ for society to address major threats, to fight poverty and to meet human needs. Money and monetary systems, I will argue, are social constructs, and can and must be managed, mobilised and deployed to serve the wider interests of society and the ecosystem. </p> <p>Second, I want to force into the open a subject that is taboo: <em>the role of private, commercial banks in the creation of money ‘out of thin air’. </em>For too long orthodox economists have misled politicians and others, and focussed only on central bank money creation. They have deliberately downplayed the role of the private sector: in credit creation or ‘printing’ money; in providing or denying finance to productive sectors; and in generating inflation.&nbsp; </p> <p>Monetarists, such as those that advised Mrs Thatcher’s government, never accuse the <em>private</em> commercial banking system of ‘printing money’. Yet the private banking system ‘prints’ 95% of the money in circulation in Britain, according to the governor of the Bank of England. It is they who hold the power in an unregulated system to provide or withhold finance from those active in the economy[3]. Yet neoliberal economists largely ignore private money ‘printing’ and aim their fire instead at governments and state-backed central bankers whom they accuse of stoking inflation by the excessive creation of money.</p> <p>The blind spot for the <em>private </em>creation of credit is part of the ideology rooted in the belief that “free, competitive markets” are the best way to organise the finance sector and the economy. This belief is in turn rooted in contempt for the democratic state. The monetarist blind spot for the link between private banks’ money creation and inflation goes some way to explaining why Mrs Thatcher’s economic advisers found they could not control both the British money supply and inflation[4]. They had aimed only to control the <em>public </em>money supply – government spending and borrowing.&nbsp; Partly as a result of monetarist doctrine, the Thatcher administration presided over <em>a rise</em> in the inflation rate to 21.9% in its first year of office. Only during the fourth year did inflation come down below the inherited rate. As William Keegan explains, the “defunct (monetarist) economic doctrine” led not only to a rise in inflation, but also to a savage squeeze on the British economy and to escalating unemployment[5]. Unsurprisingly, “the private sector did not respond… because the methods chosen by the evangelicals made the economic outlook much worse, so that there was no incentive for it to respond.”[5]</p> <p><strong>Economic orthodoxy and money</strong></p> <p>Unfortunately because most orthodox economists treat money as if it were ‘neutral’ or simply a ‘veil’ over economic transactions, the question of how to control the monetary system and in whose interests it should be managed, has long been neglected. In the words of a leading economist who will remain anonymous money or credit is “a matter of third order importance.” Some think that this neglect by the economics profession is not accidental. It has enabled global finance capital to thrive, untroubled by close academic or public scrutiny. </p> <p>If we are to reclaim the public good that is the monetary system; if we are to once again subordinate the small elite that makes up the finance sector to the interests of society and the economy as a whole, there must be democratic and accountable oversight of the system. We know it can be done, because in our recent history, after the 1929 financial crash, society succeeded in wrenching control of the monetary system back from a reckless and greedy wealthy elite. Last time depression and world war created the conditions for reform. This time a greater public understanding of money is required. It is perhaps the only thing that will head off depression and world war.</p> <p>Unfortunately citizens will not receive much help in understanding or taming finance from the economics profession, from regulators or officials because many are either uninterested or ill-informed about the nature of both money and banking.</p> <p>While the dominant, orthodox or neoclassical school of economists may pay little attention to ‘neutral’ money in designing models of the economy, they also conceive of it as akin to a commodity. Money, in their view, is represented by a tangible asset or commodity, like gold or silver. In this view money can represent a surplus to be set aside or saved, accumulated and then loaned out. In this story, savers lend to borrowers, and bankers are mere intermediaries between savers and borrowers. </p> <p>Because neoclassical economists conceive of money in this way, and because all commodities have a scarcity value, these economists theorise as if money is subject to market forces of supply and demand, and like commodities, can become scarce. But money is not like a commodity. To define it as such is to create a ‘false commodity’ as the political economist Karl Polanyi argued[7].</p> <p><strong>Orthodoxy’s opposition to the management of finance</strong></p> <p>Many orthodox economists are opposed to managing and regulating finance in the interests of society as a whole. Acting consciously or unconsciously on behalf of creditor interests, many effectively provide justification for ‘easy’ (that is unregulated) but ‘dear’ (at high rates of interest) credit, the worst possible combination for society and, I will argue, the ecosystem.</p> <p>Orthodox economists also have an unhealthy obsession with the state, which they accuse of ‘rent-seeking’ while ignoring the rent-seeking of the private sector. </p> <p>There is an alternative understanding of money, one that is periodically lost to history. This understanding informs the work of some of our greatest and most influential economists[8]. They have all understood that money is not and never has been a commodity, nor is it based on a commodity. Instead money is a <em>social construct</em> – a social relationship based primarily and ultimately on trust. </p> <p>This gap between the orthodox or neoclassical understanding of the nature of money and, for example, the Keynesian understanding of money is as wide and profound as that between 16th century Ptolemaic and Copernican concepts of the heavens. It is a gap in understanding that led the 2013 winner of the Nobel Prize in economics, the orthodox Eugene Fama to make this response to a <em>New Yorker </em>journalist: </p> <p><em>Many people would argue that… there was a credit bubble that inflated and ultimately burst.</em></p> <p>Eugene Fama: I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.</p> <p><em>So what caused the recession if it wasn’t the financial crisis?</em></p> <p>Eugene Fama: (Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity.<em>&nbsp;</em></p> <p>Imagine if, after an airline crash and the death of 300 people, engineers, physicists - &nbsp;professionals and academics working on the design and build of the aeroplane - said: “aeronautical engineering is not very good at explaining crashes”. Would we not regard those aeronautical engineers as at worst reckless and irresponsible, and at best, incompetent and undeserving of their posts? &nbsp;How can a Nobel Prize winner in economics get away with arguing that economics cannot explain a financial crisis that has done far more harm than all the airline crashes in history?</p> <p>When the economics profession finally moves away from an orthodoxy based on Fama’s flawed notion of credit as the savings of ‘people that save too much’ it will be a step as revolutionary as the paradigm shift in astronomy that took place under the leadership of Copernicus. <em>Just Money</em> will, I hope, move the process along. Not by persuading the economists themselves, but by changing the distribution of knowledge in the societies within which they operate. </p> <p><strong>&nbsp;</strong></p> <p><em><strong>This article is part of the OurKingdom series, <a href="http://www.opendemocracy.net/ourkingdom/collections/just-money#1">Just Money</a>, examining some of the themes in Ann Pettifor's new ebook </strong></em><strong>Just Money: How Society Can Break the Despotic Power of Finance,</strong><em><strong> published by Commonwealth. It is available on <a href="http://www.amazon.co.uk/gp/product/B00HTAI3YY/ref=as_li_ss_tl?ie=UTF8&amp;camp=1634&amp;creative=19450&amp;creativeASIN=B00HTAI3YY&amp;linkCode=as2&amp;tag=opendemocra0e-21">Kindle</a> and direct from the <a href="http://www.primeeconomics.org/">Prime Economics</a> website. You can donate to OurKingdom’s work <a href="http://www.opendemocracy.net/ourkingdom/donate">here</a>.</strong></em></p> <p><strong>Notes</strong></p> <p>[1]<strong> </strong>Satyajit Das: <em>Traders, Guns and Money: Knowns and Unknowns in the Dazzling World of Derivatoves. </em>Financial Times series Prentice Hall 2010.<strong>&nbsp;</strong></p> <p>[2]<strong> </strong>Geoffrey Ingham, The Nature of Money.</p> <p>[3] See Cullen Roche: <em>Understanding why Austrian Economics is Flawed. </em>Blog Pragmatic Capitalism 10 September, 2013. Online: <a href="http://pragcap.com/category/myth-busting">http://pragcap.com/category/myth-busting</a> [accessed 3/10/2013, 10:58 GMT]</p> <p>[4] For more on this, see <em>Mrs Thatcher’s Economic Experiment</em> by Victor Keegan, published by Allen Lane, 1984.</p> <p>[5] <em>Mrs Thatcher’s Economic Experiment</em> by William Keegan, Penguin Books, 1984, pg.208.</p> <p>[6] As above</p> <p>[7] Karl Polanyi: <em>The Great Transformation: the political and economic origins of our time</em>. First Beacon Paperback edition 1957.</p> <p>[8] These include: John Law, John Maynard Keynes, Joseph Schumpeter, Karl Polanyi, Kenneth Galbraith and Herman Minsky; and of contemporary economists and sociologists like Victoria Chick, Steve Keen, Geoff Tily, Cullen Roche, Geoffrey Ingham and the school of ‘Modern Monetary Theory.’&nbsp; </p> uk uk money financial crisis finance eurozone euro banking Just Money Ann Pettifor Thu, 06 Mar 2014 00:11:11 +0000 Ann Pettifor 79998 at https://www.opendemocracy.net The IMF – our sleeping beauty? https://www.opendemocracy.net/ourkingdom/douglas-coe/imf-%E2%80%93-our-sleeping-beauty <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>Finance has cast a spell on the framework for international economic co-operation established after the Second World War. The 2007-8 crisis and its aftermath highlight the need to rouse the IMF and the World Bank from their slumbers.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/lagarde.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/lagarde.jpg" alt="" title="" width="400" height="247" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Christine Lagarde. Flickr/IMF</span></span></span></p><p>In Christine Lagarde’s Richard Dimbleby lecture (3 February 2014), ‘A New Multilateralism for the 21st Century’, the Managing Director of the International Monetary Fund set out a bold vision of multinational cooperation and an agenda for monetary reform. Closing, she argued that the financial system should “serve rather than rule the real economy”. This is presumably a deliberate echo of one of America’s greatest monetary reformers, Abraham Lincoln: “Money will cease to be the master and will then become the servant of humanity”. Lincoln’s words have been an inspiration to all progressive political forces, most recently in Britain, the Labour Government of 1945-1951.</p> <p>Moreover Lagarde celebrated the multilateralism at the end of the second world war, and in particular the role of the British economist J. M. Keynes, the multilateralism that set the way to the instigation of the IMF itself and other multinational institutions, and to the detailed practical arrangements that permitted the prosperity of the post-war age.</p> <p>While Lagarde’s ambitions are far-reaching and greatly encouraging, it is vital to understand the relations between these two ideals: of monetary reform and of internationalism, and their relevance today. </p> <p>The Bretton Woods conference originated in President Roosevelt’s call for “a bold, forthright, and comprehensive discussion looking forward to the construction of… a ‘free, fertile economic policy for the post-war world’ excluding nothing in advance” (XXIII, p. 228).[1] </p> <p>Keynes grasped the opportunity to consign the terrible economic policy mistakes of the inter-war period permanently to history. From his rejection of the gold standard exchange system, he had come to understand that any arrangements to facilitate international trade should be compatible with countries having autonomy to set their own monetary and fiscal policies. These domestic policies should then be used to foster a high level of aggregate demand, achieved fundamentally by the aiming of monetary and debt management policy at cheap money, that is, at permanently low interest rates. </p> <p>Central to the final Bretton Woods agreement was enabling a world of capital control: </p> <p>“Freedom of capital movements is an essential part of the old <em>laissez-faire</em> system and assumes that it is right and desirable to have an equalisation of interest rates in all parts of the world. It assumes, that is to say, that if the rate of interest which promotes full employment in Great Britain is lower than the appropriate rate in Australia, there is no reason why this should not be allowed to lead to a situation in which the whole of British savings are invested in Australia, subject only to different estimations of risk, until the equilibrium rate in Australia has been brought down to the British rate. In my view the whole management of the domestic economy depends upon being free to have the appropriate rate of interest without reference to the rates prevailing elsewhere in the world. Capital control is a corollary to this. (XXV, p. 149)”</p> <p>In terms of exchange policy, the agreement fell short of the ideal in Keynes’ own ‘Clearing Union’ scheme, but still led to an era of relative exchange stability. </p> <p>Following his immense contribution to the Bretton Woods conference, Keynes then devoted his energies to persuading the British policymakers, politicians and public alike--all deeply sceptical of US motives--to accept these reforms. In this he was successful, but even only a few months later he was much more cautious. </p> <p>Keynes greatness extended far beyond economics and statesmanship. He had been important to a revival of London ballet, and was expected to escort the King and Queen to the Royal box for Tchaikovsky's Sleeping Beauty, chosen for the post-war opening of Covent Garden (in fact he was only able to join them for the third act). When in March 1946 he spoke as the British delegate to the inaugural meeting of the governors of the IMF and World Bank in Savannah, he had this performance in mind:&nbsp;</p> <p>"I am hoping that Mr Kelchner [the convenor] has not made any mistake and that there is no malicious fairy, no Carabosse, whom he has overlooked and forgotten to ask to the party. For if so the curses which that bad fairy will pronounce will, I feel sure, run as follows: ’You two brats shall grow up politicians; your every thought and act should have an <em>arrière-pensée</em>; everything you determine shall not be for its own sake or on its own merits but because of something else.’ </p> <p>If this should happen, then the best that could befall--and that is how it might turn out--would be for the children to fall into an eternal slumber, never to waken or be heard of again in the courts and markets of Mankind. (XXVI, pp.216-17)"</p> <p>Ultimately he feared that the institutions would be in thrall to the bad fairy of US politics, and, as a result, vested interests. Only a little over a month later, Keynes was dead.</p> <p>His internationalism was for a scheme that permitted a world of individual nations, but connected through trade and economic cooperation. No matter how imperfect the outcome of these conferences, we can now see that it took some time for Keynes’ fears to be realised. His post-war settlement established the conditions for the prosperity, near full employment, relative stability, narrowed income distribution and social advance that is now know as the golden age. </p> <p>But this world was dismantled, most obviously with the abandoning of the Bretton Woods exchange regime in 1971, then with the removal of capital controls at the end of that decade and the consequent abrupt and sustained rise in global interest rates.&nbsp; The IMF and other Bretton Woods organisations became champions of a globalization of finance and industrial capital that they were originally established to keep at bay, a globalization that would consequently reverse all the hard fought economic and social gains of the post war age. </p> <p>We might wishfully consider Lagarde’s speech as amounting to recognition on the part of global policymakers of this grave failure.</p> <p>But these are not new problems. They are old problems; they are the problems that Keynes and his contemporaries identified and overcame. She is right that “the international monetary system has travelled light years since the original Bretton Woods system”. But this journey was backwards, not forwards. The financial system she seeks, “that serves the productive economy rather than its own purposes”, is that Bretton Woods system. It is time to rouse the sleeping beauty that lies in her own institution. </p> <p>&nbsp;</p> <p><em><strong>This article is part of the OurKingdom series, <a href="http://www.opendemocracy.net/ourkingdom/collections/just-money#1">Just Money</a>, examining some of the themes in Ann Pettifor's new ebook </strong></em><strong>Just Money: How Society Can Break the Despotic Power of Finance,</strong><em><strong> published by Commonwealth. It is available on <a href="http://www.amazon.co.uk/gp/product/B00HTAI3YY/ref=as_li_ss_tl?ie=UTF8&amp;camp=1634&amp;creative=19450&amp;creativeASIN=B00HTAI3YY&amp;linkCode=as2&amp;tag=opendemocra0e-21">Kindle</a> and <a href="http://commonwealth-publishing.com/2014/02/12/just-money/">via Paypal in pdf format</a>. You can donate to OurKingdom’s work <a href="http://www.opendemocracy.net/ourkingdom/donate">here</a>.</strong></em></p> <p><strong>Notes</strong></p> <p>[1] Quotations are taken from the Collected Writings of John Maynard Keynes, Volumes XXIII, XXV and XXVI, concerned with the external financing arrangements for the British war effort and the debates on post-war international architecture.</p> <p>&nbsp;</p> uk openEconomy uk banking euro eurozone finance financial crisis money Just Money Douglas Coe Wed, 05 Mar 2014 00:11:11 +0000 Douglas Coe 79928 at https://www.opendemocracy.net Reuniting the monetary union: a proposal to counter the eurozone’s imbalances https://www.opendemocracy.net/ourkingdom/luca-fantacci/reuniting-monetary-union-proposal-to-counter-eurozone%E2%80%99s-imbalances <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>Persistent trade imbalances are threatening to derail the European economy. Luca Fantacci calls for a European Clearing Union to promote a sustainable pattern of production and consumption across the Eurozone.</p> </div> </div> </div> <p>Almost four years after the beginning of the euro crisis, we have managed to avert a collapse, but not to foster a steady recovery. For too long we relied on a diet of austerity as the only possible cure. But the treatment turned out to be ineffective, and even harmful, because it was based on the wrong diagnosis. Public debts were blamed, budgets were slashed, the recession deepened. Only recently has expert opinion acknowledged that public debts are, if anything, just part of a broader and different problem: foreign debts.</p> <p>In fact, in spite of the call for convergence that it has voiced since its inception, the monetary union has paradoxically led to a growing divergence in the economies of member countries: since the introduction of the euro, some countries have accumulated trade surpluses year after year, while others have symmetrically accumulated deficits. </p><p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/fanta1.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/535628/fanta1.JPG" alt="" title="" width="460" height="292" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Click to enlarge</span></span></span></p><p>Until the outbreak of the crisis, these deficits were financed by an inflow of private capital: loans from the “core” countries to the “periphery” were encouraged by the existence of the single currency, which eliminated exchange risk, as well as by the growing liquidity and integration of the European financial system. Once credit markets were overwhelmed by uncertainty, there was a sudden stop, and indeed a reversal, of capital flows. The reluctance of foreigners to refinance the governments of Southern Europe resulted in a surge in interest rate differentials. The single currency was no longer the same in Greece and in Germany. </p> <p>Only the intervention of the European Central Bank through unconventional refinancing operations allowed it to bring money back to the periphery, leading to a relative realignment in the costs of borrowing euros across the eurozone. However, these operations have merely bridged the gap, not closed it: the imbalance between surplus and deficit countries, in the absence of private capital, is financed through official channels, but it is still far from being reabsorbed.</p> <p>This is because the money lent by the ECB to the periphery flows back towards the centre and here, instead of being spent abroad (helping to equalize the balance of payments) or inside (helping to adjust the real exchange rate), it is redeposited at the ECB. Thus, since 2007, surplus countries have accumulated a total of around 1,000 billion euros of credits with the ECB, while deficit countries have accumulated debts for an equivalent amount, within a clearing system called TARGET2 (T2).</p><p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/fanta2.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_xlarge/wysiwyg_imageupload/535628/fanta2.JPG" alt="" title="" width="460" height="318" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_xlarge" style="" /></a> <span class='image_meta'><span class='image_title'>Click to enlarge</span></span></span></p><p>What can be done, then, to reabsorb these imbalances? Firstly we need to acknowledge that symmetrical imbalances require symmetrical adjustments. We may well admit that a competitive country is virtuous, but there is no virtue in maintaining a position of surplus indefinitely. On the contrary, a country with a surplus ought to dispose of its credit, otherwise its obstinacy in selling without buying creates a deflationary pressure throughout the EU as a whole. </p> <p>The principle of symmetrical adjustment was proposed by Keynes to reform the international monetary system after World War II. The idea was very simple. An International Clearing Union would act as a bank for the settlement of all payments related to international trade, and would finance temporary imbalances simply by crediting the account of the exporting country and debiting the account of the importing country. However, unlike a regular bank, the Clearing Union would charge an interest not only on debtor countries, but also on creditor countries, since it benefited both: the deficit countries, by allowing them temporarily to buy more than they would have otherwise afforded to buy; but also the surplus countries, by allowing them to sell more than they would otherwise have been able to sell. Moreover, the symmetric charges would act as an incentive for all countries to converge towards a balanced trade.</p> <p>Keynes’s proposal was not adopted at the Bretton Woods conference that defined the postwar global economic order in 1944. Only a few years later, however, it was taken as a model for the creation of the European Payments Union. From 1950 and 1958, the EPU intermediated 75 per cent of commercial transactions between member countries, contributing significantly to the “economic miracles” of the time, like Italy and Germany, and to the beginning of the process of European integration. </p> <p>Today, if it wants to complete and not to jeopardize that process, Europe needs a Clearing Union to reabsorb the imbalances that threaten to disrupt it. Target 2 is a clearing system, managed by the ECB, that could potentially serve this purpose. The problem is that, until now, it has managed to finance imbalances, but not to reduce them. In order to promote the convergence between surplus and deficit countries, Target 2 should be reformed according to the principles of the Clearing Union.</p> <p>One possibility to put these principles into practice again today has been described in a recent paper by <a href="http://www.ispionline.it/en/pubblicazione/bringing-money-back-real-economy">Bruni and Papetti</a>. The proposal consists in creating a subset of Target 2, named for example Target 3, dedicated to recording commercial settlements between member countries. Target 3 would allow the ECB to stabilize the cost of funding trade between member states, taking it away from the uncertain conditions prevailing on capital markets. Moreover, in Target 3, as in Keynes's Clearing Union, it would be possible to charge interest not only on debts, but also on credits. A cooperative mechanism of adjustment would reduce the financial imbalances that enhance instability and speculation and give a decisive impetus to the actual circulation of money in the circuits of the real economy. A balanced trade would thus actually operate as a cohesive force for the unification of Europe.</p><p>&nbsp;</p><p><strong><em>This article is part of the OurKingdom series, <a href="http://www.opendemocracy.net/ourkingdom/collections/just-money#1">Just Money</a>, examining some of the themes in Ann Pettifor's new ebook</em><em> </em>Just Money: How Society Can Break the Despotic Power of Finance,<em> published by Commonwealth. It is available on <a href="http://www.amazon.co.uk/gp/product/B00HTAI3YY/ref=as_li_ss_tl?ie=UTF8&amp;camp=1634&amp;creative=19450&amp;creativeASIN=B00HTAI3YY&amp;linkCode=as2&amp;tag=opendemocra0e-21">Kindle</a> and <a href="http://commonwealth-publishing.com/2014/02/12/just-money/">via Paypal in pdf format</a>. You can donate to OurKingdom’s work <a href="http://www.opendemocracy.net/ourkingdom/donate">here</a>.</em></strong></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/ann-pettifor/we-can-end-despotism-of-finance-at-price">We can end the despotism of finance, at a price</a> </div> <div class="field-item even"> <a href="/ourkingdom/geoffrey-ingham/whose-money-is-it">Whose money is it?</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk Can Europe make it? openEconomy uk UK money financial crisis finance eurozone euro banking Just Money Luca Fantacci Tue, 04 Mar 2014 00:11:11 +0000 Luca Fantacci 79875 at https://www.opendemocracy.net Financial repression - myth, metaphor and reality https://www.opendemocracy.net/ourkingdom/jeremy-smith/financial-repression-myth-metaphor-and-reality <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>“Financial repression” always casts state regulators as authoritarian villains and allows apologists for uncontrolled finance to pose as freedom fighters. Maybe we should worry far less about efforts to “repress” finance and far more about finance’s efforts to oppress the rest of us.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/banking33.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/banking33.jpg" alt="" title="" width="400" height="267" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Flickr/Lisa Norwood</span></span></span></p><p><em>Financial repression: </em></p> <p><em>“a pejorative term akin to political repression”: Ronald McKinnon </em></p> <p><em>“a technical term”: Carmen Reinhart </em></p> <p>A spectre is haunting economists and creditors across the world – the spectre of “financial repression”. The fear that governments may throw regulatory grit into the otherwise frictionless working of the financial services machine, and so limit the “freedom” of the machine’s owners to manufacture financial gains however they will, wherever they will, whenever they will. </p> <p>The financial sector, let us recall, caused the 2008/9 crash through greed and speculation, was bailed out by governments and taxpayers in gigantic sums, which led to rises in public sector debt as measures were taken to rescue economies and look after victims of the crash.</p> <p>But now the financial sector and its intellectual lobbyists are deeply concerned.&nbsp; Concerned, that is, to protect their assets and interests. </p> <p>On 8th January 2014 on the BBC Today Radio 4 programme, emerging market investor Jerome Booth told listeners: </p> <p><em>We’re certainly going to have to have a decade or so of reducing the debt through maybe inflation eventually. At the moment it is through financial repression.</em></p> <p>Asked what this meant, he defined financial repression as “any policy which captures domestic savings in order to fund the government and to do so at lower cost.”&nbsp; </p> <p>He added that after the Second World War, “financial repression basically stole the money of savers over many, many years.”&nbsp; </p> <p>“Captures”, “stole”, “repression” – this is emotive language.&nbsp; In <em>Metaphors We Live By</em> (first published in 1980) George Lakoff and Mark Johnson argued that our use of language – indeed language itself - is pervaded by coherent systems of metaphors which we may no longer be conscious of.&nbsp; They explain:</p> <p><em>Political and economic ideologies are framed in metaphorical terms. Like all other metaphors, political and economic metaphors can hide aspects of reality. But in the area of politics and economics, metaphors matter more, because they constrain our lives. A metaphor in a political or economic system, by virtue of what it hides, can lead to human degradation.</em></p> <p>“Financial repression” is self-evidently a metaphor.&nbsp; Someone or something is being kept down by the repressor, evoking mental images such as tanks crushing peaceful demonstrations, or robber barons “capturing” or “stealing” your money.</p> <p>The term was first coined in 1973 by two Stanford University economists Ronald McKinnon and Edward Shaw, who worked in the field of LDCs (“less developed countries”). That year, McKinnon’s book <em>Money and Capital in Economic Development</em> was published, as was Shaw’s <em>Financial Deepening in Economic Development</em>. </p> <p>McKinnon’s thesis begins as follows:</p> <p><em>Most of the population, and most actual and potential entrepreneurs, in LDCs (especially in rural areas) are not served by the banking system.&nbsp; They are forced into the hands of local moneylenders and pawnbrokers at very high rates of interest. <strong>They are thus financially repressed</strong>.</em></p> <p>Here at the outset, it is poor people who are the victims of financial repression. In this context the metaphor seems to makes sense. McKinnon’s remedy is to remove maximum rates on interest rates (usury ceilings), and thus to encourage the banking system to increase and broaden lending, at very high real rates of interest – of around 15-25%. </p> <p>However McKinnon is not consistent in his assessment of who is being repressed.&nbsp; At another point he writes:</p> <p><em>Unfortunately, the more usual method in LDCs is to <strong>maintain a small and repressed monetary system</strong> and then to rely on a battery of fiscal and other interventions in commodity and factor markets as a substitute for bank intermediation.</em> [My emphasis]</p> <p>A repressed monetary system? He has shifted the metaphor from the “repressed rural masses” to the “repressed monetary system”. And both he and Shaw go on to use it generally in this sense.</p> <p>Recently, he has disclosed that he coined the term “financial repression” to make a political point.&nbsp; In his paper “Hot Money Flows, Commodity Price Cycles, and Financial Repression in the US and the People’s Republic of China” (January 2013) co-authored with Zhao Liu, he explains its origin: </p> <p><em>In the 1970s, the term financial repression originated with McKinnon and Shaw when inflation was a problem in a number of less developed countries (LDCs). In the 1960s and 1970s, governments in many LDCs intervened to put ceilings on nominal interest rates and impose high reserve requirements on their banks, along with other techniques to direct the flow of credit in the economy… <strong>Wanting to find a pejorative term—akin to political repression — to describe this syndrome</strong>, McKinnon and Shaw first used the term financial repression in 1973. </em>(My emphasis).</p> <p>Here we are in classic Lakoff and Johnson territory. This is a politically-driven metaphor the finance sector and economics profession have lived by for over 40 years!&nbsp; </p> <p>Many orthodox economists followed McKinnon and Shaw in using “financial repression” as a concept. Only a few economists challenged it: for example Carlos Diaz-Alejandro, in a 1984 paper with the great title “Good-bye financial repression, hello financial crash”:</p> <p><em>This paper seeks to understand why financial reforms carried out in several Latin American countries during the 1970s, aimed at ending “financial repression”, as defined by Ronald McKinnon … and generally seeking to free domestic capital markets from usury laws and other alleged government-induced distortions, yielded by 1983 domestic financial sectors characterized by widespread bankruptcies, massive government interventions or nationalizations of private institutions and low domestic savings.</em></p> <p>In recent times, alas, many others – including those of a generally progressive bent, such as Duncan Weldon of the TUC, Larry Elliott of the <em>Guardian</em>, and Paul Mason (when Economics Editor of BBC’s <em>Newsnight</em>) have been drawn into using the term as if it were value-free. </p> <p>It is relentlessly promoted by Carmen Reinhart, co-author with Kenneth Rogoff of the 2010 paper “Growth in a Time of Debt”. This publication was famously replete with spreadsheet errors and flawed conclusions, but was nonetheless frequently cited by leading conservative politicians in the US, UK and Eurozone as intellectual ballast for austerity policies. </p> <p>In an interview with Der Spiegel in April 2013, Ms Reinhart described financial repression as a “technical term”:</p> <p><strong><em>SPIEGEL:</em></strong><em>&nbsp;When the inflation rate is higher than the interest rates paid on the markets, the debts shrink as if by magic. The downside, though, is that this applies to the savings of normal people.</em></p> <p><strong><em>Reinhart:</em></strong><em>&nbsp;The technical term for this is financial repression. After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit default. After the war, governments imposed interest rate ceilings for government bonds. Nowadays they have more sophisticated means.</em></p> <p><strong><em>SPIEGEL:</em></strong><em>&nbsp;Which means?</em></p> <p><strong><em>Reinhart:</em></strong><em>&nbsp;Monetary policy is doing the job. And with high unemployment and low inflation that doesn't even look suspicious. Only when inflation picks up, which is ultimately going to happen, will it become obvious that central banks have become subservient to governments.</em></p> <p>For Reinhart, anything that impedes the finance sector in any way is deemed to be financial repression.&nbsp; In a 2011 paper co-authored with Maria Belen Sbrancia entitled “The Liquidation of Government Debt”, she asserted that “financial repression” can include any of the following:</p> <p>- Explicit caps or ceilings on interest rates, including caps on rates charged by the finance sector to governments</p> <p>- Indirect caps or ceilings on interest rates</p> <p>- Capital account restrictions </p> <p>- Exchange controls</p> <p>- High reserve requirements,</p> <p>- Requirements to hold government debt,</p> <p>- “Prudential” regulatory measures requiring that institutions hold government debts in their portfolios </p> <p>- Transaction taxes on equities, </p> <p>- Prohibitions on gold transactions,</p> <p>- Direct ownership of banks and other financial institutions</p> <p>- Extensive management of banks and other financial institutions</p> <p>- Restrictions of entry to the financial industry</p> <p class="ListParagraph">- Directing credit to certain industries.</p> <p>In their famous 2009 book “This Time is Different”, Kenneth Rogoff and Carmen Reinhart analyse banking and financial crises from 1900 to 2008. They include a chart (Figure 13.1, p.205) which plots the proportion of countries with banking crises, weighted by their share of world income.&nbsp; The chart shows several crisis peaks from 1900 to 1928, then the giant peak of the Great Depression, falling back to almost zero in 1940. The chart is flat at zero from 1950 to 1972 – in other words there are no financial crises of any significance over this period - after which the chart rises and falls dramatically: most recently in 2008-9.&nbsp; </p> <p>In other words, the post-1945 age of so-called “financial repression” was an age of stability, and in many parts of the world, of sustained economic progress.&nbsp; The authors’ comment is revealing:</p> <p><em>Figure 13.1 also reminds us of the relative calm from the late 1940s to the early 1970s.&nbsp; This calm may be partly explained by booming world growth but perhaps more so by the repression of the domestic financial markets (in varying degrees) and the heavy-handed use of capital controls that followed for many years after World War II …</em></p> <p><em>Since the early 1970s, financial and international capital account liberalization – reduction and removal of barriers to investment inside and outside a country – have taken root worldwide. <strong>So, too, have banking crises </strong>…</em> (my emphasis).</p> <p><em>In the early 1980s, a collapse in global commodity prices, <strong>combined with high and volatile interest rates in the United States</strong>, contributed to a spate of banking and sovereign debt crises in emerging economies, most famously in Latin America and Africa. <strong>High interest rates raised the cost of servicing large debts</strong>… Falling prices for commodities, the main export for most emerging markets, also made it more difficult for them to service debts</em>. (my emphasis)</p> <p>That is, emerging countries were hit by high interest rates (advocated, let us recall, by the creators of the demon of “financial repression”) set not locally, but in the USA.&nbsp; </p> <p>Rogoff and Reinhart also find that </p> <p><em>banking crises almost invariably lead to sharp declines in tax revenues… On average, during the modern era, real government debt rises by 86 percent during the three years following a banking crisis.</em></p> <p>In brief, policies of financial liberalization are far more likely to lead to private sector banking crises, which then have a grave impact on public finances and thus on public services. Yet we are supposed to believe that “financial repression” is always a bad thing, something akin to political repression!</p> <p>In a response to her 2011 paper co-authored with Ms Sbrancia, Professor Alan Taylor, University of California at Davis and adviser to Morgan Stanley, neatly but politely dissects the flawed logic and approach of Ms Reinhart, and indeed of the “financial repression” concept.&nbsp; He concludes, under the sub-heading “Financial regulation sounds better than financial repression” (at <a href="https://www.bis.org/publ/work363.pdf">https://www.bis.org/publ/work363.pdf</a> p.53): </p> <p><em>We must be wary of confusing financial repression (which sounds like a terrible thing) with financial regulation (which sounds a good deal more wholesome). &nbsp;In the context of current debate on how better to regulate the financial sector after the recent debacle, it is entirely understandable that the authorities have decided that banks and other entities were given far too much leeway to pursue activities that were not only self-destructive, but also destructive of the wider economy…</em></p> <p><em>Whether we call it financial repression, lack of competition, tough regulation, the fact remains that the 1945 to 1975 era was a glorious period of economic growth in the advanced countries, as well as in many emerging economies.&nbsp; It was a time of rapid economic growth with the allocation and mobilization of large amounts of capital, generalized macroeconomic and financial stability, sustained real wage growth and low unemployment. </em></p> <p><em>For good reason, it is a time remembered glowingly through terms such as The Golden Age, Les Trente Glorieuses, and so forth. In marked contrast, the subsequent thirty-some year period from 1975 to the present has been one of financial liberalization, but at the same time has seen a pronounced slowdown in growth and capital accumulation, more financial crises, real wage stagnation, and elevated unemployment.</em></p> <p>Despite this, the “financial repression” meme rolls on. From its origins as a call for action to help small rural farmers access credit, it is now a general term of abuse of governments whenever, and for whatever motive, they regulate the activities of the finance sector. </p> <p>Yet curiously, while creditors and their economist allies cry “foul, financial repression” whenever real rates are negative, they do not see other falls in real returns in the same light. Take the “theft” of savings by the financial services industry, through financial failures, absurd administration charges or extremely low annuity payments. But above all, take the long-standing and continuing fall in real rates of pay to employees – both in the UK and US. So far no economist, to my knowledge, has described this fall in incomes as “financial repression”. </p> <p>So let’s invent our own pejorative term. Not a “metaphor to live by” perhaps, but one to just about scrape a living by.&nbsp; </p> <p>How about “financial oppression”</p><p>&nbsp;</p><p><strong><em>This article is part of the OurKingdom series, <a href="http://www.opendemocracy.net/ourkingdom/collections/just-money#1">Just Money</a>, examining some of the themes in Ann Pettifor's new ebook</em><em> </em>Just Money: How Society Can Break the Despotic Power of Finance,<em> published by Commonwealth. It is available on <a href="http://www.amazon.co.uk/gp/product/B00HTAI3YY/ref=as_li_ss_tl?ie=UTF8&amp;camp=1634&amp;creative=19450&amp;creativeASIN=B00HTAI3YY&amp;linkCode=as2&amp;tag=opendemocra0e-21">Kindle</a> and <a href="http://commonwealth-publishing.com/2014/02/12/just-money/">via Paypal in pdf format</a>. You can donate to OurKingdom’s work <a href="http://www.opendemocracy.net/ourkingdom/donate">here</a>.</em></strong></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/costas-lapavitsas/understanding-and-confronting-financialisation">Understanding and confronting financialisation</a> </div> <div class="field-item even"> <a href="/ourkingdom/ann-pettifor/we-can-end-despotism-of-finance-at-price">We can end the despotism of finance, at a price</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk openEconomy uk UK banking finance financial crisis money Just Money Jeremy Smith Mon, 03 Mar 2014 09:02:49 +0000 Jeremy Smith 79857 at https://www.opendemocracy.net Understanding and confronting financialisation https://www.opendemocracy.net/ourkingdom/costas-lapavitsas/understanding-and-confronting-financialisation <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>The growth of finance over the last forty years has changed capitalism profoundly. It is time for its critics to grasp the nature and significance of these changes. Only then will the supremacy of finance face an effective challenge.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/marx.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/marx.jpg" alt="" title="" width="400" height="300" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Marx & Engels, Berlin. Flickr/Sam Kelly</span></span></span></p><p>The rise of finance during the last four decades is the most prominent feature of contemporary capitalism. Finance has grown enormously in terms of assets and profits, its markets and institutions have become global, its concerns dictate economic policy, its influence shapes the political process. Non-financial enterprises may borrow less from banks, but engage in financial activities to earn profits. Finance has also permeated the lives of individuals and households in unprecedented ways. Private financial institutions now determine the choices made by millions in housing, education, and health, and even influence the ethics, morality and customs of everyday life. Contemporary capitalism can rightly be called ‘financialised’. </p> <p>The gigantic crisis of 2007-9 has brought to the fore the financialisation of capitalism. The crisis emanated out of a vast financial bubble in the USA, pivoting mostly on real estate, involving loans to the poorest US workers, and fostering manic financial alchemy that secured trading profits, fees and commissions for banks. The bursting of the bubble threw the global economy into a recession that subsequently required a vast mobilisation of social resources to be tackled. Policy makers aimed to protect financial profits, a task they achieved by driving interest rates close to zero, while also making public funds available to the financial system. The costs of the crisis were borne by society as a whole through persistent austerity and wage restraint.&nbsp;&nbsp; </p> <p>In the summer of 2008, when the crisis was at its sharpest, it briefly looked as if there might be significant changes to mainstream economic theory and policy. There was talk of a ‘Minsky moment’ and even radical-sounding policy ideas about controlling finance. Unfortunately, normal service was soon resumed and mainstream economics continued to preach the virtues of the market, typically ascribing economic ills to (often imaginary) faults of the state. Five years after the crisis, economic theory appears not have noticed any structural changes in capitalism, and nor any weaknesses in its own approach to capitalism. Even worse, little of substance has changed in the realm of policy and financialisation continues to reign unchallenged.</p> <p>Equally striking, however, has been the response of Marxist political economy to the most gigantic turmoil of world capitalism since the end of the World War II. Marxist theory was initially at a loss as to what to say, but it soon began to produce arguments that sounded remarkably as if nothing novel had actually taken place. For many, the cause of the crisis is – apparently – the tendency of the rate of profit to fall, implying that the roots of the turmoil lie in production and finance is merely an epiphenomenon. Focusing on finance, presumably, runs the risk of treating the crisis as the outcome of mistaken policy rather than a development deeply rooted in the social relations of capitalism. Harsh as it might sound, there is a strange symmetry between such Marxist arguments and the intellectual immobility of neoclassical economics.</p> <p>Facts, however, are stubborn things. Try as one might, it is simply impossible to put together a convincing explanation of the gigantic crisis of 2007-9 based on the tendency of the rate of profit to fall, even if a commonly agreed measurement of the rate of profit could (ever) be arrived at. There was no fall of the rate of profit prior to the crisis that was remotely commensurate with the turmoil that actually occurred, not to mention the protracted difficulties of accumulation that followed. To be sure, the long-term performance of the rate of profit has remained problematic in recent decades, and that is indeed a characteristic feature of financialised capitalism. But the long-term trend of the rate of profit does not amount to a theory of crisis. </p> <p>Five years after the crisis, the reality of mature capitalist countries is grim. Financialisation continues unchallenged, mainstream economics is completely bereft of new ideas, and class tensions are on the rise, particularly in Europe. Heterodox thinking, with Marxism at its core, has a vital role to play in analysing the state of contemporary capitalism and in offering fresh ideas on policy and action. But for that, it must first acknowledge financialisation and treat it with the seriousness it deserves.</p> <p>The crisis that shook global capitalism in 2007-9 is a crisis of financialisation. It resulted from a vast financial bubble in 2001-7 that matched the extraordinary rise and transformation of finance in the preceding period. The crisis was certainly not merely the result of monetary and credit policy, but reflected the profound structural financialisation of contemporary capitalism. For the same reason, the crisis has cast fresh light on a range of radical policies that are urgently required to confront and reverse financialisation: public ownership and control over financial institutions, public investment, preventing productive enterprises from playing games in financial markets, reducing the exposure of households to private finance for housing, health, education, pensions and so on. Measures of this type are intrinsically anticapitalist, opening new avenues for the communal and associational organisation of society. Reversing financialisation could open new paths toward socialism.</p><p><br /><em>Costas Lapavitsas' most recent book, <span><a href="http://www.versobooks.com/books/1506-profiting-without-producinghttp://" target="_blank">Profiting Without Producing: How Finance Exploits Us All</a>, is published by Verso.</span></em></p><p><strong><em>This article is part of the OurKingdom series, <a href="http://www.opendemocracy.net/ourkingdom/collections/just-money#1">Just Money</a>, examining some of the themes in Ann Pettifor's new ebook</em><em> </em>Just Money: How Society Can Break the Despotic Power of Finance,<em> published by Commonwealth. It is available on <a href="http://www.amazon.co.uk/gp/product/B00HTAI3YY/ref=as_li_ss_tl?ie=UTF8&amp;camp=1634&amp;creative=19450&amp;creativeASIN=B00HTAI3YY&amp;linkCode=as2&amp;tag=opendemocra0e-21">Kindle</a> and <a href="http://commonwealth-publishing.com/2014/02/12/just-money/">via Paypal in pdf format</a>. You can donate to OurKingdom’s work <a href="http://www.opendemocracy.net/ourkingdom/donate">here</a>.</em></strong></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/steve-keen/keen-krugman-debate">The Keen-Krugman debate</a> </div> <div class="field-item even"> <a href="/ourkingdom/ann-pettifor/we-can-end-despotism-of-finance-at-price">We can end the despotism of finance, at a price</a> </div> </div> </div> </fieldset> uk openEconomy uk banking finance financial crisis money Just Money Costas Lapavitsas Fri, 28 Feb 2014 00:11:11 +0000 Costas Lapavitsas 79780 at https://www.opendemocracy.net Shadow banking, or why black holes are important in the global financial system https://www.opendemocracy.net/ourkingdom/anastasia-nesvetailova/shadow-banking-or-why-black-holes-are-important-in-global-financia <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>The shadow banking sector is now integral to the global financial system. Its architects are constantly seeking to evade oversight and control through the use of offshore accounting and forbidding complexity. The regulatory reforms that followed the 2007-8 crisis are bound to be tested.</p> </div> </div> </div> <p>“It takes me about two hours to assemble a team of finance geeks and lawyers to devise a product or a transaction that would bypass any new rule or regulation coming our way,” said a senior French banker to me in the midst of the financial crisis in autumn 2008.</p> <p>His confession captures the essence of the challenge facing the regulators and policy-makers in the aftermath of the most devastating financial crisis since the 1930s. It seems that whatever financial regulators come up with as part of post-crisis policy reform, the financial industry is likely to find a way to bypass it. Or at the very least, minimize its impact. Probably the most compelling illustration of this blunt logic of financial evolution is the phenomenon of <em>shadow banking</em>, a term that entered public debate in 2007 and has preoccupied regulators and finance experts ever since.&nbsp; </p> <p>Narrow definitions of shadow banking suggest that it is, essentially, a system of market-based (as opposed to bank-based) funding, or “money market funding of capital market lending” (<a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2232016">Mehrling et al 2012</a>). More inclusive concepts define shadow banking as a complex network of credit intermediation outside the boundaries of the traditional, regulated bank. It was the crisis of 2007-09 that brought the scale of shadow banking into light; or rather, made a process that had been accepted as a benign force of financial innovation and competition into a political problem. Paul McCulley, then of PIMCO, argued that “the growth of the shadow banking system, which operated legally yet entirely outside the regulatory realm “drove one of the biggest lending booms in history, and collapsed into one of the most crushing financial crises we’ve ever seen” (<a href="http://www.cfainstitute.org/learning/products/publications/rf/Pages/rf.v2009.n5.15.aspx">McCulley 2009).</a></p> <p>Almost immediately after Paul McCulley first coined the term, it became clear that “shadow banking” was both a stroke of genius and an unfortunate choice of words. Unfortunate, because confusingly (and wrongly), “shadow” banking resonates with “shady” or underground economic activity, ascribing pejorative connotations to an essential segment of finance. Ingenious, because the continuing disputes over definitions of shadow banks matured into a wide-ranging debate among industry experts, regulators, academics and civil society. Key issues being debated include what precisely shadow banking is; which entities should be included under this umbrella and why; and what to do with this system of financial intermediation in the post-crisis economy. </p> <p>Academic and policy work on shadow banking shows that over the past three or four decades, banks and financial institutions have developed what amounts to a parallel financial universe. Today, behind the facade of any major banking conglomerate, there is a plethora of entities, transactions and quasi-legal cells. Many of them are “orphaned” from the visible part of the bank by complex legal and financial operations and often embedded in offshore financial havens, yet they have become integral to the functioning of our banks. These channels and cells of credit creation have included the rather specialized and obscure entities such as special purpose entities (SPEs), special investment vehicles (SIVs)[1] and asset-backed commercial paper (ABCP)[2] but also, according to some definitions, more established institutions, such as hedge funds, money market funds and government sponsored financial institutions like the American mortgage giants, Fannie Mae and Freddie Mac.</p> <p><a href="http://www.financialstabilityboard.org/publications/r_131114.htm">The Financial Stability Board (FSB)</a> puts the global size of the shadow banking system at $71tn. This accounts for, roughly, half of total banking assets globally and a third of the world’s financial system. Globally, shadow banking is predominately Anglo-Saxon, with US and UK accounting for 46% and 13% of the global shadow banking system, and Japan and the Netherlands following closely (8% each). At the same time, shadow banking is an internationally diverse phenomenon, with around 40% of credit in the emerging markets provided by the nonbanking sector (Ghosh et al 2012).&nbsp; Perhaps the most unsettling fact about this data is that analysts at all levels tend to admit that current figures on shadow banking activities tend to be under-estimations. </p> <p>Since the crisis erupted in 2007, research into shadow banking has progressed quite rapidly, and it is undeniable that our knowledge and understanding of this complex web of finance have vastly improved. At the same time, some major political dilemmas remain unresolved. On the one hand, shadow banking is a vital part of financial activity today. It helps banks meet liquidity needs, conduct securitization and lending functions, and accommodates a variety of economic interests, from investment banks and pension funds to high-net worth individuals and sovereign wealth funds. </p> <p>On the other hand, shadow banking raises at least three problems related to financial stability. First, relying on long, complex and opaque structures of credit creation, many visible banks are able to enlarge their <em>de facto</em> size, often creating undetected leverage and thus, adding to the problem of “too big to fail.” Second, by netting several entities into opaque chains of credit intermediation, the shadow banking system amplifies the scope for regulatory arbitrage. Third, relying and thriving on complexity, shadow banking obscures the sources and real dimensions of systemic risk in the financial system and aggravates the problem of non-transparency of finance.&nbsp; </p> <p>The three problems are inter-related. Complexity, Gillian Tett argues, has become a social and even cultural tool of opacity, employed by financial elites in effort to isolate themselves in “silos of silence” (<a href="http://www.banque-france.fr/fileadmin/user.../etude14_rsf_1007.pdf‎">Tett 2010</a>). During the boom years and even in the wake of the crisis, professional jargon and heavy mathematics serve as barriers against transparency of the often controversial yet profitable business of financial innovation that too often, is akin to financial sabotage <a href="http://connection.ebscohost.com/c/articles/91267656/sabotage-financial-system-lessons-from-veblen">(Nesvetailova and Palan 2013</a>). Ironically, though perhaps not surprisingly, in the largely self-governed financial system, this complexity would prove implosive: the increasing sophistication and precision of financial practices were mirrored by the growing ignorance about the actual developments in finance. In the midst of 2007-09 meltdown, possibly for the first time in modern economic history, regulators, senior managers and academics resorted to the concept of complexity to excuse and even justify their ignorance about the developments in the financial system in general and in their own institutions in particular (<a href="http://www.tandfonline.com/doi/abs/10.1080/13563467.2012.710601?journalCode=cnpe20#.Uvi2b7Rtb5k">Datz 2013). </a>&nbsp;</p> <p>The recognition that shadow banking - an undetected and/or opaque network of financial cells and channels - played a leading role in the global financial meltdown has served to empower national and international financial regulatory bodies. It is quite remarkable that the first generation of scholarship on shadow banking has been pioneered by the regulators themselves, with major studies and insights suggested by teams working with <a href="http://ineteconomics.org/people/zoltan-pozsar">Zoltan Pozsar (US Treasury</a>), <a href="http://www.imf.org/external/pubs/ft/wp/2013/wp13186.pdf">Manmohan Singh (IMF),</a> <a href="http://www.bankofengland.co.uk/about/pages/people/biographies/haldane.aspx">Andy Haldane (Bank of England</a>), <a href="http://ineteconomics.org/people/adair-turner">Adair Turner</a> (the British FSA until 2013), <a href="https://www.bis.org/author/claudio_borio.htm">Claudio Borio</a> (BIS) and researchers in other national and international regulatory institutions. These efforts helped produce refined regulatory maps, heralded by the <a href="http://www.ny.frb.org/research/staff_reports/sr458.pdf‎">ground-breaking study</a> by Zoltan Pozsar and his colleagues, then at New York Fed. In the post-2007 world, these efforts are crucial steps towards a new paradigm of financial governance (Turner 2013;&nbsp; <a href="https://www.bis.org/publ/work395.htm">Borio 2012</a>; <a href="http://www.interdependence.org/wp-content/.../Helicopter_Money_Final1.pdf‎">McCulley and Pozsar 2013</a>). Instructively, this work also shows how hopelessly obsolete and inadequate mainstream economics has become in dealing with real-life challenges (Keen 2011; <a href="http://commonwealth-publishing.com/2014/02/12/just-money/">Pettifor 2014</a>).</p> <p>Academic research on shadow banking in turn, reveals a shocking scarcity of conceptual and even historical knowledge of financial innovation. &nbsp;Up until the crisis, financial innovation had been assumed to be driven by the demand of economic agents for new financial techniques and products (Awrey 2013). It was thus seen as a natural, organic and ultimately progressive element of capitalist development. In this general paradigm, there was little dedicated conceptual knowledge developed about financial innovation <em>per se</em>. At best, it was viewed as a universal engine of economic growth. At worst, financial innovation did not merit specialized academic research[3]. Current academic studies of shadow banking in turn, illustrate that secrecy, lack of transparency, complexity and opacity have become essential ingredients of today’s financial innovation, yet for reasons different from those traditionally assumed.&nbsp; </p> <p>Perhaps the real significance of the shadow banking system, broadly conceived, is that it functions as a crucial ‘black hole’ in the global economy. <a href="http://www.taxresearch.org.uk/Blog/richard-murphy/">Richard Murphy</a> explains that a major misconception about financial transparency is the assumption that the secrecy world is geographically located. It is not. As he writes, “it is instead a space that has no specific location. This space is created by tax haven legislation which assumes that the entities registered in such places are ‘elsewhere’ for operational purposes, i.e. they do not trade within the domain of the tax haven, and no information is sought about where trade actually occurs… To locate these transactions in a place is not only impossible in many cases, it is also futile: they are not intended to be and cannot be located in that way. They float over and around the locations which are used to facilitate their existence as if in an unregulated either” (<a href="http://www.financialsecrecyindex.com/PDF/SecrecyWorld.PDF">Murphy 2009: 2</a>). </p> <p>Therefore, while the idea of&nbsp; “elsewhere”&nbsp; has been paramount to the emergence of the global financial system and its key nodes,&nbsp; the shadow banking system firmly linked together the notion of “elsewhere” and “nowhere” not simply for the conduct of financial transactions, but for the very process of credit creation as well (<a href="http://www.city.ac.uk/arts-social-sciences/international-politics/research/cityperc/working-papers">Palan and Nesvetailova 2014</a>).</p> <p>It would be useful to remember this today, when, confronted with protracted recession and lack of funding for the economy, even the more critically minded of the regulators call for the return of securitization in order to boost investment and credit flow. These calls, perhaps like no academic theory or quantitative data, confirm that shadow banking is not a paranormal development of the economy or an outcome of bankers’ misguided behavior. Shadow banking is the very infrastructure of financial innovation. Without shadow banking, finance cannot function; and that is why shadow banking, however defined, is here to stay.&nbsp;&nbsp; </p> <p>It is therefore quite likely that the next (and inevitable) bout of financial instability and crisis would involve a nexus of official and shadow banking systems. It remains an open question whether the rules and safeguards erected in the aftermath of the 2007-09 crisis would suffice to minimize the costs of the next crisis.&nbsp; Optimists would say that our regulators are better informed, better equipped and better staffed today than they were in say, 2000 or 2006. They are. Pessimists would remind us though that it takes a team of finance geeks and lawyers only a couple of hours to devise a product that bypasses any rule or restriction. </p> <p>&nbsp;</p> <p><em><strong>This article is part of the OurKingdom series, <a href="http://www.opendemocracy.net/ourkingdom/collections/just-money#1">Just Money</a>, examining some of the themes in Ann Pettifor's new ebook </strong></em><strong>Just Money: How Society Can Break the Despotic Power of Finance,</strong><em><strong> published by Commonwealth. It is available on <a href="http://www.amazon.co.uk/gp/product/B00HTAI3YY/ref=as_li_ss_tl?ie=UTF8&amp;camp=1634&amp;creative=19450&amp;creativeASIN=B00HTAI3YY&amp;linkCode=as2&amp;tag=opendemocra0e-21">Kindle</a> and <a href="http://commonwealth-publishing.com/2014/02/12/just-money/">via Paypal in pdf format</a>. You can donate to OurKingdom’s work <a href="http://www.opendemocracy.net/ourkingdom/donate">here</a>.</strong></em></p> <p>&nbsp;</p> <p><strong>Notes</strong></p> <p>[1] SIVs can either be affiliated with a single banking institution, or obtain support from multiple institutions. Adrian and Ashcraft (2012) report that since 2008, SIVs have stopped operating.</p> <p>[2] Commercial paper collateralized by a specific pool of financial assets. The bankruptcy remoteness of all of these entities implies that the collateral backing the ABCP is exempt from the potential bankruptcy of the institution that provides the backup lines of credit and liquidity (Adrian and Ashcraft 2012).&nbsp;&nbsp; </p> <p>[3] For instance, in their survey article (2004) reviewing the state of the studies of innovation Frame and White found only two dozen empirical articles addressing financial innovation, 14 of which had been written since 2000.&nbsp; As the authors observed then, to the best of their knowledge, “there are no articles attempting to rank financial institutions by their innovative tendency or to measure the effect of innovative tendency on long run market yields to the institutions’ common shares” (cited in Dew 2007: 2-3).</p><p>&nbsp;</p> <p><strong>References and Sources</strong></p> <p>Adrian, T. &amp; A. Ashcraft 2012 ‘Shadow banking: a review of the literature’, Federal Reserve Bank of New York, Staff Report Nr. 580.</p> <p>Awrey, D. 2013, '<a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2094254">Toward a Supply-side Theory of Financial Innovation</a>', 41:2, <em>Journal of Comparative Economics</em> 401.</p> <p>Borio, C. 2012, “The Financial Cycle and Macroeconomics: What Have We Learned?” BIS Working Paper 395, Bank for International Settlements </p><p>Datz, G. 2013, “The Narrative of Complexity in the Crisis of Finance: Epistemological Challenge and Macroprudential Policy Response”, &nbsp;New Political Economy, 18:4. </p> <p>Dew, J.K. 2007, “Why are Profits from Financial Innovation So Difficult to Identify? Innovation Clusters and Productive Opacity”, NFI Working Paper No. 2006-WP-13, February. </p><p>Mehrling, Perry and Pozsar, Zoltan and Sweeney, James and Neilson, Daniel H., Bagehot was a Shadow Banker: Shadow Banking, Central Banking, and the Future of Global Finance (November 5, 2013). Available at SSRN: http://ssrn.com/abstract=2232016 or <a href="http://dx.doi.org/10.2139/ssrn.2232016">http://dx.doi.org/10.2139/ssrn.2232016</a></p> <p>McCulley, P. and Z. Pozsar 2013, “Helicopter Money: &nbsp;Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation”, Global Society of Fellows, January. </p> <p>McCulley, P., 2009, “The Shadow Banking System and Hyman Minsky’s Economic Journey”, Research Foundation of CFA, December, 5:1. </p> <p class="Default">McCulley, P. and Z. Pozsar 2013, “Helicopter Money: &nbsp;Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation”, Global Society of Fellows, January. </p> <p>Ghosh, S., I.&nbsp;&nbsp; Gonzalez del Mazo, and İnci Ötker-Robe, 2012, Chasing the Shadows: How Significant Is Shadow Banking in Emerging Markets?, <em>Economic Premise</em>, No. 88, The World Bank. </p> <p>Keen, S. 2011, Debunking Economics - Revised and Expanded Edition: The Naked Emperor Dethroned? London: Zed Books. </p> <p>Murphy, R. 2009, “Defining the Secrecy World. Rethinking the language of ‘offshore’, Tax Justice Network. </p> <p>Nesvetailova, A. and R. Palan, 2013, “Sabotage in the Financial system: Lessons from Veblen”, <em>Business Horizons</em>, November. </p> <p>Palan, R. and A. Nesvetailova, 2014, “Elsewhere, Ideally, Nowhere: Shadow Banking and Offshore Finance”, CITYPERC Working paper 2014-01, <a href="http://www.city.ac.uk/arts-social-sciences/international-politics/research/cityperc/working-papers">City Political Economy Research Centre</a>, City University London. </p> <p>Pettifor, A. 2014, Just Money <a href="http://www.primeeconomics.org/?wpsc-product=just-money-how-society-can-break-the-despotic-power-of-finance">&nbsp;– How Society Can Break The Despotic Power Of Finance</a>, London: Commonwealth/PRIME. </p> <p>Singh, M., 2011, “Velocity of Pledged Collateral: Analysis and Implications”, IMF Working paper 11/256, International Monetary Fund. </p> <p>Tett, G., 2010, “Silos and silences.<strong> </strong>Why so few people spotted the problems in complex credit and what that implies for the future<em>”, Financial Stability Review No.14</em>, Banque de France. </p> <p>Turner, A. 2013, “Credit, Money and Leverage: What Wicksell, Hayel and Fisher Knew and Modern Macroeconomics Forgot”, Stockholm School Of Economics Conference&nbsp; on: Towards <em>a&nbsp; Sustainable&nbsp; Financial System", </em>Stockholm, 12 September 2013. </p> <p>&nbsp;</p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/steve-keen/keen-krugman-debate">The Keen-Krugman debate</a> </div> <div class="field-item even"> <a href="/ourkingdom/geoffrey-ingham/whose-money-is-it">Whose money is it?</a> </div> </div> </div> </fieldset> uk openEconomy uk banking finance financial crisis money Just Money Anastasia Nesvetailova Thu, 27 Feb 2014 00:11:11 +0000 Anastasia Nesvetailova 79746 at https://www.opendemocracy.net The Keen-Krugman debate https://www.opendemocracy.net/ourkingdom/steve-keen/keen-krugman-debate <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>The debate between these two economists on the role of banking and specifically the creation of credit is of fundamental importance in understanding the shortcomings of orthodox economic thinking - and why it was so ill-equipped to handle, let alone predict, the crash of 2008.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/card.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/card.jpg" alt="" title="" width="400" height="267" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Flickr/Thiru Murugan</span></span></span></p><p><em>Introduction by Ann Pettifor</em></p><p>Many rightly applaud Paul Krugman for using his platform at the <em>New York Times</em> to defend further fiscal stimulus in the US--against a hostile political crowd, not to mention the downright opposition of neo-liberal economists--and we commend him for that.</p> <p>However, because he has such an important platform, it matters more to many monetary economists (including the editor of this series) that he appears to lack a proper understanding of the nature of credit, and the role of banks in the economy. In one of his columns Professor Krugman wrote: </p> <p>“As I (and I think many other economists) see it, banks are a clever but somewhat dangerous form of financial intermediary... For in the end, banks don’t change the basic notion of interest rates as determined by liquidity preference and loanable funds... Banks don’t create demand out of thin air any more than anyone does by choosing to spend more; and banks are just one channel linking lenders to borrowers.” (March 27, 2012, Banking Mysticism, <em>New York Times</em>).</p> <p>Krugman thus supports what monetary reformers like Prof Steve Keen identify as the orthodox ‘Loanable Funds Theory’ – often (wrongly) defined as “Keynesian”. Professor Mankiw of Harvard, a prominent neoliberal economist, defines ‘Loanable Funds Theory’ this way: “Saving is the supply of loans – individuals lend their saving to investors or they deposit their saving in a bank that makes the loans for them.&nbsp; Investment is the demand for loans – investors borrow from the public directly by selling bonds or indirectly by borrowing from banks.” (Mankiw, <em>Macroeconomics</em>, p.65). </p> <p>According to this theory money for loans is provided by savers, and the ‘price’ (or rate of interest) for loans is determined by changes in demand and supply of ‘loanable funds’. Credit does not appear to enter into the theory. Mankiw and Krugman do not appear to accept that banks create credit--“out of thin air”--on the guarantee of collateral, a contract to repay over a fixed time period, and at a certain rate of interest. Instead, according to this view, they are simple intermediaries between savers and borrowers; between those who are ‘patient’ savers and ‘impatient’ borrowers. </p> <p>We fundamentally disagree, and argue that it is this misunderstanding of the nature of credit and the role of bankers that led to reckless de-regulation of the finance sector, and ultimately to many financial crises.</p> <p>The piece below is Steve Keen´s final response to Krugman in a long exchange that began in March of 2012. It serves as an excellent introduction to the ongoing debate within professional economics about the nature of credit and bank money, the role of banks, and the impact of credit (or debt) in generating demand within the economy.</p> <p>Ann Pettifor</p> <p>&nbsp;</p> <p><strong>Oh My, Paul Krugman Edition, by Steve Keen<br /></strong></p><p>What a difference a year (and three-quarters) makes. Back in March of 2012, Paul Krugman rejected the argument I make that new debt creates additional demand:</p> <p class="Quote">&nbsp;“(Steve) <strong><em>Keen then goes on to assert that lending is, by definition (at least as I understand it), an addition to aggregate demand. I guess I don’t get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand.</em></strong> Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I’m not sure what. I think it has something to do with the notion that creating money = creating demand, but again that isn’t right in any model I understand.” (Krugman, “<a href="http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/?_r=0">Minsky and Methodology (Wonkish)</a>”, March 27, 2012)</p> <p>Then late last year, this argument turned up in his musings about the secular stagnation hypothesis:</p> <p class="Quote">“Start with the point I’ve raised several times, and others have raised as well: underneath the apparent stability of the Great Moderation lurked a rapid rise in debt that is now being unwound… <strong><em>Debt was rising by around 2 percent of GDP annually; that’s not going to happen in future, which a naïve calculation suggests means a reduction in demand, other things equal, of around 2 percent of GDP.</em></strong>” (Krugman, “<a href="http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/?_r=0">Secular Stagnation Arithmetic</a>”, December 7, 2013)</p> <p>Don’t get me wrong: I’m glad that Krugman <strong><em>may</em></strong> finally be starting to support the case that I (and some other endogenous money theorists like <a href="http://www.youtube.com/watch?v=cCsxKy6Lbvg">Michael Hudson</a> &amp; <a href="http://www.youtube.com/watch?v=nyGKs-M8SeU">Dirk Bezemer</a>) have been making <a href="http://www.debtdeflation.com/blogs/wp-content/uploads/papers/Keen1995FinanceEconomicBreakdown_JPKE_OCRed.pdf">for many years</a>: that rising debt directly adds to aggregate demand. If he is, then welcome aboard. Though there’s doubt as to whether Keynes ever uttered the words attributed to him that “when the facts change, I change my mind. What do you do, sir?”, I’m happy to accept this shift in that spirit.</p> <p>But I don’t want to see this change in analysis sneak under the radar either: It deserves acknowledgement as a major shift in the thinking of a major figure in contemporary economics. It calls for a theory in which this is possible: a theory in which an increase in debt causes a commensurate increase in demand. </p> <p>In the neoclassical Loanable Funds universe, only if the lender is a miser and the borrower a spendthrift will demand rise all that much. Generally, mainstream economists downplay this possibility—ignoring issues of the distribution of income in the process of course. But they are right to regard this as a “second order” effect. The trouble is that they also turn a blind eye to “first order effect” that a bank doesn’t have to “save” in order to be able to lend.</p> <p>This blindspot in the neoclassical approach to debt and banking is easily illustrated using a couple of lines of bookkeeping. </p><p> The neoclassical vision of saving as modelled by Krugman (after inserting an implicit banking sector into Krugman’s bank-less model) is shown in Table 1. From this perspective, lending makes no difference to the level of aggregate demand (unless the impatient agent has a markedly higher propensity to spend) because lending does not change the amount of money in circulation—it only alters its distribution by reducing the amount in Patient’s account and increasing the amount in Impatient’s. The banking sector’s assets are ignored because the bank is treated as a “mere intermediary” that facilitates the loan between depositors (and maybe charges a fee for the service) but otherwise does nothing.</p><p>Table 1</p> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/table 1.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/table 1.JPG" alt="" title="" width="400" height="40" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Click to enlarge</span></span></span></p> <p>The endogenous money vision is shown in Table 2. Here bank assets play an essential role: the bank loan increases its assets and its liabilities in one step. Bank lending therefore increases the amount of money in circulation, and adds to the spending power of the “Impatient agent” (in practice, normally either an investor or a Ponzi speculator) without subtracting from the spending power of the “Patient agent”. Aggregate demand increases because the increase in debt increases the amount of money in circulation. </p> <p>Table 2: Endogenous money perspective on lending </p> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/Table 2.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/Table 2.JPG" alt="" title="" width="400" height="39" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Click to enlarge</span></span></span></p><p>Table 2 is not only more faithful to Minsky’s vision: it is also more realistic. Real world lending is not a transfer of money from one depositor’s account to another’s, but a contract between a bank and a borrower in which the bank credits the borrower’s account (thus increasing the bank’s liabilities). in return for the borrower agreeing to be in debt to the bank for the same amount (thus increasing the bank’s assets). This increases the aggregate amount of money in circulation, increasing aggregate demand in the process—and predominantly finances investment or speculation rather than consumption. Contrary to neoclassical a priori logic, the level of private debt has serious macroeconomic effects, and plays a dominant role in setting asset prices. </p> <p>Considering this, we <strong>must</strong> abandon the “Loanable Funds” model of lending, which treats banks as “mere intermediaries” and therefore ignores them in macroeconomics. Loanable Funds has to go and a truly monetary approach to economics, in which banks, debt and money play integral roles, has to take its place. Loanable Funds is a kindred spirit to the Classical Physics assumption that <a href="http://en.wikipedia.org/wiki/Maxwell%27s_equations#Limitations_for_a_theory_of_electromagnetism">energy was infinitely divisible</a>: if one goes—continuous energy for physics; Loanable Funds for economics—then so does the other—Maxwellian Physics back then; the still dominant non-monetary approach to macroeconomics for economics today.</p> <p>Krugman’s recent “naïve calculation” throws out the latter. Will he now also ditch the former? That would be a <strong><em>really</em></strong> big shift, because until now he has been the staunchest defender of Loanable Funds, and derisory of the alternative “Endogenous Money” model, in which banks play an essential role in macroeconomics. In a series of posts—“<a href="http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/?_r=0">Minsky and Methodology</a>”. “<a href="http://krugman.blogs.nytimes.com/2012/03/27/banking-mysticism/">Banking Mysticism</a>”, “<a href="http://krugman.blogs.nytimes.com/2012/03/30/banking-mysticism-continued/">Banking Mysticism, Continued</a>”, “<a href="http://krugman.blogs.nytimes.com/2013/08/24/commercial-banks-as-creators-of-money/">Commercial Banks as Creators of ‘Money’</a>” to name a few—he has heaped ridicule both on the proposition that banks matter in macroeconomics, and on the people who make that case.</p> <p>Clearly he’s been rude—and ill-informed—in doing so. And he’s been rudest to me of all (see “<a href="http://krugman.blogs.nytimes.com/2012/04/02/oh-my-steve-keen-edition/">Oh My, Steve Keen Edition</a>”). But if he does abandon Loanable Funds, then “all is forgiven”, because I’m convinced that the Neoclassical belief in Loanable Funds is the biggest barrier there is to the development of a realistic, monetary macroeconomics. If Krugman gives way on this belief, then maybe there’s hope that Central Banks and Treasuries around the world will eventually do so too. They might finally start to develop economic policies that reduce the problems caused by the crisis, rather than making them worse.</p> <p>[Keen has gone on to write more about this topic, including a “Post Keynesian” model that shows how bank lending adds to aggregate demand, and comments on Nick Rowe´s “Neoclassical” explanation of the same phenomenon. This can be found on Keen’s website <a href="http://www.debtflation.com/">www.debtflation.com</a> and on his column on Business Spectator <a href="http://www.businessspectator.com.au/contributor/steve-keen">http://www.businessspectator.com.au/contributor/steve-keen</a>.]</p><p>&nbsp;</p><p><strong><em>This article is part of the OurKingdom series, <a href="http://www.opendemocracy.net/ourkingdom/collections/just-money#1">Just Money</a>, examining some of the themes in Ann Pettifor's new ebook</em><em> </em>Just Money: How Society Can Break the Despotic Power of Finance,<em> published by Commonwealth. It is available on <a href="http://www.amazon.co.uk/gp/product/B00HTAI3YY/ref=as_li_ss_tl?ie=UTF8&amp;camp=1634&amp;creative=19450&amp;creativeASIN=B00HTAI3YY&amp;linkCode=as2&amp;tag=opendemocra0e-21">Kindle</a> and <a href="http://commonwealth-publishing.com/2014/02/12/just-money/">via Paypal in pdf format</a>. You can donate to OurKingdom’s work <a href="http://www.opendemocracy.net/ourkingdom/donate">here</a>.</em></strong></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/geoffrey-ingham/whose-money-is-it">Whose money is it?</a> </div> <div class="field-item even"> <a href="/ourkingdom/ann-pettifor/we-can-end-despotism-of-finance-at-price">We can end the despotism of finance, at a price</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk openEconomy uk UK money financial crisis finance banking Just Money Steve Keen Wed, 26 Feb 2014 00:11:11 +0000 Steve Keen 79698 at https://www.opendemocracy.net Whose money is it? https://www.opendemocracy.net/ourkingdom/geoffrey-ingham/whose-money-is-it <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:PunctuationKerning ></w> <w:ValidateAgainstSchemas ></w> <w:SaveIfXMLInvalid>false</w:SaveIfXMLInvalid> <w:IgnoreMixedContent>false</w:IgnoreMixedContent> <w:AlwaysShowPlaceholderText>false</w:AlwaysShowPlaceholderText> <w:Compatibility> <w:BreakWrappedTables ></w> <w:SnapToGridInCell ></w> <w:WrapTextWithPunct ></w> <w:UseAsianBreakRules ></w> <w:DontGrowAutofit ></w> </w:Compatibility> <w:BrowserLevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--></p><p><!--[if gte mso 9]><xml> <w:LatentStyles DefLockedState="false" LatentStyleCount="156"> </w:LatentStyles> </xml><![endif]--><!--[if gte mso 10]> <mce:style><! /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} --> <!--[endif] --> </p><p>Money is currently produced by a ‘public-private partnership’ between the state and the financial sector, a partnership whose nature remains obscure to the great majority of the population. Is another distribution of knowledge – and hence of power – possible? This, argues, Geoffrey Ingham, remains the crucial question for socialists.</p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/money66_0.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/money66_0.jpg" alt="" title="" width="400" height="299" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Flickr/robjewitt</span></span></span></p><p>The basic structure of capitalist monetary systems originated in Europe during the 15th and 16th centuries[1]. The most distinctive feature has been the gradual integration of privately organised banking networks (giros), for clearing and settling payments between producers and traders, with states’ issue of public currencies. Was this, as is widely accepted, a process of ‘evolutionary selection’ which has produced an increasingly effective system? Or, do we have a suboptimal outcome that owes its existence to the advantages that it confers on the major agents – the banks and states? If it’s the latter, can we do better?</p> <p>Banks make profits by creating money from debt contracts with their borrowers who pay interest on the loans. It is essential to be clear that these are <em>private</em> <em>debts</em> (between two <em>private</em> agents: bank and borrower) which are transformed into <em>public money</em> (currency) by means of the links between the banks, the central bank, and in turn the link between these two to the state. Modern banks don’t merely lend money that has been deposited by savers; rather new money is produced by loans that create deposits for a borrower. Private debts – what has been borrowed – are spent as public currency. It is often said that banks create money <em>ex nihilo</em> – that is, out of nothing. But this way of looking at the process derives from seeing money as a material ‘thing’, which is based upon the old metallic currency conception of money. In modern capitalism, money it is not produced from ‘nothing’; rather it originates in the borrower’s promise to repay the private debt to the bank. In short, banks undertake two activities that are essential for the capitalist system: they operate the payments system and they create the credit-money by which it is financed. </p> <p>In early modern Europe, private banks issued their own means of payment in the form of paper bills and notes which circulated within trading networks across Europe and the Near and Far East. The viability of these private payment networks was almost entirely dependent on the timely settlement of debts which, in turn, depended on the continuity of production and trade that made this possible. However, the vagaries of bad harvests and constant warfare, in addition to routine business failures and defaults, rendered the monetary networks unstable and fragile. Where states were able to establish a credible metallic standard and to impose and effectively collect taxes, denominated in their monetary measure of value (money of account), they were able to provide a stable public currency. In many regions, these two monetary systems remained quite separate and antagonistic – as in China and Islamic states. </p> <p>Private mercantile money enabled tax evasion (as it does today with Bitcoin and local exchange systems), and as a source of autonomous power it was resented by states. Despite the integration of private and public money in capitalism, the underlying antagonism has not been entirely eliminated. In the USA, for example, the conflict between democratic government and the ‘money powers’ persisted into the early twentieth century and surfaced again in the opposition between ‘Wall Street’ and ‘main Street’ in the wake of the Great Financial Crisis (GFC) of 2007-8[2]. But it is truly remarkable that this did not develop into a more radical and politically focused response.</p> <p>In some European states, especially England, from the late 17th century onwards, private mercantile money and states forged a relationship in which each eventually came to depend on the other for long-term survival. In pursuit of domestic and geopolitical power, states borrowed from the merchants, and thereby escaped from the financial straitjacket imposed by the scarcity of precious metal currency, without having to debase the coinage and risk loss of legitimacy. Loans to states were organised by consortia of private bankers in return for which they were granted the lucrative monopoly to form ‘public’ (later ‘central’) banks. In this way, paper bills and notes used in the private banking payments system were ‘hybridised’ with states’ metal currency. Private bankers had access to the state’s backing of the currency which, in turn, greatly enhanced the acceptability of their own notes. (In very small print at the top of today’s banknotes, the Bank of England still anachronistically ‘promises to pay the bearer the sum of £5’. This is now five base metal £1 coins, not five gold sovereigns issued by a royal mint.) Backed by the state, Bank of England notes, for example, were soon most in demand, and by the early twentieth century they eventually supplanted the private issue of banknotes by the myriad independent ‘country’ banks. By the late nineteenth century, the Bank of England was no longer a mere intermediary between the state and the banks. Rather, it had become the ‘lender of last resort’ by providing money to save the banking system from a destructive chain reaction of defaults during financial crises. This is now augmented by a routine drip feed of loans to the banking system which has been augmented since the GFC in the guise of ‘quantitative easing’. </p> <p>Thus private capitalist banks are able to ‘advance’ money into existence on the basis of the support they receive both routinely and in crises from the central bank and, in turn, from the state. Looking at the system from the other side of the links, we may say that the state ‘spends’ money into existence when its treasury, using its central bank account, pays for the goods and services that it buys from the private sector)[3]. These payments are deposited in the private banks, increasing their reserves held at the central bank which are available to maintain the economy’s payments system. Despite the recurrent crises, persistent malpractice, and predatory levels of remuneration coupled with incompetence, it could, with some effort, be argued that capitalist banks do discharge basic functions – the payments system is never seriously disrupted and some level of credit money continues to be created. However, as even this minimally acceptable performance now depends entirely on the support of the state and its central bank, it could be argued that the private banking system should be placed under public control on the grounds of both efficiency and equity. </p> <p>Currently, there is a lively debate in some academic economic circles about the ultimate point of origin of money creation – that is, a debate about ‘whose money is it’? Does money start its circuit from state expenditure or from advances by the banking system, including the central bank? Is the treasury account at the central bank merely a ‘useful fiction’ that reinforces the belief that governments need ‘our’ money in taxes? Does the state first need our taxes in order to spend or do we need to acquire the state’s money in order to pay them? In the absence of sufficient tax revenue states sell bonds to finance spending; but whose money does it borrow? Is it that which has been created in the private banking system or its own money that it has spent into existence[4]? Aside from the arcane technical details of the balance sheets and transfers between treasuries, central banks and the banking system, these questions are fundamentally about who has the power to create and control money. Arguably, this is the most important source of power in modern democracies, but it is largely outside democratic control. </p> <p>These arrangements--the pivotal ‘public-private partnership’ in capitalism--bring both benefits and costs. On the one hand, the transformation of private debts into public currency, especially after the abandonment of the gold standard, has enabled the vast expansion of finance upon which modern capitalism is based. It is a major source of ‘infrastructural power’ – that is, the means of collectively getting things done. On the other hand, a range of deleterious consequences follow from the private control of this collective capacity. The production of money is operated as a profitable franchise underwritten by the public sector. Banks make their money by selling debt and consequently there is a constant tendency for its volume to increase to the point at which destabilising defaults occur. Collective infrastructural social power and systemic fragility both increase simultaneously – a genuine contradiction for which, as such, there is no final resolution within the existing system. </p> <p>In the short term at least, as operators of the payments system and the immediate source of credit-money, private producers and controllers of money are ‘too big’ to be allowed to fail in the crises that their activities bring about. Furthermore, this monopoly power in the control of the production of credit money is exercised ‘despotically’ by the power to impose rates of interest and to rig markets to extract more value – as in the recent manipulation of the Libor rate and foreign exchange markets. In a further expression of the ‘too big to fail’ dilemma, regulators are increasingly reluctant to impose further large fines for these transgressions for fear of weakening the banks’ capital and ability to withstand crises.</p> <p>The complexity of this hybridisation of public and private functions means that the question of who is responsible for the aims and conduct of monetary policy remains obfuscated and continuously contested. For example, the government is engaged in a futile attempt to exhort banks to lend to small and medium enterprises, but cannot command them to do so. Given the self-inflicted damage of the GFC, banks prefer to repair their balance sheets. The impasse is entirely a result of the structure of the existing system. The ambiguous and vacillating status and role of central banks as expressed in their dual roles as agents of governments and guardians of the private banking system is a constant source of tension. For example, the fad for ‘independent’ central banks in the late twentieth century was intended to persuade foreign exchange markets that freedom from manipulation by profligate governments would enable them to control inflation. However, the façade of independent neutrality has become increasingly difficult to maintain since the crisis[5].&nbsp; </p> <p>What is to be done? This brief introduction to the question is not concerned with the widely discussed details<strong> </strong>of the proposed reforms to the existing system – increasing capital adequacy ratios; separation of the lending and payments settlement from speculation/investment banking and so on. Leaving aside the political struggle that it would involve, the focus here is on the fundamental issue of whether basic public-private linkage and the franchising of the state’s monetary sovereignty <em>could</em> be abolished. Moreover, this question is not merely about money, but entails two unresolved doubts about the possibility of a feasible democratic socialism. First, by what democratic means might a public agency reach an agreement on the principles and management of the supply of money – how much and to what ends? A necessary precondition for the formulation of any answer is an adequate theoretical understanding of money. In this way, the money question is soon shown to be <em>the</em> question. Second, the ‘socialist calculation’ debate of the 1920s and 1930s will have to be revisited. Opponents of socialism contended that as we can never have sufficient knowledge effectively to plan an economy, the adaptive reflexivity of decentralised (or ‘market’) mechanisms, including demand and supply for money, is the only viable alternative. </p> <p>&nbsp;</p> <p><strong><em>This article is part of the OurKingdom series, <a href="http://www.opendemocracy.net/ourkingdom/collections/just-money#1">Just Money</a>, examining some of the themes in Ann Pettifor's new ebook</em></strong><strong><em> </em>Just Money: How Society Can Break the Despotic Power of Finance,<em> published by Commonwealth. It is available on <a href="http://www.amazon.co.uk/gp/product/B00HTAI3YY/ref=as_li_ss_tl?ie=UTF8&amp;camp=1634&amp;creative=19450&amp;creativeASIN=B00HTAI3YY&amp;linkCode=as2&amp;tag=opendemocra0e-21">Kindle</a> and <a href="http://commonwealth-publishing.com/2014/02/12/just-money/">via Paypal in pdf format</a>. You can donate to OurKingdom’s work <a href="http://www.opendemocracy.net/ourkingdom/donate">here</a>.</em></strong></p> <p>&nbsp;</p> <p><strong>Notes</strong></p> <p>[1] A process I describe in chapter 6 of Ingham G., <em>The Nature of Money </em>(Cambridge: Polity, 2004).</p> <p>[2] See Johnson, S. and J. Kwak, <em>13 Bankers: The Wall Street Takeover and the Next Financial Crisis</em>, (New York: Pantheon, 2010).</p> <p>[3] See Wray R., <em>Modern Monetary Theory: A Primer on Macroeconomics for Sovereign Monetary Systems</em> (London: Palgrave, 2012).</p> <p>[4] See Wray, op. cit.</p> <p>[5] See Mann, G., ‘Monetary Exception: Labour Distribution and Money in Capitalism’, <em>Capital and Class</em>, 37, 2 (2013) for a Mann, G. (2013) ‘Monetary Exception: Labour Distribution and Money in Capitalism’, <em>Capital and Class</em>, 37, 2 for a penetrating analysis).</p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/ann-pettifor/we-can-end-despotism-of-finance-at-price">We can end the despotism of finance, at a price</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk openEconomy uk UK banking finance financial crisis money Just Money Geoffrey Ingham Tue, 25 Feb 2014 00:11:11 +0000 Geoffrey Ingham 79660 at https://www.opendemocracy.net We can end the despotism of finance, at a price https://www.opendemocracy.net/ourkingdom/ann-pettifor/we-can-end-despotism-of-finance-at-price <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p>To mark the publication of Ann Pettifor's e-book, <a href="http://commonwealth-publishing.com/2014/02/12/just-money/"><em>Just Money: How Society Can Break the Despotic Power of Finance</em></a>, OurKingdom are running <a href="http://www.opendemocracy.net/ourkingdom/collections/just-money#1">a series of articles</a> that explore the nature of money and the politics of the financial system. Here Pettifor launches the series and introduces some of its key themes.</p> </div> </div> </div> <p>After the 2008 global financial crisis and panic, the international banking system very nearly collapsed. In the days after Lehman Brothers failed, panic prevailed. ATMs were on the very brink of denying punters access to their own money. A prominent international banker advised his wife to withdraw all their funds from the banking system. </p> <p>To salvage the private banking system taxpayer-backed central banks intervened in ways that were (and remain) spectacular and historically unprecedented. Extraordinary monetary and other measures were and are still taken to bail out the finance sector’s big losers: reckless private bankers and financiers. Central bankers created trillions of dollars ‘out of thin air’ and used it to finance private bank bailouts. They went further: they lowered central bank base rates of interest charged to bankers – and have kept those rates extraordinarily low for almost six years - to slash the cost of borrowing for private bankers. </p> <p>Governments too bent over backwards to save bankers. They amplified the extraordinary largesse of their central banks by extending taxpayer-backed guarantees against losses. These guarantees hauled global banks back from the brink of bankruptcy. </p> <p>The result is a global casino in which the vast majority of taxpayers lose, and a favoured few continue with business as-better-than usual. And it’s one in which, despite the catastrophic failure of 2007-9 and its consequences, the finance sector continues to make unprecedented and unexpected gains.</p> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/goldman.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/goldman.jpg" alt="" title="" width="400" height="267" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Protest against Goldman Sachs. Flickr/SEIU International</span></span></span></p><p>At the same time the global economy persists in a state of weakness and stagnation: what Martin Wolf of the FT calls “a contained depression.” Unemployment across the world remains high and in some countries is higher than during the depression of the 1930s. Global financial imbalances persist – with countries like China and Germany building up surpluses, and others like the US and UK persisting with trade and capital account deficits. Fiscal deficits exploded after the crisis, as a result of rising unemployment, a collapse in tax revenues and bank bailouts. Social and political upheavals are inevitable. And, as the recent emerging market instability revealed, the global financial system remains wildly volatile and unpredictable. Most worrying of all: the threat of deflation stalks the Eurozone and beyond. </p> <p>There are three lessons from this experience. </p> <p>First: as the global bank bailout revealed, in a well-developed monetary system with the apparatus of a central bank and with its own currency – there is never a shortage of money. As Prime Minister Cameron recently reminded us when he addressed the flooding crisis facing voters in Conservative constituencies, and soon after he had declared that Britain “is nearly bankrupt”: “<a href="http://www.newstatesman.com/politics/2014/02/camerons-declaration-money-no-object-has-destroyed-his-austerity-message">Money is no object</a>” for a government bent on funding a solution. </p> <p>In the real world, where billions of people live, money is always scarce. There is no money, we are told, for transforming the economy away from fossil fuels; for reducing poverty, caring for the vulnerable, creating jobs, providing affordable childcare, tackling diseases, or for educating every one of the world’s children. </p> <p>Denmark’s Social Democrat government and central bank recently argued that “there is no money” to fill a hole in the finances of a state-owned energy company that had made an operating loss of DKr6bn in 2012. This created an opening for Goldman Sachs – the investment bank memorably described by Matt Taibbi as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.&nbsp; </p> <p>Goldman was invited by Denmark’s Social Democrats to take a 19% stake in Dong energy. With this minority stake the Danish government has allowed the bank to leverage enormous power over the taxpayers of Denmark. Goldman now has veto rights over the state-owned company’s business plan, its CEO or finance director, acquisitions or the sale of new shares. </p> <p>Second: if private wealth holders who gamble are then granted government bailouts, protection from losses and subsidies for speculation, then we are no longer dealing with anything resembling a free market system. If those who make investment decisions are protected from the consequences – if the link between risk and reward is broken, as it was in the centrally planned Soviet economies – then the market system breaks down. Today’s global capital “free-market” system exists only in the imaginations of orthodox economists.</p> <p>The third, and most important, lesson for citizens of democratic states is this: the small elite that controls the global finance sector has succeeded in capturing, effectively looting, and then subordinating democratic governments and their taxpayers to the interests of those who possess private wealth. Citizens who value democracy and its institutions have a duty to regain control over finance, and to render the sector servant, not master, of their economies. </p> <p>On the day Goldman Sachs was granted its stake in Denmark’s Dong Energy, its despotic power was made plain: the chairman was promptly <a href="http://www.windpoweroffshore.com/article/1229437/dong-chairman-bows">sacked.</a> 80% of Danes bitterly opposed the Prime Minister’s deal in a poll, and thousands turned out to demonstrate in front of Parliament. Their protests merely served to emphasise the political impotence of the Danish people, the weakness of their democratic institutions, and the contempt they are held in by both bankers and politicians. </p> <p>To maintain its hold over the global economy, financiers backed by their friends in the media and politics increasingly demand that democratic institutions be further weakened or hollowed out. Only recently the <em>Economist</em> <a href="http://www.economist.com/news/leaders/21595904-if-ever-europe-needed-competent-reformer-new-ideas-it-now-lagarde-president">called for</a> an unelected bureaucrat, Ms Lagarde, to be <em>appointed </em>as EU president, and complained that the <em>election </em>of president would make the EU bureaucracy "even more beholden to Parliament." </p> <p>Thanks to the growth of “<em>offshore </em>capitalism”-–operating beyond government regulation or taxation, but simultaneously backed by almost unconditional <em>onshore </em>taxpayer guarantees and protection--the finance sector can now make massive speculative and almost risk-free gains. Because there has been no meaningful effort by governments to reform or re-regulate the global financial system, and given the systemic threat the global banking system continues to pose, financiers grip on democratic institutions and resources tightens. </p> <p>This series has been commissioned to shine a light on the nature of money, on the global financial system and to deepen awareness of the urgent need to defend our democratic systems from the rapacious greed of the global finance sector. </p> <p>In the series we explain how, in the words of Geoffrey Ingham, “private capitalist banks are able to ‘advance’ money into existence on the basis of the support they receive both routinely and in crises from the central bank and, in turn, from the state.” Steve Keen draws attention to the flaws in orthodox economics’ foundational ideas about money – ideas upon which the flawed economic theory of globalisation is built. Jeremy Smith exposes the way in which orthodox economists have deliberately contrived “pejorative language” to frame and ridicule the regulation of finance as “financial repression” – a term re-defined as “technical” by the prominent economist, Carmen Reinhart. Anastasia Nesvetailova explores the world of “shadow banking&nbsp; - a complex network of credit intermediation outside the boundaries of the traditional, regulated bank.” Costas Lapavistas, author of <em>Profiting without Producing,</em> examines “the response of Marxist political economy to the most gigantic turmoil of world capitalism since the end of the World War II.”</p> <p>The series also examines solutions. Lucca Fantacci makes a proposal for “reuniting the monetary union” of the Eurozone. Douglas Coe proposes that the head of the IMF should follow through on her assertion that the financial system should “serve rather than rule the real economy”; and encourages her bold vision for multinational cooperation and an agenda for monetary reform. </p> <p>The series illuminates an important truth: that at the heart of western democratic institutions are our publicly managed <em>monetary systems </em>that have evolved over centuries. As a result of bloody struggles between private wealth and wider society, they emerged as a <em>public</em> infrastructural resource, for all, not just the few. They can be reclaimed by the people, for the people. But this will only happen if we grasp the origins and nature of money, and spread broader understanding of the financial system. Once we overcome our reluctance, money ceases to combine the inevitability of nature and the power of taboo. It becomes a shared resource, an instrument for securing the common good. </p> <p>If we are to reclaim the public good that is the monetary system; if we are to once again subordinate the small elite that makes up the finance sector to the interests of society and the economy as a whole, there must be greater understanding, and democratic and accountable oversight of the system.</p> <p>The current order exploits the natural diffidence of the inexpert. It mobilises the resources of patriarchy and the misleading insights of every day life, comparing for example a household budget to the government’s budget. Its defeat will require that we give up an all-encompassing structure of sentiment. </p> <p>The price, and there is always a price, is the transformation of ourselves. Our naïve intuitions about money will have to give way, and we will have to forego the pleasures of irresponsibility. </p> <p>We know that finance can be reformed, because in our recent history, after the 1929 financial crash and the Second World War, society succeeded in wrenching control of the monetary system back from a reckless and greedy wealthy elite.&nbsp; The period that followed is still known as the ‘golden age’ of economics. </p> <p>We must learn from that experience, and prepare to once again wrench back control of the monetary system for society as a whole. This series will, we hope, provide a start. </p> <p>&nbsp;</p> <p><strong>Ann Pettifor’s<em> <a href="http://commonwealth-publishing.com/2014/02/12/just-money/">Just Money: How Society Can Break the Despotic Power of Finance</a> </em>is available on <a href="http://www.amazon.co.uk/Just-Money-Society-Despotic-Finance-ebook/dp/B00HTAI3YY/ref=sr_1_1?ie=UTF8&amp;qid=1393155606&amp;sr=8-1&amp;keywords=Ann+Pettifor">Kindle</a> and <a href="http://commonwealth-publishing.com/2014/02/12/just-money/">via Paypal in pdf format</a>. This article is part of the OurKingdom series, <a href="http://www.opendemocracy.net/ourkingdom/collections/just-money#1">Just Money</a>. You can donate to OurKingdom’s work <a href="http://www.opendemocracy.net/ourkingdom/donate">here</a>.</strong></p><div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk openEconomy uk UK austerity banking finance financial crisis money Just Money Ann Pettifor Mon, 24 Feb 2014 00:11:11 +0000 Ann Pettifor 79622 at https://www.opendemocracy.net Frankenstein's bankers - the tale every taxpayer should know https://www.opendemocracy.net/ourkingdom/keith-fisher/frankensteins-bankers-tale-every-taxpayer-should-know <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p><span style="font-size: 13px; line-height: 1.5;"><img style="float: right;" src="http://www.opendemocracy.net/files/ok-friday-essay.png" alt="" width="50" />It is now 5 years since the banking crash but its effects are still with us. What exactly happened, what has the world done about it, and is there anything to stop something similar happening again?</span></p> </div> </div> </div> <p><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/Frankenstein.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/Frankenstein.jpg" alt="" title="" width="400" height="312" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'> Some rights reserved by Mike Licht, NotionsCapital.com</span></span></span></p><blockquote><p>Alas! I had turned loose into the world a depraved wretch, whose delight was in carnage and misery.</p><p>(Mary Shelley, <em>Frankenstein</em>)</p></blockquote> <p>Like most human creations, money and banking can, when misunderstood, turn against their creator, taking on a destructive, out-of-control life of their own. Thus, after the collapse of the US banking system in 1929 and the following international economic depression of the 1930s, economists and politicians of the era came to understand the inherently volatile nature of money and banking, and they implemented strong measures aimed at taming and harnessing the financial sector in the service of the common good. However, over time this knowledge faded from memory, and economics, though aspiring to the status of science, actually regressed; as a senior economic analyst at the International Monetary Fund (IMF) put it recently, “for many decades in the interim, banks have almost been completely off the radar screen of macroeconomics. So we're starting again at a point that's almost pre-World War I.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote1sym">1</a> As a result, from the 1960s the national and international regulation that had helped maintain a relatively stable banking system was dismantled, while new financial developments and innovations received minimal attention from outside the financial markets and, despite warning signs, elicited little regulatory response – culminating in the immense financial crash of 2007-8.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote2sym">2</a></p> <p>Possibly the most striking revelation to emerge from the financial crisis is how detached from reality mainstream academic economics had become. Most astonishingly, it omitted any serious study of money and banking.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote3sym">3</a> The IMF's chief economist admitted, “We assumed we could ignore the details of the financial sector”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote4sym">4</a>; the Governor of the Bank of England noted, “money, credit and banking play no meaningful role” in standard economic models<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote5sym">5</a>; and a professor of finance acknowledged that economists “simply didn't believe the banks were important.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote6sym">6</a> The reason for this was that in contrast to economists of the 1930s to 50s, later economists reverted to very simplistic, and fundamentally misleading, ideas about money and banking.</p> <p>Current mainstream economics regards the state, or central banks, as controlling the supply of money in the economy and views commercial banks as functioning essentially as intermediaries between savers and borrowers. In fact, in the prevalent system of what is known as 'fractional reserve banking', about 97% of money is created by private commercial banks. This act of money creation takes the form of banks' extension of loans to borrowers, whereby a bank simply adds the amount of a loan to the borrower's account, held on computer (or, in earlier decades, in written ledgers). Thus, banks are fundamentally money creators rather than intermediaries. Savings ultimately derive from loans, not the other way round; in other words, debt is necessary for 97% of our money supply. Furthermore, this process of credit-creation is constrained only by banks' judgements of the likelihood of repayment of loans, and not by the monetary policies adopted by the state or central banks.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote7sym">7</a></p> <p>The implications of these, unbelievably largely forgotten, fundamental facts are huge, encapsulated in the statement of one of the few prominent figures who are beginning to remember, the former chairman of the UK Financial Services Authority (FSA), Lord Adair Turner: “The financial crisis of 2007/08 occurred because we failed to constrain the private financial system's creation of private credit and money.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote8sym">8</a> The central problem is that this system of money and banking is inherently economically unstable. Banks have an incentive to create as much money as they can, due to the interest they earn on the credit they issue. Ironically, it is often more immediately profitable for banks to lend to non-productive sectors, such as for mortgages and to other parts of the financial sector, than to the productive economy. This generates a mirage of prosperity, encouraging further demand for, and issuance of, credit, in what becomes an unsustainable, credit-induced bubble.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote9sym">9</a> As the chief economics commentator at the <em>Financial Times</em> put it, “the essence of the contemporary monetary system is the creation of money, out of nothing, by private banks' often foolish lending.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote10sym">10</a> The bubble will inevitably burst, or at least deflate, creating economic and social fallout, particularly if banks themselves collapse in the process; as Turner says, “Banks which can create credit and money to finance asset price booms are thus inherently dangerous institutions.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote11sym">11</a></p> <p>The costs of this system to society are immense. Most obviously, and absurdly, it means that since nearly all money is actually debt, we are having to pay vast sums, in interest, to private banks for creating money out of nothing, simply so we can have enough money in circulation for a functioning economy.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote12sym">12</a> Secondly, since we are so utterly dependent on banks for 'holding' our money and enabling us to make and receive payments, they enjoy a further huge hidden public subsidy for being too important to fail, a subsidy that becomes painfully apparent when they have to be bailed out by the state.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote13sym">13</a> As the Governor of the Bank of England put it, for the banks it is “a case of heads I win, tails you – the taxpayer – lose.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote14sym">14</a> Further ways in which the financial sector is a drain on society include its tendency to raise house prices far ahead of wages, due to the high proportion of credit that it extends for mortgages rather than for socially beneficial economic activity<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote15sym">15</a>; and the tax avoidance schemes it devises, that allow large corporations, wealthy individuals and the banks themselves to shift the collective tax bill over to ordinary businesses and citizens.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote16sym">16</a> Ironically, a highly profitable financial sector is often lauded as a major contributor to a nation's prosperity, when in fact these profits are accrued almost entirely at everyone else's cost. Overall, the financial sector is – as currently structured – parasitic upon society at large.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote17sym">17</a></p> <p>How was it that mainstream economic thinking forgot the lessons of the 1930s, of how banking could become so destructively dysfunctional and dangerously unstable? It was due to a complex interplay of ideological bias, financial sector influence and complacency.</p> <p>The Cold War encouraged a simplistic polarisation between the ideas of individualistic, free market capitalism on the one hand, as opposed to collective, state planned communism on the other.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote18sym">18</a> Among those defensive of capitalism, it became a matter of almost religious faith that the less business was regulated and coordinated by government, the better; the liberated forces of entrepreneurship and competition would spontaneously produce the best possible economic and social outcome. In synchrony, academic economists in the 'west' incorporated this idealised view of capitalism into the very foundations of their discipline, by assuming that the economy could be modelled essentially as the interaction of fully rational and informed economic agents, the sum of whose individually self-serving actions would translate into an efficient, stable system delivering the maximum benefit for all.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote19sym">19</a> Crucially, it was assumed that money would flow frictionlessly through this system to where is would be best put to use, as water naturally finds its level under the simple force of gravity. The business of banking, seen as a merely passive conduit for money to the underlying 'real' economy, could therefore be ignored.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote20sym">20</a> Unwelcome consequences of the free market – particularly in the financial sector – were pretty much defined out of existence<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote21sym">21</a>, and economists who studied such 'market failure' came to be dismissed as maverick.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote22sym">22</a> Mainstream economics, aping rigorous science, devoted itself to the elaboration of sophisticated mathematical models – based on assumptions about human economic behaviour, however, that were quite unreal.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote23sym">23</a> “As I see it,” wrote a Nobel Prize-winning economist a year after the height of the financial crisis, “the economics profession went astray because economists, as a group, mistook beauty, clad in impressive-looking mathematics, for truth.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote24sym">24</a> According to a former member of the Bank of England's Monetary Policy Committee, “the typical graduate macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so, may have set back by decades serious investigations of aggregate economic behaviour and economic policy-relevant understanding. It was a privately and socially costly waste of time and other resources.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote25sym">25</a></p> <p>Even in the decades immediately following the Great Depression, the powerful, well-connected banking lobby had managed to resist prudent financial regulation.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote26sym">26</a> But as mainstream economists – many of whom received funding from, and worked for, financial institutions – began to ignore the overall structure of the financial system, current and former bankers came to be seen as the only real 'experts' or possible candidates for official posts, despite all the obvious conflicts of interest.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote27sym">27</a> In the words of an unusually free-thinking former IMF chief economist, “A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote28sym">28</a> Banking legislation and accounting rules were written by and for bankers<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote29sym">29</a>, and financial innovation was encouraged, based on the universal justification that competition and market forces would inevitably render the financial sector stable, efficient and socially beneficial.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote30sym">30</a> Ironically, the contribution of prudential regulation to the relative stability of post-1930s banking added to the sense of complacency towards that very legislation. US Federal Reserve Chairman Alan Greenspan was typical in arguing that “modernization” of the financial sector was needed “to remove outdated restrictions that serve no useful purpose, that decrease economic efficiency,” and that “the self-interest of market participants generates private market regulation.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote31sym">31</a> In this spirit, a US regulatory agency's 2003 annual report featured a photo of a group of regulators and bankers taking a chainsaw, pruning shears and loppers to a stack of financial regulations.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote32sym">32</a></p> <p>And so, from the 1960s, the financial sector came to operate increasingly on the basis of unrestrained competition and became more globalised, as 'fire-break' controls on the permitted scope of banking activities, the scale of bank lending and international capital flows were removed<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote33sym">33</a> – the effects of which were magnified by the adoption of computer and communications technology. The structure of the financial system, therefore, became increasingly determined by whatever new innovations and schemes would generate the greatest profits for market players. In this fiercely competitive environment, banks came under greater pressure to maximise profits by lending as much as possible and putting any available capital to the most profitable use. They were thus impelled to push hard against the financial and regulatory limits they faced and to find new and increasingly sophisticated means of getting around them.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote34sym">34</a></p> <p>The key innovations to emerge were securitisation and credit derivatives, techniques of financial engineering designed to optimise lending and borrowing by dealing with the risks of repayment default in quite new ways.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote35sym">35</a> By securitisation, loans or anticipated cash-flows are repackaged to produce bonds, or securities. Whereas in the past banks extended loans and then kept them on their balance sheet until repayment, now they could sell these loans on to third party investors in the form of bonds.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote36sym">36</a> Similarly, with the use of credit derivatives third parties, acting somewhat like insurers, could take on the risk of repayment defaults, in return for a fee.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote37sym">37</a> The general idea – promoted by bankers and institutions such as the IMF – was that, according to the notion of 'market completion', money could now flow around the world more efficiently, as investors and borrowers could be matched across the globe by any manner of means. Thus, it was said, with securitisation and derivatives the risk of loan defaults could now be dispersed widely among willing investors rather than being concentrated in banks, thereby – crucially – making the banking sector more resilient.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote38sym">38</a> </p> <p>The reality, however, was quite the reverse. Since the sale of financial products was driven by the increasingly short-term profit motive, financial innovations were actually aimed primarily at hiding risk rather than reducing it.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote39sym">39</a> Banks could therefore get away with profiting from more reckless lending – for as long as “the delusions of this time” could be maintained, as the FSA put it.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote40sym">40</a> Highly elaborate and opaque mathematical models, touted by bankers as allowing the risk of complex new securities to be carefully controlled, were systematically over-optimistic and achieved a merely illusory precision.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote41sym">41</a> While many such securities initially looked good by reliably generating a high return over the short- or medium-term, this came with the hidden cost of greater long-term catastrophic risk.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote42sym">42</a> “IBGYBG,” short for “I'll be gone, you'll be gone,” became of a catch-phrase among these products' innovators and sellers, including the ratings agencies – primarily Moody's, Standard &amp; Poor's and Fitch – who earned colossal fees from giving their 'AAA' seal of approval to these innovations.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote43sym">43</a> When in 1996 the banks succeeded in having their own risk models incorporated into international banking standards (Basel II), this undermined precisely the kind of regulation that may have protected the banking system as a whole from those very models' biases and limitations.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote44sym">44</a></p> <p>By using credit derivatives, individual banks profited from regulatory loopholes in the insurance sector in a way that collectively made the banking system less stable.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote45sym">45</a> Derivatives were championed as increasing the 'price-discovery' powers of the market place, when in fact their use made the task of valuing companies, including banks, far more difficult. The proliferation of often complex and opaque derivative transactions – with many going unrecorded, 'over the counter' – meant that financial institutions became interconnected in such maddeningly complex ways that it became impossible really to know what types and levels of risk any bank – or the sector as a whole – was exposed to.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote46sym">46</a> Derivatives turned out to be, indeed, “financial weapons of mass destruction.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote47sym">47</a></p> <p>With the competitive drive for profits pressuring banks into putting any available capital to the most profitable use, they reduced their levels of 'idle' working capital to the bare minimum. To this end, banks relied increasingly on cheap short-term loans in order to honour day-to-day payments – in the form of interbank lending, and with so-called commercial paper and repurchase agreements or 'repo'.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote48sym">48</a> An executive at the US investment bank Bear Stearns recalled his firm's daily repo financing: “Our guys would borrow maybe $75 billion a day, ... most of it daily.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote49sym">49</a> Even many supposedly prudent high street banks across Europe began to adopt this short-term funding strategy. In other words, banks made money by maintaining only a dangerously wafer-thin buffer against cash-flow insolvency, or a liquidity crisis. Much of this bank borrowing derived from minimally regulated, and potentially flighty, money market mutual funds, bank-like institutions operating in a manner that avoids costly banking regulation.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote50sym">50</a></p> <p>An additional danger accompanying both derivatives and repos is that they were granted exemption from bankruptcy laws, measures designed to avert mass panic withdrawals of funds from companies to allow, at the very least, an orderly and fair distribution of funds to their creditors. However, financial institutions that are on the creditor side of derivative and repo contracts with an apparently faltering bank have both the incentive and the right rapidly to withdraw their funds, along with sizeable penalties, before others do, in a vicious circle leading to a 'run' on the fund. This protection against the risk of counterparty bankruptcy also seriously undermines the basic 'market discipline' of carefully having to monitor the creditworthiness of those one enters into contracts with.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote51sym">51</a></p> <p>Prudent regulation was evaded and risk concealed further by means of ever more elaborate accounting techniques (developed largely by the 'Big Four', comprising Deloitte, PwC, Ernst &amp; Young and KPMG) increasingly deployed by corporations including banks, and even governments.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote52sym">52</a> The widespread use of 'off-balance sheet' accounting – usually involving 'offshore' or low-regulation jurisdictions such as the City of London, the Cayman Islands or some US states – meant that company accounts, particularly those of banks, no longer presented a true picture of their financial condition, a basic requirement for averting fraud and enabling market forces to operate properly.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote53sym">53</a> “Accounting has become a new exercise in creative fiction,” declared the head of a prominent investment firm, while a member of an urgent task force at the Accounting Standards Board went as far as to argue that the banking collapse was “a crisis largely caused by accounting.”<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote54sym">54</a> </p> <p>Through the evolution and complex interplay of these financial innovations, there grew a vast 'shadow banking' system where banking activities are conducted out of range of even the light regulation covering standard banking.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote55sym">55</a> In the shadow banking system in particular, the traditional checks and balances of prudent, sustainable banking, based on transparency and accountability, all but disappeared, enabling bankers to profit from deception on an institutional scale. The financial crisis was caused by a sudden collapse in this shadowy system of smoke and mirrors – essentially a bank run within the financial sector. High street banks, which had become increasingly involved, directly or indirectly, in shadow banking, were therefore brought down with it.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote56sym">56</a></p> <p>Ironically, relative to the scale of the problem the causes of the crisis, in shadow banking, have barely been addressed at all, while the much trumpeted reforms of standard banking have been minimal<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote57sym">57</a> – largely due to intensive lobbying from the banking industry.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote58sym">58</a> The major part of the government, taxpayer-funded response to the crisis has been simply to re-inflate the bubble economy; most of the money supposedly pumped into our real economy through 'quantitative easing' has effectively disappeared into the financial sector.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote59sym">59</a> Hence the widespread view that further financial crisis is inevitable; one financial consultancy report predicts that excessive private sector money supply, asset price bubbles and financial crises will plague the global economy for the foreseeable future.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote60sym">60</a></p> <p>In supposedly democratic countries it is, in principle, the ordinary voting public that is responsible for how its society operates. However, the electorate has been denied the necessary analysis – whether from the news media or from genuinely informative public inquiries – of banking, money-creation, shadow banking and accounting.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote61sym">61</a> Were this provided we might, for example, begin to recognise the ways in which free-market finance inherently tends towards instability rather than stability<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote62sym">62</a>; to consider the case for replacing our current out-of-control, debt-based system of privatised money creation with a publicly accountable, prudent and measured system of money supply; to see a need radically to rewrite financial law from the ground up so that banking can rest on far simpler, solid foundations and reliably serve the public interest, rather than being a confused and frenzied casino that weighs down, distorts and destabilises our real economy<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote63sym">63</a>; and to bring accounting rules under democratic control as statutory legislation rather than being left to unaccountable, private bodies controlled by the accounting firms and their corporate clients.<a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote64sym">64</a> Just as Dr Frankenstein was responsible for creating a tragic human monster, so are we collectively ultimately responsible for our severely dysfunctional financial system and the activities of its bankers.</p><p>&nbsp;</p> <p><strong>&nbsp;</strong></p><p><em><strong><span>Liked this piece? Please donate to OurKingdom </span><a href="http://www.opendemocracy.net/ourkingdom/donate"><span>here </span></a><span>to help keep us producing independent journalism. Thank you.</span></strong></em></p><p><em><span>A more fully referenced version of this piece can be found <a href="http://www.flyingfish.org.uk/articles/bankers/frankenstein%27s-bankers.htm">here</a>.</span><strong><span>&nbsp;</span></strong></em></p><p><br /><span><strong>References</strong></span></p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote1anc">1</a>Michael Kumhof, 'The Chicago Plan Revisited', presentation at <a href="http://www.positivemoney.org/2013/04/video-from-the-conference-fixing-the-banking-system-for-good/" target="_blank">31st Annual Monetary Trade Conference: 'Fixing the Banking System for Good', Global Interdependence Center and LeBow College of Business, 17 April 2013</a>. See also <a href="http://www.positivemoney.org/conference-2013/" target="_blank">Victoria Chick, 'Why Don't Academics Understand Money?', presentation at 3rd annual Positive Money Conference, 'Modernising Money', 26 January 2013</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote2anc">2</a><a href="http://www.gpo.gov/fdsys/pkg/GPO-FCIC/content-detail.html" target="_blank">Financial Crisis Inquiry Commission (FCIC), </a><a href="http://www.gpo.gov/fdsys/pkg/GPO-FCIC/content-detail.html" target="_blank"><em>Financial Crisis Inquiry Report</em></a><a href="http://www.gpo.gov/fdsys/pkg/GPO-FCIC/content-detail.html" target="_blank"> (U.S. GPO: January 2011)</a>, ch.2-4; Nicholas Shaxson, <em>Treasure Islands: Tax Havens and the Men Who Stole the World</em> (London: Vintage Books, 2012), pp.73-102.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote3anc">3</a><a href="http://www.bis.org/publ/othp06.htm" target="_blank">Stephen G Cecchetti, Piti Disyatat &amp; Marion Kohler, 'Integrating financial stability: new models for a new challenge', Joint BIS-ECB Workshop, 'Monetary policy and financial stability', 10-11 September 2009</a>; Steve Keen, <em>Debunking Economics</em>, revised and expanded edition (London &amp; New York: Zed Books, 2011), pp.6,12-14.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote4anc">4</a>Quoted in <a href="http://www.fsa.gov.uk/static/pubs/speeches/1102-at.pdf" target="_blank">Adair Turner, 'Monetary and Financial Stability: Lessons from the Crisis and from classic economics texts', Speech at South African Reserve Bank, 2 November 2012</a>, p.10.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote5anc">5</a><a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech606.pdf" target="_blank">Mervyn King, 'Twenty years of inflation targeting', The Stamp Memorial Lecture, London School of Economics, 9 October 2012</a>, p.5</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote6anc">6</a>Franklin Allen, quoted in <a href="https://knowledge.wharton.upenn.edu/article/why-economists-failed-to-predict-the-financial-crisis/" target="_blank">'Why Economists Failed to Predict the Financial Crisis', </a><a href="https://knowledge.wharton.upenn.edu/article/why-economists-failed-to-predict-the-financial-crisis/" target="_blank">Knowledge@Wharton,</a><a href="https://knowledge.wharton.upenn.edu/article/why-economists-failed-to-predict-the-financial-crisis/" target="_blank"> 13 May 2009</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote7anc">7</a><a href="http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf%3F" target="_blank">Jarmoir Benes &amp; Michael Kumhof, 'The Chicago Plan Revisited', IMF Working Paper, August 2012</a>, pp.4-17;<em> </em>Keen, <em>Debunking Economics</em>, pp.305-14.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote8anc">8</a>Turner, 'Monetary and Financial Stability', p.19.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote9anc">9</a><a href="https://www.positivemoney.org/modernising-money/" target="_blank">Andrew Jackson &amp; Ben Dyson, </a><a href="https://www.positivemoney.org/modernising-money/" target="_blank"><em>Modernising Money: Why our monetary system is broken and how it can be fixed</em></a><a href="https://www.positivemoney.org/modernising-money/" target="_blank"> (London: Positive Money, 2012)</a>, pp.110-48,153,157,167-8; <a href="http://ssrn.com/abstract=2033959" target="_blank">Thorvald Grung Moe, 'Shadow Banking and the Limits of Central Bank Liquidity Support', Levy Economics Institute, April 2012</a>, pp.52-68.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote10anc">10</a><a href="http://www.ft.com/cms/s/0/93c4e11e-ec39-11df-9e11-00144feab49a.html#ixzz14yZBSY8z" target="_blank">Martin Wolf, '</a><a href="http://www.ft.com/cms/s/0/93c4e11e-ec39-11df-9e11-00144feab49a.html#ixzz14yZBSY8z" target="_blank">The Fed is right to turn on the tap</a><a href="http://www.ft.com/cms/s/0/93c4e11e-ec39-11df-9e11-00144feab49a.html#ixzz14yZBSY8z" target="_blank">', </a><a href="http://www.ft.com/cms/s/0/93c4e11e-ec39-11df-9e11-00144feab49a.html#ixzz14yZBSY8z" target="_blank"><em>Financial Times</em></a><a href="http://www.ft.com/cms/s/0/93c4e11e-ec39-11df-9e11-00144feab49a.html#ixzz14yZBSY8z" target="_blank">, 9 November 2010</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote11anc">11</a>Turner, 'Monetary and Financial Stability', p.8.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote12anc">12</a>Jackson &amp; Dyson, <em>Modernising Money</em>, pp.155-60.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote13anc">13</a><a href="http://www.bankofengland.co.uk/publications/Pages/news/2010/036.aspx" target="_blank">Andrew Haldane, 'The $100 Billion Question', </a><a href="http://www.bankofengland.co.uk/publications/Pages/news/2010/036.aspx" target="_blank"><em>Bank of England</em></a><a href="http://www.bankofengland.co.uk/publications/Pages/news/2010/036.aspx" target="_blank">, March 2010</a>, pp.2-6; Jackson &amp; Dyson, <em>Modernising Money</em>, pp.90-95,170-2.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote14anc">14</a><a href="http://news.bbc.co.uk/today/hi/today/newsid_9718000/9718062.stm" target="_blank">Mervyn King, 'The Today Lecture 2012', </a><a href="http://news.bbc.co.uk/today/hi/today/newsid_9718000/9718062.stm" target="_blank"><em>BBC Radio 4</em></a><a href="http://news.bbc.co.uk/today/hi/today/newsid_9718000/9718062.stm" target="_blank">, 2 May 2012</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote15anc">15</a>Jackson &amp; Dyson, <em>Modernising Money</em>, pp.125-6,144-5,148-9.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote16anc">16</a><a href="http://visar.csustan.edu/aaba/PINSTRIPEMAFIA.pdf" target="_blank">Austin Mitchell &amp; Prem Sikka, 'The Pin-Stripe Mafia: How Accountancy Firms Destroy Societies', Association for Accountancy &amp; Business Affairs, 2011</a>; <a href="http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf" target="_blank">J</a><a href="http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf" target="_blank">ames S. Henry, </a><a href="http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf" target="_blank">'</a><a href="http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf" target="_blank">The Price of Offshore Revisited'</a><a href="http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf" target="_blank">, </a><a href="http://www.taxjustice.net/cms/upload/pdf/Price_of_Offshore_Revisited_120722.pdf" target="_blank">Tax Justice Network, July 2012</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote17anc">17</a><a href="http://www.neweconomics.org/publications/entry/quid-pro-quo" target="_blank">Lydia Prieg, Tony Greenham &amp; Josh Ryan-Collins , </a><a href="http://www.neweconomics.org/publications/entry/quid-pro-quo" target="_blank"><em>Quid Pro Quo: Redressing the privileges of the banking industry</em></a><a href="http://www.neweconomics.org/publications/entry/quid-pro-quo" target="_blank">, New Economics Foundation, September 2011</a>; <a href="http://www.taxjustice.net/cms/front_content.php?idcat=150" target="_blank">Nicholas Shaxson and John Christensen, 'The Finance Curse', Tax Justice Network, May 2013</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote18anc">18</a>David Harvey, <em>A Brief History of Neoliberalism</em> (Oxford &amp; New York: Oxford University Press, 2005); Naomi Klein, <em>The Shock Doctrine: The Rise of Disaster Capitalism</em> (London: Allen Lane, 2007).</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote19anc">19</a>Keen, <em>Debunking Economics</em>, ch.3,8-10.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote20anc">20</a><cite>Jackson &amp; Ben Dyson, </cite><cite>Modernising Money</cite><cite>, pp.116-7; <a href="http://mpra.ub.uni-muenchen.de/15892/1/" target="_blank">Dirk J. Bezemer, '”No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models', 16 June 2009</a></cite><cite>.</cite></p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote21anc">21</a><cite>John Cassidy, </cite><cite>How Markets Fail: The Logic of Economic Calamities</cite><cite> (London: Penguin, 2009), ch.1-8.</cite></p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote22anc">22</a><cite><a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011Crisis_BP2_Multilateral_Surveillance.pdf" target="_blank">Angana Banerji, 'IMF Performance in the Run-Up to the Financial and Economic Crisis: Multilateral Surveillance', IMF Independent Evaluation Office, 9 December 2010</a></cite><cite>, pp.14-32; <a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011crisis_bp4_us_bilateral_surveillance.pdf" target="_blank">Sanjay Dhar, 'IMF Performance in the Run-Up to the Financial and Economic Crisis: Bilateral Surveillance of the United States', IMF Independent Evaluation Office, 9 December 2010</a></cite><cite>, pp. 24-31,51-63; <a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter1.pdf" target="_blank">FCIC, </a><a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter1.pdf" target="_blank">Financial Crisis Inquiry Report</a></cite><cite><a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter1.pdf" target="_blank">, pp.17-18</a>.</cite></p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote23anc">23</a><cite><a href="http://www.ifw-members.ifw-kiel.de/publications/the-financial-crisis-and-the-systemic-failure-of-academic-economics-1/KWP_1489_Titel_Financial_Crisis.pdf" target="_blank">D</a><a href="http://www.ifw-members.ifw-kiel.de/publications/the-financial-crisis-and-the-systemic-failure-of-academic-economics-1/KWP_1489_Titel_Financial_Crisis.pdf" target="_blank">avid Colander et. al., 'The Financial Crisis and the Failure of Academic Economics', Working paper No.1489, Kiel Institute for the World Economy, February 2009</a>; <a href="http://cje.oxfordjournals.org/content/33/4/759.abstract" target="_blank">Tony Lawson, 'The current economic crisis: its nature and the course of academic economics', </a><a href="http://cje.oxfordjournals.org/content/33/4/759.abstract" target="_blank">Cambridge Journal of Economics</a></cite><cite><a href="http://cje.oxfordjournals.org/content/33/4/759.abstract" target="_blank">, </a><a href="http://cje.oxfordjournals.org/content/33/4/759.abstract" target="_blank">Vol.33, Issue 4 (July 2009)</a></cite>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote24anc">24</a><a href="http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all" target="_blank">Paul Krugman, 'How Did Economists Get It So Wrong?' </a><a href="http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all" target="_blank"><em>New York Times</em></a><a href="http://www.nytimes.com/2009/09/06/magazine/06Economic-t.html?pagewanted=all" target="_blank">, 6 September 2009</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote25anc">25</a><a href="http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/#axzz2jxns0jhy" target="_blank">Willem Buiter, 'The unfortunate uselessness of most ‘state of the art’ academic monetary economics', Willem Buiter's Maverecon blog, </a><a href="http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/#axzz2jxns0jhy" target="_blank"><em>FT.com</em></a><a href="http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/#axzz2jxns0jhy" target="_blank">, 3 March 2009</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote26anc">26</a>Benes &amp; Kumhof, 'The Chicago Plan Revisited', p.19; Shaxson, <em>Treasure Islands</em>, pp.74-6.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote27anc">27</a><a href="http://www.chathamhouse.org/sites/default/files/public/International%20Affairs/2010/86_3baker.pdf" target="_blank">Andrew Baker, 'Restraining regulatory capture? Anglo-America, crisis politics and trajectories of change in global financial governance', </a><a href="http://www.chathamhouse.org/sites/default/files/public/International%20Affairs/2010/86_3baker.pdf" target="_blank"><em>International Affairs</em></a><a href="http://www.chathamhouse.org/sites/default/files/public/International%20Affairs/2010/86_3baker.pdf" target="_blank">, Vol.86, No.3 (2010)</a>; <a href="http://cje.oxfordjournals.org/content/36/1/43.full" target="_blank">Jessica Carrick-Hagenbarth &amp; Gerald A. Epstein, 'Dangerous interconnectedness: economists’ conflicts of interest, ideology and financial crisis', </a><a href="http://cje.oxfordjournals.org/content/36/1/43.full" target="_blank"><em>Cambridge Journal of Economics</em></a><a href="http://cje.oxfordjournals.org/content/36/1/43.full" target="_blank">, Vol.32, No.1 (January 2012)</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote28anc">28</a><a href="http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/" target="_blank">Simon Johnson, 'The Quiet Coup', </a><a href="http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/" target="_blank"><em>Atlantic Magazine</em></a><a href="http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/" target="_blank">, May 2009</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote29anc">29</a><a href="http://www.tandfonline.com/doi/abs/10.1080/09692290.2011.603669#.UoD5pqoicUQ" target="_blank">Ranjit Lall, 'From failure to failure: The politics of international banking regulation', </a><a href="http://www.tandfonline.com/doi/abs/10.1080/09692290.2011.603669#.UoD5pqoicUQ" target="_blank"><em>Review of International Political Economy</em></a><a href="http://www.tandfonline.com/doi/abs/10.1080/09692290.2011.603669#.UoD5pqoicUQ" target="_blank">, Vol.19, No.4 (October 2012)</a>; <a href="http://www.publications.parliament.uk/pa/jt201213/jtselect/jtpcbs/writev/panelontax/m23.htm" target="_blank">Prem Sikka, written evidence to Parliamentary Commission on Banking Standards, Panel on Tax, Audit and Accounting, 16 January 2013, p.5</a>9.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote30anc">30</a><a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011Crisis_BP2_Multilateral_Surveillance.pdf" target="_blank">Banerji, '</a><a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011Crisis_BP2_Multilateral_Surveillance.pdf" target="_blank">IMF Performance'</a>, pp.14-17,25-6; <a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011crisis_bp4_us_bilateral_surveillance.pdf" target="_blank">Dhar, '</a><a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011crisis_bp4_us_bilateral_surveillance.pdf" target="_blank">IMF Performance'</a>, pp.3-32.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote31anc">31</a>Quoted in FCIC, <em>Financial Crisis Inquiry Report</em>, pp.<a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter2.pdf" target="_blank">35</a>,<a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter4.pdf" target="_blank">53</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote32anc">32</a><a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter4.pdf" target="_blank">FCIC, ibid., p.53</a>; <a href="http://www.fdic.gov/about/strategic/report/2003annualreport/section1.pdf" target="_blank">Federal Deposit Insurance Corporation, </a><a href="http://www.fdic.gov/about/strategic/report/2003annualreport/section1.pdf" target="_blank"><em>2003 Annual Report</em></a><a href="http://www.fdic.gov/about/strategic/report/2003annualreport/section1.pdf" target="_blank">, p.13</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote33anc">33</a><a href="http://www.rooseveltinstitute.org/sites/all/files/Glass%20Steagall.pdf" target="_blank">Raj Date &amp; Michael Konczal, 'Out of the Shadows : Creating a 21st Century Glass-Steagall'</a>, in <a href="http://www.rooseveltinstitute.org/sites/all/files/MMBM%20FINAL%20March%208.pdf" target="_blank">Robert Johnson &amp; Erica Payne (ed.), </a><a href="http://www.rooseveltinstitute.org/sites/all/files/MMBM%20FINAL%20March%208.pdf" target="_blank"><em>Make Markets Be Markets</em></a><a href="http://www.rooseveltinstitute.org/sites/all/files/MMBM%20FINAL%20March%208.pdf" target="_blank">, Roosevelt Institute, March 2010</a>, pp.61-70; <a href="http://www.ase.tufts.edu/gdae/Pubs/rp/KGCapControlsPERIFeb11.pdf" target="_blank">Kevin P. Gallagher, 'Regaining Control? Capital Controls and the Global Financial Crisis', PERI Working Paper No.250, Feb 2011</a>, pp.2-7.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote34anc">34</a><a href="http://www.storep.org/workshopsiena/Chick.pdf" target="_blank">Victoria Chick, 'The current banking crisis: an evolutionary view', 2009</a>, pp.3-5; <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech565.pdf" target="_blank">Andrew G Haldane, 'Financial arms races', </a><a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech565.pdf" target="_blank"><em>Bank of England</em></a><a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech565.pdf" target="_blank">, 14 April 2012</a>. </p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote35anc">35</a>Gillian Tett, <em>Fool's Gold</em> (London: Abacus, 2010), ch.1-9.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote36anc">36</a>FCIC, <em>Financial Crisis Inquiry Report</em>, pp.<a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter3.pdf" target="_blank">38-45</a>,ch.<a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter7.pdf" target="_blank">7</a>-<a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter8.pdf" target="_blank">8</a>; <a href="http://www.imf.org/external/pubs/ft/gfsr/2008/01/pdf/chap2.pdf" target="_blank">IMF, </a><a href="http://www.imf.org/external/pubs/ft/gfsr/2008/01/pdf/chap2.pdf" target="_blank"><em>Global Financial Stability Report</em></a><a href="http://www.imf.org/external/pubs/ft/gfsr/2008/01/pdf/chap2.pdf" target="_blank">, April 2008, ch.2</a>; <a href="http://www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/371/37105.htm" target="_blank">House of Commons Treasury Committee, </a><a href="http://www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/371/37105.htm" target="_blank"><em>Financial Stability and Transparency</em></a><a href="http://www.publications.parliament.uk/pa/cm200708/cmselect/cmtreasy/371/37105.htm" target="_blank">, 3 March 2008, pp.15-24</a>; <a href="http://scholarship.law.duke.edu/faculty_scholarship/1794/" target="_blank">Steven L. Schwarcz, 'The global alchemy of asset securitization', </a><a href="http://scholarship.law.duke.edu/faculty_scholarship/1794/" target="_blank"><em>International Finance Law Review</em></a><a href="http://scholarship.law.duke.edu/faculty_scholarship/1794/" target="_blank"> (May 1995)</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote37anc">37</a><a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter3.pdf" target="_blank">FCIC, </a><a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter3.pdf" target="_blank"><em>Financial Crisis Inquiry Report</em></a><a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter3.pdf" target="_blank">, pp.45-50</a>; <a href="http://ssrn.com/abstract=1558625" target="_blank">Houman B. Shadab, 'Counterparty Regulation and Its Limits: The Evolution of the Credit Default Swaps Market', </a><a href="http://ssrn.com/abstract=1558625" target="_blank"><em>New York Law School Law Review</em></a><a href="http://ssrn.com/abstract=1558625" target="_blank">, Vol.54, No.2, 2009/10</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote38anc">38</a><a href="http://www.fsa.gov.uk/static/pubs/speeches/0419-at.pdf" target="_blank">Adair Turner, 'Securitisation, Shadow Banking and the Value of Financial Innovation', Rostov Lecture on International Affairs, John Hopkins University, 19 April 2012</a>, pp.1-4; <a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011crisis_bp4_us_bilateral_surveillance.pdf" target="_blank">Dhar, '</a><a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011crisis_bp4_us_bilateral_surveillance.pdf" target="_blank">IMF Performance'</a><a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011crisis_bp4_us_bilateral_surveillance.pdf" target="_blank">, pp.5-16</a>; <a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011Crisis_BP2_Multilateral_Surveillance.pdf" target="_blank">Banerji, '</a><a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011Crisis_BP2_Multilateral_Surveillance.pdf" target="_blank">IMF Performance'</a><a href="http://www.ieo-imf.org/ieo/files/completedevaluations/01102011Crisis_BP2_Multilateral_Surveillance.pdf" target="_blank">, p.17</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote39anc">39</a><a href="http://ssrn.com/abstract=1323190" target="_blank">Michael Simkovic, 'Secret Liens and the Financial Crisis of 2008', </a><a href="http://ssrn.com/abstract=1323190" target="_blank"><em>American Bankruptcy Law Journal</em></a><a href="http://ssrn.com/abstract=1323190" target="_blank">, Vol.83, 2009</a>; <a href="http://ssrn.com/abstract=1403973" target="_blank">Arthur E. Wilmarth, Jr., 'The Dark Side of Universal Banking: Financial Conglomerates and the Origins of the Subprime Financial Crisis', </a><a href="http://ssrn.com/abstract=1403973" target="_blank"><em>Connecticut Law Review</em></a><a href="http://ssrn.com/abstract=1403973" target="_blank">, Vol.41, No.4 (May 2009)</a>; <a href="http://ssrn.com/abstract=952486" target="_blank">Arthur E. Wilmarth, Jr., 'Conflicts of Interest and Corporate Governance Failures at Universal Banks During the Stock Market Boom of the 1990s: The Case of Enron and Worldcom', George Washington University Legal Studies Research Paper No.234 (2006)</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote40anc">40</a><a href="http://www.fsa.gov.uk/pubs/other/rbs.pdf" target="_blank">Financial Services Authority, </a><a href="http://www.fsa.gov.uk/pubs/other/rbs.pdf" target="_blank"><em>The failure of the Royal Bank of Scotland</em></a><a href="http://www.fsa.gov.uk/pubs/other/rbs.pdf" target="_blank">, December 2011</a>, p.145.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote41anc">41</a><a href="http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?pagewanted=all&amp;_r=0" target="_blank">Joe Nocera, 'Risk Management', </a><a href="http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?pagewanted=all&amp;_r=0" target="_blank"><em>New York Times</em></a><a href="http://www.nytimes.com/2009/01/04/magazine/04risk-t.html?pagewanted=all&amp;_r=0" target="_blank">, 2 January 2009</a>; <a href="http://www.fsa.gov.uk/pubs/other/rbs.pdf" target="_blank">FSA, </a><a href="http://www.fsa.gov.uk/pubs/other/rbs.pdf" target="_blank"><em>The failure of the Royal Bank of Scotland</em></a>, pp.153-5,374-5.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote42anc">42</a><a href="http://dss.ucsd.edu/%7Egrondina/pdfs/CovalJurekStafford_structfinance.pdf" target="_blank">Joshua Coval, Jakub Jurek, &amp; Erik Stafford, 'The Economics of Structured Finance', </a><a href="http://dss.ucsd.edu/%7Egrondina/pdfs/CovalJurekStafford_structfinance.pdf" target="_blank"><em>Journal of Economic Perspectives</em></a><a href="http://dss.ucsd.edu/%7Egrondina/pdfs/CovalJurekStafford_structfinance.pdf" target="_blank">, Vol.23, No.1, Winter 2009</a>; <a href="http://www.nber.org/papers/w14878" target="_blank">Efraim Benmelech &amp; Jennifer Dlugosz, 'The alchemy of CDO credit ratings', </a><a href="http://www.nber.org/papers/w14878" target="_blank"><em>Journal of Monetary Economics</em></a><a href="http://www.nber.org/papers/w14878" target="_blank">, Vol.56, No.5 (July 2009)</a>.. </p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote43anc">43</a><a href="http://www.hsgac.senate.gov/download/stmt-michalek-richard-april-23-2010-financial-crisis-hrg" target="_blank">'Statement of Richard Michalek, former VP/Senior Credit Officer, Moody's Investors Service', submitted to Permanent Subcommittee on Investigations, US Senate, 23 April 2010</a>, p.5; FCIC, <em>Financial Crisis Inquiry Report</em>, pp.<a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter1.pdf" target="_blank">8,17</a>,<a href="http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter7.pdf" target="_blank">118-122</a>; Cassidy, <em>How Markets Fail</em>, pp.591-6; .</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote44anc">44</a><a href="http://www.bankofengland.co.uk/publications/Pages/speeches/2013/657.aspx" target="_blank">Andrew G Haldane, 'Constraining discretion in bank regulation', </a><a href="http://www.bankofengland.co.uk/publications/Pages/speeches/2013/657.aspx" target="_blank"><em>Bank of England</em></a><a href="http://www.bankofengland.co.uk/publications/Pages/speeches/2013/657.aspx" target="_blank">, 9 April 2013</a>; <a href="http://www.bankofengland.co.uk/publications/Pages/news/2010/082.aspx" target="_blank">Mervyn King, 'Banking: From Bagehot to Basel, and Back Again', </a><a href="http://www.bankofengland.co.uk/publications/Pages/news/2010/082.aspx" target="_blank"><em>Bank of England</em></a><a href="http://www.bankofengland.co.uk/publications/Pages/news/2010/082.aspx" target="_blank">, 25 October 2010</a>, pp.12-13; <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech596.pdf" target="_blank">Andrew G Haldane, 'The dog and the frisbee', </a><a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech596.pdf" target="_blank"><em>Bank of England</em></a><a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech596.pdf" target="_blank">, 31 August 2012</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote45anc">45</a>FCIC, <em>Financial Crisis Inquiry Report</em>, pp.45-51,139-42; <a href="http://ssrn.com/abstract=1874806" target="_blank">Lynn A. Stout, 'Derivatives and the Legal Origin of the 2008 Credit Crisis', </a><a href="http://ssrn.com/abstract=1874806" target="_blank"><em>Harvard Business Law Review</em></a><a href="http://ssrn.com/abstract=1874806" target="_blank">, Vol.1 (2011)</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote46anc">46</a><a href="http://www.princeton.edu/%7Emarkus/research/papers/liquidity_credit_crunch.pdf" target="_blank">Markus K. Brunnermeier, 'Deciphering the Liquidity and Credit Crunch 2007–2008', </a><a href="http://www.princeton.edu/%7Emarkus/research/papers/liquidity_credit_crunch.pdf" target="_blank"><em>Journal of Economic Perspectives</em></a><a href="http://www.princeton.edu/%7Emarkus/research/papers/liquidity_credit_crunch.pdf" target="_blank">, Vol.23, No.1 (Winter 2009)</a>, pp.96-8.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote47anc">47</a><a href="http://news.bbc.co.uk/1/hi/2817995.stm" target="_blank">'Buffett warns on investment 'time bomb'', </a><a href="http://news.bbc.co.uk/1/hi/2817995.stm" target="_blank"><em>BBC News</em></a><a href="http://news.bbc.co.uk/1/hi/2817995.stm" target="_blank">, 4 March 2003</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote48anc">48</a><a href="http://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/chap2.pdf" target="_blank">IMF, </a><a href="http://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/chap2.pdf" target="_blank"><em>Global Financial Stability Report</em></a><a href="http://www.imf.org/external/pubs/ft/gfsr/2010/02/pdf/chap2.pdf" target="_blank">, October 2010, ch.2</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote49anc">49</a>Quoted in William D. Cohan, <em>House of Cards: A Tale of Hubris and Wretched Excess on Wall Street</em> (New York: Doubleday, 2009), p.37.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote50anc">50</a><a href="http://research.stlouisfed.org/publications/review/09/11/Anderson.pdf" target="_blank">Richard G. Anderson &amp; Charles S. Gascon, 'The Commercial Paper Market, the Fed, and the 2007-2009 Financial Crisis', </a><a href="http://research.stlouisfed.org/publications/review/09/11/Anderson.pdf" target="_blank"><em>Federal Reserve Bank of St. Louis Review</em></a><a href="http://research.stlouisfed.org/publications/review/09/11/Anderson.pdf" target="_blank"> (November/December 2009), pp.594-601</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote51anc">51</a><a href="http://www.stanfordlawreview.org/sites/default/files/articles/Roe-63-Stan-L-Rev-539.pdf" target="_blank">Mark J. Roe, 'The Derivatives Market's Payment Priorities as Financial Crisis Accelerator', </a><a href="http://www.stanfordlawreview.org/sites/default/files/articles/Roe-63-Stan-L-Rev-539.pdf" target="_blank"><em>Stanford Law Review</em></a><a href="http://www.stanfordlawreview.org/sites/default/files/articles/Roe-63-Stan-L-Rev-539.pdf" target="_blank">, Vol.36, Issue 3, March 2011</a>; <a href="http://www.rollingstone.com/politics/news/wall-streets-bailout-hustle-20100217" target="_blank">Matt Taibbi, 'Wall Street's Ba</a>i<a href="http://www.rollingstone.com/politics/news/wall-streets-bailout-hustle-20100217" target="_blank">lo</a><a href="http://www.rollingstone.com/politics/news/wall-streets-bailout-hustle-20100217" target="_blank">ut Hustle', </a><a href="http://www.rollingstone.com/politics/news/wall-streets-bailout-hustle-20100217" target="_blank"><em>Rolling Stone</em></a><a href="http://www.rollingstone.com/politics/news/wall-streets-bailout-hustle-20100217" target="_blank">, 17 February 2010</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote52anc">52</a><a href="http://www.publications.parliament.uk/pa/cm200809/cmselect/cmtreasy/144/144w202.htm" target="_blank">House of Commons Treasury Committee, Banking Crisis, Vol. II - Written Evidence, 1 April 2009, Memorandum from Professor Prem Sikka, Ev285-293</a>; <a href="http://www.euromoney.com/Article/1000384/How-Europes-governments-have-enronized-their-debts.html" target="_blank">Mark Brown &amp; Alex Chambers, 'How Europe's governments have enronized their debts', </a><a href="http://www.euromoney.com/Article/1000384/How-Europes-governments-have-enronized-their-debts.html" target="_blank"><em>Euromoney</em></a><a href="http://www.euromoney.com/Article/1000384/How-Europes-governments-have-enronized-their-debts.html" target="_blank">, September 2005</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote53anc">53</a>Frank Partnoy &amp; Lynne E. Turner, 'Bring Transparency to Off-Balance Sheet Accounting', in <em>Make Markets Be Markets</em>, pp.85-95; <a href="http://www.franzhoermann.com/downloads/financialcrisisandthesilenceoftheauditors.pdf" target="_blank">Prem Sikka, 'Financial crisis and the silence of the auditors', </a><a href="http://www.franzhoermann.com/downloads/financialcrisisandthesilenceoftheauditors.pdf" target="_blank"><em>Accounting, Organizations and Society</em></a><a href="http://www.franzhoermann.com/downloads/financialcrisisandthesilenceoftheauditors.pdf" target="_blank">, Vol.34, Issues 6-7 (August-October 2009)</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote54anc">54</a>Quoted in <a href="http://www.reuters.com/article/2008/10/30/us-financial-lazard-blackstone-idUSTRE49T77O20081030" target="_blank">Joseph A. Giannone &amp; Megan Davies, 'Lazard CEO sees world's market woes just beginning', </a><a href="http://www.reuters.com/article/2008/10/30/us-financial-lazard-blackstone-idUSTRE49T77O20081030" target="_blank"><em>Reuters</em></a><a href="http://www.reuters.com/article/2008/10/30/us-financial-lazard-blackstone-idUSTRE49T77O20081030" target="_blank">, 30 October 2008</a>; Quoted in <a href="http://www.publications.parliament.uk/pa/ld201011/ldselect/ldeconaf/119/11908.htm" target="_blank">House of Lords, Select Committee on Economic Affairs, </a><a href="http://www.publications.parliament.uk/pa/ld201011/ldselect/ldeconaf/119/11908.htm" target="_blank"><em>Auditors: Market Concentration and their Role</em></a><a href="http://www.publications.parliament.uk/pa/ld201011/ldselect/ldeconaf/119/11908.htm" target="_blank">, Vol.I - Report, 30 March 2011, p.33</a>. </p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote55anc">55</a><a href="http://ssrn.com/abstract=2175144" target="_blank">Tobias Adrian &amp; Adam B. Ashcraft, 'Shadow Banking: A Review of the Literature', Federal Reserve Bank of New York Staff Report No.580, October 2012</a>; <a href="http://www.imf.org/external/pubs/ft/sdn/2012/sdn1212.pdf" target="_blank">Stijn Claessens, Zoltan Pozsar, Lev Ratnovski &amp; Manmohan Singh, 'Shadow Banking: Economics and Policy' IMF Discussion Note SDN/12/12, 4 December 2012</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote56anc">56</a><a href="http://www.princeton.edu/%7Emarkus/research/papers/liquidity_credit_crunch.pdf" target="_blank">Brunnermeier, 'Deciphering the Liquidity and Credit Crunch'</a>; Tett, <em>Fool's Gold</em>, ch.11-15.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote57anc">57</a><a href="http://articles.latimes.com/2013/sep/20/opinion/la-oe-weiner-economy-crash-lessons-20130920" target="_blank">Eric J. Weiner, 'The next financial crisis', </a><a href="http://articles.latimes.com/2013/sep/20/opinion/la-oe-weiner-economy-crash-lessons-20130920" target="_blank"><em>Los Angeles Times</em></a><a href="http://articles.latimes.com/2013/sep/20/opinion/la-oe-weiner-economy-crash-lessons-20130920" target="_blank">, 20 September 2013</a>; <a href="http://www.bloomberg.com/news/2013-09-10/banks-seen-at-risk-five-years-after-lehman-collapse.html" target="_blank">Yalman Onaran, Michael J. Moore &amp; Max Abelson, 'Banks Seen at Risk Five Years After Lehman Collapse', </a><a href="http://www.bloomberg.com/news/2013-09-10/banks-seen-at-risk-five-years-after-lehman-collapse.html" target="_blank"><em>Bloomberg</em></a><a href="http://www.bloomberg.com/news/2013-09-10/banks-seen-at-risk-five-years-after-lehman-collapse.html" target="_blank">, 10 September 2013</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote58anc">58</a><a href="http://www.rollingstone.com/politics/news/how-wall-street-killed-financial-reform-20120510" target="_blank">Matt Taibbi, 'How Wall Street Killed Financial Reform', </a><a href="http://www.rollingstone.com/politics/news/how-wall-street-killed-financial-reform-20120510" target="_blank"><em>Rolling Stone</em></a><a href="http://www.rollingstone.com/politics/news/how-wall-street-killed-financial-reform-20120510" target="_blank">, 10 May 2012</a>; <a href="http://www.nytimes.com/2013/09/22/opinion/sunday/was-this-whistle-blower-muzzled.html" target="_blank">William D. Cohan, 'Was This Whistle-Blower Muzzled?', </a><a href="http://www.nytimes.com/2013/09/22/opinion/sunday/was-this-whistle-blower-muzzled.html" target="_blank"><em>International Herald Tribune</em></a><a href="http://www.nytimes.com/2013/09/22/opinion/sunday/was-this-whistle-blower-muzzled.html" target="_blank">, 21 September 2013</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote59anc">59</a><a href="http://www.publications.parliament.uk/pa/cm201314/cmselect/cmtreasy/writev/qe/m08.htm" target="_blank">House of Commons, Treasury Select Committee - Quantitative Easing: Written evidence submitted by Positive Money, January 2013</a>; <a href="http://www.neweconomics.org/publications/entry/strategic-quantitative-easing" target="_blank">Josh Ryan-Collins, Richard Werner, Tony Greenham &amp; Giovanni Bernardo, </a><a href="http://www.neweconomics.org/publications/entry/strategic-quantitative-easing" target="_blank"><em>Strategic quantitative easing: Stimulating investment to rebalance the economy</em></a><a href="http://www.neweconomics.org/publications/entry/strategic-quantitative-easing" target="_blank">, New Economics Foundation, July 2013</a>; <a href="http://www.bbc.co.uk/news/business-24614016" target="_blank">Liam Halligan, 'UK QE has failed, says quantitative easing inventor', </a><a href="http://www.bbc.co.uk/news/business-24614016" target="_blank"><em>BBC News</em></a><a href="http://www.bbc.co.uk/news/business-24614016" target="_blank">, 22 October 2013</a>.</p> <p><a href="https://mail.google.com/mail/u/0/?tab=wm#1427b79d4abaf463_sdfootnote60anc">60</a><a href="http://www.bain.com/Images/BAIN_REPORT_A_world_awash_in_money.pdf" target="_blank"><em>A World Awash in Money: Capital Trends Through 2020</em></a><a href="http://www.bain.com/Images/BAIN_REPORT_A_world_awash_in_money.pdf" target="_blank">, Bain &amp; Co., November 2012</a>. See also <a href="http://www.imf.org/external/pubs/cat/longres.aspx?sk=25155.0" target="_blank">Zoltan Pozsar, 'Institutional Cash Pools and the Triffin Dilemma of the U.S. Banking System', IMF Working Paper No.11/190, August 2011</a>.</p><div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk openEconomy uk UK money financial crisis finance banking Keith Fisher Fri, 22 Nov 2013 01:11:11 +0000 Keith Fisher 77203 at https://www.opendemocracy.net More than a lobby: finance in the UK https://www.opendemocracy.net/ourkingdom/tamasin-cave/more-than-lobby-finance-in-uk <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p> <!--[if gte mso 9]><xml> <o:OfficeDocumentSettings> <o:AllowPNG></o> </o:OfficeDocumentSettings> </xml><![endif]--> <!--[if gte mso 9]><xml> <w:WordDocument> <w:View>Normal</w:View> <w:Zoom>0</w:Zoom> <w:TrackMoves></w> 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mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-priority:99; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman";} --> <!--[endif] --> <!--StartFragment--> </p><p class="Standfirst">Finance and the British state are mutually embedded to the point that it can be hard to tell where one stops and the other starts. Here, Tamasin Cave of Spinwatch gives us a brief tour of the tangled web that is public life in the UK.</p> </div> </div> </div> <p class="Bodytextdropcap"><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/549405/northern rock.jpeg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/549405/northern rock.jpeg" alt="" title="" width="400" height="300" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'><span class='image_title'>Flickr/Dominic Alves. Some rights reserved.</span></span></span></p><p class="Bodytextdropcap">Lord Sassoon, until January this year economic secretary to the Treasury in the UK government, is a man who bestrides the worlds of government and finance. In 2012 he delivered the inaugural summer lecture of the British Bankers Association. He began by thanking the outgoing head of the BBA, Angela Knight, for her services to Britain [1]: “Angela, the country owes you a debt of gratitude”, he said, praising her for her steady, calm presence during the Northern Rock crisis of 2007, for her masterful lobbying to defend the City in Brussels, and for rebuilding banking’s relationship with the UK government and with the industry’s customers.</p> <p class="BodyA">Sassoon went on to explain how, as early as 2003, the Bank of England financial stability team had already identified “some of the key issues that would be at the heart of the crisis, for example, the over reliance of Northern Rock on wholesale funding, the extent of Bradford and Bingley’s exposure to the buy-to-let market, RBS’s increasing exposures in Germany and elsewhere”.</p> <p class="BodyA"><strong>Offshore dynasts, old and new</strong><strong>&nbsp;</strong></p> <p class="BodyA">He talked of how in 2005, Andrew Large, who was deputy governor of financial stability at the Bank, was “ringing alarm bells’, one of two people identified by Sassoon at “the top global table that were standing out against the orthodoxy”. “Sadly we all listened but took no action,” said Sassoon.</p> <p>According to Lord Sassoon, this is a government “utterly committed to ensuring the UK is open to business and that London continues to thrive as a global economic centre… A government with a number of bankers in its ranks, led by a Prime Minister who is proud to say he comes from a stock broking family”. Sassoon’s remarks echo the sentiments of the Labour Party’s Ed Balls a few years earlier. In 2006 Ed Balls, then the Economic Secretary to the UK Treasury, told an audience at the BBA that “when the WorldCom accounting scandal broke in the US, we resisted pressures from commentators for a regulatory crackdown”. He went on to say that the UK government had a “specific and clear interest” in safeguarding “the light touch and proportionate regulatory regime that has made London a magnet for international business”. Of course it was this same “light touch” regulatory regime that allowed Northern Rock, Bradford and Bingley and RBS – finance as a whole – to engage in a frenzy of risky business.</p> <p>Lord Sassoon is only one of many former bankers to have served in the current UK government. In the current Cabinet both David Laws, a Liberal Democrat Minister for Schools, and Oliver Letwin, a Conservative Minister at the Cabinet Office, worked in investment banking before they entered Parliament. In fact the UK comes second only to Switzerland for the number of people moving through the “revolving door” between the finance sector and officialdom according to a report by the OECD [2]. Baron Green of Hurstpierpoint, previously Chairman of HSBC, is currently a Minister at both the Department for Business Enterprise and Skills and the Foreign and Commonwealth Office. In May 2013 the former Chairman of Goldman Sachs, Richard Sharp, joined the Bank of England’s Financial Policy Committee, the new watchdog set up to protect the public from another financial meltdown [3]. Two months later another former Goldman Sachs banker, Mark Carney, became the governor of the same institution. Current and former employees of the investment bank also known as “the vampire squid” have donated £8.8million to Britain’s political parties in the last decade. Sharp himself donated £400,000 during that period. And this is only a fraction of what the sector gives. In 2011, hedge funds, financiers and private equity made up over a quarter of Conservative Party funding, with the City as a whole contributing more than half of its donated income.</p> <p>The global accountancy firms – the so-called “Big Four”, PWC, KPMG, Deloitte and Ernst &amp; Young – are also deeply embedded in the British state. They earn hundreds of millions of pounds a year from government business while loaning their staff to government departments and political parties, where they advise on everything from tax law to privatisation programmes. </p> <p>All four companies insist that their involvement is limited to providing “technical insight” into proposed polices. But at the same time some actively lobby government for changes in tax legislation. Ernst &amp; Young’s Tax Policy Development team, for example, says that it “works with clients to develop proposals for changes in tax policy that can be taken to government”.</p> <p>“Unlike a traditional lobbying service,” the pitch reads, Ernst &amp; Young’s team will work with its clients to develop “technical policy options in a form that is used inside Government today”. Put simply, this means it uses its knowledge of the workings of government to lobby for clients. This, it says, means that tax changes can be “implemented with the minimum of delay”, and makes sure that “the concerns of policy-makers are addressed”. This gives proposed tax breaks “the maximum chance of adoption”. In this respect, the insider status of E&amp;Y is clearly of benefit to its clients.</p> <p>The advantages to clients of lobbying for tax policy changes – as opposed to tax planning – are clearly explained in Ernst &amp; Young’s pitch: “In an era where the government is focusing on actively identifying and countering tax avoidance, and where there has been considerable media coverage on particular “tax avoiders”, policy development offers a low risk alternative.” In other words, “policy development” – lobbying for changes in the law – offers its corporate clients a less risky way to reduce their tax bill.</p> <p>Incidentally, Ernst &amp; Young’s lobbying team would not be covered by the government’s proposed register of lobbyists, which is making its way through Parliament. If it passes in its current form, the register will include only a tiny fraction – 5 per cent on some estimates – of the £2 billion UK lobbying industry [4].</p> <p>Former politicians beat a well-trodden path in the other direction. Tony Blair took a job with JP Morgan when he left Downing Street. He joins a group of politicians-turned-financiers too numerous to name here. But some idea of the scale of what’s happening can be grasped if we restrict ourselves to former Ministers in the Department of Health during the New Labour years. Alan Milburn is an advisor to Bridgepoint, a private equity firm and PWC. Norman Warner has been an adviser to Apax Partners, another private equity firm. And Patricia Hewitt has advised Cinven, yet another private equity group.</p> <p>And then there is the current Prime Minister. As Lord Sassoon notes, David Cameron comes from a stock broking family. This underplays things a little. His father co-founded the Panamanian investment company Blairmore Holdings and was the chairman of Close International Asset Management, based in Jersey [5]. Unlike Tony Blair, the British Prime Minister from 1997 to 2007, who only began to make extensive use of tax havens on leaving office, Cameron is part of an offshore dynasty. Blairmore indeed.</p> <p>Through the revolving door that takes politicians into lucrative employment and financiers into government, through party donations, and through the informal mechanisms of finance’s lavish hospitality, the political class is integrated with the sector to the point where it can be difficult to see where one stops and the other starts. Ambitious politicians have been eager to associate with investment bankers and others from the sector. There’s money to be made, of course, but also the seductive sense that they are in the room with the people who understand how the world really works, with the winners. Billions in taxpayers’ money seems like a small price to pay for such company. And the pervasive secrecy and clannishness of British politics only compounds the problem. We do not know, for example, how much money finance contributes to the free market think tanks that enjoy such sympathetic coverage in the UK media.</p> <p>Given the degree of overlap, and the shared commitment to London as a world financial centre, the organised lobbies for finance do not have to spend much time persuading the government to promote their interests. Instead, in the words of the then-Chancellor and later Prime Minister Gordon Brown, they work together to “promote the City and its financial service expertise throughout the world”. It is hardly surprising that the few warnings that reached Sassoon’s “global top table” went unheeded. By then the British government no longer saw the financial sector as one lobby among others. It saw itself as a lobbyist for finance. This was, and is, a recipe for trouble.</p> <p class="Authordetails"><strong><span>To find out more about the Tax Justice Network, to subscribe to Tax Justice Focus, or to read The Finance Curse e-book, </span><a href="http://www.taxjustice.net/cms/front_content.php?idcat=150">click here</a><span>.</span></strong></p><p class="Authordetails"><strong><span><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/TJN Logo_3.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/TJN Logo_3.jpg" alt="" title="" width="400" height="189" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'></span></span><br /></span></strong></p><p><strong><span class="wysiwyg_imageupload image imgupl_floating_none 0">&nbsp;</span></strong></p> <p class="Crosshead"><strong>End notes</strong></p> <p class="Footnotetext">[1] BBA summer lecture, 20 June 2012</p> <p class="Footnotetext">[2] Miller and Dinan, Revolving Doors, Accountability and Transparency – Emerging Regulatory Concerns and Policy Solutions in the Financial Crisis, a report commissioned by the OECD, May 2009: <a href="http://search.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=GOV">http://search.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=GOV</a>/PGC/ETH%282009%292&amp;docLanguage=En</p> <p class="Footnotetext">[3]&nbsp;<a href="http://www.dailymail.co.uk/news/article-2333068/Goldman-Sachs-banker-hand-picked-Osborne-job-new-finance-watchdog-gave-400-000-Tory-party.html#ixzz2cSO6seie">http://www.dailymail.co.uk/news/article-2333068/Goldman-Sachs-banker-hand-picked-Osborne-job-new-finance-watchdog-gave-400-000-Tory-party.html#ixzz2cSO6seie</a></p> <p class="Footnotetext">[4]&nbsp;<a href="http://www.lobbyingtransparency.org/15-blog/general/94-a-fake-register">http://www.lobbyingtransparency.org/15-blog/general/94-a-fake-register</a></p> <p class="Footnotetext">[5] <a href="http://www.theguardian.com/politics/2012/apr/20/david-cameron-jersey-panama-geneva">http://www.theguardian.com/politics/2012/apr/20/david-cameron-jersey-panama-geneva</a></p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/john-keane/short-history-of-banks-and-democracy">A short history of banks and democracy</a> </div> <div class="field-item even"> <a href="/simon-parker/greek-tragedy-on-london-stage-city-eurozone-crisis-and-urban-dark-age-to-come">A Greek tragedy on the London stage: the City, the Eurozone crisis and an urban dark age to come</a> </div> <div class="field-item odd"> <a href="/openeconomy/andrew-bowman/grip-of-banking-lobby-on-british-politics-seems-unlikely-to-soften-soon">The grip of the banking lobby on British politics seems unlikely to soften soon</a> </div> <div class="field-item even"> <a href="/ournhs/caroline-molloy/milburn-nhs-and-britains-revolving-door">Milburn, the NHS, and Britain&#039;s &#039;revolving door&#039;</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk uk UK banking Lobbying Democracy and government The Finance Curse Tamasin Cave Thu, 26 Sep 2013 08:30:28 +0000 Tamasin Cave 75565 at https://www.opendemocracy.net The ills of financial dominance https://www.opendemocracy.net/ourkingdom/doreen-massey/ills-of-financial-dominance <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p class="Standfirst">The power of the financial sector in Britain has worked a transformation on the country’s ‘common sense’.&nbsp; A successful challenge will require a radical change to the language we use to describe our shared life.</p> </div> </div> </div> <p class="Bodytextdropcap"><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/thread_0.JPG" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/thread_0.JPG" alt="" title="" width="400" height="274" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'></span></span></p><p class="Authordetails"><em>Threadneedle Street, once teeming with small businesses specialising in the garment trade, now home to a very different kind of stitch-up. Image: Chris P Dunn, some rights reserved.</em></p><p class="Authordetails"><em><br /></em></p><p class="Bodytextdropcap">Societies take different shapes in different eras. They are framed by distinct forms of economy, specific social and political arrangements, and particular common understandings of how the world works. These are expressed too in distinct geographies, which in turn feed back into the way in which the country develops.</p> <p class="Bodytext">Since the undermining of the social-democratic settlement of the post-war years, UK economy and society has been framed by what we have come to call ‘neoliberalism’. This was not inevitable, other alternatives were available; the victory of neoliberalism was an outcome of political and social contest[1]. And central to that victory, and to neoliberalism in its widest sense, was the triumph of finance. ‘Finance’, in the current era, is not just a sector of the economy; it is at the core of a new social settlement in which the fabric of our society and economy has been reworked. There is a long history in the UK of ‘the City’ having an important and often harmful role, but this time is different. Finance and financialisation now mould our economy, geography, ideology and politics to a degree that is not only astonishing but deeply negative.</p> <p class="Bodytext">Some of the dismal results of this dominance at national level are well documented: the vicious exacerbation of economic inequality; the crowding-out of other sectors of the economy (far from being the golden goose, the dominance by finance makes life much more difficult for other sectors); the pervasiveness of individualism and competitive greed. But the way these things work out on the ground in different places highlights even more the contradictions inherent in this social settlement[2].</p> <p class="Bodytext">London itself, the pinnacle of finance’s success, is riven with contradictions. A city once known for its variety of small industries is seeing that rich ecology erased - especially in the area around the City - by the power of finance as it either buys up, or simply has the effect of raising the price of, land and property. Small companies, perfectly viable in production terms, cannot survive – a real irony given the ritual political invocation of small businesses as the hope for the future.</p> <p class="Bodytext">London is also the most unequal city in the country, and this too produces problems. It exacerbates the poverty of the poor, especially through house prices. In its most bizarre recent manifestation local councils are ‘decanting’ their benefit-claiming poor to other regions. The whole social reproduction of the city is made more difficult.&nbsp; </p> <p class="Bodytext">Meanwhile ‘the regions’ also suffer from the dominance of finance. It is not only that this sector itself, and its wealth, are located in London. It is that its dominance of the national economy (and polity – see later) actively undermines regional growth.</p> <p class="Bodytext">Thus the City sucks in graduate labour from other regions, depriving them of a stratum from which economic growth might spring. (Meanwhile politicians castigate them for a lack of skills!) If the golden goose argument worked there’d be a geographical ‘trickle-down’ to the rest of the country. The truth is that the opposite happens. Meanwhile the degree of national inequality is exacerbated through the regional dimension, as owner-occupiers in London and the South East ‘make’ more from increases in house-prices than they earn from their jobs.</p> <p class="Bodytext">One response from the London financial elite is that there is a fiscal transfer from London to the regions. Not only does this not address the dynamics of regional growth, it is a carefully calibrated fiction[3]. It is a political slogan based on very narrow criteria, which fails to take account of a host of ways in which London (and finance specifically) benefit from national policy. And it provokes damaging antagonisms, dividing the nation on regional lines when hostility should really be addressed to finance and the super-rich.</p> <p class="Bodytext">So we have a dysfunctional capital city, ferocious inequalities both within that city and between a vortex of growth in the South East and a land often referred to as ‘the Rest of the Country’, as well as an economic path that is detrimental to balanced growth. And all these are problems arising not from the crisis of finance and the way that has been addressed, but from its growth, its dominance. It is imperative that we construct a different settlement.</p> <p class="Bodytext">One reason this bizarre arrangement exists is that finance dominates not only the economy but also politics and ideology. Its political influence is widely documented, yet somehow unseen or simply accepted (compare with the outrage at any hint of influence by trades unions). Yet in fact it is extremely active: it funds endless research projects that confirm its status as the golden goose, it is seen as a source of unbiased expertise, there are revolving doors with government and it doesn’t even have to ‘lobby’ very explicitly, since it is cosily part and parcel of the social world of the elites. Policies across the range reflect the interests of finance, whose upper échelons are at the core of an elite whose spatial concentration in the South East consolidates their mutual support. There is a grossly unequal geography, as well as class configuration, of democracy and of voice in this country. And the City puts in a lot of work to keep it thus.</p> <p class="Bodytext">Less routinely recognised is how ‘finance thinking’ has become hegemonic ideologically. Finance may be a global industry but part of its power lies in the fact that it is intimate too – it gets inside our heads. People from finance are interviewed as ‘experts’ in the media, as though they had no interests at stake. Economics is thus removed from political contestation.&nbsp; Competitive individualism is taken for granted. Distinctions are forgotten (erased) between earned and unearned, between value creation and value extraction (convenient, since finance’s growth has depended so much on the latter – hence the burgeoning inequality from which we began this thumb-nail sketch of the state of the nation). In this society that celebrates choice we are told there is no alternative. This truly is hegemonic common sense, and it is at this level that social settlements are consolidated. It is at this level, therefore, that a challenge must be launched. This means not just contesting individual policies and issues (though that must be done) but even more importantly challenging the whole framework, the very language, that has become our society’s common sense, and that both obscures the injustice that is being done and lulls us into acceptance that it is all inevitable[5].</p> <p class="Bodytext">Moreover if this challenge is necessary because of the effects ‘at home’, it is equally so because of the UK’s role in the wider world. As the Tax Justice Network has tirelessly pointed out, the existence of tax havens, and the practices of tax evasion and avoidance, are a means of redistribution from global poor to global rich and a key cause of world poverty.&nbsp; London’s finance sector is a prime node in these arrangements. Could we develop what I have called ‘a politics of place beyond place’, addressing our responsibilities for the global effects of our economy?[6] Indeed the internal and external politics of place are linked – the poverty in London is an element in the same dynamics as the poverty in the global South.&nbsp; To take us back to the initial argument, London’s finance sector was one of the crucial birthplaces of, and is now a key place of diffusion of, global neoliberalism, with its practices of cutting back state services, privatisation and deregulation. These are among our main exports.</p> <p class="Bodytext">We are living a strange situation – a populace guided by a hegemonic discourse that prevents escape from neoliberalism and yet a wide range of disparate groups whose interests potentially range them against the dominance of finance. There has been an economic (financial) crisis, but the ideological carapace has not cracked. Is it possible to build alliances, perhaps as suggested in the <em>Green New Deal</em>, and to break out of the common sense of this finance-dominated social settlement?</p> <p><strong>This article was written for <em>Tax Justice Focus</em>, the newsletter of the Tax Justice Network.&nbsp;To read the <em>Finance Curse</em> e-book, or to subscribe to Tax Justice Focus,<span><strong>&nbsp;<a href="http://www.taxjustice.net/cms/front_content.php?idcat=150" target="_blank"><span>click here</span></a></strong></span>.</strong></p><p><strong><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/TJN Logo_1.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/TJN Logo_1.jpg" alt="" title="" width="400" height="189" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'></span></span><br /></strong></p><p><strong><span class="wysiwyg_imageupload image imgupl_floating_none 0">&nbsp;</span></strong></p> <p class="Bodytext"><strong>End notes</strong></p> <p class="Footnotetext">[1] See the Kilburn Manifesto: ‘After neoliberalism?’ by Stuart Hall, Doreen Massey and Michael Rustin.&nbsp; <a href="http://www.lwbooks.co.uk/journals/soundings/manifesto"><strong>http://www.lwbooks.co.uk/journals/soundings/manifesto</strong></a>. Also in <em>Soundings</em>, 53, Spring 2013, <br /> pp. 8 – 22. </p> <p class="Footnotetext">[2] For a fuller analysis see Doreen Massey (2010) World City, Polity Press.</p> <p class="Bodytext">[3] See World City (note 2) and Nicholas Shaxson and John Christensen (2013) <em>The Finance Curse</em>, Tax Justice Network.</p> <p class="Footnotetext">[4] See Kilburn Manifesto (note 1).</p> <p class="Footnotetext">[5] This is what I have begun to do in Doreen Massey (2013) ‘Vocabularies of the Economy’ at the Kilburn Manifesto site, and in <em>Soundings</em>, 54, Summer 2013, <br /> pp.&nbsp; 9 – 22.</p> <p class="Footnotetext">[6] See World City (note 2).</p><fieldset class="fieldgroup group-sideboxs"><legend>Sideboxes</legend><div class="field field-related-stories"> <div class="field-label">Related stories:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> <a href="/ourkingdom/nicholas-shaxson/resource-curse-or-paradox-of-poverty-from-plenty">The resource curse, or the paradox of poverty from plenty</a> </div> </div> </div> </fieldset> <div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk uk UK banking financial crisis The Finance Curse Doreen Massey Tue, 24 Sep 2013 08:08:02 +0000 Doreen Massey 75550 at https://www.opendemocracy.net The resource curse, or the paradox of poverty from plenty https://www.opendemocracy.net/ourkingdom/nicholas-shaxson/resource-curse-or-paradox-of-poverty-from-plenty <div class="field field-summary"> <div class="field-items"> <div class="field-item odd"> <p class="Standfirst">Is finance like crude oil? Countries rich in minerals are often poverty-stricken, corrupt and violent. A relatively small rent-seeking elite captures vast wealth while the dominant sector crowds out the rest of the economy. The parallels with countries ‘blessed’ with powerful financial sectors are becoming too obvious to ignore.</p> </div> </div> </div> <p class="Bodytextdropcap"><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/fintopx.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/fintopx.jpg" alt="" title="" width="400" height="267" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'></span></span><em>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Is a big financial sector a good thing? <a href="http://www.flickr.com/photos/attac-france/8574870888/sizes/z/in/photostream/">Flickr/Attac France.</a></em></p><p class="Bodytextdropcap">While serving as the Reuters correspondent in oil-rich Angola in the mid 1990s, I wondered how such a ‘rich’ country could suffer such poverty. The shortest answer at the time was ‘War’. Angola’s conflict had many causes, but without the diamonds to fuel rebel leader Jonas Savimbi’s army, not to mention the government’s offshore oilfields, it would have been less bloody, and shorter.&nbsp; </p> <p class="Bodytext">As I arrived in Angola in 1993 a British academic, Richard Auty, was putting a name to a then poorly-understood phenomenon: what is now widely known as the ‘Resource Curse’. Countries that depend heavily on natural resources like oil or diamonds often perform worse than their resource-poor peers in terms of human development, governance and long-term economic growth. Studies by renowned economists such as Jeffrey Sachs, Paul Collier, Terry Lynn Karl, Joseph Stiglitz and many others have now established the Resource Curse in the academic literature, and in the public mind too.</p> <p class="Bodytext">A weak version of this Curse, which few would disagree with, holds that resource-dependent countries tend to be bad at harnessing those resources to benefit their populations. The windfalls are squandered. A stronger version is more surprising: natural resources tend to make matters <em>even worse</em> than if they had been left in the ground, leading to higher rates of conflict, more corruption, steeper inequality, deeper absolute poverty, more authoritarian government, and lower long-term economic growth. I am in no doubt that the stronger version of the curse applied to Angola on all these metrics when I lived there.&nbsp; </p> <p class="Bodytext">To be fair, the wider cross-country evidence here is more complicated. Some countries like Norway that already have good governance in place before resources are discovered seem to fare relatively well – but being rich first is no guarantee of success either. Michael Edwardes, the former chairman of ailing British car manufacturer British Leyland, spoke of this with some prescience in 1980, following the OPEC oil price shocks: “If the cabinet does not have the wit and imagination to reconcile our industrial needs with the fact of North Sea oil, they would do better to leave the bloody stuff in the ground.” Even if some rich countries can suffer from mineral windfalls, it is poor, badly governed countries that tend to suffer the most.&nbsp; The picture also varies with the global commodity price cycles: things look particularly bad during troughs in these cycles – as in the mid 1990s – and look less bad, at least on the surface, in the boom years.&nbsp; </p> <p class="Bodytext">How do we explain this ‘curse?’ The explanations fall into three main categories. First is the so-called “Dutch Disease.” Large export revenues from oil, say, cause the real exchange rate to appreciate: that is, either the local currency gets stronger against other currencies, or local price levels rise, or both. Either way, this makes local manufactures or agriculture more expensive in foreign-currency terms, and so they lose competitiveness and wither. Much higher salaries in the dominant sector also suck the best skills and talent out of other sectors, out of government, and out of civil society, to the detriment of all. Overall, the booming natural resource sector ‘crowds out’ these other sectors, as happened when many oil producers saw devastating falls in agricultural output during the 1970s oil price booms.&nbsp; </p> <p class="Bodytext">Finance-dependent economies, it turns out, suffer a rather similar Dutch Disease-like phenomenon, as large financial services export revenues in places like the United Kingdom or the tax haven of Jersey raise the cost of housing, of hiring educated professionals, and the general cost of living. A Bank for International Settlements (BIS) study last year found that finance-dependent economies tend to grow more slowly over time than more balanced ones, and noted that, by way of partial explanation, ’finance literally bids rocket scientists away from the satellite industry’. My short <em>Finance Curse</em> e-book, co-authored with John Christensen, provides plenty of detail on this.</p> <p class="Bodytext">A second standard explanation for the Resource Curse is revenue volatility. Booms and busts in world commodity prices and revenues can destabilise the economies of countries that depend on them, further worsening the crowding-out of alternative sectors. Gyrations in the world oil price – from below $10/barrel in the late 1990s to well over $100 within 10 years – have played havoc with budgeting in many oil-dependent countries, often with terrible effects on economic and political stability and broad governance. Those alternative sectors that were crowded-out during the booms aren’t easily rebuilt when the bust comes: it is a ratchet effect. Again, there are close parallels with the financial sector, a source of great volatility, as the latest global financial crisis shows. Britain’s industrial base, decimated by (among many other things) over-dependence on the financial sector, is proving slow to recover, post-boom.</p> <p class="Bodytext">The third category for explaining the Resource Curse – the biggest, most problematic, and the most complex – falls under the headline ‘governance’.&nbsp; </p> <p class="Bodytext">Why do natural resources tend to make governments more wasteful, corrupt, and authoritarian? </p> <p class="Bodytext">A big part of the answer lies in the fact that minerals in the ground provide unproductive economic ‘rents’: easy, unearned money. As the Polish writer Ryszard Kapuscinski so brilliantly put it: </p> <p class="Bodytext">"Oil is a resource that anaesthetises thought, blurs vision, corrupts. Oil is a fairy tale and, like every fairy tale, it is a bit of a lie. It does not replace thinking or wisdom."&nbsp; </p> <p class="Bodytext">When easy rents are available, rulers lose interest in the difficult challenges of state-building, or the need for a skilled, educated workforce, and instead spend their energies competing with each other for access to a slice of the mineral ‘cake’. While those neglected sectors wither, this competition among ‘godfathers’ can lead to overt conflict, particularly in ethnically diverse societies, but it can also lead to great corruption as each player or faction in a government knows that if it does not act fast to snaffle a particular mineral-sourced financial flow, another faction will. This is the recipe for an unseemly, corrupting scramble.</p> <p class="Bodytext">The financial sector, likewise, contains a multitude of potential sources of easy ‘rents’. A secrecy law, for instance, has long been a source of rents for Swiss bankers, who haven’t needed to do much else apart from watch the money roll in. More grandly, the network of British-linked secrecy jurisdictions scattered around the world, serving as ‘feeders’ for all kinds of questionable and dirty money into the City of London, is another big source of rents for the financial sector. Financial players’ special access to information is another. Martin Berkeley, a former British banker, <a href="http://treasureislands.org/city-of-london-dont-tell-anybody-but-we-are-making-lots-of-money-again/">described</a> one mechanism deployed by his bank as it sought to sell its customers dodgy derivatives:&nbsp; </p> <p class="Bodytext">"On their client database they had in big letters written ‘Client Has Screens’ - meaning the client actually knows what the markets are doing: these tricks couldn’t be played on them." </p> <p class="Bodytext">The Libor scandal provides another example of rent-seeking. One might reasonably also make a comparison between owning an oil well and having – as the banking system does – the ability to create money. Yet there is a difference too: rising credit creation – and the growing private debts that accompany it – generate fees for the financial sector that are extracted not from under the ground, as with oil, but from debtors, taxpayers and others: from the population itself.</p> <p class="Bodytext">Another source of the trouble in resource-rich states is that when rulers have easy rents available, they don’t need their citizens so much to raise tax revenues. This top-down flow of money <a href="http://taxjustice.blogspot.de/2013/08/imf-paper-points-to-no-taxation-without.html">undermines</a> the ‘no taxation without representation’ <a href="http://taxjustice.blogspot.de/2008/01/how-to-build-state.html">bargain</a> that has underpinned the rise of modern, accountable states through the rise of a social contract based on bargaining around tax, and through the role that tax-gathering plays in stimulating the construction of effective state institutions. If the citizens complain, those resource rents pay for the armed force necessary to keep a lid on protests.</p> <p class="Bodytext">In economies dependent on finance we don’t see the same kind of crude, swaggering petro-authoritarianism of Vladimir Putin’s Russia or José Eduardo dos Santos’ Angola. But we do see some surprisingly repressive responses to criticisms of the financial sector and the finance-dominated establishment, particularly in small tax havens like Jersey, as Mike Dun’s article in this edition – along with the main <a href="http://www.taxjustice.net/cms/upload/pdf/Finance_Curse_Final.pdf"><em>Finance Curse</em></a> e-book and my book <a href="http://treasureislands.org/"><em>Treasure Islands</em></a> – repeatedly illustrate.&nbsp; </p><p> All these processes – the economic crowding-out of alternative economic sectors such as agriculture or tourism, plus the ‘capture’ of rulers and government by the dominant mineral sector, who become apathetic to the challenges posed by trying to stimulate other sectors – add up to a mortal threat not just to democracy, but also to the long-term prospects for a vibrant economy. Since Angola’s long civil war ended 11 years ago, politicians have routinely called for a ‘diversification’ of the economy and a ‘rebalancing’ away from dependence on oil. The fact that petroleum still makes up over 97 percent of exports and contributes to 60 percent of GDP, is testament to the difficulty even the most well-meaning reformer faces. Similarly, calls for ‘rebalancing’ away from excessive dependence on the financial sector have tumbled from the mouths of politicians in the United Kingdom and Jersey. But these calls will prove equally empty if they do not actively work to shrink and contain the financial sector.</p><p>&nbsp;</p><p><strong>This article was written for <em>Tax Justice Focus</em>, the newsletter of the Tax Justice Network.&nbsp;The he <em>Finance Curse</em> e-book is available on <a href="http://www.amazon.co.uk/The-Finance-Curse-Oversized-Financial-ebook/dp/B00CXTZ08S">Kindle</a> or <a href="http://commonwealth-publishing.com/2014/02/05/finance-curse/">via Paypal in pdf format</a>. To subscribe to Tax Justice Focus,<span><strong>&nbsp;<a href="http://www.taxjustice.net/cms/front_content.php?idcat=150" target="_blank"><span>click here</span></a></strong></span>.</strong></p><p><strong><span class='wysiwyg_imageupload image imgupl_floating_none 0'><a href="//cdn.opendemocracy.net/files/imagecache/wysiwyg_imageupload_lightbox_preset/wysiwyg_imageupload/535628/TJN Logo_0.jpg" rel="lightbox[wysiwyg_imageupload_inline]" title=""><img src="//cdn.opendemocracy.net/files/imagecache/article_large/wysiwyg_imageupload/535628/TJN Logo_0.jpg" alt="" title="" width="400" height="189" class="imagecache wysiwyg_imageupload 0 imagecache imagecache-article_large" style="" /></a> <span class='image_meta'></span></span><br /></strong></p><div class="field field-country"> <div class="field-label"> Country or region:&nbsp;</div> <div class="field-items"> <div class="field-item odd"> UK </div> </div> </div> uk openEconomy uk UK banking The Finance Curse Nicholas Shaxson Mon, 23 Sep 2013 17:20:49 +0000 Nicholas Shaxson 75501 at https://www.opendemocracy.net