Banking: What’s to be Done?
Nothing concentrates the mind like the thought of losing a great deal of cash- what other explanation could there be for drawing in a large group of people to talk about banking on a chilly February evening?
At a well attended public meeting on Banking at St Nicholas Church, Weymouth, Molly Scott Cato, Professor of Strategy and Sustainability at the University of Roehampton, and The Green Party’s economics spokesperson gave a fascination talk on Rethinking Finance. She first described of the problems of the banking system, and the origins of the banking crisis. She then went on cover some of the possibilities remedies, none of which the government has taken up.
Main points:
Only the green party is arguing for full separation of retail from investment banking
Big Bang and the loss of political control: reverse this rather than ‘regulation’
Local and mutual forms of lending are thriving – as per the stuff later on about local bonds etc.
She explained how establishment figures had sounded the need for change. For example governor of the bank of England, Mervyn King has said, “Of all the many ways of organising banking, the worst is the one we have today.” He and others are not being listened to; the government’s one ‘big idea’ – ring fencing of investment banking from bread and butter high street banking will not solve the problems.
The system agreed at the Bretton Woods conference in 1944, which involved financial restraint such as credit controls and exchange controls, had worked well. True, you couldn’t take much money abroad and there were mortgage queues, but growth was steady and people had basic needs met. The system had broken down in the 1970s, and credit and exchange controls had been progressively weakened culmination in the UK with Mrs Thatcher’s Big Bang in 1986. The result has been a massive increase in the financial assets globally from 1.5 times GDP to 4.5 times GDP, matched by a huge increase in the wealth and power of those who make money out of money. Debt has massively increased.
The lubrication of a fully functioning economyis the most basic role of banking, but it is incompatible with the role as acommodity in international speculation.
As a result of the crash government borrowing ballooned from August 2008 to May 2009 and has only very gradually decreased since – not noticeably faster under the coalition than under Labour.
Molly described the emergence role of Citizens’ Audit which has picked up on the concept of ‘odious debt’, demanded transparency and focus on the needs of citizens rather than financiers.
She went on to show how the money supply had grown very much faster than GDP, and banks now produce 97% of our money in the act of granting ‘loans’. Banks have played a vital part in the growth of debt. Their priority is to make profit by expanding their balance sheets, rather than to promote a healthy economy. As well as causing the crash, excessive debt (not just government debt) enslaves the vast majority of us.(1) One remedy proposed by Green Party members and others (such as (Professor Werner at Southampton) is basically to restore some of the former controls, and in particular to limit banks’ lending for speculation in real estate, which causes ‘bubbles’.
At Bretton Woods, British economist J. M. Keynes had argued for a new international currency for settling international payments imbalances. However US treasury official Harry Dexter White had insisted on a system of fixed exchange rates linked to the dollar which in turn was linked to gold. The Americans were in a position to call the shots, and this made the dollar the principle reserve currency and was very advantageous to American borrowers.(2)
As President of the European Commission, Jacques Delors’ motivation for pushing the European project and working towards a common currency was to challenge US domination.
Molly then turned to a number of initiatives to reduce dependence on the big banks and find local financing and banking solutions:
- Local Bonds for financing local projects such as renewable energy projects – gets the project stated and producers better return for investors than through the banks.
- Ecotricity’s Eco Bonds
- Mutual Home Ownership
- Peer to Peer Lending
- Local Currencies
After a break for tea, coffee and home made cakes, a lively discussion ensued covering everything from LETS (trading goods and services without money), to monetary reform.
One question that came up was whether the state or the Bank of England should over the creation of money from the banks. Some asked, ‘Can you trust government’, to which others, ‘Do you prefer to trust banks? There is a well worked out scheme whereby the bank of England would create money free of debt and give it to the Treasury, and in return commercial banks would be prohibited from creating money. This is promoted in the UK by Positive Money www.positivemoney.org .
It was also pointed out that Adair Turner and Martin Wolf had both come out in favour of ‘helicopter money’ as a way out of the current recession. This requires the Bank of England creating money and giving it to government.(3)
Molly was thanked for coming from Stroud to give us a very interesting talk.
Other points to consider:
1. There are two kinds of evidence for supporting the view that excessive debt caused the crash:
First the argument from history.In the preface to their book ‘This time is different: Eight Centuries of Financial Folly’, Reinhart and Rogoff write “If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.”
Secondlyseveral heterodox (=heretical) economists predicted the crash based on theory especially based on Hyman Minsky’s Financial Instability Hypothesis.
2. Under the Bretton Woods system the US could not devalue. Harry Dexter White had intended that the US always run a surplus. With the expense of the Vietnam War the US could not sustain this and Nixon had to float the dollar. This started a chain of events, one of which was general deregulation, though right wing economists and Thatcher played a big part in this.
3. ‘Helicopter Money’ is advocated as a replacement for Quantitative Easing which has involved the Bank of England buying bonds mainly from banks. The argument is that this drives up the price of bonds, thus driving down the yield and interest rates. In practice it has probably only helped banks. The danger of ‘helicopter money’ is inflation, but it is argued that while banks are rebuilding their balance sheets rather than lending, this would not happen, but why not finish the job and prevent commercial banks creating money in future?
David Smith
