27 September 2012

How to Solve the Eurozone Crisis


Inter-war Germany may not be the place you would look first for advice on tackling tricky financial issues, but on the other hand somebody did manage to move the country from the situation where you needed a wheelbarrow to buy a loaf of bread to the country that could afford to spend so much on arms that it could rapidly conquer the whole continent. That man was Hjalmar Schact: he was not a magician but rather a financial expert who was not in hock to financiers. That is a rare commodity and one we are in desperate need of just now.

What a coincidence, then, that I spent yesterday at a conference with Professor Richard Werner of Southampton University. A modest, self-effacing man, he has nonetheless managed to persuade the Telegraph's City correspondent to suggest something like the Schact Plan to solve the Eurozone crisis. The solution is simple: create enough money through quantitative easing to buy back the bad assets. According to Hurley, Werner then suggests that governments should stop selling bonds but rather 'fund themselves through loan contracts from banks in their countries', which strikes me as rather odd when the more obvious proposal would be simply to continue to issue money as public credit. 

What Richard does not tell us is what backed up the creation of vast amounts of new German money that Schact created. That is a point I covered in my book Market, Schmarket back in 2006. I like this better now, because it reminds us of the importance of land. Effectively, Schacht used the German land and its wealth as collateral:

‘Once confidence in a currency is so severely damaged the only feasible response is to create a new currency, which was a process managed by the Finance Minister Hjalmar Schacht. In November 1923 he created a new parallel currency called the Rentenmark; to create confidence it was backed by land, in this case the most solid asset of the German economy. The Rentenmarks allowed economic transactions to take place within the economy, although they were not legal tender, had no fixed relation to the Reichsmark they replaced, and could not be used for international payments. This made the Rentenmarks speculation proof. Bizarrely, much of the speculation against the currency that had destroyed it had actually been funded by loans from German banks. In The Magic of Money Schacht explains how the Reichsbank made loans to support the speculation against the German currency. Thus the government, which has always been blamed for economic mismanagement and for printing too much paper money, was not primarily responsible for the inflation. By 1924 the Rentenmark and Reichsmark were being treated equally and the Rentenmark could be withdrawn. The lessons of the German hyperinflation are twofold: first, that financial speculators’ only motive is to make profits and that they are unconcerned about the social and political consequences of their speculative activity; but, nonetheless, governments can use political power to control this speculation if they wish, exposing the myth of powerlessness.’

It just so happens that we are looking for an independent and skilful financial expert for a rather important job just now. I have suggested to Richard that he put together an application for the top job at the Bank of England. If he is agreeable we could start an interesting campaign, especially as the man who invented quantitative easing has much stronger credentials than most of the current front-runners.
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24 September 2012

US Set to Buy up the Pyramids

When Keynes wanted to come up with an example of activity that enables an economy to flourish by requiring the investment of huge amounts of physical labour but without causing the failure of aggregate demand he suggested the Egyptian pyramids. Today, however, Egypt is providing a different kind of lesson that I hope the Egyptian people learn in time: that democracy and indebtedness are not compatible.

Egypt is in the midst of negotiations with the US over the debt of its former regime. Such debt, which enriched Mubarak and his cronies, was one of the causes of the revolution and should now be reupdiated as odious and no longer the responsiblity of the citizens of the newly democratic Egypt. The presence of Christine Lagarde in Cairo offering 'loans' and 'partnership' suggest that this is unlikely to happen, and that Egypt will, like so many countries before it, lose its freedom to an entanglement of foreign debt. The process was begun as soon as Mubarak fell, as reported by Egyptian economist Noha el Shoki in March.

As Nick Dearden of the Jubilee Debt Campaign notes in a recent Guardian blog, the media reports of 'turmoil' in the Middle East are being used to cover the next round of resource theft that will follow the negotiation of dollar loans:

'This allows the US and European governments to portray the $4.8bn IMF loan under negotiation, the "assistance" funds that will shortly start flowing into public-private "partnerships" and free trade zones being planned by the EU, as "gifts" to the Egyptian people. . . . However, many people remain sceptical about the IMF's agenda – privatisation, indirect taxation, removal of subsidies (many of which are corrupt, but some of which do genuinely support the poor) and an economy based around exports. As one government insider said last week: "In Egypt, we call privatisation what it is – stealing." A propaganda campaign aims to convince Egyptians that "there is no alternative".'

The brave Egyptians who spent night after night in Tahrir Square demonstrating for their independence should realise that the battle was only half won. Physical freedom and political freedom mean nothing without financial freedom. Just as we are being subjected to the decimation of our public services to pay off banks and investors whose money was created from thin air, so all the wealth of Egypt will be lost to its people unless they resist the attempt by the IMF and the US to 'lend' it money to finance its development.

23 September 2012

Financial Ignorance a Sinn

The next step on the rocky road of the Eurozone crisis is the financial union, proposed by Barroso last weekend. The proposal for a banking union is suggested as a way of saving the euro and the European financial system. If we will not take this step then the finance houses will not trust us and will destroy us. But just a minute. If the financiers are so all powerful how come they needed us to bail them out? This is one basic logical flaw. Another is why a system that failed because it was too consolidated and too centralised is to be saved by becoming entirely centralised, with just one regulator overseeing all of Europe's 6000 banks.

The answer is that German money is needed to make the banking union work, and the German monetary authorities will not agree to this unless they have control of what those banks are able to do. A proposal so draconian and disempowering will never be acceptable to banks in the countries of the European periphery that still have the economic strength to resist, which will make withdrawal from the EU much more likely, and especially in the UK. The proposal is the opposite of a real solution to the crisis, which would rely on more diversity, the breaking up of the larger banks into smaller banks more responsive to their local communities, and the creation of many currencies rather than the monopoly of the Euro.

The public debate about the Eurozone crisis has been lamentably shallow. A recent exception was an interview with Hans-Werner Sinn on Hardtalk. He was responding to George Soros's recent call that Germany should either 'lead or leave' the euro, which Sinn portrayed as a veiled demand for Germany to pay more. As a financier it is unsurprising that Soros should call for the German government to create more money that, as previously identified on a guest post on this blog, will mostly end up in the hands of financiers.

The most interesting parts of the interview have been cut from this video, although Sinn does identify how the 'policy of making private debt contracts public debt contracts is dangerous to Europe'. By increasing tensions between national governments, as the northern countries become the creditors of the southern European countries. This will raise tensions between the nations of Europe, the very tensions that the EU was set up to diminish. The whole interview, available as a podcast, is well worth listening to, as a heterodox view of the Eurozone crisis that also exposes the ignorance and lack of understanding of BBC staff.
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19 September 2012

Tunisia's Financial Revolution

The job of Governor of the Bank of England is now being advertised. I a hoping that radical critics of the present elitist and destructive monetary regime will find a candidate we can rally behind. Between Occupy and the New Economics Foundation we should launch a shared platform for the favoured candidate. Alternatively we should send our individual cvs as radical economists, especially those of us who were able to see the crash coming before 2007 and warned accordingly.

It has been disturbing over the past few years to witness how some of the most radical criticisms of government monetary and financial policy have been issuing from the Bank of England. I have been intrigued and encouraged to find that their staff have, in print and in person, shared much of my view of what has gone wrong, and sometimes what we should do to address these issues. When I ask why more radical policies, such as using QE to remove more of our debt from circulation or taking steps to bring about a managed default, are not being implemented the answer is that there is insufficient political pressure to fore the politicians to act. The reasons are political not technical.

Let us contrast this supine acceptance of austerity and social dislocation with the situation in a country whose democracy we consider a mere fledgling compared to our own soaring eagle. In Tunisia the people are struggle to repudiate the debts taken on by the oppressive regime they overthrew in their Arab Awakening. They understand that without control of their financial system they can never have the freedom they crave. President Marzouki is demanding an audit of the debts taken on by the former regime as a first step to deciding which should be honoured, because they benefited the country, and those which only filled the foreign bank accounts of a kleptocrat and should therefore be repudiated.

You can find links to videos where some of those leading the citizens audit campaigns describe what is happening in their countries. My presentation with Jonathan from Jubilee Debt Campaign on the UK is here. I presentation from Patrick about Tunisia is here.
Those of us who support radical policies or vote for parties that do not get represented in parliament have long understood the image nature of democracy in the UK. But we have reached a situation now where the politicians are selling a line about our inability to pay for public servjces that should be open to debate, but in the UK in 2012 the 'three main parties' that is to say the three parties which the edia tells the people are available to receive votes, agree in the the financial conspiracy that services the 99% and sacrifices the rest of us on the altar of their greed, We have grown used to patronising the countries of the middle East with their 'awakening' from the slumber of tyranny. Isn't it time that we rather woke ourselves up and started using our democratic systems to reject the grossly unequal and exploitative nature of our current economic system?
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11 September 2012

Co-operative History Tour

Radio 4's Farming Today recently focused on the role co-operatives might play in supporting the incomes of farmers, especially dairy farmers, and increasing their ability to withstand the oppressive power of the supermarkets. In the Year of Co-operation this is to be welcomed, and the comparisons with the situation in other countries, where more than 90% of dairy farmers sell their milk through co-operatives, are particularly useful. However, it is not just a question of transferring a business model: we need to understand how our politial and economic history has left us with a different attitude towards co-operatives.

Rather than milk co-operatives, until 1994 UK farmers had the protection of the Milk Marketing Board, which set a national price for milk and thus supported production and farmers' livelihoods. Like defence and energy, milk was considered a strategic resource - too vital to national well-being to be left to the vagaries of the market. This was a typical example of the statist approach to constraining the power of the market that was favoured in Britain in the post-war period, and no doubt an interesting comment on our changing food culture to vegan readers of this blog.

The vision of socialism as being exercised through one party and at the state level was particularly strong in Britain, where the Fabian socialists fought and defeated the guild socialists during the early years of the 20th century. I have written a longer academic piece about the intellectual links between the guild socialists and the modern green movement. Take, for example, this quotation from William Morris's 1890 pamphlet News from Nowhere:

'that individual men cannot shuffle off the business of life on to the shoulders of an abstraction called the State, but must deal with it in conscious association with each other ... Variety of life is as much an aim of true Communism as equality of condition, and ... nothing but an union of these two will bring about real freedom.' (Morris, 1890).

As the centralised state bastions were challenged and defeated one after another through the Thatcher years, both consumers and producers were left up vulnerable to the chilly winds of untrammelled market capitalism. This has led to excessive market power by banks, supermarkets, developers, and energy companies. In other countries where the market had always been more powerful, citizens had already combined to defend themselves. We are now in a situation of having to catch up.

We also need to remember the political lesson from the Blair years: while unity is strength, uniformity is weakness. The centralisation of the model of state ownership and democratic control by one party left a whole range of organisations from the Milk Marketing Board to the Labour Party itself vulnerable to takeover by those who sought to neutralise rather than reform them. The co-operatives, for all the snide criticisms they faced from the Fabians for compromising with the market, have proved more resilient. It is now the Green movement rather than the socialists who maintain this tradition of mutualism and local control.
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5 September 2012

Reclaiming the Green Economy

I have become increasingly saddened in recent weeks to see how those of us who first conceptualised the 'green economy' have been allowing that phrase to be co-opted by the forces of capital and by those who would seek to use it to swell the size of their profits. I am now reading critiques of the green economy from the left which lead me to ask, if not a green economy, then what? Surely our strategy should rather be to reclaim the green economy.

An example is a recent report from the Rosa Luxemburg Foundation called Beautiful Green World: on the Myths of a Green Economy. In the following sentence it abandons the attempt to ensure that the green economy will be founded on social justice rather than the maximisation of profit:

'The green economy therefore does not mean that the protection of people and the environment substitutes the drive for profit. Rather, in the world of the green economy the generation of profit remains the necessary condition of all economic activity, and environmental protection is subordinated to it.'

I could not disagree more and I think it is a disastrous idea to concede this turf to the capitalists.



The sort of argument critiqued by Rosa Luxemburg is to be found in a report from the Green Alliance: Green Economy: A UK Success Story. This attempts to argue for investment in the green economy to save the economy from recession and stimulate growth. It grows out of exactly the same competitive, growth-driven mentality that has created the ecological crisis. The message to policy-makers is that Britain can compete most effectively and make the most profits from prioritising the green economy. While it is immensely encouraging to see how the green sectors are flourishing in the midst of recession, this framing is not helpful.

It is a fine line between calling for investment in better-insulated homes and rail networks while rejecting the idea of green growth, but I find the concept of transitional investment helpful here. If money (and energy) invested now can ensure that we will be able to enjoy a good life with a lower investment of energy in the future then it can be justified. Just as we have had to hold onto the meaning of sustainability, as it has been disfigured into 'sustainable development' and even emptied of meaning other than something that lasts for a year or two, so we should not abandon the use of the phrase 'green economy' while rejecting any association with oxymorons such as 'green growth'.
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3 September 2012

Renew Calls for Citizens' Audit

For a while now I have been blogging about the importance of a Citizens' Audit. The role of such an audit would be to settle the issue of how we acquired the debts that have left us so vulnerable that the Director of the government's Office for Budget Responsibility has apparently recent claimed that 'Britain is Bust'. At least as important, however, is to question how is the financial crisis and recession redistributing wealth?

The Bank of England  has recently addressed this question in a report on the distributional consequences of their policy of quantitative easing. This policy is often referred to as 'printing money', but in fact it is anything but. Printed money would have to be spent on real output, and hence would inevitably provide some stimulus to the real economy. QE, by contrast, has consisted of the creating of credit in the government's account at the Bank of England, with which it has bought government gilts, or IOUs.

This has fed money into the financial economy and resulted in a boost for financial institutions and traded stocks. As the bank concludes: 'By pushing up a range of asset prices, asset purchases have boosted the value of households’ financial wealth held outside pension funds'. This is illustrated in the figure, where you can see clearly the fall in the value of stocks as a result of the credit crunch in 2008, which is reversed as the policy of quantitative easing starts to take effect from March 2009 onwards.

Had we not bought our own debt presumably we would look even more bust than Robert Chote thinks we do already. Hence the QE policy has reduced the cost of national borrowing, keeping the rates of interest charged by our foreign creditors low. The Bank has also kept its own base rate at a historic low of 0.5%, reducing the earnings of those who live from savings, especially the elderly.

What has most incensed the citizens of the UK is that the financiers who caused the financial crisis that has bankrupted the country as still profiting, whereas those who work or have saved are losing the value of their assets and their incomes. The Bank concedes this accepting that 'holdings are heavily skewed with the top 5% of households holding 40% of these assets', i.e. the assets that have increased in value as a result of QE.

These matters are the result of political and policy decisions and yet these decisions are not the subject of political debate. Instead of buying gilts, money could be created by government and used to fund green infrastructure, insulating the homes of the pensioners whose income is now so reduced that they cannot afford to pay their fuel bills, perhaps. The calls for a Citizens' Audit are precisely to enable us to have the information necessary to make these decisions as we should do in a democracy - together and in service of the interests of the majority rather than the wealthy minority.
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