Transforming Finance - 2. Lapavitsas, Chick, Dyson, Dearden

Prof Costas Laparitsas (Univ. of London) began the morning parallel session at One Moorgate Place:  The Fresh Thinking on Debt and Recovery with the theme of the financialization of more and more of life. This leads to the growing accumulation of debt for UK households. The way out of debt is general inflation, debt forgiveness, cancellation or structural economic changes. The credit money theory is not new (see Sir James Steuart) and is not the key to open all doors. Financial activity is the key factor, which leads to credit, which leads to loans. For more understanding he referred to the 'real bills doctrine'. He warned that even 'good loans' can become 'bad loans' further down the road.  A key policy should be the reversing of finacialization with public provisioning in other ways; he warned about the quantity theory of money and mused on the idea of a benevolent dictator to manage the money supply.

Prof Victoria Chick (Univ of London) commenting on the debate on austerity (enforced privation due to public debt reduction) pointing out there is good and bad debt with an illustration   (like this one)  of  UK debt / GDP from 1909 to 2009 showing that current public debt is at a low level historically, with a small uptick at around 60%  compared with pasts peaks around 250%.  Good debt pays for itself if there are productive outcomes which bring rising earnings  and tax back to government. There is plenty for government to invest in from the green agenda. Bad debt causes asset bubbles and, referring to the request to define speculation:  'like art I can tell it when I see it', and often merely involves someone who has the fastest finger on a button. She said we need to move from a cowardly state to a Courageous State as the book by Richard Murphy . However, she observed that no one does money management very well.  She recommended the targeting of nominal GDP.  Keynes did talk about the money supply, see: liquidity preference, and in 1913: that banking policy is the key to the change in economic activity. The question 'who is responsible for money?' is now never asked although it was a big issue at the foundation of the United States. The original position was that the state alone issued coins as money. Now, the banks are given the franchise to create money on the state's behalf  but the crisis has shown that the state will underpin the banks despite what they do with the privilege. A 'state of schizophrenia'. 

Ben Dyson (Positive Money) said whilst public debt is not really a problem currently, private debt is. As this debt is paid down, money is eliminated from the economy - the money supply shrinks. The falsity of the old 'trickle down theory of economics' has been exposed by the financial crisis as per the dictum: 'we are still being trickled on from a great height'.  He suggested an alternative issuing of money in the form of a citizen's dividend.

Nick Dearden (Jubilee Debt Campaign) ran a successful campaign against 'vulture funds' and is involved in lobbying for world debt cancellation, which would have beneficial wealth distribution power.  However as shown by German post-war debt cancellation growth is needed beyond that. The bailout of the Anglo Irish Bank aided billionaire bankers but left generational debt for the people. There is a social struggle on and to sort out competing self-interests we must have good answers, not only: What? but: How? He advocates a debt audit with democratic decisions on which debts should be cancelled.

From the floor: The manufacture of money out of nothing by banks is a massive ideological issue; democracy itself is being killed in the name of economics. 
Conference videos are being posted on Covi 
posted by Charles Bazlinton

Transforming Finance -1. Bennett, Philopponnat, Griffith-Jones, Werner, Keidal

Boom and bust is bad for the economy and environment said Craig Bennett of Friends of the Earth, introduced the Transforming Finance conference in the City of London on 10th May. He said the banks over a 5 year period paid £203 bn in tax but that the bail out cost £1 trn. One theme of the day was that the 2007/08 financial crisis showed that deregulation resulting in banks having unfettered freedom over the creation of credit resulted in privatising the gains (for banks - whilst they made them) and socialising losses (payout by taxpayers - after the system broke). Chairing the first session was FT's Pauline Skypala. 

Thierry Philopponnat (Finance Watch)   said that with an unlimited stock of money spent on a limited stock of assets,  bubbles are inevitable. Sensible productive spending gets hardly a look-in. Derivative markets amount to 12x world GDP and are obviously mostly a pure speculation play and not a hedging device. 

Stephany Griffith-Jones (University of Columbia) wanted new financial instruments to be approved as new drugs are tested before use. She said that the Glass-Steagall regulations had kept the world relatively free of crises for 40 years. Strict loan to value ratios were said to be too political - but look what happened at Northern Rock with 120% LTV ratios.  

Richard Werner (University of Southampton) said we could not ban speculation (which he defined as anything dealing in transactions not included in GDP calculations), but we could ban credit creation of the money used for speculation.  He agreed that in the UK in the 1950s & 60s credit had been directed by the Bank of England and said decades of productive growth in Japan, Korea, Taiwan and China had occurred under a credit guidance regime. QE money created by the Bank of England or the FED, stays in the central bank and does not add to circulating money unless it causes credit creation by banks. One way to end the recession, a situation arising due to shrinking credit (-1.4% currently) is for the government to borrow directly from banks.  
[This is explained in his book, New Paradigm in Macroeconomics p 302:
'halting all bond issuance by the government and shifting fundraising  for the entire public sector borrowing requirement to direct borrowing from banks in the form of standard bank loan agreements. By shifting public sector borrowing from bond issuance to borrowing from banks, crowding out of private sector activity is minimised....selling bonds to the non-bank private sector amounts to a zero-sum game, while borrowing from banks results in credit creation (a positive-sum game), that is, the increase in purchasing power in the economy...and increased economic activity. ]

Thomas Keidal (Sparkassen)   said the German locally autonomous savings banks provided for all sectors of the population bringing employment and investment and recycling profits to their own reserves and to local good causes. The resilience of the German economy largely grows from the dispersed local banks. They are not state- or municipality- owned. They thrive due to relationships between customer and bank. Not a single savings bank has needed to be bailed out - the association of savings banks does what is needed for its own if trouble comes.  He was told pre-2007 that he was in an old fashioned dying institution and he would be 'the last communist in Europe'. Now people are following the Sparkassen guidelines such as a 60% limit loan to value ratios. He warned about the bad example of the  Spanish Caja banks which copied the local idea but then were allowed to compete with each outside their areas which resulted in financial disaster.    
posted by Charles Bazlinton

Bankers are still biting the hand that feeds them

Bankers bit the hand that fed them - so why are they allowed to keep biting? Clifford De Souza, is an ex-banker and is quoted in the Financial Times that 'bankers had forgotten what decades ago used to be their prime purpose. “You wanted to get paid well but with a strong view that your job is protecting the bank.' When the world financial system was just about to tip over a precipice in 2006, the FT's Daniel Shafer reports that the average pay + bonuses package for top investment banks was 9.6x the average for the FTSE 100 company.  Now the average is 5.8x. For ordinary banks the figure was 2.0x and is now about 1.9x. With the public attuned to the chopping of  'banker's bonuses', guess what? Bankers are now asking what their base salaries will be. A head hunter is quoted as saying that not long ago they wouldn't even know what their base salary was.  

From an European investment banker: 

'The problem is that bankers control their means of production. A farmer can also keep the grain he produces but there is a limit to how much grain this guy can eat. With money, there is no such limit.'

How can this be? Why is banking such a money spinner that: 'there is no such limit' ? For enlightenment see this blogpost quoting Dr Andrew Hilton , 'banks like cement makers'.

Prof Richard Werner clearly states how we could resolve this situation in this interview. The situation is succinctly put in another (the YouTube interview on Local Banks):
'...banks weren’t told, when they were given this privilege to create and allocate the money supply: ‘Now go out and do this wisely’. They weren’t told to do that, and of course what they’ve been doing is really just look after their own interests. As it turns out, they can’t even look after themselves, just look at the banking crisis!'

The private allocation of the money supply by banks of all descriptions, given the natural inclination to human greed, ensures predation on the general public. In a fairer system the money supply would be diverted mostly to productive uses. We the public have been doubly duped. Not only do we allow the benefits of credit creation to be in private hands, but having bailed out the banks with public money once, we have signalled to bankers that risk taking in their own cause will be OK for the future. The fact that there is still any multiple in pay+bonus comparisons in favour of bankers shows that no one has changed the rules.  
posted by Charles Bazlinton. See also the book The Free Lunch - Fairness with Freedom and the section on crucial differences between two types of occupation: 'Bakers and Bankers'

Germany won, UK regain? Local bank challenge ECOBATE 2013-4

Some killer history facts for the local bank scene were given by one of the final speakers at the public session at ECOBATE 2013 in Winchester: Dr Karl-Peter Schackmann-Fallis, Executive Board Member, German Savings Banks Association. 

The 1817 UK Savings Bank Act was followed by the establishment of nearly 500 savings banks by 1820. In Germany at the time there were only half that number. Currently the numbers are: Germany 422 (15,000 branches), UK very few.

The independent banking sector in Germany which comprises these savings banks and 1100 co-operative banks is not glamourous and is not a cash cow for financial investors. The savings banks themselves are not private banks or co-operatives and above all, are not state banks. They add to banking diversification and are decentralised, local, and with independent management. Short decision making time and a lot of local information for businesses are valuable features that are not available from centralised banks. IT is centralised across the savings banks (Sparkassen), giving economy of scale. Savings banks bring added competition to the private banks and co-operatives and  success has been hard earned and tested over 200 years. Whilst the local economy grows by supplying loans to small, mostly family-owned businesses, net income expands the savings banks' reserves and grows their equity for more lending. Grants to many local good causes are made.

He encouraged the UK to move toward a similar savings bank model. He advocated new local retail banks with a legal framework in place to prevent buyouts by big banks.  Referring to the UK's 1817 Savings Bank Act and its charitable nature he said 'the UK set Germany a fine example'. 200 years later will we learn from Ye Proven Olde English export idea?

View Dr Schackmann-Fallis' talk on video: The Information Daily.com 
ECOBATE 2013 was hosted by Prof Richard Werner, Director of the Centre for Banking, Finance & Sustainable Development, University of Southampton.
posted by Charles Bazlinton

Vince Cable: 'We need lots of Banks of Dave' ECOBATE 2013-3

Pity your government minister. He accepts an invitation to speak at a pioneering economics conference but, being in town everyone wants to see him and bend his ear. So his time is taken up in personal lobbying and he misses hearing much of the valuable contributions to the banking crisis from other speakers. 

Vince Cable MP, the UK Secretary of State for Business, Innovation and Skills said in Winchester that the banking situation in the UK is a 'massive problem', with the collapse of major banks and the absence of local banking. As earlier speakers had done, he gave us more history: JS Mill described UK bank collapses in the early 19th century but ever since, until Northern Rock in 2007 we had escaped them, with even the mid-20th century depression which affected US banks not troubling the UK in that way. He mentioned the Cruickshank Report of 2000 on competition in UK Banking which called for government to address the monopoly position of banks; to bring about diversity to the flows of money in the economy; to examine the effectiveness of the FSA in bringing increased competition. Dr Cable, in opposition at the time, had championed the report but ministers dithered and it went away as a political issue.  The failure to take it seriously meant that the chickens came home to roost, as bank customers queued for their money at Northern Rock branches in 2007. 

Dr Cable spoke of government support for bank lending to small businesses and welcomed the ventures of Dave Fishwick  'we need lots of Banks of Dave',  Handelsbanken, Metro Bank and others new banks. He extolled the virtues of the German Sparkassen (savings bank) movement a  'superb model', 'wonderful system, localised, decentralised' and wondered why 'we don't have anything remotely like the Sparkassen system?'. He called the UK banking system 'horribly inappropriate', having lost its  local banking when the building societies were de-mutualised. Watch his speech on YouTube.

A welcome VC quote: 'I come here to learn as much as to preach'. Earlier in the day Alex Templeton had indicated clearly what needs to be done to introduce a Sparkassen type system in the UK even under existing local authority powers.  He gave a short but highly convincing case for local authority backed local banks.  He described specific current merits of the German Sparkassen system in producing jobs and growth and carbon reduction, contrasted with a potential sustainable growth venture in Hampshire which is stalling due to lack of ready credit.
Watch Alex Templeton's  speech on YouTube (9 mins).  

It looks as though Dr Cable really wants local banks. He need do no more than actively encourage local authorities to back local community banks. With government cash grants and/or guarantees Vince Cable could soon have local credit flows invigorating the economy from the bottom up, bringing growth and jobs, rather than the prospect of another failure of the 'horribly inappropriate' current system overtaking us. 

Posted by Charles Bazlinton reporting on the European Conference on Banking, Finance and Sustainable Development. Winchester, 6th March 2013.

Michael Kumhof. ECOBATE 2013-2

Prof Charles Goodhart (last blogpost) gave us history from his personal perspective having been at the centre of economic policy-making for decades. He told us as it was, with its flaws and failures, but it was a sobering tale rather than a hopeful one.  

At the ECOBATE event last weeek, Michael Kumhof, Deputy Division Chief of the Modeling Division in the IMF Research Department and sometime Asst. Professor at Stanford University, also gave us history, but with prospects of hope for a far better way to run national economies through monetary reform.  The Chicago Plan in the mid-1930s, from the Great Depression era,  was the fruit of what Kumhof called a more profound, deeper intellectual debate than we are having now in our own financial crisis. Irving Fischer supported it.  It called for the separation  of the monetary and credit functions of the banking system by requiring 100% backing of deposits by public reserves, that is: government-issued money. And the banning of the private creation of credit 'out of nothing', as happens through banks now. 

To illustrate the way banking is popularly thought to work, compared with how it actually does he gave the example of a garage, where goods are placed on the forecourt and then sold. The garage acts as an intermediary. It is mistakenly assumed that this is how banking works, deposits arrive and are then lent out. Wrong. 'It doesn't happen'; 'that is never used' ; 'that is not what banks do'. Kumhof was a Barclays Bank manager in Singapore for some years and knows from the inside. No other business has the privilege of creating its own raw materials like this. See the book The Free Lunch- Fairness with Freedom, Ch 3: Bakers and Bankers. 

Kumhof has reworked the Chicago Plan to suit modern times and his paper is available HERE.  At page 64, etc, are diagrams which show how transition to a Chicago Plan could work out. Solidly researched in history he cites Michael Hudson with his work on ancient Mesopotamia and debt forgiveness. Also Zarlenga and  Graeber, who show that the private issuance of money through history has caused major societal problems: 'a calculated misuse of a nation's money system for private gain' . He named Steve Keen as one who warned of the problems we now see. 

The key private power of banks that has created the mess we are going through is: 'bank liabilities are money that can be created and destroyed at a moment’s notice...The critical importance of this appears to have been lost in much of the modern macroeconomics literature on banking, with the exception of Werner'. 

He showed how reform would release wealth to all, instead of to banks. A regular Citizen's Dividend could be issued to everyone, private debt could be paid down, permanent low interest rates would ensue, boom and bust cycles would be easier to control, young people would study engineering rather than finance. As an illustration of the reform he held up a banknote which is based on 'debt money' which has to be repaid and a coin which never has to be. The Chicago Plan Revisited could mean that all money would have this debt-free quality. His paper is a must read for anyone wanting a fairer society.  Despite some unfamiliar equations (skip them?) much can be gained.
posted by Charles Bazlinton

Goodhart & Werner. ECOBATE 2013 -1

It's pleasing when your local event has a global media spotlight shone on it on the day. In the UK's dark early hours on 6th March this happened for the ECOBATE 2013 conference through a letter published in the Financial Times by conference originator Prof Richard Werner. Dr Werner had written commenting on Paul Tucker's suggestion that negative interest rates might be charged on some bank reserves at the BoE and the FT published it on the day. His letter was a tutorial on three types of money in our monetary infrastructure.  For good measure he also threw in a reference to the 'Quantitative Easing'  term which he had coined in the 1990s in Japan, giving it his originally intended meaning. Added to all that, also in the FT, an op-ed article by Martin Wolf  acknowledged Werner's old argument that central banks should borrow directly from commercial banks as a means of reviving an economy. 

Day dawned on Winchester's Guildhall (UK) and inside at ECOBATE the lessons of history featured strongly. As Prof Charles Goodhart said in his Conference Keynote speech, 'where you are going depends on where you have come from'. He sketched two historically different world banking models. Firstly, the Anglo-Saxon banks started as a) diverse local retail banks which handled the smaller end of lending, and b) merchant banks which were gatekeepers to large capital markets. The second was  the Continental (Japanese) one was based on, c) a universal model of banking without much capital market access, but with d) post office, co-op and sparkassen retail banks.  He thought that the Vickers 'ring fence' proposals to separate banking business are not likely to succeed  on the continent and will be watered down. He thinks the UK is on its own on this, which will make it difficult for UK banks to compete.  

He told us it was wishful thinking to expect banks to bear the burdens of their failures. 'Banks' are an abstract entity and it is always some sub-set of households or another that takes the pain. He was doubtful about success from attempts to 'separate those dreadful gambles  and make retail banks safer'. And how can you separate a hedging transaction by a small farmer to cover his future crop from large scale speculation in that crop? These are interchangeable, intertwined actions. The interconnectedness of investment banks means that liquidation of them would be horrific. One customer transaction such as selling foreign exchange has a knock-on effect through different banks across maybe 10 deals as each tries to cover itself -the 'hot potato' effect of avoiding contagion. If we think it possible to make retail banks safer: 'wait 10 -15 years'.  He has observed 4 crashes in his lifetime and is 'inking in' another housing-based financial crisis for 2028.  Very few in 2007 foresaw the crisis. The Professor quoted the FED's Bernanke: 'never stronger banks'. Credit default swaps (a type of banking insurance) were priced at their lowest-ever levels in 2007. 

Would earlier intervention help? Auditors have never shut a bank; running out of cash shuts banks.  Much higher equity is needed for banks, but managers and owners will only raise equity if desperate. Unless massive deleveraging happens, stagnation will continue - banks cannot be made to lend.  He spoke of equity ratios, liquidity ratios and 'ladders of sanctions' and penalties, on managers: 'Choose your multiple choose your sum'.   

He agreed with a questioner about the effects of the next generation being in charge with no experience of the last crisis. The study of history is vital. He wondered if a new departure in regulation might include a ' comply or explain' aspect. He described Credit Rating Agencies using as a guide 15 years of stable property prices, as a 'monumental misreading of probabilities'.  Charles Goodhart is always thoroughly good value - but you may have to run hard to keep up the pace and sheer coverage. 

And so on to the Gothic revival style King Charles Hall and an excellent lunch and more good value from Vanilla Catering & Events of Southampton.  More on ECOBATE 2013 anon.
posted by Charles Bazlinton

  

Hat trick from Vince Cable in Winchester Wed 6th March?

The latest UK bank lending figures to small  businesses are abysmally low. The special Bank of England / Government 'Funding For Lending' scheme launched last year, seemingly having achieved less than zilch in the last 2012 quarter - lending actually dropped. See Sky news.

ECOBATE 2013 in Winchester tomorrow awaits to see what Vince Cable, UK Business Minister, will pull out of his splendid hat that will trigger the flow of credit to that engine for a revival in economic growth - small businesses.  

The Secretary of State will be speaking at 6pm at the Winchester Guildhall and admission is free.  Earlier, from 1.30pm the theme is Local Community Banks and all sessions are free to the public. Register on arrival - just turn up.

More details on the previous blogpost.
posted by Charles Bazlinton. Book: The Free Lunch - Fairness with Freedom 

Local Bank theme to ECOBATE 2013 conference in Winchester,UK

The second European Conference on Banking and the Economy (ECOBATE 2013) is on Wednesday  6th March at Winchester's Guildhall, UK. Title - Banking: From global to local. Academic papers will be delivered from international economists and bankers representing universities, central banks, Sparkassen, the IMF, the OECD and other world institutions. Conference participants includes: Charles Goodhart, Michael Kumhof, Thomas Keidel,  Richard Werner, James Vacarro,  Brian Lacey, Neil Marriott, Don Nutbeam, Hans-Peter Schackmann-Fallis, Roy Ruffler, Fiona Brownsell.  

Dr Vince Cable MP, UK Business Secretary will give a Keynote speech later in the day. There is an early afternoon session on Local Banks which is free to the public (1.30pm -3.30pm). The second free session starts at around 3.30pm and runs to 7.30pm and includes Dr Cable's contribution to the general theme of Local Banks. 

For full registration to the academic event, with lunch, and including the local bank sessions go to the University of Southampton website and choose the 'package option' tab.  

To register for free admission to the local bank sessions at 1.30pm - 3.30pm and at 3.30pm - 7.30pm,  send an e-mail to: charles.bazlinton@local-first.org.uk

Monetary reform is on the main agenda: A government funding model for infrastructure that  does not add debt; 
And: How to end post-crisis recessions and increase growth & employment without further government expenditure 
Also: Financing the transition to a low-carbon economy and preventing destructive growth

Monetary reform: A promise not to pay back. Justin Welby: Skinning live bankers

Dr Vince Cable, UK Business Minister is to be the keynote speaker at the second European Conference on Banking and the Economy, Wednesday 6th March 2013 at the Guildhall, Winchester, UK (ECOBATE 2013).

Other notables include Mr Georg Fahrenschon, President of the German Savings Bank Association, who will speak on the Local Bank theme which is attracting a growing following in the UK.  Professor Charles A. E. Goodhart, CBE, FBA is coming again. He addressed a plenary at ECOBATE 2011 - and is always good value as an elder statesman among economists. A newcomer is Professor Brian Lucey, Professor of Finance, Trinity College, Dublin.

Lord Turner gave the keynote speech at ECOBATE 2011 and yesterday (6 Feb 2013) in an FT article by Chris Giles Turner defends permanent printing of money , Lord T shows he is very much on the theme of his contribution at the ECOBATE 2011 event where he spoke of managing credit creation to deliver social optimality. He thinks that current measures including QE are nearing the end of their effectiveness. The FT report says he advocates 'monetary financing of deficits, which involves the central bank financing a deficit permanently without having to sell government bonds',  and: 'to pump money directly from the authorities into the real economy with the promise that it does not have to be paid back'.

Lord Turner's theme seems right in line with Prof Richard Werner's statements on the YouTube 'Debt-Free and Interest-Free money'. He says: 'many politicians think, that governments need to borrow and get indebted in order to fund government expenditure. That's not actually true... The government can spend money into circulation, money that it has issued.'

Local Banks, that is local, community, not-for-profit banks, are ordinary and accepted in Germany, Switzerland, the US and elsewhere. The UK is bereft of them. Handelsbanken prides itself on local decision-making and access for customers to managers but it is a privately owned bank that feeds shareholders with profits that others, such as Sparkassen, recycle, 'fulfilling public interests' to the communities they are in. 

The new Archbishop of Canterbury, Justin Welby, less than a week into the role, is still skinning live bankers with gusto at the Parliamentary Commission on Banking  Standards. In The Times today: Archbishop takes a stand against the moneylenders  he is narked that they want both high salaries and high bonuses,

'what is it essentially about bankers...that they need skin in the game? 
We don't give skin in the game to civil servants, to surgeons.' 

Obviously an insightful man, with a nice turn of phrase. Quite odd really, a top prelate espousing themes found in the book The Free Lunch - Fairness with Freedom.  Nice though. 

Did central bankers hear this at Davos?

Jens Weidman is the top man in Germany's Bundesbank and according to the FT editorial on 24 January Weidmann's doubts  he is worried about central banks losing independence. He sees battles in Japan over who controls monetary policy: government or central bank? In an article Chris Giles spells out the issues around The Fed, the BoJ, the ECB and the BoE. The first and last have an operational independence to meet a government-set target and the middle two have absolute independence to set their own monetary policy target and meet it. 

The FT editorial is wary of politicians steering monetary policy (as UK 1970's & 80's) and messing up with high inflation. But here is an interesting phrase from the FT leader writer:
'Democratically elected governments still have a role to play. They have the right to choose* a governor whose preferences regarding inflation are broadly consistent with their own. In some countries, such as the UK, politicians also set the central bank's objectives.'
That's OK then. We are to be allowed a little bit of democracy as far as the awesome power of central banks is concerned. But how have these current systems worked out?
[* Democratic element for the choice of the new BoE governor limited to a hurried interview and then leave it all up to Mark Carney's good judgement that the unfolding 'set objectives' arrive before the end of his 5 year term?]

Sir Mervyn King of the UK's BoE clearly admits that he failed to warn years back, about approaching dangers. See this blog 13 August 2012 The awesome power of central banks . 
He, in Chris Giles' words, (Why Sir Mervyn has taken a walk on the supply side) 
'has done a four year volte-face by admitting that the pre-crisis period was infected by unsustainable overexposed bank lending  and unsustainable paths of consumption'.
So whatever the balance of independence, when the person placed to be the country's bank supremo can get it so wrong - and hats off to Sir Mervyn for his sackcloth and ashes admissions - the current system is clearly broken and wonky, with nasty noises in the back axle as it approaches Basel and unresponsive steering too. What more does the awesome, street facade of the Bank of England signify now, than just a studwork-and-plaster film set, signifying grandeur but hopelessly exposed as not fit for purpose for the real world? Help! It's our lives that they are playing with as they try and pretend the machine just needs an odd new committee bolted on here and a couple of safe banking ratios there, to fix it. 

Here is good sense from a quite different monetary policy reform, proposed by Huber and Roberston in Creating New Money (free download), p9:
Non-cash money will be issued and put into circulation in the following  way:
The first step will be for a central bank simply to write it into a current account which it manages for its government.... most importantly these will be debt-free payments...
The second step will be for the governments to spend the new money into circulation just as they spend other public revenue - on public expenditure programmes such as education, defence, servicing the national debt, etc.

See how Prof Richard Werner of the University of Southampton  explains this remarkable possibility in a 7 minute YouTube video Debt-Free and Interest-Free Money.  Or click on this article's 'very readable' link.  Ben Dyson is leading a country-wide campaign on the same topic: Positive Money.

The maestro governors of central banks need to be transformed into our wise servants through Parliaments and Congresses as they create our money and transparently do their work to bring growth and safety to our economies. I wonder if they talked about this at Davos? 
posted by Charles Bazlinton.  BOOK: The Free Lunch- Fairness with Freedom 

'Government faces a perfect storm of tax and benefits chaos'

The article (Editorial) below is entirely from the latest Citizen's Income Trust website: 

Summary: The UK's new 'universal credit' welfare system is to be launched in 2013. When you are attempting:
a) to marry up 2 national computer system with 
b) those in many of the 350 local councils and
c) reforming the local council tax system which can impact on benefit claimants,

there is likely to be an 'impending disaster', involving computer glitches, bureaucratic muddle, local variations, non-payment disputes and family privation, over-payment and clawback disputes... and political unrest to say the least.  

The book The Free Lunch - Fairness with Freedom expands on the theme of a universal Citizen's Income as the 'Plan B' below. Based on existing computerised Child Benefit and pension payment systems as models, it must make good sense. For the background to such a timely solution read the book.  

Editorial Citizen's Income Trust Newsletter Issue 1: 2013. 

In an article in The Guardian on the 10th September Frank Field MP raised serious concerns about both the principle and the viability of 'Universal Credit' ( - we use quotation marks because it is far from universal and it is a benefit and not a credit). His criticisms relate to monthly rather than weekly or fortnightly payments, and to a marginal deduction rate still at 65%. A major concern, expressed both by Field and by the computer industry, is that for 'Universal Credit' payments to be accurate, the computer systems of employers, Her Majesty's Revenue and Customs, and the Department for Work and Pensions, will all need to communicate with each other in an accurate and timely way, at least once a month, over every single 'Universal Credit' claimant. This would be a tall order for a simple benefits and tax system, but for our complex tax and benefits system the plan could be called heroic. Just to mention one major complexity: We are taxed as individuals, but 'Universal Credit' claims are assessed on the household. If all of the necessary computer systems work together accurately, all of the time, then this IT project will be a most spectacular technological achievement.

What Field did not mention was that at the same time as 'Universal Credit' is being implemented, Council Tax Benefit is being localised. Different Local Authorities will be able to apply different taper rates, thus making it impossible for the Government to keep the overall taper rate to 65%, impossible for national policy on taper rates to be either formulated or implemented, and impossible for individuals and households to predict how much of every extra £1 earned they will be able to keep. And which is it to be? Will income post-'Universal Credit' be used to calculate Council Tax Benefit, or will income post-Council Tax Benefit be used to calculate 'Universal Credit'? If the former, because 'Universal Credit' will now be calculated and paid separately and potentially at different amounts every single month using real-time earnings data, Local Authorities will be puzzling over how to calculate a household's Council Tax Benefit; and if the latter, then every Local Authority's computer system will need to relate accurately to the Department for Work and Pensions' system at the same time as HMRC's system is trying to do so.

It is just possible that 'Universal Credit' could have worked, and we rather hoped that it would. It would have provided a little more coherence in a chaotic means-tested system, and it would have been a useful step along the way to a Citizen's Income. With Council Tax Benefit being localised at the same time, we are as sure as anyone can be that the Government faces a perfect storm of tax and benefits chaos. David Cameron and George Osborne, having agreed to Council Tax Benefit localisation for political reasons, and to 'Universal Credit' for practical reasons, are now wondering how to extract themselves and their Government from the impending disaster. Moving Iain Duncan Smith from the Department for Work and Pensions so that they could drop 'Universal Credit' was all they could think of. This failed. Their only option now is to abandon Council Tax Benefit localisation. Otherwise they will be rabbits looking into a car's headlamps.

The Government has decided that there is no Plan B in relation to reducing the annual public spending deficit. If they do not abandon Council Tax Benefit localisation then they will need to start thinking quite quickly about a plan B to implement when the tax and benefits system collapses.

A template for Plan B would be Child Benefit. No other elements of the tax and benefits system affect how much of it is paid; it never rises or falls with decreased or increased earnings; in proportional terms it benefits non-earners and low earners more than it benefits higher earners; it never contributes to marginal deduction rates and so is never a disincentive to employment; and its administration and computerisation have never been a problem. To extend the principle of Child Benefit to every UK citizen would provide the Government with precisely the policy mix for which it is looking. And an added bonus: to replace 'Universal Credit' with a genuinely universal Citizen's Income would even enable Council Tax Benefit to be localised without too many problems.

posted by Charles Bazlinton

Where are council tax changes going to end?

In the UK the debt-burdened government is barrel-scraping to pay its way whilst neglecting a perfectly sound way to generate the growth that would help to balance the books.   Terrified of international ratings agencies, it has become fixated on austerity. Ordinary people seemed doomed to a long period of faltering or flat economic activity because any new credit being created - the seed of new growth - rather than flowing to productive business, is mostly feeding speculative bubbles. The authorities are blind to the power of government to create money to fund productive, non-inflationary growth which would enable a steady and safe climb out of the fiscal hole. See this link for a short YouTube explanation how.  

One of the current tax collection themes is council tax from second homes. Up to now those people with above-average wealth had not only the privilege of a second home in some nice part of the country but feather-bedding from the state to help them pay for it through a discount on the local council tax which covers local services. The reason given was low use, but it ignored the fact that those services had to be run anyway.  

So with full council tax payable soon (or even a surcharge) quid pro quo arrives for wealthy sheltered 2nd home owners. Fair contribution to the community for benefits received from the community - that is, the added value that derives from being located in a highly desirable locality.  But just to complicate the  ranking of 2nd homes in the fairness stakes, bear in mind that for every home bought by a 2nd home owner it means one is taken out of those for local people who have not been able to afford even one home. 

Another tax hike on high value homes is the rise of stamp duty on change of ownership, from 5% to 7%; and to 15% in some cases.  Yet another possible one is an annual tax on homes over £2m value. All these changes have prompted Rob Perrins of Berkeley Group (a top UK housebuilder)  to plead for a 'simple competitive tax on property', he doesn't like the 'endless tinkering' (FT 8 Dec 2012). When an eminent developer reporting such promising results and prospects as Berkeley has done recently, says such things you suspect that something is hurting. 

Both Deputy Prime Minister Nick Clegg and Business Secretary Vince Cable are known to support land value tax and a reasonable guess is that the coalition government is moving towards this, starting with the easy targets. Along with cuts in the central government council tax subsidy which will probably affect all council tax payers at all band levels, we should see some interesting debate ahead. 

Land value tax is a 'simple tax' which rates highly in terms of fairness as illustrated in the book The Free Lunch - Fairness with Freedom.   

Simple time management trick

Have you ever thought that given a small amount of extra regular money you might work out how to also get the time to develop a skill or work up a business idea? The trouble is that the shortage of both the cash and the time, means that such meaningful ventures are unfulfilled for many people. In the book The Free Lunch - Fairness with Freedom, one key idea is the payment of a Citizen's Income to everyone each month which would enable the release of such human creativity. The book shows why the idea is quite possible and gives an example of where this has happened long-term.

But whatever the cash shortages, time always seems short and here is a tip to enable you to achieve those things that are getting neglected because the lack of motivation stops you even starting them. 

What you do is set yourself a very short-term deadline using the timer on your mobile phone. For example, you might have a large and daunting backlog of work that needs hours to complete, it may even be accumulating and seems impossible to get through.  What do you do? On Day 1 you decide a time - say 30 minutes - and set the timer on your  phone and start the work. When the alarm goes off, you stop the task and then get on with other pressing things.  On Day 2 (or later on Day 1, or whenever) you repeat the routine. Slowly you chip away at the task. 

Another example is when you know you really ought to practice some new task, such as watercolouring, or piano.  Maybe you have not worked out a new routine yet or  because your skill level is lowish you lack motivation to begin the practise session. On this type of problem you might set just 10 minutes on your phone timer. Stop when the alarm sounds. Then do something else. But you may find that self-motivation has crept in and you run on hardly noticing the bleep that came and went. 

This method is the diametric opposite of having a'blitz' on a problem over many hours or days which in most lives are just not available. Manage these large neglected problems by  nibbling away at them.   

Lord Lawson vs George Osborne: Glass-Steagall failure or suceess?

Lord Lawson picked up on something UK Chancellor of the Exchequer George Osborne said this morning at the Parliamentary Commission on Banking Standards. George Osborne had said that the US Glass-Steagall Act (part) repeal in the 1990s was because it had 'failed'. Lord Lawson, before starting his questions to the Chancellor put Osborne right about his 'failed'. He said that President Clinton was pressured to repeal the G-S because it was so 'successful' in doing was it was intended to do and keep dangerous banking activities from infecting ordinary banking. The banking lobby pressure cleared the decks, with S-G  out of the way, to  'reflect changes in the world's financial system' (see Wikipedia, et al) . The repeal is alleged to have allowed the financial system to blow up into the 2007 crisis, and so on, to this day. George Osborne joked that ex-Pres. Clinton should call in to the Committee to explain. Lord Lawson: 'No need, you can take my word for it.' 

There is now a similar discussion. There are those who want to have a complete separation of retail from investment banking. Briefly the argument is about a ring fence around the bits to be kept safe and protected for the public, and keeping out the rest. But where to place the ring fence? GO said there is a consensus about where the ringfence should be and told the Committee to beware of 'unpicking' the consensus. But big questions are unresolved: which bits to include in the safe bit? how do you define them? who defines them? what about people who 'tunnel  under the ring fence'. GO and Greg Clark the Financial Secretary to the Treasury sought to pacify the Committee members that all would be carefully looked at over the next year of legislation. 

The Vickers proposals (the consensus) rejects full separation into 'narrow banking' from the rest. The members pointed out the pressure and wealth of the banking lobby to get their own way. GO rejected a rejection by the Committee of the Vickers Commission after so much work.  It seems obvious that George Osborne is more on the side of the banks than the Committee is. 

Whilst archane points are debated on in the next few months about ring fence location, anti-tunnelling devices; the compilation of glorious ragbags of regulations, etc, one wonders that no-one is mentioning alternative money creation systems using government agencies rather than banks to create credit. The system is clearly broken and such crises as we are now experiencing will recur unless we do something to get rational and civilised thought about the dangers of money creation. See this video interview with Prof Richard Werner (Univ. of  Southampton) Debt free and Interest Free Money. A lot of problems would just not arise if the ideas of the book Creating New Money  were followed, see it here: Free e-book download James Robertson and Joseph Huber
posted by Charles Bazlinton who quotes Creating new Money in the book: The Free Lunch-Fairness with Freedom 

Dr Andrew Hilton on banks like cement makers

The Parliamentary Commission on Banking Standards (lead by Mark Garnier MP), taking evidence this morning has brought some gems from Dr Andrew Hilton, Director of the Centre for Study of Financial Innovation.

He likened the banking industry to a cement works: banks treat money like a cement manufacturer treats cement and concrete - they just keep pouring it through. Their attitude to glitches and risk is rather as the cement maker: So what if a little bit drops off the system?   He said that the trouble is the huge quantity of money passing through banks. Maybe the risk is only 0.001% but the total handled is so huge but even that tiny part is huge.  

What does reputation mean for banks? He said Goldman Sachs, although having endured a thoroughly bad press for a decade are still rated as top bankers. Would you as a client prefer to have them defend you in a tight deal; or might the reputation of say the Co-op bank, noted for donating to ethical causes, mean more? 

On trying to sort out risk and forming procedures to reduce it, he warned about the working of  'Goodhart's Law' in that however many levels of defence you formulate in a quantitative manner the real concern is qualitative assessment.  As Baroness Kramer said, the official lines of defence become 'gameable'. After failure, people justify their actions which cleverly avoided the letter of the rule.  

Whilst a Parliamentary Committee tries to sort out what has gone wrong with banking, will they examine the money creation aspect that Dr Hilton alluded to in his 'cement works' analogy? In examining important things such as risk and internal audit and whistleblowing, etc, will they give a forensic examination of the money creation process? Otherwise they will be in danger of missing the main point: that the unavoidable risk /the elephant in the room / the-baby-not-the-bathwater, is that the commercial banking process allows private firms to create our money supply and do what they will with it. See Prof Richard Werner's short YouTube explanation of this. As Dr Hilton said, many people will still able to make a personal fortune by the age of 35 if they go into investment banking. Is anyone seriously asking why the public privilege of money creation should facilitate this and inevitably expose the financial system to blow-up, again and again in years to come? 

Positive Money are leaders in promoting money creation alternatives. 
posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom     

Dave Fishwick - lighting the fuse at the House of Commons for local bank reform

'When people rob banks they go to prison. When banks rob people they get bonuses'. Dave Fishwick owner of 'Bank on Dave!' the new savings and loans outlet in Burnley, Lancashire, England was in rattling good form at the House of Commons last week the day after Guy Fawkes day. In a crowded committee room he regaled MPs, academics, financiers and advocates of local banking with his story of supporting local people with loans and with decent interest of 5% on customer's deposits. Steve Baker MP for Wycombe chaired the meeting: 'Better Banking for Britain'.    

Fishwick is no soft touch, he does refuse some requests for loans - the obvious question has to be asked: 'Will they repay? He made £10,000 profit in 180 days and gave it away to local charity shops. He takes in and lends £100,000 each month and has a waiting list for deposits and loans. The judgement about a loan is largely a decision by a person and not by a credit-scoring computer. His 'Bank on Dave!' has no greater a default rate than the high street banks. He started his venture when suppliers to his mini-bus factory were refused loans by the big banks. 

The Financial Services Agency (FSA) which licences banks, require a £10m reserve which is far in excess of what is truly needed for a small limited-purpose local bank besides being beyond the funding of one.  Someone in the audience wondered if credit unions under their new flexible rules would be enough to achieve what Dave wants? Mr Fishwick does not favour that option and Professor Richard Werner (Chair International Banking, University of Southampton), who was present, said that despite recent loosening of rules, these do not permit true 'CU banks' to form. He wonders if the City of London banking establishment has written the restrictive CU rules?   See his YouTube video on Local Banks. 

Dave Fishwick spoke of the German Sparkassen local bank system which has flourished for so long to the benefit of the German economy. He has visited these successful small local banks and others in New Jersey, US, which shows him that the UK is abysmally lacking in this facility. The old local UK Trustee Savings Bank movement, has now long since been absorbed into the big banking movement.  

I made a point about the poor regulation of the banking monopoly as compared with the achievements of good regulation of the health service monopoly, with regards to the supply of services.  This was part of my letter on that theme as published by the FT on 23 October 2012:
... By comparison, the regulation of the health service monopoly seems to work well in respect of providing supply where needed. General practitioner services are locally available and face-to-face consultation takes place, usually with the same doctor. It would be a scandal if we routinely had to travel 50 miles for help with a minor ailment. But we are tolerating such a mismatch in credit supply [from banks]. Typically, someone based at that distance or more makes the credit decision for a small company; and it might exist for them only on a spreadsheet and as some tick-boxes on their screen.

Also at the meeting was Derek French of the Campaign for Community Banking  which works for the retention of local banking services. When the last banking branch shuts in a small town or village it has a devastating effect on other businesses. The draw to visit a town was the banking service provided and other businesses were visited in addition. When banking disappears so does this valuable incidental trade, to the detriment of jobs and local economic vibrancy.   
posted by Charles Bazlinton. Author: The Free Lunch- Fairness with Freedom

   

Ben Dyson on Radio 4 on Money Reform

The money reform message was this week into the UK national media through a short (15 min) radio slot on Wednesday by Ben Dyson founder of Positive Money. BBCRadio4 Four Thought series.  Spread it... 

Think about it. We are now 5 years past the Northern Rock bank run, firms have collapsed, jobs vanished, most of us are suffering declining income, low ranking bank staff have lost jobs but bonuses for bank bosses are only just being reigned in. Yet this is probably the first time that the BBC has permitted such a frank revelation of the existing money system, and how it has brought the chaos. 

Despite recent dark days, the BBC do so many things well, so that you might have thought that they would have been running a series for years on how money is made and what reforms are possible. Where is their sense of duty of education?  The intellectual understanding of the BBC about money reform has, maybe, just been stirred. But as it a sop or a series? 
posted by Charles Bazlinton: author The Free Lunch - Fairness with Freedom with a section on money creation 

The local bank answer for SME lending

The failure of the banking system to provide small and medium sized firms with the credit they need has long been a feature of the UK scene. In 1931 the term Macmillan Gap was used to describe the separateness of finance and industry so that, in particular, smaller firms could not borrow as readily and favourably as they did in Germany and the USA at the time. Now 70 years on and the very same problems are with us. 

Yesterday at as seminar at Civitas, London  'We're all in favour of industrial policy now!' the lack of funding was mentioned by all speakers: David Green (Civitas); Nicola Smith & Duncan Weldon (TUC); Prof David Bailey (Univ. of Coventry). The Chair, David Smith (Sunday Times) wrote about the Macmillan Gap in a recent article.

I contributed to the discussion on this by speaking of the analogy between the ways the National Health Service and the banking system function. They are both monopolies. Monopolies  disrupt market flows and raise prices of goods and services. In a theoretical 'free market' prices and supply work out so that goods are available at fair prices with both suppliers and consumer getting a good deal. The regulation of the medical services monopoly (NHS) has been appropriately regulated so that everyone has a GP in their own town or district. If you are living in Hull you do not have to go to Leeds to see a GP to have an ailment sorted.  

Something is still very wrong with the UK banking model. Greg Clark the new City Minister is tackling banking: Scandal-hit staff must go, banks warned (FT Wed Oct 17, 2012). He is sorting out the rot, but he appeals for reasonableness towards bank staff who had nothing to do with the mess. He says he wants to streamline the process of applying for a banking licence, making life easier for new entrants into banking, and 'it needs a particular push on the part of the authorities to reopen the markets to competition'.  I wonder if he will address the inappropriateness of the way borrowing for small firms works now? Can you go into your local bank branch and set up a loan, with someone you know? Or is the decision made by someone who is based 50 miles away whom you might never have met, and who knows nothing of your firm apart from figures on a spreadsheet? If the NHS worked the way bank lending to small firms does we would be scandalised.  

The German Sparkassen local community bank model shows how a sustainable local, and hence national, economy derives from geographically restricted banking. It is the tested way to regulate the banking monopoly if we want small firms to multiply jobs and growth. With a UK banking licence, once achieved it enables the holder to do banking anywhere. Ask yourself, if you were a bank manager would you spend time talking to 100 small businesses wanting a loan of £20,0000 each or to one business wanting a loan of £2,000,000? So a new bank with a full banking licence setting up in Town A will hunt out the big loans whether they are round the corner or 50, 500 or 1000 miles away. They will not bother with the many small businesses round the corner. Hence the Macmillan Gap perpetuates. See this short video interview with Prof Richard Werner for more. 

If there was a simplified banking licence that excluded the features that contributed to the financial crisis, such as speculative borrowing, new entrants might come forward and bring the competition that Greg Clark wants, to sort out the banking monopoly.

Government could  guarantee lending given by local authorities to provide start-up equity capital for local community, not-for-profit banks. This would give a signal that localism powers could be used for something positive like jobs and growth. There must be one of the several recent banking fund initiatives, or a QE feature, that could be used for this from tomorrow morning by Greg Clark, surely?  

Local independent banks have worked well for many decades  in Germany, USA, Switzerland and elsewhere. The Spanish savings bank crisis resulted from the failure to prevent several small local banks setting up shop in one town, thus monopolies for banks need particularly crafted regulations, like health services do. But there are enough good models to follow if we dare to look beyond the white cliffs of Dover.
Posted by Charles Bazlinton