Monday, July 05, 2010

Divide and Rule - Werner on credit

Brake and accelerate - now! say economics experts.  The leading article  in The Times on Saturday July 3rd 2010 (No Easy Option) shows they are worried that UK monetary policy is too easy already and we are likely to be headed for a dangerous bout of inflation. The Financial Times on the same day (Recession is still a looming menace) has it that the danger is recession and there is little sign of inflation for some time, so care must be taken that government action does not hurt growth. This argument was rehearsed in this Blog March 19th with Lord Skidelsky explaining both views.   

This divergence of view at the highest levels is at a time of trying to mend broken banks which are supposed to be the source of credit to struggling firms to bring the growth needed. So do we want new credit to bring booming house prices again?  Do we want more weird financial products to be gambled with to blow the system up again? No & No. Do we want new jobs created and productive old ones safeguarded? Yes & Yes. So both The Times' and the FT's views are partly right. So is a solution possible?

Professor Richard Werner of Southampton University (Chair: International Banking) points the way. He says that dangerous credit creation brings inflation in asset prices such as financial products (so ban new credit for financial speculation e.g. credit for firms to take over other firms). He says benign credit creation does not bring inflation as the money goes to productive job-making in the real economy. Quantitative easing / printing money IS needed but not for the wrong things. Differentiate. Discriminate. Divide. It makes sense. Do we want another boom and bust? If so, mend the banks and let them do exactly what they did before - creating 98% of the money supply and using it indiscriminately.  If not,  divide credit up into good credit and bad credit. Severely restrict/ban bad credit; encourage good credit. Divide like this and rule for the good of all - not for the financial sector as it has been. Lord Adair said:Sept 22nd 2009 'some financial activities which proliferated over the last ten years were ‘socially useless’ '. But is anything going to change?
Posted by Charles Bazlinton 

No comments: