Monday, October 25, 2010

Too many jockeys but the horses aren't being fed

In England the summer is marked off with social/sporting events – such as Ascot (horseracing); Henley (rowing boats - river); Goodwood (horseracing); Cowes ( sailing boats - sea). Last week like a reverse Cowes Week - where hopefully everything floats - we have had Cuts Week to prevent the economy sinking. Months of scary talk from the government ended as George Osborne wielded his axe on public jobs and projects. All in the cause of avoiding national bankruptcy, apparently. 

The hope is that private investment will make the economy grow and wealth-making return to bring more jobs. Vince Cable said on BBC Radio 4 this morning that the flow of credit to small firms needed to increase. The hope is that central bankers will do some more monetary magic – quantitative easing (QE). But QE monetary policy has achieved little so far (why do more if it has worked already?). Samuel Brittan in the Financial Times (22 Oct) referred to Milton Friedman writing about the 1930's and the failure by the US Federal Reserve in 'maintaining the money supply'. But QE is supposed to be about the pumping of money into the economy. Trouble is, this variety of QE does not get credit to the right place to save jobs or make them in small firms where most people are employed.

Miles Costello in The Times (18 Oct) reviews a new book The Gathering Storm by hedge fund managers (Lee Robinson , Howard Marks, et al) which warns that the original crisis may revisit because much of the new credit has gone in propping up failed banks which should have been allowed to fail. Henny Sender in the FT (22 Oct) quotes Larry Fink of Black Rock saying that Ben Bernanke has a belief in the 'wealth effect of equities' - so the credit from QE hopefully will create another bull market which will enable [big?] firms to raise cash, invest, grow, etc? Or create another bubble?

The breakdown in traditional bank lending is discussed by Tony Jackson (FT 18 Oct), he quotes Prof Amar Bhide of Tufts University who shows how banks are now centralised empires. Bhide says that the findings of Friedrich Hayek in The use of knowledge in society which was critical of soviet central planning could easily be used as a criticism of banks now. Decisions are made about centrally determined financial products at the level of the lowest common denominator and the easiest available profit. But really useful banking is about a local manager accurately assessing the customer and their situation as they sit across a desk. Mechanistic models run by a strong centre, whilst good for processing computer chips, are no good for such banking. In short, capital gets misallocated – this time on a huge scale, hence the bubbles and crisis, and meanwhile a vital part of the economy droops through lack of credit. 

Banks are now huddled in a corner rebuilding their balance sheets licking their self-inflicted wounds. (Remember how they bubbled up the property market and what then happened? This collateral for small firms is now vanishing as the market drops – fewer loans.)
Professor Richard Werner is holding a seminar in Southampton at 6pm on Thursday 28th Oct on Quantitative Easing ' What you always wanted to know about it, and what you are not supposed to find out'. He invented the QE name and it will be fascinating to hear what he says about its use in the current crisis. Here is what he says in his book New Paradigm in Macroeconomics p214-5, writing on the credit market:

' the decision about whether and how much to lend and who to lend to is entirely made by the banks, a crucial public goods function that effects the entire economy is performed by them. They not only create most of the purchasing power in the economy, they also decide about who will use it for what purpose...some are accepted some are rejected . There is no guarantee that the choice made by the individual banks is consistent with the allocation that would maximise social welfare'. 
Back to Ascot and Goodwood: It has been found that in UK plc there are far too many jockeys for the number of horses and the Osborne cuts are supposed to be sorting that out. Trouble is the horses are not being given the feed they need.

So how can a way be found to create credit for loans, without using ordinary banks? 

To register for the seminar on Thu 28th Oct contact:

posted by Charles Bazlinton

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