Tuesday, May 14, 2013

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

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