Sunday, April 17, 2016

Faulty bank lending - the scourge of our economic system. Fred Harrison, Adair Turner & Richard Werner

Fred Harrison, wrote in 2005, 6 years ahead of the depression he predicted for 2010: 
 'The driving force that shapes the business cycle is the pursuit of capital gains from land' 
(p 215. Boom Bust - House prices, Banking and Depression of 2010. Shepherd-Walwyn 2005). Then in 2010:
'When bankers fabricate money (credit) to lend to a borrower whose land is rising in value, they emulate Mr Ponzi. Why? Because the escalating value of land is nothing more than an increase in debt. Value is not being added to the wealth of the nation....In the end that bubble must burst' (2010 The Inquest. DA Horizons 2010)

Adair Turner 12 years later and after the Harrison-forecast property-driven crash of 2007/8 says: 
 ' and real-estate cycles are not just part of the story of financial instability in advanced economies; they are almost the entire story.' ( April 6th. 2016).  As he further says, specifically about China, faulty bank-led resource allocation of credit into real estate means much investment has been wasted. He concludes that free market competition, whilst valid for most economic sectors, should therefore not apply to banks. 

Prof Richard Werner in an audioBoom recording on 6th March  with Marie Mc Cahery for Bradford  bcb106.6fm radio gets to the heart of the problems revealed in the above quotes which underlies them: the banking system.  He gives four suggestions to the programme's title strapline question: 'Why don't economists?...   

1. Why don't economists... Find out how the economy actually works?
 He says that contrary to any other discipline such as medicine, economists start with deductive methods involving the assumption of the underlying laws without looking at the facts. They choose axioms such as:  people are assumed to act in a selfish manner to maximise their own satisfaction / they are never affected by outside influences / there is perfect competition and no collusion / perfect conditions prevail. What they should use are deductive  methods which would start with the facts - such as that people are not always selfish but help each other and that they are changed by outside influences.  Werner says that the prevailing engrained-selfishness theory is wrong, as it 'mathematically' proves what is assumed. It is a theoretical dream world and particularly dangerous to society as economists use this model to advise politicians. 

2. Why don't economists... Understand the role of money and banks? 
Werner quotes from a leading economist's textbook which explains why the matters of money and banks are left out of the book because 'it would obscure or confuse the reality'.
The common misconception is that the government or the central banks create money but only 3% of money is produced by the central banks (cash) and the rest by ordinary banks. In allowing banks to do this they are not instructed to create money wisely. 
The creation of money by banks was acknowledged by the Bank of England in March 2014 and Werner had conducted an experiment in August 2013 to prove this fact empiricallyLinked to this,  the quantity of credit is, in Werner's view, the driver of the economy and not interest rates. The trend to negative interest rates will achieve nothing for GDP growth. Interest rates follow growth. 

3. Why don't economists... ward off crises caused by asset purchases?
Crises arise now through Ponzi-style housing funding (asset finance).   New money creation from banks should rather go to investment in the productive economy with consumption needs met from 'lenders' whom Werner distinguishes from credit creating banks. Growth will come through the expansion of the money supply through bank credit, but it should be under guidance, and is the most effective policy for growth in the real economy.

4. Why don't economists... create recovery without any extra costs to the taxpayer?
Rather than full monetary reform whereby the government creates the money supply without debt, which would need rather too extensive changes than we are yet ready for, Werner advocates 'Enhanced debt management' carried out through the Debt Management Office by the government. Here money would be raised for the government as it borrowed directly through bank loans (non-tradable, unlike bonds which are tradable) which Werner says would be economically advantageous being less expensive than issuing bonds.      

The interview ends with the case for local community banks which would promote lending to small and medium sized businesses as the German Sparkassen model and as already under way in the UK with the formation of Hampshire Community Bank.  
Posted by Charles Bazlinton.. Author The Free Lunch - Fairness with Freedom

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