Wednesday, August 08, 2018

Alan Greenspan cold shouldered Richard Werner and set back economic progress for decades

Central bankers speak in very measured ways as they pronounce on important things such as the likely track of the national or global economy, Brexit or reading the runes about future interest rates, but what are they really up to? Are they truly working for the best interest of each of us? The Bank of England set its base rate at 0.5% in 2009 which lasted for years until a Brexit dip to 0.25% in 2016/17, and last week it went up to 0.75%. Well paid officials and back up teams deliberated over this inactivity for nearly a decade. But you might say democracy is expensive. But is it democracy? Are central banks answerable to us or anybody? Is there an agenda in central banking that we don't understand? 

Professor Richard Werner who revealed the hidden workings of the Bank of Japan in his best selling book Princes of the Yen published in 2001 in Japan, has just re-published the book in a new English edition which includes a chapter that was missing from the 2003 US, English language edition. Before that US publication he became aware of a problem over one chapter in the original Japanese language edition. It related an interesting story about the US Federal Reserve's then chairman Alan Greenspan. 

Werner is renowned for his clarity on banking and he explains these for the non-expert - and for the uninformed expert - in a series of short videos.  A key banking fact is that ordinary banks create by themselves most of the money we use in society, out of nothing. They don't wait for deposits to arrive before being able to lend. They create the money, lend it to their customers then it goes into general circulation - a new deposit arises in the borrower's account at the point of loan creation so everything balances. In the UK, only notes and coins come from the Bank of England itself the rest of the money is from private banks. It has taken a lot of Werner's career so far to get acknowledgement of this money creation fact officially stated and it is only belatedly, in 2014, that a UK chancellor of the exchequer George Osborne admitted it.    

The offending chapter was that Alan Greenspan had discovered the bad effects promoted by the Fed central bank in the 1920s, which had encouraged excessive and unwise credit creation by ordinary banks. He published his findings in a 1967 paper: 'Gold and economic freedom'. And this is just what Werner discovered about Japan in the 1990s! Werner relates how Greenspan in his paper, had shown how the US Fed both allowed the 1920s bubble to arise though unwise bank lending; and then failed to prevent the Great Recession of the 1930s 'the lost decade' when it could have kept banks solvent and encouraged the flow of money into the economy. What happened then was that the political understanding grew that the banking system was powerless (wrong, it was just malfunctional) and that the government needed to take more control to get the economy moving (only needed because the banking system wasn't working benignly). This led to new federal taxes and the growth of centralised control through the New Deal the effects of which endure.      

Werner relates about his personal dealings with Fed officials and a brief encounter with Alan Greenspan when Greenspan fully acknowledged Werner's precise findings which he had studied for himself. He then embarrassingly blanked him and moved away from further conversation. 'I received the cold shoulder. I began to realise that central bankers did not like my work. I was spilling the beans on their actions'.

Werner considers Greenspan's embarrassment arose because since the 1960s he had been captured by the same power at the heart of central banking he had observed in Japan and recounts so tellingly in Princes of The Yen. For, in his time as Fed chairman 1987-2006 Greenspan behaved as the 1920s Fed had done earlier. He frequently majored on interest rates, which as Werner says are not the determinant for economic growth whilst the quantity of productive credit creation is. Soon after he retired the world economy suffered the financial crisis of 2007/08  'triggered by Greenspan's policies'  (see Foreword in Princes of the Yen). 

Werner has much to show in the new Foreword and in the missing chapter about how central banks should operate and also how they should not operate. One of his key ideas is that many local banks should be encouraged to form and supply credit to local businesses and local institutions. Central banks should encourage the growth of lending to productive businesses and employment and discourage lending to the speculative buying of assets.

See my and other reviews of Princes of the Yen, the book is very readable and insightful. Every politician bothered enough to want to bring a better life for their voters should absorb this story which needs to affect future economic policies.       

Greenspan knew what went wrong in central banking in the US in the 1920s and 1930s and failed to practice his insights when he was able to do so. Nearly 100 years of less than optimal economic and financial policy with crashes have ensued from those times. Are central banks democratic? Do they work for the interests of all? 

Posted by Charles Bazlinton. Author: The Free Lunch - Fairness with Freedom. Director, Local First CIC , Promoting Local Banks

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