Reforming the Debt Creators
The aims of the Just Banking conference were ambitious – to provide insights and proposals necessary to create a banking sector which serves society, one which delivers stable and environmentally sustainable prosperity for all.
Since the banks are seen by many as central to the current economic crisis, the growth of inequality and the global assault on our environment, that was challenging. What was even more remarkable is that it succeeded, judging by the enthusiastic feedback from participants.
Most participants would have started with a sense of outrage but also bewilderment at the scale and complexity of the problems which the banks have created – and at their power, the apparent impotence of government to do anything other than prop them up and the lack of options for getting what we want from them. This conference hacked some clear tracks through the undergrowth of complexity and armed us with some radical but effective policy proposals for “making finance the servant not the master”.
This was possible because key speakers presented a devastating critique, based on empirical insights into how banks actually work, of what was described as the incoherence of neo-liberal economic orthodoxy, based on unproven theories and false assumptions; “In economics, the creationists run the show” (Ann Pettifor) . They offered public solutions to the disasters imposed on us by speculative private money unleashed in unfettered global markets.
While many of the speakers succeeded in making technical questions about banking interesting, indeed riveting, the fundamental dismay at what the banks have done (with complicity of governments) was expressed by Ann Pettifor when she said that the crisis arose because “banks fraudulently and corruptly lent” for their own gain. Looking at the human impact, Katherine Trebeck of Oxfam pointed to the financialisation of food, saying that 61 per cent of the food futures market is now speculative, and quoted the UN Rapporteur on the Right to Food that rising food prices are leading to desperate hunger and represent “silent mass murder due entirely to man-made actions”. She reminded us that their socialisation of risk has been at massive cost to our public services.
The main strand of thought at the conference was a set of linked ideas presented variously by Richard Werner, Josh Ryan-Collins, Tony Greenham, Steve Keen and Ben Dyson:
- Over the last three decades the power to create money has passed from public institutions to the banks through the removal of controls and deregulation – making this ‘the biggest privatisation ever’. The money supply was privatised in the shift from notes and coins to digital private money creation – 97 per cent of the UK’s money supply is created in this way by private banks, compared to three per cent by the Bank of England.
- This came about because governments gave way to pressure for deregulation, breaking any real link between bank deposits and the money they lend. In fact, when banks make loans they don’t lend us existing money, they create new money – rather than pass on some share of what has been deposited by others, which is the orthodox view of what banks do. Reserve requirements as low as one per cent bear this out – “there is no such thing as a bank loan now, only credit creation” said Richard Werner.
- The banks have used the power to create money to seek profits; and have found that the easiest way to do this is by speculation rather than investment in the productive economy. Accelerating amounts of debt is the main source creating asset price bubbles like the house price bubble which precipitated the ‘credit crunch’ and so the current economic crisis.
- Ben Dyson illustrated this in the housing market; “In the last 20 years, the population rose by eight per cent and housing stock by 16 per cent, but house prices trebled and mortgage lending rose five-fold. This is not about supply and demand”. Credit creation has driven the rise in house and land prices. Those rises then attract in more debt-fuelled money; and the banks are making more profits, giving them more capital to lend. “Banks ration credit and the proportion that they are putting into business is falling and the proportion going to speculation is rising”, according to Josh Ryan-Collins.
- This system cannot deliver a stable money supply in the long term. “Banks create too much money when confident and too little when they panic. That causes the boom-bust cycles” said Ben Dyson. “The UK banking system has been the cause of the recurring boom-bust cycles and banking crises. It has failed to support the real economy, small firms, the regional economy and sustainable development” said Richard Werner.
- The banks’ role as the ‘operating system of the whole economy’ means that they are private companies performing vital public functions. They have been allowed to use their unique and central place in the system to extract profit from the workings of the rest of the economy. This drives a rise in inequality, reflected in the ridiculous packages and bonuses paid to some in the sector. There is constant redistribution – upwards; to the banks from the real economy; to the city from the rest of the economy.
- Decisions taken by the banks about where the banks’ credit goes matter to us all, Tony Greenham pointed out. They determine the kind of economic development we get and there is not just the one model – different countries’ systems generate different patterns of development. For tackling the big environmental challenges (for example climate change) we need slow patient capital, said Mary Mellor “but we have the opposite”. “Productive credit creation gives growth without inflation; or credit creation for consumption drives inflation but not growth” according to Richard Werner while Ben Dyson points out “We have to borrow the money supply and pay interest on it”.
The UK bank sector in particular is concentrated in the hands of a small number of massive corporations which combine retail and investment operations. Because banking is central to the economy, they are too big to fail. Even though they are guaranteed by the state and we have bailed them out, the sector does not support sustainable economic development. Adam Posen said that in particular it has a poor record of supporting small and medium-sized enterprises. Stephen Boyd told the conference that the Scottish investment banking is not doing a good job of supporting Scottish manufacturing
There is no such thing as a bank loan now, only credit creation
Smaller, local banks are more likely to fund local enterprise and less likely to speculate. Richard Werner pointed to Germany which has many more small local banks and much more investment going into the productive economy. Across the USA, locally-owned banking vehicles, known as ‘community development financial instruments’ came into being as a result of legislation, itself responding to organised campaigning from disenfranchised communities
There are alternative banking models in the UK, like credit unions. However the UK regulatory regime has not encouraged them and since the de-mutualisation of most building societies this is a minor sector, though with potential to grow. In fact Richer Werner claims “Credit unions have been artificially restricted in the UK”.
With the scale of the financial sector and the size of the big banks comes a powerful banking lobby. Hand in hand with government advisers and most politicians, it has been successful in limiting the reforms proposed by government. Its lobbyists argue that this is a ‘strategic sector’ for the economy; but Adam Posen argued for an end to any special treatment for the sector within economic strategy.
The debate about government policy has been distorted as well, focusing on public debt, which is manageable in scale; while the ballooning growth in private debt, which has trebled in two decades, is the issue which has really destabilised the economy. As Ann Pettifor put it “‘Easy, dear Money’ (credit) fuelled ‘Easy Shopping’ (consumption) which in turn fuelled ‘Easy Jet’ (emissions) … The primary cause of the continuing financial crisis is the unprecedented explosion of a vast expanse of de-regulated, liberalised private credit created by banks and financial entities”.
Since it is based on mistaken views about the roles of the banks and a mistaken obsession with public debt, government policy cannot resolve the financial and economic crises, let alone change the priorities of the system. The proposals of the Vickers Commission, though seen as necessary by the speakers, are inadequate to correct these flaws in this system.
Speakers presented more radical policies. Richard Werner called for the return of the power to create and allocate money to the people “to whom this public privilege rightly belongs”. He wanted to end the suppression of the third sector, with the creation of hundreds of locally-based co-operative, mutual or municipality-owned banks or credit unions. At macroeconomic level he proposed Credit Guidance, which restricts credit creation for unproductive purposes; and Green Quantitative Easing which will pour money into conversion into a low or no-carbon economy.
Ann Pettifor suggested the reintroduction of capital controls and of a debt management policy. A Green New Deal should create new jobs which tackle climate change. Money creation should revert to the Bank of England. Steve Keen called for a Modern Debt Jubilee or “quantitative easing for the public”. This would cancel irresponsibly created debt without penalising savers through money injection via private bank accounts.
Within Scotland there were calls for the establishment of a Scottish banking reform commission. Partrick Harvie hoped that local banks and currencies could be set up; and the new financial powers in the Scotland Act will be used to the full. Individuals can learn what their banks do with their deposits, choose one which acts ethically and Move Their Money. There was a call to create a forum for people who want to explore setting up new banks which serve their communities. “What is banking for? If it is not for social and environmental purposes, its outcomes won’t serve our social and environmental purposes” as Tony Greenham put it.
The conference was organised by Friends of the Earth Scotland with UNISON, STUC, Christian Aid, WDM, new economics foundation, Economics Society (Edinburgh University) and Compass. It was supported by Edinburgh University Business School, Triodos Bank, Carnegie Trust and Edinburgh University Students’ Association.
For more information http://www.justbanking.org.uk/.