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Newsletter No. 16 - October 2008

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CONTENTS 

1. Common Sense about Money and Banking - after the emergency

2. The American Monetary Institute – making great progress

3. Dethroning the Dollar – a role for India?

4. "A Green New Deal" – the New Economics Foundation

5. Bring Back Keynes? - Ann Pettifor

6. "A crisis is a terrible thing to waste" - Hazel Henderson

7. Fairness with Freedom - Charles Bazlinton's recent blog posts on banking

 

1. COMMON SENSE ABOUT MONEY AND BANKING - AFTER THE EMERGENCY

Emergency measures are being taken now to bail out the banks and stop the banking collapse turning into the deepest and most damaging global economic depression of all time. But they must not only protect us against that. They must obviously avoid rewarding bank chiefs whose irresponsibility and incompetence got us into the mess. Less obviously but more importantly in the longer term, they must open the way to more deeply rooted permanent reform.

In a world governed by common sense we wouldn't dream of allowing the public money system to be managed as it has been up to now. Anyone would be laughed out of court who proposed to allow commercial banks to create as debt the supply of public money on which we all depend. To let them do this, as part of their profit-making business in the market for lending and borrowing, would be seen as idiotic.

It is obvious that the two functions conflict. Combining them prevents either being done wisely or well. We don't need rocket science to see that today. The fact that they are merged is the underlying cause of the present financial crisis - and previous ones too. The two functions need to be separated. In a world addicted to debt, that goes unnoticed. It is what Alcoholics Anonymous calls "the elephant in the room".

Most of the items in this present newsletter are about that. But we shouldn't forget that governments - "democratic" or not - handle their other main financial operations also in ways that inevitably produce perverse outcomes. As managed at present, taxation and public spending, along with the money supply, systematically transfer money from less wealthy to more wealthy citizens, and from less wealthy to more wealthy nations - with undesirable economic, social and environmental consequences in both cases. Item 5 below includes a brief reference to taxation and public spending. Other documents on this website deal with them at greater length.

So what's to be done about money and banking?

The present money and banking crisis has clearly shown that allowing commercial banks to create money is bound to cause recurrent credit booms and busts, with damaging consequences for people all over the world. Chuck Prince recognised its inevitability from the commercial bankers' point of view a year ago. He explained when given his $100 million 'golden parachute' as the 'chucked out' CEO of Citibank: "As long as the music is playing, you’ve got to get up and dance".

Many months ago, Mervyn King, Governor of the Bank of England - whose performance in this whole affair deserves respect - stated publicly that a number of steps were needed to avoid future banking liquidity crises and "ensure that the temporary measures put in place in recent weeks [to deal with Northern Rock - JR] evolve into permanent reforms in the coming months". These steps included:

  • to separate banks' retail deposit books - the insured deposits - from the rest of a bank's balance sheet,

  • to ensure that the risks of losses on bank lending remain with banks' shareholders, and

  • to introduce a special insolvency law, or a more far-reaching deposit insurance scheme, for banks to provide greater security for retail deposits than now.

The emergency measures introduced now by governments in panic in many countries are intended to cover these points, and also to purge 'toxic assets' from banks' balance sheets. That is needed to free-up the flows of money through the economy which, under the present arrangements for managing the money supply, the banks' excessive gluttony has constipated. While we must hope these emergency measures will stabilise things, it will be very difficult to see whether the separate, interacting proposals are being effectively enforced because of their complexity.

These aims will be more simply and transparently achieved by a basic monetary reform consisting of a pair of complementary measures:

(1) transferring to nationalised central banks  the responsibility for creating, not just banknotes as now, but also the major part of the supply of public money consisting of bank-account money held and transmitted in electronic form; and

(2) prohibiting anyone else, including commercial banks, from creating money out of thin air as profit-making, interest-bearing loans to their customers - just as forging metal coins and counterfeiting paper banknotes have been treated as criminal activities for many years.

These complementary measures will amount to genuinely nationalising the national money system but not the commercial banks. The commercial banks that have been nationalised should be denationalised when the crisis is past, and all commercial banks should be required to compete unsubsidised by their present privilege of creating the public money supply as profit-making debt.

The first of the two measures would make an agency of the government responsible for directly creating and maintaining the public money supply in the public interest. The second would lead to a more competitive market for facilitating loans between lenders and borrowers than today. That will bring commercial banks into line with ordinary businesses which don't get given their main materials for free. It will encourage them to provide more efficient services to customers than now. It will also attract new entrants into the industry, who may be more motivated and able to do just that.

A key factor influencing the prospect of world society surviving in anything like its present form through the rest of this century will be how the money system works. What will it reward and what will it penalise? How will it motivate us all to live? Reforming the way money is created and put into circulation is an urgently necessary change.

Further background can be found at:

Creating New Money: A Monetary Reform for the Information Age - www.jamesrobertson.com/books.htm#creating

"Money From Thin Air" - Guardian online article, March 20 2008 - www.jamesrobertson.com/news-jul08.htm#guardian

 

2. THE AMERICAN MONETARY INSTITUTE - MAKING GREAT PROGRESS

I was presented with the AMI Lifetime Achievement Award by the American Monetary Institute (www.monetary.org) at its recent 2008 Annual Conference. As I was unable to be there myself, I was grateful to Alistair McConnachie (www.prosperityuk.com) for responding on my behalf as follows:

"I am greatly honoured by the AMI Lifetime Achievement Award, and very sorry not to be with you to respond to it. But I'm delighted that Alistair McConnachie is with you to make this response for me.  

"You in the USA and other countries and we in Britain, thanks to the efforts of Alistair and his colleagues, are building the foundations of an international movement for monetary reform.

"This simple proposal to change the way the money system now works recognises that managing the public money supply and conducting competitive banking business in the market for borrowing and lending are two different functions. They must be separated, if either is to be done properly.

"The present credit crunch, following the latest in the recurring series of credit booms and busts, demonstrates once again the inevitable consequence of confusing the two functions. From the commercial banker's viewpoint, Chuck Prince of Citibank famously explained why it happens: "So long as the music is playing, you’ve got to get up and dance".

"This year's AMI conference is taking place at an exceptionally topical time. I am confident that you will make significant further progress toward our shared goal of monetary reform. Achieving it could make a vital contribution to the future of human society through the rest of this century and beyond."

AMI is indeed progressing under Stephen Zarlenga's leadership. For examples, go to its website. Outstanding are its two draft Acts - the American Monetary Act, setting out details of the Monetary Reform proposed by AMI; and the Monetary Transparency Act, requiring the US government to publish detailed information about who benefits and what is supported, and who and what doesn't benefit and isn't supported, by the present privately controlled method of creating new money.

 

3. "DETHRONING THE DOLLAR" - A ROLE FOR INDIA?

As the US dollar loses its 'hegemony' as the leading currency for international trade, the creation of a world currency must be the global counterpart of national monetary reform.

The world currency should be issued by a world central monetary authority reporting to the United Nations. It should be a parallel currency, not replacing existing national currencies but providing a fairer medium for international or global transactions than any particular national currency can.

Otherwise a chaotic situation will develop over the next few years, in which of a number of powerful national currencies - such as the euro, the Chinese yuan, the Russian rouble and the failing US dollar - will compete to profit from handling the international transactions of other countries as well as their own.

The Indian Business Magazine Businessworld published my article on "Dethroning the Dollar" on 26 September. See www.businessworld.in/index.php/Columns/Dethroning-The-Dollar.html

For geopolitical background, see one of many current American expressions of understanding that the world's future will be post-American - www.informationclearinghouse.info/article20926.htm

For an outspoken but relevant Latin American view see www.asalbuchi.com.ar/?p=82

 

4. "A GREEN NEW DEAL" - THE NEW ECONOMICS FOUNDATION

Published by the New Economics Foundation in July, this first report of the Green New Deal Group (www.neweconomics.org/gen/z_sys_Publication Detail.aspx?pid=258) puts forward a combination of policies to deal with the 'triple crunch' of the financial crisis, accelerating climate change, and the onset of peak oil and rising energy prices. The Group's nine authors will all be known to many UK readers of this newsletter as prominent in the environmental and 'new economic' fields.

Their approach, modelled on President Roosevelt's New Deal in response to the Great Depression of the 1930s, includes a £50 billion a year crash programme to create a low carbon energy system that will make 'every building a power station', and a range of measures to re-regulate the domestic and international finance systems, such as controlling the generation of credit more tightly and minimising tax evasion by clamping down on tax havens.

I recommend Jonathan Porritt's summary and comments of 28 July (www.jonathonporritt.com/pages/2008/07/how_bad_is_the_economic_ downtu.html) and also Brian Leslie's comment below it that, in addition to the measures the report proposes, the banks' privilege of being allowed to create money in the form of 'credit' should be ended - see also the proposal at 1. above.

The Green New Deal Group asked for comments on the report. My comments on 30 September were as follows.

"I don’t think anyone should be surprised that the Group’s first report didn’t cover all the “green” threats humanity faces and possible responses to them. Later reports might perhaps deal with:

  • population - too many people for the planet’s capacity to support decent lives?  
  • shortages of drinkable water and adequate food, exacerbated by the overriding priority now being given to carbon reduction and therefore to biofuels?

"Since the report was published in July, the severity of the monetary, banking and financial crisis has become much more apparent. In future reports you might like to look at the following:

(1) the case for monetary reform, transferring the function of creating the supply of money (which provides the scoring system of rewards and penalties that shape how everyone plays the game of economic life)  to central banks  that serve the public interest; and prohibiting the commercial banks from creating the supply of money as profit-making, interest-bearing loans to their customers;

(2) the need for a tax shift, away from the value of the rewards (incomes and profits) to people and organisations for contributing to the common pot by their work and skill and enterprise, and on to the value of common resources (including environmental resources) which people and organisations take from the common pot – a shift that would make it more difficult for the rich and powerful to exploit tax havens;

(3) the need for a citizen’s income, to support more self-reliant and responsible citizens providing for themselves and one another; it would be financed by the proceeds of the above tax shift and by replacing much of the present heavy expenditure of public money on the provision of dependency-creating services and social welfare benefits to citizens by big government and big business; and

(4) the encouragement thereby of a shift of policy on work, away from pushing people into dependence on jobs with employers (very wasteful in terms of commuting, duplication of buildings, energy use and other facilities at workplaces, not to mention its negative impact on many people’s perceptions of the purposes and impacts of their work); to encouraging more self-organised work on meeting the needs of oneself, one’s family and neighbours and local community.

"NEF has in fact published a number of reports in recent years on those topics. It might be worth taking a look at them."

 

5. BRING BACK KEYNES? - ANN PETTIFOR

Ann Pettifor is one of the authors of "The Green New Deal". Her letter in the "Financial Times" on 30 September hits the nail on the head (www.ft.com/ cms/s/0/efefb156-8e87-11dd-9b46-0000779fd18c.html).

See also www.debtonation.org.

These are powerful comments, although I hope that sixty years after Keynes' death we can go further than he did on important points - such as the four at 4. immediately above.

 

6. "A CRISIS IS A TERRIBLE THING TO WASTE" - HAZEL HENDERSON

" A crisis is a terrible thing to waste!  Each new revelation of greed, recklessness and stupidity will drive the emergence of new forms of more ethical markets suitable for human needs in the 21st century."

" The task now is to manage the downsizing of Wall Street and the global financial casino and redesign regulatory systems and markets to restore their useful but limited role in facilitating the production of useful, ecologically-benign goods and services in the growing green economies of the Solar Age. The truth is now in plain sight: there was no invisible hand!  Markets and money are both shaped by legislation, central bankers, tax policies, subsidies, lobbying special interests and cronyism.  Economics has always been politics in disguise".

I hope those two quotes will encourage readers to read the whole article "Chicago Boys' Curse Comes Home to Wall Street" (www.ethicalmarkets. com/?p=873).

 

7. FAIRNESS WITH FREEDOM - CHARLES BAZLINTON

See Charles Bazlinton's blog posts on 15th and 27th September on "Banker’s Rewards & Risk Management" (www.the-free-lunch.blogspot.com/2008 /09/bankers-rewards-risk-management.html) and "The choice: More banking regulation? or Banking reform?" (www.the-free-lunch.blogspot. com/2008/09/choice-more-banking-regulation-or.html).

 

It's not all bad news. A breakdown can be a breakthrough too.

James Robertson

13 October 2008