Sunday, October 16, 2016

ECOBATE 2016 Prof David Llewellyn. More banking models needed for safer UK banking.

Professor David Llewellyn recommends more competition in banking to reduce the social cost of banking crises such as that which affects us still since 2007. He sees the best way to do this is through different banking models. The model that is prevalent in the UK is that of shareholder value banks and a mix is needed so that stakeholder value banks are not only encouraged but increased in number. The historical de-mutualisation of building societies in the UK was at a great cost to the stability of the banking system when these stakeholder banks were privatised, morphing into shareholding banks. The benefits of competition through more models of banks will be far greater than just adding more banks of the same shareholding kind. Typical of this genre will be community banks, savings banks, mutuals and cooperatives. These do not seek to maximise the capital return as shareholder banks do and they are likely to be less hazardous and risky. Some being locally based will encourage accountability through better relationships with customers, which will bring trust and confidence.

'Culture determines behaviour'. The bad behaviour of an individual can be dealt with (say a rogue trader), but the bad behaviour coming from underlying bad culture is very difficult to address. He wants culture to be a regulatory issue. In acknowledging Prof Richard Werner's point that in the USA small banks have a different regulator to large banks, he said that 'economists like competition' and thus competition between different regulators is to be encouraged.  

His overview of where we are now used a pendulum image. Whilst pre-crisis there was great faith in markets now we have swung to great faith in regulations. His 'series of reflections' at ECOBATE 2016 in Winchester under the general heading ' Are Banks Over-Regulated Today?' gave us a fascinating view from this ex-Chair of the EU's European Banking Authority's consulting and advisory body: the Banking Stakeholder Group (BSG). He said he would not have been able to give his talk a few month's ago when he was Chair of BSG as he would have been gagged. Now his views, as he delivered them, were his own. He is Professor of Money and Banking at Loughborough
University. He was co-author of the Bankers Oath.

The challenges for a safe banking system are firstly reducing likely failure of individual banks and secondly reducing social costs of failure if that happens. A perfectly safe banking system could be arrived at through measures such as 60% capital ratios; 50% liquidity ratios; 40% of that liquidity in German Govt Bonds, but it would be useless banking system! The problem, given that the failure rate can be reduced somewhat, is: How can we reduce the social costs arising when banks do fail? He was not for pressing for every bank to be a stakeholder bank at the expense of losing all shareholder banks. He wants a far better mix of both.  

A problem with regulation is that there is a symbiotic relationship between the regulations and banking behaviour. Both respond to each other. Banks will arbitrage the regulations ('game' them) and regulators are tempted to respond with tighter rules. But there are limits to the resulting escalation. If regulation is seen as a free good then the public will always want more of it. In fact regulation has a cost and the price of this must be taken into account. There has to be a trade off between: complexity/safety and simplicity/risk. He said that whilst individual regulations might be reasonable under a cost/benefit analysis, the totality of the regulations might not be. Excessively complex regulation might encourage unthinking 'box ticking'. Current 'one size fits all' regulations don't differentiate between what is needed for a large international bank and a small bank.  He indicated by hand the height of the stack of paperwork of all EU bank regulations - it was at about one metre off the floor.      
Why is culture important? Banking culture deteriorated in the years before the crisis and now trust and confidence in the banking system is as low as it has ever been. Underlying culture sets standards and influences employee attitudes which determines behaviour. He is working on a paper to cover what he outlined at ECOBATE as above, on the 'post crisis banking regulatory regime' arising out of his work with BSG.

His lecture was the Keynote Plenary held at the academic part of ECOBATE 2016 which for the first time was held at Winchester University's Business School, West Downs Campus, Romsey Road on 12th October. ECOBATE 2016 was organised by ARBE.

Saturday, October 08, 2016

Michael Hudson reviews James Galbraith's: 'Welcome to the Poisoned Chalice'

Michael Hudson in a review of James Galbraith’s new book: 'Welcome to the Poisoned Chalice’ says of current solutions to the post-financial crisis world that: 
financial interests override sovereign  self-determination  and national referendums on economic and social policy…[and] impose austerity and force privatisation selloffs that are basically foreclosures on indebted economies. Galbraith rightly calls this financial colonialism.’
Real-world economics review issue 76 carries the review.

It points out that resolutions to the current situation have been available since the 1920s. The book covers the economic traumas that the Greek nation is going through.  The prospect is that similar measures across the Eurozone will turn it into a dead zone along the lines of Latvia’s... 
‘disastrous ‘’success’’ story involving drastic emigration and declining after-tax wages’.

The solutions imposed through bond holders involve widening fiscal deficits, with countries being forced to sell off their land and mineral rights, public buildings, electric utilities, phone and communications systems, et al, at distress prices.

The problem is that the EU’S central bank (ECB) does not finance deficit spending to revive employment and economic growth. Additionally the German constitution imposes austerity by blocking funding of other countries budget deficits (except for quantitative easing to save bankers).  The 2010 bailout by banks is likened to the unpayably high German reparations imposed in the 1920s. The hope of the lenders is that deep austerity and privatisation will enable the repayments, when what is really needed is bad debt writeoffs and an expansionary fiscal policy.  

Lord Turner back at ECOBATE 2011 spoke on 'managing credit creation to deliver social optimality' See this Blog link.  
And (same blog) Chris Giles of the FT in 2013 has: 'Turner defends permanent printing of money'.

In the You-Tube film 'Debt-Free and Interest-Free money' Richard Werner exposes the false notion that debt alone is the only solution for government expenditure:  'The government can spend money into circulation, money it has issued'.

Galbraith's book highlights the rule in Europe by the dictats of finance and banking favouring right wing governments, along with opposition to any left wing alternatives to austerity. They won in Greece.

The UK has a different Conservative government from 3 months ago that looks to be setting policy ideals derived from left, right and centre. How radical will its economic changes prove to be? Chancellor Philip Hammond is soon to make an Autumn Statement on the economy. Does he realise the powers he has to invest for the common good without increasing debt? 

Friday, September 23, 2016

Prof David Llewellyn: 'Most serious banking crisis ever'. Are we safer now? Answers at ECOBATE 2016?

The 4th European Conference on Banking and the Economy (ECOBATE 2016) takes place on Wednesday 12th October in Winchester with its mix of academic seminars and free public meetings.  This year for the first time the University of Winchester's Business School (West Downs Campus, Romsey Road, Winchester) is hosting the academic side until mid-afternoon and then from 3.45pm the free public session is back across the city in its usual place - the Bapsy Hall at Winchester's Guildhall.

Up to 60 academic research papers are expected to be presented on banking and finance covering a wide range of topics from 8.30am at the University's Business School.

At the Guildhall (free to the public) Prof David T Llewellyn of the University of Loughborough is a keynote speaker. On a YouTube film (2015) speaking on the financial crisis of 2007/8 he considers that we have experienced:  'the most serious banking crisis ever on record' and his work is to help lower the chance of it happening again and to protect bank customers and save taxpayers future costs if it does. He has worked as an economist with Unilever, the UK Treasury, the IMF, Halifax Building Society and the Stakeholder Group of the European Banking Authority. He is highly respected for his banking research and regulatory advice.

Sir Vince Cable another keynote speaker was Secretary of State for Business Innovation and Skills in the UK's Coalition Government to 2015. He regularly features in the media as an independent commentator on finance and the economy and political issues.

Among current topics expected to to be addressed at ECOBATE 2016:

  • Negative interest rates
  • Cash - are they trying to ban it? 
  • Cybercurrencies 
  • Monetary reform and monetary policy
  • Ethics - who are the stakeholders in our financial systems & who is profiting?
  • BREXIT and its effects on the economy
  • Economic growth and the lack of it.  

See the Eventbrite registration website   for more detail.

The ECOBATE conferences have been running from 2011 and are the brainchild of Professor Richard Werner who has chaired them. He is leading banking academic (Chair International Banking, University of Southampton). One of his current projects is the formation of Hampshire Community Bank a pioneering venture to create a new culture of banking for the common good in the UK.

ECOBATE  travel: There is no onsite parking at either venue but there are efficient park-and-ride schemes on the edge of Winchester. The main line railway station (Winchester) is about a 20 minutes walk away from both venues. See the conference websites for late updates and for more details on speakers.

Saturday, August 06, 2016

Theresa May's Magnificent Words

Our new Prime Minister Theresa May said some Magnificent Words as she entered No 10 Downing Street. 
...We will make Britain a country that works not for a privileged few but for every one of us'
Words that could have been sourced from the book The Free Lunch - Fairness with Freedom which in a similar vein, deals with how to start to overturn the 'Lottery Principle' of life where 'The poor create the rich'.  The problem with Magnificent Words at Number 10 is they raise expectations and then scepticism, given the meagre achievements of governments. But let us leave Mrs May's Magnificent Words still bright, shining and untested and wish her the very best. We all look forward to her chancellor's first budget for signs that this time it will be different.         

As an illustration as to how the current arrangements of our society work for the few and not the many, at a recent public planning enquiry in Winchester, developers awaited expectantly whilst a planning Inspector assessed objections to that part of the local plan relating to the small town of Alresford.  Winchester City Council has taken some years to formulate this plan after much public consultation.  Whatever the outcome of Inspector Nigel Payne's deliberations, soon the green light will be given to a landowner/developer or two, to cash in on a huge uplift of land values. For example a green field of agricultural land with a value of merely around £700 per house-plot size, will zoom to a value of perhaps £200,000 per house-plot after the local authority grants planning permission for housing.  Our 'democratic' system massively favour landowners over those needing the land to have a home. The movement in wealth is from the many to the few: 'The poor create the rich'. What about that Mrs May?

An example of a more egalitarian outcome sought at the same hearing was about public car parking. A car park is needed alongside two adjacent sites owned by different landowners. Which one would release the land for this? Might both? Someone said land for car parking has little value, because car parking by local councils is not an economic service. Quite wrong. This article from The Times in 2015 shows  that for English local authorities over £0.6 BN of revenue was raised through car parking. So a local authority which has control over land planning use, can restrict city parking and can force drivers to pay to park creates a clear money-spinner for themselves and their tax payers. What is happening is that they use their democratically given monopoly power and, as rentiers being leaseholders or owners of land, are using it for the common good above the break-even cost of parking. This will help cap other taxes and can also reduce pollution if park and ride schemes are used.

Another issue mentioned at the hearing was the use of a part of development sites for 'affordable housing' - to be rented by, or part-sold to low income earners. Some of the uplifted land value of a whole development is clawed back through using a portion of the site's land (at a low cost to a not-for-profit housing association) solely for rented or part-owned homes. An enlightened device favouring some of the disadvantaged. 

On one scheme on a previously developed (brownfield) site in a particular Winchester city site the developer had declared he cannot afford to release land for such homes in his new development. 'The sums don't add up!' But a competent developer would have known of their liability to provide the public benefit through land at lower than market housing value to make affordable housing possible. Development obligations such as these have been around since at least 1990 with planning regulation for developer contributions such as 'section 106' and now the Community Infrastructure Levy. Perhaps a developer overpaid for land at some stage so the sums now don't work. But should the public benefit suffer because an unwise commercial decision may have been made by a developer at the top of a market price bubble? If such a case is accepted it opens the possibility of a high price false 'sale' to an associated firm to establish non-viability due to a high base cost. 

This scare story about non-viability of affordable homes was raised as a possibility for a large greenfield site in Alresford. But the planning officer reported that the landowner/developer  for that site is happy that the site development is viable with all costs covered for new trunk road works, affordable housing, et al. A large greenfield site with no development history is less likely to have had run of different owners who might have overpaid at some stage. Or perhaps the developer is being sensible about the huge gains still available and doesn't want the jinx the magic of the expected planning consent.   

So the Winchester inspection will eventually result in one or two very pleased (wealthier) landowner/developers, through the public gift of planning permission. Albeit with help for some housing-poor.  Not forgetting we too who have been buying our homes for decades, whilst not gaining quite that 200+ times wealth multiple from these brand new developments, also benefit a growing equity nest egg through this long standing public gift of planning consent - and for us, tax free. 

The unfairness of the institutional skewing as above, of so called 'market capitalism' to the benefit of the few is developed as a theme in Guy Standing's book:  The Corruption of Capitalism: Why rentiers thrive and work does not pay 'he reveals how global capitalism is rigged in favour of rentiers to the detriment of all of us, especially the precariat. A plutocracy and elite enriches itself, not through production of goods and services, but through ownership of assets, … '. Read the extract provided.

Another book, by Fred Harrison, As Evil Does gives evidence (p.64) that academic research is blocked by government to prevent solutions that would overcome such failings of our society. Such as land value taxation. He refers to an article by Nicholas Stern about his 'Report on the reform of the tax system', in the FT 6 Aug 2014 'Fairer Fixes for the public purse lost in a chancellor's drawer'.   

Have you seen Sir Nicholas's report yet Mrs May? Could be a good way to fulfil those Magnificent Words.

Sunday, July 10, 2016

Sir Vince Cable: Brexit - causes and outcomes

Sir Vince Cable came to Winchester last week for the Winchester Festival and said we may see him around a bit in that city as he is now involved with local people who are setting up Hampshire Community Bank, a non-profit bank as per the German Sparkassen model.  On Thursday he was in Winchester to promote his book: After the Storm, which is an insider account of his time as minister in the coalition government from 2010 to 2015.

On the recent Brexit vote to leave the EU he referred us back to a paper he wrote on the politics of identity - see this 'revisting' of that 1994 paper  published by Demos in 2005 - as: Multiple Identities - Living with the new Politics of Identity . His writings showed how we are in an era when the traditional 'left/right' political classification is less and less meaningful, with people acknowledging quite different identities for themselves as the old often class-based identities fade. We now have a kaleidoscopic array involving nationality or region of origin, religion (with many sub-divisions within), or based on multiple identities such as Scottish and British and European. He says the term 'multi-cultural community' is unhelpful in describing what is actually often a very complex situation. Such phrases may stereotype and mislead into regarding very varied groups as monolithic 'vote banks' for political purposes. What we need - he quotes Trevor Philips - is a need to create a sense of shared identity called 'Britishness'. 

With the measures that followed the 2007/8 financial crisis the financial system has been kept afloat (like a heart attack victim being kept alive) with artificial injections of  ultra-cheap money, with interest rates set near zero and going lower. They are 'lower than Babylonian times' - we are in an Alice in Wonderland situation. The ongoing result is that economic output has been lost and wages are stagnant. On the other hand another effect is to pump up asset prices (property and shares). If you are a homeowner and live in Winchester or London you are considerably wealthier through this cheap money policy, but if you live in Barrow, Blackpool, Middlesborough or Hull you don't see this. Sir Vince said that the resulting envy and resentment found an outlet in a vote to leave the EU.  He also said that globalisation means that such countries as China became competitive and that many people in western countries are suffering lower living standards thereby. Elsewhere, such as in the US, this resentment  of growing inequality has appealed across the political spectrum where even the old right (Republican) wing headed by Donald Trump is gaining support as well as, to be expected, the socialist Bernie Sanders. In the UK many Labour supporters moved in the UKIP direction in the 2015 election crossing old party lines.  

Post Brexit he sees Mark Carney at the Bank of England as competent and following a predicted policy for pumping cash into the system. The £ exchange rate has dropped - which is 'no bad thing'; property prices have fallen - which is 'no bad thing'. It is likely that net bank lending will fall, but he hopes the British Business Bank will help new lending to firms and head off disaster. The next phase may involve a recession or at least an economic slow down. He is encouraged that his successor in the Business Innovation & Skills Dept. Sanjit Javid is prepared to borrow to invest, in such as housing and the railways. He hopes that a re-orientation of the economy is being planned with a long-term industrial strategy involving such as pharmaceuticals, aerospace, car production and training. 

To general laughter he reminded the audience that the Tories campaigned in May 2015 on the slogan 'Cameron or Chaos'. He did not agree with a legal challenge to the Brexit result, we need to get on with the new situation, although some fellow Lib-Dems think differently. He sees the consequences of Brexit to be massive. He is appalled there was no planning for a possible Brexit vote. The bureaucratic changes needed will involve a huge amount of work and take a very long time.    
Audience Q&A's: 
  • He expected City of London employment to drop from 750,000 to 550,000. 
  • He said that the country needed to be told to expect problems, anything falsely optimistic would bring later resentment. 
  • Aligning with his identity analysis and from his experience in the Coalition for 5 years, would he support the suggestion that prospective MP's (should an early election be called) might stand branded Conservative/Coalition; Labour/Coalition; Lib-Dem Coalition so that voters could be encouraged to vote for national unity? He said that he thought the overall opinion was that the Coalition brought better governance. Someone had likened it to decision-making 'in concrete' rather than 'in jelly' otherwise. He said old loyalties are fading, parties are fragile, but how do you change the dynamic?  He thought there might be a  move to the centre with a resurgent Lib-Dem, a Labour breakaway and the Greens. Given such a scenario the suggestion was a possibility. 
  • On the continuation of UKIP as a party, he couldn't say. Maybe the UKIP voters will stop voting, continue to, or move (back?) to other parties? 
  •  What were his views on lobbying by big business? He thought that if it is done openly it is fine, as ministers must listen to concerned people. What is to be avoided is behind the scenes influence.  
  • How could young people be encouraged to vote? He said that David Willetts in his book 'The Pinch' examined the great change that has happened between the generations recently, with life chances severely curtailed, for example in abandoned hopes of house buying for young people in their 20s and 30s and on quite good salaries.  There has been a breakdown in the contract between the generations and young people are abandoning participation in the system due to cynicism.  Sir Vince gave no solution himself.
Sir Vince's 'multi-identity' analysis gives the ideas in the book The Free Lunch - Fairness with Freedom a fresh boost. The idea is that the citizen should be placed at the centre of political thinking to bring extra basic rights to empower them. Policies would cover the financial redirection of resources, the simplification of welfare and taxation, less intrusive bureaucracy, reduced housing costs and steadier economic growth.  Whatever identities each citizen identifies themselves with would make no difference to their new basic citizens' financial rights. Rather than people opting out through alienation it would encourage their participation through inclusion. We are approaching confused and uncharted waters in political life and peaceful yet radical changes are needed to foster unity and co-operation. 

Posted by Charles Bazlinton. Author, The Free Lunch - Fairness with Freedom       
Charles Bazlinton is a director of Local First CIC which is promoting Hampshire Community Bank

Saturday, June 25, 2016

Brexit-inducer George Osborne

Someone has said the Brexit vote to leave the EU seems to be similar to a mid-term bye-election event when voters lash out at the government through frustration - knowing that when the next general election comes they can revert to tribal voting, but for now they only want policy change, not government change. But now with the decisive anti-EU vote we get the biggest change for decades. Was it all down to frustration and could anything have been different? Could anything have changed the determination of just 3 voters in every hundred to swing with the EU for a little longer and give them a bit more time to reform?

The pundits say it was voters from the north, rural areas and seaside towns, those who felt excluded from the London-centric globalisation who won the day. Austerity victims? Renters and would-be home owners? The likely candidates can be found in blogposts: George 'Two Nations Toryism' Osborne  from March last year. Also in:  Budget 2015. Comfort for the comfortably off. Worries for the vulnerable.  

Tory supremo Chancellor George Osborne was left to work his grinding way with the balanced budget austerity-inducing agenda for years, whilst knowing that there was always another way to manage government financing:
 ' It is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. This would allow governments to increase spending or reduce taxation without raising corresponding finance from the private sector.'  
See para 3.34 of his Treasury document from 2013. 

Mr Osborne uses fear. He scared voters before the 2015 election about Labour 'mis-management' see: How did the Tories do that? Election May 2015  Last week he was openly threatening a terribly harsh budget if we dared to vote to Leave the EU.   But no, huge numbers of Brits voted for Brexit, and even his own MPs are rebelling on that threat.

George Osborne, Brexit-inducer,  has hopefully delivered his last budget. His harsh and unnecessary policies have brought about his own and David Cameron's downfall. The next Chancellor of the Exchequer will have a clear desk so the outlook is hopeful for some serious economic re-thinking, to bring about a fairer and stronger outcome than the lost years of growth-preventing austerity. 

There are many suggestions for new ways of handling financial matters that would bring fairer outcomes whilst promoting growth. Here is a good summary involving - at one event
Lord Turner; Prof Steve Keen;  Fran Boait; Chris Giles; Barb Jacobsen; Natalie Green and Richard Spencer.

Prof Richard Werner writes (para 3):
'...much greater economic growth is possible as soon as steps are taken to boost bank credit for productive purposes – irrespective of whether the UK stays in the EU or not (although Brexit will make it much easier to take such policy steps).'

Posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom

Thursday, June 23, 2016

ECOBATE 2016 speakers Profs: Sir Vince Cable; Yanis Varoufakis & David Llewllyn. Gaston Reinesch (Central Bank Governor)

The fourth ECOBATE conference (European Conference on Banking and the Economy) is to be held on Wednesday 12th October in Winchester and the submission date for papers is 1st July.  These conferences are unusual as they have always attracted interest from academics and from the general public. Lord Adair Turner  acknowledges the influence of ECOBATE founder Richard Werner on his thinking:
'Richard's writings on monetary policy and the importance of a credit focus are absolutely important, and very important to the evolution of my thinking.' 

The format will be similar to earlier years with free public sessions and keynote speakers from mid-afternoon:

  • Sir Vince Cable, former Secretary of State for Business, Innovation and Skills. Hon. Prof. Univ. of Nottingham.
  • Professor David T. Llewellyn, Prof. of Banking, Univ. of Loughborough
  • Gaston Reinesch, Gov.Banque Centrale du Luxembourg, Member of the General Council of the European Central Bank (ECB)
  • Professor Yanis Varoufakis, Prof. of Economic Theory,Univ. of Athens, Greece; former Minister of Finance, Greece

This year's ECOBATE will be held under the auspices of the Association for Research on Banking and the Economy a new charity (Reg. No: 1166422) set up by Professor Richard A. Werner with charitable objects as follows (Charity Commission website):


Also announced is a series of Oxford Seminars starting in October at Linacre College , Oxford.

See also links to blogposts: ECOBATE 2011 (1-4) ; ECOBATE 2013 (1-4) ; ECOBATE 2014 (1-3)
posted by Charles Bazlinton. Author, The Free Lunch - Fairness with Freedom

Sunday, May 29, 2016

EU Referendum: Fairness & Freedom - that would really make a difference

George Osborne thinks house prices may drop from 10-18% in the two years after a referendum vote to Leave the EU on 23 June. Private Eye (16 May) had Cameron saying:
'There could be a World War'. Osborne: 'Or even worse, house prices might fall!' 

What is fascinating is the importance of soaring house prices to him. For his recent efforts in boosting them with the Help to Buy scheme, see this blog March 6 'The Idolatry of our House Prices' . If his views as to what strikes terror into the hearts of home-owners are politically accurate it says little of voters' feelings for aspiring buyers for whom dropping prices would help. Come on George aren't we 'all in this together'? Raise our sights and help us to think of other's needs!  But meanwhile let's nominate him as High Priest of the religion of house prices. No salvation for the renters - the good times and the 'free lunch' asset gains are not for you. 

Another person trying to scare us into voting Remain is the President of the European Commission Jean Claude Juncker. The Times reports  (May 21) that after a Brexit vote 'the UK...won't be handled gently'. At the same time he urged France to demand deeper EU integration. So in a double revelation he exposed his threatening attitude to Leavers in the UK and his aim for closer union in the EU, which David Cameron allegedly has had an 'opt out' from. Will Mr Juncker suddenly turn very accommodating on this if we vote Remain?

A word doing the rounds in the media describing a political trend is 'populism'. Philip Stephens in the FT 27 May 'The myth of Brussels (mis)rule'  writes a very reasonable account of how (thus far) the UK has run it own affairs in its own sweet way, so pay attention Leavers. And Remainers shouldn't exaggerate about 'war and pestilence' after Brexit. 

He blames demagogues like leading EU Leavers, Donald Trump and Marine Le Pen for using 'Take Back Control' as a 'marketing meme' because: 'it speaks to the populists' contempt for reason' . So Mr Stephens, anyone getting a little edgy that future closer union in the EU might lose UK sovereignty a little too much even with David Cameron's 'opt out', is guilty of 'contempt for reason'?  The extremism he accuses some Leavers of, is at least matched in this 'contempt'. I suppose even the best of us can show fleeting irrationality at times. 

The 'Fairness with Freedom' sought through this blog asks now of the EU debate : Will a vote for Leave or a vote for Remain, better bring fairness and freedom for the the individual, their family and their grouping? A Basic Income (aka: 'Citizen's Royalty') for every  citizen as of right is likely to be the best way to achieve this. The FT 27 May 'Money for nothing'  has a full page spread on the topic and nations looking seriously into it include Finland and Switzerland. Matthew Taylor of the UK's RSA is excited by the idea ('Universal Basic Income') see this report  by Anthony Painter and Chris Thoung. 

Let Leavers and Remainers become populists for Basic Income and maximise their causes for fairness and freedom which is at the heart of it all. Bring it on! 
Posted by Charles Bazlinton. Author THE FREE LUNCH - FAIRNESS WITH FREEDOM. 

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

Sunday, March 06, 2016

The Idolatry of our House Prices

How long will the UK housing bubble last? Max Keiser and Stacy Herbert host a world-ranging video discussion of current housing bubbles and related economic news (particularly Australia and UK/London) with Prof Steve Keen and Ross Ashcroft [KR883] Keiser Report: Global Housing Bubbles .  
In London the Cameron/Osborne government has added credit fuel to the housing mortgage market. What started out as Help to Buy (2013) has just become London Help to Buy and 200,000 first-time buyers under the age of 40 will qualify for an initially interest-free loan (after 5 years you pay a 1.75% fee i.e. interest) for a newly built home. This is a government guarantee to the mortgage provider that the extra deposit money is safe, but not a guarantee for the buyer if they fail to pay back [NB. Beware a lifetime debt millstone and no house if you default]. Steve Keen says that this scheme to boost an obvious asset bubble is being launched by people 'who don't understand the system...they have power, not control' Max K. asked why, when the global macroeconomic tendency is deflationary would a government encourage investment which is based on inflation? Ross Ashcroft thinks they are 'terribly deluded'.  
So are we in the UK  due for a re-run of the Japanese housing boom/crash from the peak around 1989/90? With (27 years later) the Japanese index showing an 80% drop from peak prices. Steve Keen thinks the current UK government has some scope for 'dragging people into this market for a while' because the UK proportion of mortgage debt to GDP is 70% and falling, but Australia is more dangerous as the figure is 95% and rising. 

Another bubble detector by way of a contrarian indicator was suggested from Japan at the time of the 1989/90 peak. Then, 9 out of the world top 10 banks were Japanese; now, with Australia having 3 of the top banks OZ may be at a similar danger point, with the New Zealand financial and banking system also dangerously exposed. Prof Keen says the cause of the bubble is the banks creating credit which feeds the property price rise. He says it is a myth that government spending caused the 2007/8 credit crisis, the cause was a private credit bubble which burst. The current government has it that the previous Labour administration's need to raise government spending to compensate for the crisis was the cause of the crisis! So now the cut-back in government spending and the ensuing austerity makes the problem worse - as more people become unemployed with less spending power.  

'There is free lunch in the housing market' said Stacy, and Max agreed: 'many, many free sandwiches in housing in the UK!'. Phrases chiming in step with the book The Free Lunch - Fairness with Freedom .  Brian Wakelin at Christ Church, Winchester on 28 Feb 2016 (Our Response to World Mission: Isaiah & Matthew) called the widespread attitude to the phenomenon 'the idolatry of our house prices' [audio: at min. 2m 00s.]. But young people are unable to buy or even to rent locally. 

As Stacy pointed out (agreeing with Brian Wakelin's sermon point without the theological terms), the general population is indeed complicit and likes the chance of a gain through government subsidy such as London Help to Buy, even though only a few get it - 1 in 10 among 2 million renters. 

So where are we in the bubble cycle? Fred Harrison for years has warned of the 18 year peak-to-peak property price index. He told the New Labour government when they took power in 1997 about a coming 2007 peak (which happened); that a financial crisis would be caused by the housing market breakdown (it was)  and that a recession would ensue (it did). The Max Keiser panel last week reminded us that Mark Carney now Governor of the Bank of England oversaw a house price boost when running banking in Canada and that the same is happening now in the UK. So with the power of the Bank of England behind Chancellor George Osborne's encouragement of property speculation it would be brave to say the price peak has already been reached and the bubble is about to burst. Albeit any temporary slowdowns which may happen to confuse. 

George Osborne is raising his tax take from high value property with new taxes which is suppressing those prices but not making the houses more affordable, because of the high tax charge. Offshore-owned homes are to be subject to an annual tax which is really the most sensible property tax, but it should be on the land value of all the real estate and apply whoever owns the underlying land. This would moderate the housing market making homes more affordable. 

We await a Chancellor and a Bank of England Governor who could extend home ownership by lowering prices through land value tax without crashing the system. Is anyone clever enough? Making an annual land value tax charge an allowable deduction against annual income tax would probably be an essential start.
Posted by Charles Bazlinton. Author The Free Lunch - Fairness with Freedom

Saturday, February 06, 2016

Bank of England and its own cartoon

The Resolution Foundation has published this image using Bank of England statements and data over the past 7 years: 

Image result for

It shows how the BoE expected its bank rate to rise following the date of its forecasts over the years, according to the reading of the economic runes at the time. Clearly the Bank does not know what is happening as it wiggles various monetary levers, squeezes prudential brakes and holds enigmatic press conferences. Yet it still continues to issue rising interest rate forecasts just as it has since the credit crisis of 2008 when rates dropped off a cliff and resolutely stayed there. 
This simple graph is as funny as an artist's cartoon. It combines a hilarious reminder of nearly a decade of economic forecasting with a pathetic illustration that the Old Lady of Threadneedle Street is the Emperor Who Has No Clothes. 

One symptom of the above very low interest rates is galloping house prices which is a likely herald of another general economic crisis ahead bringing renewed financial difficulties for many. Will the Bank or the Chancellor, or both...or enough other people ...anybody! please!... summon humility and call for a general discussion of what to do next?  Time is short and we should not wait for the crisis to hit. Anyone reading The Free Lunch blogs will be aware there are eminent people whose untried ideas deserve examination. For example: Lord Turner, Prof Richard Werner, Prof Steve Keen, Lord Skidelsky, Fred Harrison, Richard Spencer,  Prof Mariana Mazzucato, Prof Michael Hudson, Ann Pettifor and many other distinguished champions of economics for the common good.