Friday, 20 April 2012

Edinburgh banking conference.

Just been to an amazing banking conference in Edinburgh (organised by Friends of the Earth). The main speakers (in no particular order) included:

* Adam Posen (Bank of England Monetary Policy Committee).
* Steve Keen (Economics prof University of Western Sydney).
* Ben Dyson (Positive Money).
* Richard Werner (International Banking prof Southampton University).
* Ann Pettifor (Director of Policy Research in Macroeconomics).
* Mary Mellor (former sociology prof, University of Northumbria, UK)
* Huw Davis (Head of Personal Banking at Triodos bank).
* Chris Cook (Senior Research fellow, University College London).
* Tony Greenham (New Economics Foundation).

Highlights of their speeches (for me) are set out below – but this won’t be a fair summary of their speeches.

First a couple of general points. Several speakers were very critical of the fact that private banks are free to create money and of the use banks have made of this freedom. But none of them (far as I remember) actually said, “let’s ban private money creation” – though they got very near.

Second, two or three of the speakers seemed to have no idea of the likely bureaucratic costs of the changes they proposed to the existing banking system. These were the speakers particularly concerned with environmental and ecological matters. I’ll enlarge on that in a post in a day or two.

Anyway, the interesting bits for me were thus. Comments by me are in brackets.

Adam Posen said:

* He accepted his current job at the Bank of England partially because of the intensity of debate in Britain as to what to do with the banking system.
* No central banks have successfully pricked bubbles.
* All of the worst bubbles were caused by house / property price increases. (This was subsequently contradicted by others who pointed to 1929 which was mainly about shares.)
* A possible way of deflating property bubbles might be to use existing property taxes – i.e. hike those taxes when bubble enlarges.
* Britain is good at international banking and has been for a long time. But it is not good at local banking for small businesses. Britain needs the VARIETY of types of finance for small businesses that the U.S. has.
* Bank subsidies are more dangerous than subsidies for other industries
* We need to question the idea that a country benefits much from having an internationally competitive banking industry.
* Bank subsidiaries in other countries should be capitalised from sources in the latter countries.

Steve Keen said:

*Schumpter said in 1934 that private banks create money out of thin air.
* Neo classical economists are clueless on money, banking, etc.
* Krugman does not realise that private banks create money.
* Solow debunked neo-classical economics.
* There is an undesirable feed-back mechanism in the private bank money creation process. (I quite agree. I think this is one of the main flaws in private money creation: it is pro-cyclical.)
* Private debts are much bigger than government debts.
* Keen showed several charts / graphs showing a close relationship between the ACCELERATION of private debt and economic buoyancy: things like employment levels, stock exchange levels, etc.
* Keen favours what he calls “jubilee shares”.
* Re the business of banks lending first and finding reserves later, they now have a month in which to find reserves, which is longer than it used to be. (Not sure if this applied to the US, UK or both or all over the world.)
* Quoted Marx on the subject of financial capital messing up industrial capital.

Richard Werner said:

* He was part responsible for originating the term “quantitative easing”. It originated by his thinking up a phrase to describe the process that would be acceptable to the Japanese (who he was advising at the time). The Japanese phrase then got translated into English as QE. (However, subsequent speakers pointed out that QE was first implemented centuries ago. Thus Werner was responsible for the phrase, but not the idea)
* Text book description of how banks work is nonsense.
* The Asia crisis was caused by excessive reliance on banks as opposed to other forms of finance.
* 97% of money in circulation is privately created, and central banks try to hide the fact.
* Quoted Donald Kohn’s attack on neo-classical economics.
* Banks are not financial intermediaries: they are creators of money. (They’re both aren’t they?)
* If newly created money / credit is used productively rather than to fund asset purchases, inflation is lower. (Not sure about that.)
* The activities of credit unions in Britain are restricted, so the activities of large private banks should also be restricted: in particular, directed towards to something better than bumping up asset prices.
* Small local banks in Germany play a much bigger role than in Britain. (There were two or three Germans at the conference who offered suggestions and support.)
* Local currencies are a good idea.
* A recent survey showed that about 80% of the population think money is created by governments / central banks. The interviewees were biased towards the more educated section of the population, so a realistic figure would be over 80%. 90% were against letting private banks create money.

Ann Pettifor said:

* Money created by banks (forget whether she was referring to central or private banks) should be allocated to specific purposes, e.g. environmentally responsible investments. (Sounds bureaucratic to me.)
* Private banks have displaced central banks when it comes to credit / money creation.
* The rise in private sector debt has been more significant than public sector debt.
* The crises was sparked off by the big rise in interest rates in the five or so years prior to the crunch plus de-regulation.
* Debt is being cut, but slowly and chaotically.
* Roosevelt as of 1933 had made a good job of dealing with the recession.
* Rogoff and Reinhart’s ideas are flawed.
* The EU has no idea what it is doing.
* Another crisis is coming. After that, everyone will be so sick of the private banking industry that draconian controls will be imposed.
* She is keen on the so called “golden age” of banking: 1945-71. This was a period during which there were much tighter controls on banking than today.
* Those of us who want a better banking system need to organise politically, but at the moment we are in a muddle as to exactly what we want.

Tony Greenham said:

* The New Economics Foundation has had plenty of help from the Bank of England with research to back the NEF’s unconventional ideas on banking. (This could be on instructions from Mervyn King, because King is very open to such unconventional ideas.)
* The conventional view of how banks work is out of date: private banks lend first, then look for reserves. And if there are not enough reserves available, the central bank is forced to supply them.
* Most bank lending goes to the asset rich, not to productive industries.

Ben Dyson said:

* The fact that privately created money or credit is backed by government means arguably that such money is in effect publically created.
* The time taken for the average household to pay off their mortgage has approximately doubled over the last 20 years. (I think it was 20 years - might be wrong there.)
* Private banks have in effect taken over seigniorage from governments / central banks, and the profit from this activity is around £2bn a year in Britain.

Mary Mellor said:

(Mary Mellor is a sociologist and fairly left of centre, which means that violently right wing male chauvinist pigs like me tend to disagree with her!! She has written a book about the crisis). She said:

* Re-jigging the private bank system needs to be done so that banks take environmental matters into account. (I don’t agree: for example CO2 emissions are best cut by increasing the price of carbon based fuels, I think.)
* Repeated the point made by Ben Dyson, namely that since government stands behind private money creation, that money is effectively publically created. (Interesting point.)
* Barter economies have never existed in any very formal sense, though there has been what she calls “recopricity”.
* The cards handed out in baby-sitting economies (she was presumably referring to Krugman’s baby sitting economy) are effectively monetary base or publically created money. (She was hinting that this is a better form of money than privately created money, though (to repeat, I don’t think she actually said “let’s ban private money creation”).

Huw Davies (Triodos Bank –

(This bank lends only for environmentally and ecologically responsible investments. It was set up in 1980.) He said:
* 30% of depositors think their money is just kept in bank vaults, and not loaned on.
* He’d like to see every depositor ask their bank what the bank uses their money for.
* Triodos has no bonus culture.

Chris Cook.

(This fellow is clever, articulate, and knows his stuff. His ideas are very unconventional. I haven’t yet worked out whether he is a genius or is right off the rails.)
* He wants to seek solutions to banking problems from centuries ago even a thousand years ago. In particular, he wants a return to the tally stick system, but done in a high tech way.
* Pointed to the municipal banks that exist in some areas in Scotland.

P.S. (24th April). Having said that none of the participants actually said “ban private money creation”, three of the participants do actually favour such a ban (i.e. favour full reserve banking). They are Positive Money, Prof. Richard Werner and the New Economics Foundation. See here.


  1. Re the last speaker, Chris Cook: can it be merely a coincidence that when the Exchequer's tally sticks were burned in 1834 they took the Houses of Parliament into the flames with them?

    1. I’m not sure I’ve got all the details right here, but those tally sticks were a form of monetary base weren’t they? I.e. the government used them to purchase goods and services, at the same time as announcing they would be acceptable in payment of taxes.


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