Why an understanding of money creation is essential to financial reform
Josh Ryan-Collins, nef blog
A new book from nef provides a much needed guide to the UK monetary and banking system.
At the heart of our dysfunctional financial system is a remarkably poorly understood fact. Private banks create the vast majority of the money supply – 97% according to most estimates. Not the Bank of England, nor the Government, nor any institution which could be viewed as democratically accountable or representing the public interest, but private banks.
Banks create money when they ‘extend credit’, to use the technical jargon. What this really means is making a loan or honouring an overdraft. When a bank makes a loan it simultaneously creates a deposit in the borrowers’ bank account. The bank does not take the deposit out of anyone else’s account. The balance that appears in your account is new money.
This is no more than simple double-entry bookkeeping. The bank has increased its assets because I now owe it money. It has also increased its liabilities by the same amount because my bank deposit is simply the money that the bank owes to me – a bank IOU if you like.
But unlike an IOU between me and you, scribbled on a piece of paper, this electronic Bank IOU is impersonalized. It is accepted by everyone else in the UK in payment for goods and services. This is because it also accepted by the government for taxes. This means everyone wants it because everyone can use it to make their most regular payments.
If you are finding it difficult to believe that banks create money so easily, by just typing numbers in to a computer, you are not alone. Policy makers and economists, including civil servants at the Independent Commission on Banking, have found it very difficult to accept. Banks are usually described as ‘financial intermediaries’, ‘recycling’ the deposits that we’ve put in them for safekeeping as loans. In fact, it’s the other way round. Bank loans create deposits. Banks are better described as ‘credit creators’ than intermediaries.
In an effort to banish these misunderstandings and create a shared reference point upon which to build arguments for alternatives, nef has decided to write a book on the topic. Where does money come from? lays out the facts in clear jargon-free language suitable for all audiences…
(29 September 2011)
You can find out more about the book here.
This economic collapse is a ‘crisis of bigness’
Paul Kingsnorth, The Guardian
Living through a collapse is a curious experience. Perhaps the most curious part is that nobody wants to admit it’s a collapse. The results of half a century of debt-fuelled “growth” are becoming impossible to convincingly deny, but even as economies and certainties crumble, our appointed leaders bravely hold the line. No one wants to be the first to say the dam is cracked beyond repair.
To listen to a political leader at this moment in history is like sitting through a sermon by a priest who has lost his faith but is desperately trying not to admit it, even to himself. Watch Nick Clegg, David Cameron or Ed Miliband mouthing tough-guy platitudes to the party faithful. Listen to Angela Merkel, Nicolas Sarkozy or George Papandreou pretending that all will be well in the eurozone. Study the expressions on the faces of Barack Obama or Ben Bernanke talking about “growth” as if it were a heathen god to be appeased by tipping another cauldron’s worth of fictional money into the mouth of a volcano.
In times like these, people look elsewhere for answers. A time of crisis is also a time of opening-up, when thinking that was consigned to the fringes moves to centre stage. When things fall apart, the appetite for new ways of seeing is palpable, and there are always plenty of people willing to feed it by coming forward with their pet big ideas.
But here’s a thought: what if big ideas are part of the problem? What if, in fact, the problem is bigness itself?…
(25 September 2011)
The real recession never ended
Anthony Mirhaydari, MSN Money
Economists tell us the economic recovery is more than two years old. Corporate profits have zoomed to record highs. Countries such as China and Brazil have roared back.
But by just about every other measure, it’s as if the 2007 recession never ended. Industrial production, retail sales, employment, home prices, construction activity, inventories and retail sales are all below pre-recession levels. In inflation-adjusted terms, the economy is smaller than it was before the downturn. That’s nearly four years of no growth.
The truth is, our problems are deeper and go back further. One example: Stocks are coming off their worst 10-year performance since the Great Depression, trading at levels first reached in 1998.
In fact, I’d argue that the real recession began a decade or more ago and hasn’t ended. The key problem — stagnant wages — has only gotten worse. It hasn’t mattered who was in the White House or in control of Congress. It’s structural, and it’s related to globalization and the rise of China.
Americans in general have felt this for years; the good news is that the folks in Washington have finally started to notice, too. But until they do something, we need to prepare our portfolios and pocketbooks for more no-growth years ahead.
I’ve got some ideas on how to do that. But first, let’s look at how this mess began.
No growth here
Comparing our most recent run to the rebound from the last four recessions, Credit Suisse economist Neal Soss finds that the economy should be 10% larger, consumer spending 14% higher, housing investment 25% higher, business investment 10% higher and wages 30% higher than they are now.
So what’s the problem?…
(21 September 2011)
Functional deficits for dysfunctional America
Paul Rosenberg, Aljazeera
As its people suffer as they haven’t since the Great Depression, the United States’ political elites have turned away from thinking about real human suffering in the name of a pious concern with the abstraction of fighting “deficits”. But if that concern were serious, and not just a political ploy, we’d see the US and the world in a strikingly different light. Three structural/functional deficits – the sustainability deficit, the time/jobs deficit and the equality deficit – revolve around values, choices that we, as a society, make about how to organise the broad patterns of how we live.
In Part One, we examined financial deficits. We saw how short-term, mid-term and long-term federal deficits each have strikingly different causes and logics, and how Washington elites’ obsessions are premised on confusing them – as well as ignoring state and local deficits. In Part Two, we considered the neglect of physical deficits – in infrastructure and ecosystem services – that undermine any sensible concern for our long-term economic future. We now turn our attention these three functional deficits, before concluding in Part 4 with two cognitive deficits – the critical thinking deficit and the imagination deficit – and one political deficit: the democracy deficit.
Functional deficits may be harder to quantify than physical deficits, but they are nevertheless quite real and very consequential. We can even begin to understand how they might be at least partially quantified, the better to enable us to begin managing them more thoughtfully. These all have some degree of a physical side to them, but they are primarily about how we organise how we do things – including how we organise our own social capacity and individual skills.
Choices about how we organise our lives are very much a matter of morality, about what we value and what we do not. The fact that we’re obsessed with financial deficits, with so little attention to structural/functional deficits, says a great deal about how morally lost we have become.
(3 October 2011)
