H/tip Jesse's Cafe Americain. Jesse wrote as introduction: "It is remarkable how gentle democractic freedom goes into that good night, and how easily the 'reform' movements fall prey to the monied interests. They seem to get better at this sort of thing with time."
Part two. Theory, Ideology and Failure.
In part One I argued that if we want to understand why our rulers have insisted we MUST bail out the banks we simply have to look at who owns the banks and the vast bulk of the wealth they house. And surprise, surprise the owners of most of the financial ‘wealth’ are…our rulers and their friends.
I ended by suggesting that true though I felt this was, there were also theoretical reasons why some people felt the banks must be protected at all costs -as long as the burden of paying that cost was placed firmly upon the backs of the little people, you understand.
Today’s Economic policy: Print, Bail and Cut
The mainstream response to what I presented in part one is to say, I have simply, perhaps wilfully, failed to understand what they have been and still are, heroically, trying to do. They will insist there is no contradiction in their position of cutting public spending and bailing out the banks at the same time. So allow me to present what I believe that logic is.
The two aspects of their policy ‘bail and cut’, they will insist are not contradictory at all. Simply put, they will say they are loosening or increasing the money supply (QE) in order to invest in growth (classic Keynesian) while simultaneously cutting those expenditures which they feel do not generate growth and which are in fact ‘drains’ on productivity – in their view any ‘public’ expenditure (Classic Free-market ). Growth, for them, equals the free-market/private sector, while drains on growth equal government, public spending. Thus their policy is a strange hybrid of Keynes and his opposite. No wonder then, that as the policy has not delivered, support for it has fractured. The fracturing has not, however, been in a straight left/right way. Please forgive this digression but before we look further at the policy I think it helps to know who is on what side and why.
Who’s who and why
Supporting the printing in order to bail out the banks are the bankers (obviously) but also all those convinced by the propaganda that if we don’t the sky will fall in. Those from the traditional left parties which have spent a decade telling us ‘We’re not left. We’re on the centre ground!’ find themselves trying to square the ridiculous circle of supporting bailing the banks, assuring their centre-party credentials by being concerned to cut public debt BUT ALSO being against austerity cuts. At least those of the true right wing, much as I dislike them , are consistent. They say bail the banks but save money by cutting everything else. Those on the centre left say, ‘Oh yes of course we should save money and cut the debt. But we must bail out the banks no matter what the cost AND ‘no, we shouldn’t save money by having cuts.’ I think the right wing is wrong. I think the centre-left is wrong and inconsistent and stupid. Of course if they did get back in to power they would cut anyway, but with tears in their eyes as opposed to the barely concealed glee of the right. The centre left is so fuddled. I can think of gerbils with more brains and integrity. But my prejudices aside, those ‘in favour’ of the current policy are a heterogeneous bunch who are not all comfortable with their unlikely bed fellows.
The same is true of those opposed. They too are a mixed up bunch. Some of The Opposed are those who regard themselves as true ‘free-market’ believers. For them the banks should have failed like any other business. They hate the debt levels all the QE has created. They also, perhaps particularly, hate the big banks. Because while the ceo’s of the big banks love to talk about Free-market values, they have, in fact, out of pure self interest (see part one), put on hold their belief in the working of the market to punish the failed, in favour of massive printing and public support…for themselves and their otherwise failed banks. They have used their position of power and wealth to arrange a deafening barrage of media, expert and political advocacy for their message that ‘the banks must be saved or the sky will fall in’.
Also opposed to the Bail outs and the Big banks are a motley group of all those who believe in the Austrian school of economics and all the hard-money, Gold Standard believers. For them debt, the fiat currency which allows it, and the banks who live by it, is a form of Satanism. This group come across like cats caught having a poo, when they are spotted. In opposition with those on the left who share with them the belief that the banks should not have been bailed. Of course the left people do not think there should be cuts and do not share any fear of debts. They believe in stimulus spending.
And that last point confuses all. For those on the right look at the bank bail outs and see stimulus spending. And why shouldn’t they? After all that is what all this spending on the banks has been called by those who ordered it. The architects of the policy have said we have bailed the banks in order to stimulate the economy. They have argued that saving the banks IS stimulating the economy, or at least essential to it. If you accept that bailing the banks has been stimulus – therefore Keynesian spending – then it is clear that stimulus, Keynesian policy has FAILED.
Only I would argue it has not. I argue Keynesian stimulus spending has not failed because, in the main, it hasn’t even been tried yet. The key is whether or not you believe that putting money in to the banks has led to real investment in the real economy for real growth. If you think that has happened, first – WAKE UP – and second, show me the evidence.
Print, Bail and Fail.
The classic neo-liberal, Free-Market world view says only the markets produce wealth while the state is parasitic upon it. It is the logic which wants to turn Great Britain in to Britain Plc. It is the IMF mantra which ‘we’ in the West have watched as it has been forced upon others and turned a deaf ear to their cries of anguish and complaint. Now we find it forced upon us and we are alarmed.
Karma aside, this ‘Private good, Public bad’ conviction is why our leaders and their economic advisers from the financial class, will live with debt if it supports the banks but not if it is for government hand outs, and pesky, ‘anti-business’ regulations. In their world the articles of faith say that only the Free-market can provide growth and only the banks can be trusted to invest wisely in that market. And given the seriousness of our current situation, they will add, we may have to tighten our belts and cut even those ‘nice’ things like welfare, health spending, education and even policing since they are not immediately wealth producing. Basically – Private Debt good, Public Debt bad. Agree or loath, that, I believe, is their logic.
Some of you may be having a seizure right about now (Especially the MMT brigade), while others of a more Free-market frame of mind may be nodding in agreement. Please both hold on a for a few minutes. Let’s look at the above logic and policy in their own terms before we take issue with the terms/assumptions themselves, because I think it is now quite clear, even to its supporters, that the policy has failed.
First lets be clear about the terms; printing for growth or stimulus spending. We need to be clear because we are already standing in the midst of one of today’s most heated and bitter arguments between those who subscribe to mainstream economic theories of how an economy works, who claim all this printing, for whatever reason, will lead to inflation and hyperinflation and opposing them, those of the MMT (Modern Monetary Theory) persuasion who claim that mainstream economics is a fatally flawed theory which does not understand the nature of economies, money or inflation.
I do not wish to be drawn, just yet, into a full fledged argument over which theory is correct and which is rubbish. My view, so you all know where I stand, is that mainstream economic theory is fatuous at best and that MMT is well on the way to providing a clearer picture of how money and an economy actually works. That said what I would like to emphasize here is not one theory over another but what all economic theories agree on. Keynesian, Austrian , Mainstream and MMT, all recognize that a sovereign government with its own currency can expand the supply of money (print). In fact they all recognize that when an economy grows, governments have to print. More economic activity needs more money/tokens of value. Pretty simple really. The question at the moment is should government expand the money supply (print) when economies are shrinking as a way of kick-starting growth and if so how?
There is also a side issue of whether QE is printing or simply changing one set of paper promises (private ones) for state backed ones. I will tackle this some other time. It doesn’t alter the current argument.
Critically all theories agree that there must be some match between the supply of money and the economic activity it serves. Which means they all agree you can print IF it leads to actual economic growth. This is the basis of Keynesian counter cyclical spending, which simply means that the government, as printer of the money, can help stimulate growth by providing money and investing it in order to off-set times of private economic contraction. All theories agree it is not a disaster to inflate the money supply as long as the new money promotes real growth. What is important is the ratio of money to economic activity.
All the theories agree if new money helps create new economic growth then that growth will soak up the extra money and the ratio of money to real economic production stays the same. Thus the argument should not really be about how much money has been printed up but whether it has been spent on things that will create real growth. THAT should be the debate.
There are two points of argument. The first, is how long you can leave extra money sloshing around trying to stimulate growth before its failure to do so will instead create inflation. MMT seems quite sanguine saying other factors are more important. The Austrian school is not at all sanguine. Neither knows for a fact how long is too long. They are theories. The second is who is best suited to invest the printed-up money in order to stimulate growth, government or the private sector? In other words if you are going to create new money to invest in growth who should control the investment of the money, government or the banks? And this is where our present policy is different from the text book story of FDR and The Great Depression. It is also where our economic situation becomes poisoned by ideology.
The classic FDR/Great Depression answer as to who should invest, was government through huge state programmes of public works: Building dams, roads, houses etc. This is often referred to, by those who dislike it, as the Statist position. The modern version we have today, unsurprisingly after three decades of neo-liberal, free-market consensus, is that the private sector, not the state, should do the investing. Thus this time around, though we have governments printing and expanding the money supply as before, the governments have not invested the expanded money supply directly ( I know there have been exceptions like GM in America) but generally they have instead funnelled nearly all the money in to the banks for them to ‘lend’ in to the real economy.
Is this progress? Those who have an ideological hatred of government and see all government as just a means whereby a small group of insiders can chose what is best for them at the expense of everyone else, are tempted to think it is progress simply because it cuts out government control. But take off the distorting lens of of ideological hatred and what have we really done? I argue we have exchanged one group of insiders in big government for another set in big banks. And worse they have a revolving door to shuttle from one to the other. So now we have a small group of men who control the 50 or so most bailed out global banks and their former colleagues now in government, who decide. Have they invested in us and our futures?
Has the monster worked for us?
In a word, no. It has not. The policy has worked only for those who gave it life – the banks. Five years in to the policy, recovery and growth in the real economy remains absent. In fact many countries are facing accelerating economic contraction, with destructively high unemployment. A measure of just how distorted our world has become is that we now have the mind boggling spectacle of the IMF warning a Tory UK government that their policy of bail and cut is not working and they should have a plan B which includes spending for growth.That’s like finding Nazis at a Bar Mitzvah.
Anyway, in the face of the abject failure of the bail the banks policy (42 million Americans on food stamps is not just failure it’s an indictment) we have had Obama and the rest of the G8 pathetically claiming, “It would have been much worse without the stimulus.” What seems clear to me is that our leaders, at the behest of the banks and sundry ideologues, have insisted on investing in the one sector of the economy which has not and, I argue, will not invest in growth in the real economy.And steadfastly refused to invest in any sector that might.
In the UK we had Project Merlin. Launched in 2011 amid great fanfare it was supposed to be a model of the new light-touch approach. A voluntary agreement between state and banks that the banks would lend more in to the real economy. It failed absolutely. In every quarter of the year it was launched the banks lent less in to the real economy than they had a year earlier.
I talked to one bank which specializes in loans to small and medium sized businesses and they concurred that there is less and less money available from the big banks. Where did the money go? Lots was returned to the central banks where we paid them interest on it, some was used to plug holes in bank balance sheets where non-performing assets had left bills unpaid, much was used to buy and sell European Government bonds and much of the rest was used to speculate on commodities in emerging markets.
I particularly like the money returned to the central banks. We lend the banks money at a very low rate. They take the money and put it back in to the central bank. Why? Because the central bank pays a higher rate of interest on this deposited money than the rate it charges the banks for borrowing it in the first place. That is better than a license to print money because you don’t even have to pay for the printing. And then the banks turn around and tell us we must cut welfare because our debts are too high. It’s brilliant. When you borrow from a bank, you pay them interest. When the banks borrow from us..we pay them.
Anyway, unperturbed by abject failure the UK government has decided to try again. This time they call it “Funding for Lending”. Yet again the banks will be allowed to swap yet more dodgy assets that no one will accept as collateral, for Gilts which they can then use as collateral for getting their own loans in the open market. Does this inflate the money supply? Well the BoE and other central banks buy the bank assets at inflated prices. And the banks then take the gilts and through layers of loan creation leverage them like mad. So yes it does inflate the amount of money – but with one massive caveat. Sadly there is no stipulation that whatever money this process unlocks for the banks has to be used for lending to Small and Medium sized businesses. The fact is they can use it for whatever they like. The financial press has already ridiculed Funding for Lending as Funding for Pretending.
The danger is that banks stock up on profitable, low capital-intensive assets like mortgages, or even high-yielding peripheral sovereign debt, and leave domestic small businesses high and dry.
Which is exactly what will happen. There is more money but not for us. The money either stays in the banks and central bank where it serves only the banks, or it flees the country to speculate elsewhere. So we have more money in existence but little more supply in the real economy than before.
The bailed out banks have no interest in investing for growth. Growth is a slow business where the company invested in has to grow first before the bank gets its reward. Banks have grown accustomed to being served first not second. They have no intention of waiting in line with the rest of us. Waiting is for little people.
So once again why are our rulers continuing to bail out the banks?
I hope you don’t mind if I break here. I know it’s not the best place to stop as it leaves out a lot of salient points but this post is already too long. I will make my remaining points in the next and final part.
Credit for pictures: William Banzai