Economics with Justice Lecture Friday 16th May, 2014
Professor Richard Werner, University of SouthamptonIn March 2014, the Bank of England published two articles in its Quarterly Bulletin that were closely modelled on the contents of the book ‘Where does money come from?’. In it, the central bank clearly acknowledged that individual banks create money out of nothing. This fact had been swept under the carpet in modern economics and in economic policy making for many decades. The implications are profound. Now that the truth is out, it is time to reclaim economics, but above all, the discourse on economic policy making, from the bankers.
Here is a transcript of the lecture:
Facilitator: Good evening ladies and gentleman. Welcome to this School of Economic Science, Economics with Justice lecture and I am really pleased we have got such a good turnout. Professor, you have got the audience you deserve. Well it is a pleasure, it is more than a pleasure, it is an honour to have with us this evening Professor Richard Werner who is the Professor of International Banking at the University of Southampton. I first recollect coming across Richard’s work shortly after the crash in 2009 and anybody who had anything to do with economics was reassessing what we had to say about it, certainly that is what we did here at the School. We felt we had quite a good grounding in what you might call the land issue, maybe not so much in the area of banking and finance. We had a theory, a very radical theory that we picked up going back to the 1960’s about how economic text books were completely wrong and the way banks created the money supply. The insight of Leon Maclaren who founded the School and established the economics, we didn’t have much in the way of facts to support it and at that time I came across Richard Werner’s book The New Paradigm in Microeconomics where, while he has been working in Japan he had this very fresh look at the whole way the financial system worked, approaching it very systematically, gathering all the data and coming with conclusions which I felt was very similar to what we had been teaching for all these years here but now very fully and firmly supported by evidence which is helpful.
But that stands and we live at the moment in very interesting times where these ideas and our understandings of how banks create money is changing. But just getting to understanding the economics is just really the first stage. The next stage is the really big questions that this raises, the ethical questions, questions of justice, who is in control of the economy? And what is their mandate? And for what purpose is the economy being directed? And I feel we have in our speaker somebody here who is well positioned as anybody to take us through and to give us some direction to answer these questions so Professor Richard Werner.
Speaker: Thank you very much, thank you for this very kind and also very interesting and informative introduction and I must read up more and learn more and hopefully you can help me about Maclaren, I look forward to that. Thank you very much.
So it is a pleasure and an honour to be here, it is my second time, I think, presenting here. I think I have been here three times in total but anyway, but it in fairly big intervals so I am glad to be back. There is a lot to cover. Conventional economics until now – and there is a reason why I mention 2014 – conventional economics as taught at the universities still, and also as published in the so-called leading journals has a particular view of the world: banks are just financial intermediaries, the financial sector therefore including banks are all intermediaries and we don’t have to model banks as anything special. They are not special so we can have theories that leave out banks. That is of course the dominant paradigm and there is a whole number of other issues and assumptions which we will have another look at such as, as we know, markets are efficient so they are best left untouched, markets will take care of things, and particularly concerning economic growth. You need savings to grow, so you must first accumulate savings and then somehow this money can be used for investments and for example the banks can help in this by intermediating veraciously and particularly developing countries because they may find they have a very low savings rate – and I am not talking about the United States – in this particular example, but developing countries that also don’t have a high savings rate well they can just borrow the money from the international bankers because they need those funds, they need those savings first, is the story, and the international bankers will be very happy to oblige, if you have valuable resources. If not you will find that these very efficient international capital markets will be not interested and fairly closed to these potential borrowing countries and of course that has created this debt problem putting developing countries very much into debt and then interest compounding in foreign currency and explaining this puzzle that money seems to flow from the developing countries to the rich countries. We will talk about puzzles – there are many puzzles but that is one of them which the standard theories can’t explain because they are supposed to have higher growth rates, higher yield, money is supposed to flow there when actually it is the other way around, but why we wonder is this happening? And of course we will find the answer to most of these puzzles has to do with the banking system and how it actually works.
The theory we have heard many times, the mainstream theory still being emphasised in the media by policy think tanks and commentators and it has a certain logic to it, nice theory but how well has it worked? This is just a short list of important fundamental questions that conventional economics has not been able to answer and explain. Empirically banks do seem to be special, why is that? Why do we have these recurring banking crises that I warned about in books such as New Paradigm in Microeconomics which came out in 2005 at a time when nobody wanted to hear about a coming banking crisis? What is the link indeed between money and the economy? More fundamentally actually what is money? How can we measure it? Why are interest rate policies not really doing what they are supposed to be doing? Not just in crisis situation but actually I can show you some graphs, they never work the way they are supposed to work according to the conventional theories. Why is fiscal policy not as effective in achieving what it is supposed to achieve? What determines asset prices? Why have certain economies such as Germany and the East Asian economic miracle economies; Japan, Korea, China, Taiwan, grown so fast without the free market model, with quite a different model? All these things just don’t fit into the conventional theory. Countries that have deregulated, liberalised and privatised and adopted all those policies recommended by the Washington think tanks and others actually not experienced the rapid economic growth that was promised, very often quite the opposite and so why have many developing countries failed to develop while others, as we saw, did very well? Why is inequality rising rapidly? That seems to be a bit of a trendy issue at the moment with some stories being discussed but are they actually looking at the crucial factors here? And why do we experience such pressure internationally on finance resources growth, even when it is really harmful, why is that happening? And of course why is economics unable to answer any of these fairly important questions if it is supposed to be such an important science? That is pretty poor show and obviously as you can tell that is just a selection of puzzles. I mentioned the other puzzle that money seems to flow from the poor countries to the rich countries.
There is evidence within the conventional publications and the leading journals that banks are special. For instance, when you look at bank closures – there is a study by Ashcroft and the federal reserve, in America there are many banks, over ten thousand, lots of small banks and the authorities have the right to close themn even when they are still operating quite reasonably well and that has happened many times, even without a banking crisis there would several dozen sometimes 100, 200, during the crisis period of 2008 it was more like 500 banks a year that were being closed in America. Because there are so many it is sort of no big deal but you can do some statistical analysis which Ashcroft did and found that there are real economic consequences, there is usually a significant negative impact on the economy and there are other studies particularly on crisis situations where there is clearly a credit crunch and there is a credit supply problem. In many countries that has been observed and of course it doesn’t fit into theory because if a bank shuts down there is many other efficient financial markets, none bank financial institutions which should be able to substitute, also foreign banks – why should it have such a significant economic impact, so that isn’t explained?
And of course, as you know banks, the text books are showing intermediaries gathering savings, they are in there and lending out the money to the ultimate investors in countries. Obviously this must be the former Irish pound, because of the UK of course there are any reserve requirements but just as an example and still mentioned in text books, there is a reserve requirement of 1% of 100, 1% of your deposits the banks have to place in reserve with the central bank and it is also again a clever little theory but empirically as we will see, just not founded on facts at all.
But this is where the puzzle is – if banks are just intermediaries, the other substitutes a none bank financial institutions and financial markets which are called direct financing why does it matter? If you switch off a bank why can’t the other mechanisms kick in? Incidentally this, the taxonomy, the naming of most of the things in economics – I always tell my students as a fundamental rule the truth is the opposite of what they tell you – so when they say banks are doing indirect finance and the capital markets are doing direct finance, of course the reality is the other way around as we will see. Banks are the ones that provide direct financing, directly from the source whereas capital markets can only transfer already existing purchasing power which is an indirect way of getting your funding. I mean there are many such examples if you just think about when they talk about real variables, real growth and real GDP, if you look into it, how real is it? What is real about real GDP or the so-called real variables? Usually my analysis is in nominal terms and when I send it to journals that is one of the fundamental objections I get – well its nominal variables – that is not real but how real are the real variables? Well as you know you deflate the nominal variables by the right price index, but what is that right price index?
The data exists but it is in the hands of people who don’t release it such as central banks. We could have the right price index temporarily or for the past, clearly not for the present or the future, to calculate the price index weighted by the size of the transactions and you have the price of – all the transactions being undertaken in the economy – and you weigh your nominal transactions, you subtract the price increase and you get your real figures but since we don’t have such data you make assumptions, when you make assumptions it is theoretical and the theoretical is unreal, not real, and it is particularly obvious when you have a period with very little inflation, indeed deflation. Look at Japan – for the past ten years, for the 2000’s or you can say for ten years up to 2013 it had an average real growth rate of 1% which is not bad but trouble is nominal GDP was shrinking on average and deflation was also significant and this is what this game with so called real variables does. So you have got two wrongs, nominal GDP shrinking and deflation, and they make one right, positive real GDP because it is a theoretical concept. Nothing was actually really expanding, the economy is based on nominal variables. The prices you pay in shop, are they real or nominal? Well the price you pay is pretty real to you and economists call it nominal. Wages, salaries, stock prices, exchange rates – its all nominal. We live in a nominal world so nominal is the real real and real is pretty theoretical and therefore quite nominal and this is just one of many examples we have in economics so we have to persist and keep asking the basic questions because there is clearly some serious attempts out there to distract us and blind us with concepts that pretend the opposite is true from the facts.
Why do we have so many banking crises? After this recent crisis most people have become aware in Europe and North America that there is such a problem, of course the rest of the world knew this very well because we have had over 50 banking crisis in the previous 40 years and the number of banking crises actually has increased and the amplitude, so the frequency and the amplitude has increased significantly and that is a puzzle that can’t be explained.
The link between money and the economy, all the major theories; classical, Keynesian, monetarist, neo classical, post Keynesian – the link that they have between money and the economy is still the quantity equation where you have money, simply called M – usually not really well defined – times a constant is equal to nominal GDP. So money moves in proportion to nominal GDP, some like the post Keynesians say that causation is the other way around and money follows GDP. They argue that there is always supply of money, it is the demand that is the problem and whoever demands money will always get as much as they want so they argue the other way around but it is still the same quantity equation and it requires a stable or constant velocity and that as it turned out, we do not have so although Freeman fairly recently in ’92 called it an identity this MV=PYtruism or text books, monetary mechanism, valid under any set of circumstances whatever and that includes this stable or constant velocity. Of course it turns out there is no such thing, velocity is usually all over the place and if anything it has a tendency to fall which already by the late 80’s created a panic amongst economists because they required a stable velocity and the empirical evidence didn’t support that. So they talked about the breakdown of the money demand function, or the velocity decline, lots of papers on that. Or the mystery of the missing money because m was rising much more than nominal GP and where is the money going?
Puzzling anomalies that federal reserve researchers Goodhard said this quantity relationship which is the foundation of all these macro theories came upon it seems during the cause the of the 80’s and that is when the problems were fairly minor compared to now. So it is basically not true – that is what the facts tell us. It is now one of the weakest stones of the foundation Boughton said in 1991 but since then things got much, much worse with velocity completely collapsing. There are attempts to explain this but they usually ask more questions than they answer. For instance we are being told it is financial deregulation, liberalisation, somehow that resulted in this velocity decline, but shouldn’t that actually increase velocity if anything if you have financial markets that are more efficient so that is not really convincing and perhaps it is a little bit of a technical thing but the main stream economists don’t really want to talk about this because it means that from the 90’s onwards there is no macro-economic theory that is actually consistent with the facts because they are all built on this one pillar. All these theories whether they are Keynesian, post-Keynesian, monetarist, neo-classical and even the GSD models which have no money whatsoever in them when they then say after the crisis we have to introduce money, we are back to the monetary equation as the fall back, once you realise that there was this major empirical problem in economics this makes you also understand why economists were so keen to fall for models that had no money and no banks in them at all. It was a form of escapism instead of facing up to this empirical problem perhaps trying to find the solution and see how they needed to change their theories, that obviously was too tall and order so they decided to just drop money entirely and went for theories that had no money in them. Trouble is those theories didn’t perform any better either.
So, what is money? We don’t know according to the textbooks and they will say that. Nowadays it is all so complex and financial markets are so complex and sophisticated that nobody knows what money is. A fairly good textbook, as text books go, says although there is widespread agreement among economists that money is important somehow, they have never agreed on how to define or how to measure it. The federal reserve says there is no definitive answer to the question, what is money? The advanced macroeconomics textbook that is used most in MSc economics courses in the UK, I did a bit empirical research on David Romer’s Advanced Macroeconomics, and it this says on page three – incorporating money in models of economic growth would only obscure the analysis. Obviously we don’t want obscured analysis so no money.
Japan experienced major economic problems, basically it has been resection for 20 years and therefore it is a major challenge to all these theories so from the early 90’s, from 1991 the central bank reduced interest rates and that still is fundamentally the way we are told the economy works. If you want to stimulate the economy you lower rates, you want to slow it you raise rates and so the Japanese central bank did that – hard to believe but we did have over 7% interest rates in the early 90’s. Of course ’91 was a time when the stock market had fallen already but the top 15 banks in the world were Japanese. Japanese money had just bought up companies, real estate, factories, and Columbia pictures – all sorts of things in the world. Japan was top of the world, the stock market had fallen though and they were lowering interest rates so most forecasters were expecting – and investment strategists – for the stock markets to rise again and the economy to recover because when you lower rates we are being told this stimulates the economy. So they lowered rates, and they lowered them, and they lowered them – did this again and again and again for a whole decade from over 7% to 0.0001% so it was quite a dramatic lowering of interest rates but of course it did not stimulate the economy – why? Well there were attempts to explain this. The post Keynesians supported by central bankers say, we central bankers we don’t have control of the money supply, we are trying to put money into the economy but nobody wants it, people just don’t want that money. The bank of Japan is in print and is the main institution making this argument. “There is just a demand problem, nobody wants our money.” The fact is of course they could purchase assets and whether people want it or not you would get it into circulation so that throws out this argument.
The monetarists say the money supply is crucial, they just didn’t increase the money supply by enough. Bank reserves, high powered money and so on, or broad money just needs to be increased more. Trouble is of course there is no more reliable relationship between these money aggregates: one, two, three, four, five and GDP therefore this argument also doesn’t really work and of course the trouble with the end measure of the so called money supply is that they measure money out of circulation, money when it is not doing anything. They measure savings or a subset of savings and of course you have got to measure money that is doing something, that is being used for transactions so that is a fundamental problem. Often people say well hang on, this interest rate problem surely Krugman has solved that because he has told us, he has explained to us the old theory that it is just a liquidity trap. Now what does this argument say? Well it says that number 1, define monetary policy as the lowering of interest rates. Then, when you have lowered rates to zero or close to zero – 0.001 or something, you can’t lower them further therefore your monetary policy will be ineffective. Well the point at which interest rates reached the lowest level was ten years after the recession started so Krugman’s argument about the liquidity trap says nothing about the time period we are interested in, namely the ten years when they lowered interest rates, they lowered and they lowered, why didn’t it have an impact? The liquidity argument says exactly nothing about that. It is a theory only about the moment in time when interest rates hit zero or close to zero so you can’t lower them and it turns out it is the mere tautology of saying when you have lowered your rates so low that you can’t lower them well then you can’t lower them anymore. So that really doesn’t explain anything, so why are these interest rate policies not effective?
Should we look at empirical evidence for the interest rate story? Of course it is a story that has been repeated daily, perhaps slightly less since the crisis started but even then it is the main story – interest rates are key, will they raise rates? Will they slow the economy? Now that some economies like the US have recovered, we are back to the old story – interest rates are key. But what is actually the empirical evidence supporting the story? There is a quote that is attributed to Goerbels but people say actually no somebody else said this but it is the famous quote about lies – if you want to tell a lie, make sure you tell a big lie because small lies we may understand there may be small lies but big lies it is hard to believe there would be big lies. Certainly the interest rate story seems to fall into this category because it turns out that we have heard it so many times in the last decades that nobody seems to have checked the facts. Is there actually a negative correlation between interest rates and growth and are interest rates actually the leading factor? You lower them first and then the economy recovers right? Well if that is the story then surely there has got to be some empirical evidence. I have Japan and the US here. First a scatter plot on the left side, of course all in nominal terms because you know trades are nominal, central banks use nominal interest rates but you could actually do it with real – it would actually work the same way but it is clearer with nominal interest rates and these are the policies. So what we find on the scatter plot is that between the vertical axis of interest rates and the horizontal axes nominal GDP growth, we get a positive correlation. So Japan have got short term interest rates, for America long term interest rates, you can switch it around you get the same pattern. So this could be due to leads and lags so let’s look at the timing. On the right side you get the time series of the same data, we find that the black line on the top graph is Japanese GDP, in ’87 it recovered and it took two years or so for short term interest rates to rise. Then GPD fell from 1990 and it took a little while for interest rates to then follow. So central banks on the short end are behind the cycle, they raise rates after the economy has recovered and then lower rates when an economy has already decelerated. It is funny that isn’t it. Of course when you mention it – we all know this so this is a phenomenon the psychologist call cognitive dissonance. We are aware that there is something that is a contradiction but we sort of rationalise it away. Certainly the economic commentators must be dealing with a lot of that cognitive dissonance. So you could say, okay fair enough, the central banks are behind the curve, behind the cycle, they are always left. Surely the bond markets, particularly the US bond market, the most liquid bond market in the world, surely that one will be ahead of things right? So efficient, all the information is in there, all the big clever smart institutional investors and so on, but if you look at the lower graph. That is nominal GDP, the US and the pink line is the ten year treasury yield and you find that treasury yields follow the economy and at times there is quite a big time lag, over a year in the 80’s. Almost two years, first GPD goes up, then interest rates, then GDP goes down first, it takes a while, then interest rates fall and so on. At best sometimes they are coincidental but you virtually never see interest rates clearly leading the economy so that means the official story that reads high rates lead to low growth and low rates lead to high growth is wrong by two dimensions, the correlation and the timing of statistical causation, it is the other way round from what we have been told. Actually if we observe, if you just look at the facts it is that high growth leads to high rates and low growth leads to low rates which means of course – yes, that is an empirical observation so surely interest rates are not that interesting as a policy tool after all?
They can’t be the cause of the cycle because they follow the cycle. So that is strange if you think about how much time the central bank spends on talking about interest rates and about how we have to really think hard, sitting around here, this is our main job we are being paid for, to think whether we should raise it by 25 base points or perhaps just leave it at this level for the moment when actually it is fairly predictable, if you have good data on the real economy they will just lag that.
So why do they keep repeating the wrong mantra about interest rates? And also the other question as well is if it is not interest rates that are driving things, what is driving the economy? That is the question you are not supposed to ask.
Why has fiscal policy been ineffective? Again Japan is a key example. So they tried lowering rates, that didn’t work, then they tried the keynesian thing and there was lots of fiscal spending as a result national debt is approaching 300% of GDP. They have really been bankrupting the Japanese nation it seems, it is mostly two Japanese investors but still it is not really an impressive record. And what was the result? Whenever there was a policy package announced to stimulate the economy and there were predictions how much it would boost growth, it didn’t boost growth. Well it clearly didn’t boost it by nearly as much as forecast so it is a puzzle. There have been attempts to explain this, of course the Fiscalists, Keynesians, post Keynesians will all say well the spending wasn’t big enough, bigger spending would have done the job but of course that is a counter factorial argument. The fact is, whatever the amount was, sometimes it was bigger, sometimes it was smaller – the effect was always less than any contemporary forecast of private sector, public sector had predicted, that is a puzzle that needs to be explained. You can’t just say if we had bigger spending then this and this would have happened. That is not even the question we are asking really is it? So that puzzle needs to be explained. Other explanations are crowding out. You only heard about until 1996 then it became very quiet about this crowding out argument. The crowding out argument says that when you have fiscal spending this boosts interest rates and that slows the economy and therefore fiscal spending can’t work but of course interest rates fell and fell and fell and fell in Japan and therefore this argument is not supported by the facts.
Other anomalies are asset prices, the Japanese property bubble here taking off in the 80’s couldn’t be explained by the standard asset theories and of course the collapse from the 90’s could not be explained and this was true not just of Japanese asset prices but all of these property and stock market bubbles, whether it was back in the past, the 1920’s in the US or more recent ones in European countries or the US, Spain, Ireland – it is always a surprise to the analysts and forecasters when these things happen. But there are other puzzles. You know this theory that free markets lead to high growth? Well explain this fact – just looking at long term economic performance, say half a century, according to the neo-classical theory countries which have a more market orientated economy should perform better than countries that have a significant component, in fact a dominant component of none market mechanisms such as cartels and other forms of allocating resources and that applies to Germany, Japan, Korea – of course China is missing – which would be probably even higher than Korea in terms of growth rate so it is a puzzle that certain none market economies have done much better than the so called free market economies. That puzzle that needs to be explained and cannot be explained with standard theory.
Now Japan is also interesting because Japan was much more none market measured quite well by the number of cartels. These are official exemptions from the anti-monopoly law and then they deregulated under US pressure from the 70’s onwards, acceleration of deregulation in the 80’s and 90’s with the recession started and they are completely deregulated now, they are much more liberalised a free market economy in terms of the financial markets than the US. The US is a very regulated financial market. Of course the prediction of neoclassical theory is that as you deregulate, liberalise and privatise your economic performance will improve – this is how they have sold it to the Japanese. Now we have empirical evidence of this. Plotting your number of cartels against economic performance, you are supposed to get a negative correlation right? More cartels, less performance, less growth. Fewer cartels, more growth. What the Japanese found was that when they increased the number of cartels, which was in the 1950’s and 60’s to over 1000 – it was the peak in the 60’s – growth accelerated, they had double digit growth approaching 20%. When they started to reduce the number of cartels growth fell and fell and fell and fell and when the number of cartels hit zero so had economic growth so that is clearly not explained by standard theory.
There are more anomalies and I have to stop here because we could go on I think all night with fundamental and important issues that main stream economics cannot explain such as why have developing countries failed to develop? Why is inequality raising rapidly? And I will comment on some of those, the pressure on finite resources to be depleted.
One thing economist should really at this stage wonder about is if you have this long list of what they call anomalies that theory cannot explain – and there is more – then perhaps isn’t it time we consider the possibility that perhaps the facts are right and the theory is wrong?
It is a possibility isn’t it? And I think it is about time to consider that , so it is time for a new paradigm and if we have a new approach in economics what should it look like? Well the requirement would be that a new approach would have to be able to explain whatever the main stream theories can’t explain, all these puzzles, and in general when you try and choose between different theories, there are fundamental principles that help you select theories and there is of course econometric evidence which includes forecasting into the future. Testability, some theories may not be testable, that is not really an attractive feature – and simplicity, this is also known as the principle of parsimony or ironically the principle of economy in logic and it is a fundamental principle in logic that a simple explanation is preferable to a complex explanation. In mainstream conventional economics it is the other way around, if you want to publish in the leading journals, the first they will look for is, is there some complex maths? Can we blind people with science with this? If it is simple the ordinary readers might actually understand what this is about.
So this principle, I always mention this because certainly when there are trained mainstream economists in the room, they have a problem with this principle and they need to be made aware of the fact that this is a fundamental principle of logic. Just think about mathematics and probability and I actually have an example coming up – if there is a complex theory it needs more assumptions to hold and what is the likelihood of that theory holding compared to a simple one that doesn’t make such assumptions?
And finally the final way to select a theory is methodology. Does a theory follow a scientific research methodology? So very briefly what research methodologies are there? These are all incidentally topics that are not being taught in University in economics courses. There is very little teaching of empirical facts of course, little mention as far as they can get away of the anomalies and certainly no talk about methodology, which is unusual because in other disciplines you have to talk about methodology before you can tackle something that has the claim to be scientific. There are two approaches inductive and deductive. The inductive approach is characterised by the inference of general laws from particular instances and the deductive method also known as the top down method starts with axioms, these are basic propositions which are held to be true and then you add assumptions and actually empirical facts do not come into the deductive approach.
Now what is the approach used in the natural sciences; chemistry, biology, physics and so on? Well the approach is fundamental – you look at facts, you observe empirical facts, natural phenomena, then you try to collate your material, organise it in categories and detect patterns and from the patterns you formulate hypothesis about causation, hypothesis and even theories and then you can test them by having experiments or you observe certain data which serves as a test and so on and then you have to revise your theory potentially. So that is called inductive reasoning and that is used in the natural sciences but it is not used in economics. In economics what is used is the deductive method and that has many problems for example it is not really very open to modification and improvement because it is fundamentally sort of a theoretical dream world that you are building by having axioms and assumptions. People have criticised this approach, criticised that if you have an approach that is immunized against being tested and falsified – tested for being potentially false – but you are immunising it then that is not very scientific but an even bigger problem is when you do what could be called reverse engineering and the deductive approach is uniquely susceptible to that. What is that, reverse engineering? Well it is the manipulation of research to come to preconceived conclusions. That is obviously wholly unscientific, in fact fraudulent. How does it work? Well start with your preferred conclusion – this is a crash course in reverse engineering, unscientific research – we need to understand that, to recognise it. So start with your preferred conclusion, let’s say government intervention is bad and free markets are good and big business needs to be able to do what they want without intervention from government – say that is our preferred conclusion – we would probably find sponsors for that preferred conclusion. So we know where we are going, that is our conclusion so then we work backwards. So what sort of model can come up with these conclusions? We have to figure this out and so once you have defined roughly the model that will come to these conclusions you have to think well how on earth will I justify this model? So then you have to come up with the right framework which means set of assumptions that give you the framework for this model which comes to your preferred conclusions and then you need to think about well some of these assumptions are just really wild, how can we justify the whole approach? We need to start with some axioms that set the scene really for this entire approach. Now finally comes the most important step in this entire process and that is now present in reverse order – ladies and gentlemen, we are all smart people lets pose some axioms. Axioms are things that we really know to be true therefore we never have to check if they are true by the way, such as, come on, we are all really selfish therefore ultimately people are rational and want to maximise their utility, they are not influenced by others they just want to maximise their utility was that sort of consumption accumulation of wealth, of goods, that is the axiom. Now we need to make some assumptions ladies and gentlemen to simplify such as – we assume perfect information, complete markets, perfectly flexible prices that immediately adjust, perfect competition, there are no oligopolies, monopolies, there are no transactions costs, infinite lives, minor additional assumptions like that okay. You know, why not? We are smart people we can work in clever abstract theory, so we are going to put together this theory and we can analyse now concrete policy situations and oh, ladies and gentlemen, by moving this model with some mathematics here is the conclusions, government intervention is bad and big business needs to be allowed to do whatever they want, free markets are best, this smart model says that.
So of course that would not be an acceptable scientific approach would it? And of course nobody in economics would ever adopt such an approach would they? Because axioms are things that we know to be true so we don’t have to check to see whether they are true and actually they are not true and assumptions are things that we know from the start are not true but what the heck, let’s build a model based on them anyway.
Now, back to concrete questions such as interest rates are key. Where does this idea come from that interest rates are so important? It doesn’t come from empirical evidence, you have seen the evidence, it comes from theory, it comes from one of these deductive models based on axioms and assumptions. When you have a list of assumptions such as – it is always the same assumptions actually so it is perfect information, complete markets, flexible prices, zero transactions costs and so on – what you find is that prices move, I mean you are assuming they adjust immediately, instantaneously – the prices move to give you equilibrium. This is the one chart in economics, the downward sloping demand curve and the upward sloping supply curve – it doesn’t matter what you are talking about, labour market, FX, it will still be used and it will always be the same story. Prices move up and down until demand and supply are equalised because within this set of assumptions – the perfect information, flexible price of free markets – that is what you get. So it is based entirely on theory and the theory is based on these assumptions so turning this around what actually happens when the assumptions do not hold? When the assumptions do not hold then we know – this is actually the great contribution of mainstream economics – they have demonstrated to us the long list of assumptions that are necessary in order to come to their preferred conclusions and since we know for sure that these assumptions do not hold, we know therefore the conclusion has nothing to do with the planet we live on. They are describing a theoretical dream world that is very different from our world and therefore when they say markets are efficient and deregulation, liberalisation, privatisation will increase welfare, we know this is very true in this theoretical dream world but we know for sure it is not true on this planet because none of these assumption hold here. Coming back to probability when a simple theory has few assumptions and a complex theory has got many assumptions. They have got many assumptions. Let’s be very generous and say what is the probability of these assumptions of one of them to hold, let’s say more than 50% which we know is not actually really true – perfect information? Come on – but let’s give them 55% and we have eight assumptions, so what is the probability of all of them holding jointly? It is less than 1% and this is what they forget because they can’t even do probability mathematics despite their mathematical models because they are all conditional probabilities, they have to jointly hold so you multiply probability so it is 0.55 to the power of eight.
We know for sure there is no equilibrium. That is what they have proven. It would be pretty good as selling this as something else, the opposite, like I told you it is the opposite of what they are trying to tell you. They are trying to tell you the equilibrium, equilibrium but actually the theories if you read them closely have proven that there is no equilibrium in any market ever. It is possible that occasionally, once in a zillion market transactions there is equilibrium but it is very rare and it is just a coincidence, it is certainly not a tendency or a general result. So all markets we have to assume are rationed, that is what happens when you don’t have equilibrium, markets are rationed and rationed markets work according to the short side principle – which ever quantity of demand or supply is smaller, that quantity determines the outcome and of course we know this, it is common sense. If you apply for a job and there is one job, you sit outside, wait for the interviewer and there is 20 people waiting, where is the equilibrium here? Are they actually asking you what is the lowest salary you are going to accept and they are going to hire the one accepting the lowest salary which is what the equilibrium theory says? No. That is true in all other markets as well. So of course it is not equilibrium, so what is it? It’s a rationed market, the short side is the one deciding on the outcome and you are on the long side. So who has power? The short side has power. This is really the main reason why everything has to be equilibrium because then it is the market, it is all neutral and you can keep power out of economics which is pure propaganda. The reality is that all markets are rationed and the short side has power to allocate and this is not based on prices, to pick and choose who to deal with and of course to extract other benefits from this and there are plenty of examples for this in many markets. Labour market is a pretty obvious one. I think we all can read in this room right? There is a job where you can earn a lot of money by reading. You get famous, you can become a future prime minister in some countries. The job of newsreader in the television news. Well how many such jobs are there in the country? It is a small number, so where is the equilibrium there? Clearly there are more applicants and more people able to do this than there are jobs because it is being allocated like everything in the economy, allocation by the allocators. Bureaucrats, they don’t have to work for the government, they can work for a company. All markets are decided by the short side. Now the short side may switch between demand and supply but whatever the short side is determines the outcome and then it is quantities that matter not prices and the whole price propaganda – including the price of money – the interest rate is out of the window because the reality is its always about quantities, and it explains this puzzle, empirically quantities dominate prices which is why when you go back to money, it is not the price of money that explains things, it is the quantity of money. Of course you have to measure it correctly and then you can show that so once you realise the reality that these assumption don’t hold there is no equilibrium rationing and then the hidden power dimension becomes visible and it is particularly important for those to understand who are by tendency less on the wielding side of power and more on the receiving side which includes I suppose the majority of the female population in general and it has to do with how markets really work and of course also how money really works.
Speaker 2: Clarify the term short side.
Speaker 1: Short side, well it is just – I suppose it must be an Americanism – but it simply the smaller quantity. So you have demand and supply whichever – if you go back to this diagram – let’s say we don’t have the equilibrium price but we have a different price. Let’s say the price is here then you would have more demand than supply, so excess demand, so what is the short side? It is the supply. Whatever is smaller, the quantity that is smaller is the short side and the short side is the one that has power because that is the common denominator you could say, that is the only quantity that can be transactioned in this case. With the price is up here then of course the short side is the demand side. But some markets are by tendency very one sided. It is very clear what the short side and long side is so in the labour market or in the market for money because money has unusual features, it is quite an attractive instrument and it is quite useful, you can do lots of things with it including of course good things and philanthropical things, therefore there is always demand for money and the demand will always be larger than the supply so the short side is the supply and the short side determines who will get this money which is also actually recognised in the main stream literature as credit rationing and there is a bit of a debate in the mainstream literature but there are plenty of people who recognise banks always ration credit at any interest rate even in good times and I think that is true because there is always more demand for money, there are always takers for money.
Now, 2014, March. Perhaps things are changing? The bank of England discovered that money is created by banks and informs the world in its quarterly bulletin. 97% is created by banks not – as they described them as – other financial intermediaries, when they extend credit, when they do what is called lending. Which actually means that banks are not financial intermediaries because they do not lend money, they create money, they are not in the business of lending, they are in the business of money creation. One pound in net new bank lending is one pound addition to the money supply and purchasing power so the bank of England has come up with that so this financial intermediation story was simply wrong, banks are not intermediaries they are creators of the money supply and of course they allocate – because there is always more demand for money, they are on the supply side and actually they are not just reallocating existing money, they are creating new money, their decision therefore become pivotal in the economy because they can decide who gets money and for what purpose and that will reshape the economic landscape in no time. That is of course why banks are so crucial. This is the process of credit creation which I believe is known at this School of Economic Science and of course once you recognise this it is a game changer for almost everything to do with economics. Economics itself, finance, banking research, forecasting, government policy, monetary policy, fiscal policy, regulatory policy, how do we regulate creators of the money supply? And this recognition of the banks as creators of the money supply also is a precondition for solving all these puzzles and also solving many of the world’s problems such as recurring banking crises, unemployment, business cycles, under development and the depletion of finite resources. So there is potential for a policy revolution if this is being recognised and it is an important moment for us all to push hard on this point. Of course so far the mainstream has said no, banks are just intermediaries and you have to have these savings first but the Bank of England came out and said no, the banks can create money we don’t need to save first. So that of course means that we can always generate more growth, there is no need for unemployment and it also means well a whole stream of other things, such as developing countries don’t need to borrow money from abroad, they have banks, they can create money of their own so they don’t need to get indebted to the international bankers.
It is a revolution because it means that almost all the current mainstream economic models have to be thrown away, they do not include banks. So once we are clear about the money creation process we can then revisit the link between money and the economy and I have shown you the quantity equation which had a problem – in fact it had two problems with it. Number one, it defined money wrongly as deposits even though when banks create money through lending they create deposits, the trouble is the deposits won’t tell you which of the money is newly created. It even won’t tell you the credit creation properly because you can have a draw down in deposit and that is credit creation, an overdraft and of course also they are mingled with existing deposits and finally there is money out of circulation, you are looking at the wrong thing. But if you look at the asset side of bank balance sheets – bank credit – then you can also measure money creation and you can also get information – that is the second problem with traditional quantity equation – you can measure what the money is used for because it will have a different impact depending on what it is used for and therefore you have split the quantity equation into two streams and define money as credit. This is basically what I did over 20 years ago when I called it the quantity theory of credit or of disaggregated credit if you want the full name whereby money is defined as credit and money is split into these two streams, this further disaggregation of course possible but the simplest is into two streams money, or credit rather, credit creation for the economy, GDP transactions which moves nominal GDP and money created for none GDP transactions and when that rises your traditionally defined velocity must fall, that is the mystery of the missing money – money wasn’t as they assumed wrongly only going into GDP, a lot was going into asset markets, but the asset transactions, property transactions are not part of GDP. For good reason, GDP is supposed to be value added and of course the asset transaction are zero sum gain – ponzi somebody’s gains and somebody else’s losses. So we can distinguish there three scenarios when bank credit money is created through credit creation and is used for consumption then you will have an impact on demand immediately but you haven’t increased the amount of goods and services so therefore you should get consumer price inflation – that is consumptive credit and that is not a good scenario of course if you have too much of that you get inflation and not more growth, stagnation perhaps. The second possibility of such unproductive credit creation is when the banks create credit and it is lent for transactions that are not part of GDP financial transactions and if the banks tends to move in line with each other – there is a good reason for that because of their need to operate if not collude in the interbank market because of how banking works and as a result they tend to work in lock step and so when they then all increase bank credit for financial transactions you are moving up asset prices and you starting a ponzi scheme, those who move get in early, buy those assets cheaply and then sell when they have risen, they get the money from those who come in at the peak and buy just before it collapses. That is usually the ordinary population buying once the newspapers have been recommending which is when the insiders are selling out. Sorry is there a question?
Speaker 3: Yes, how do we know whether the credit is going to go into the financial market or the investors market? Everybody is always talking about the investment credit and yet it all ends up in assets, it is almost like we know about it afterwards not in the beginning so how do we?
Speaker 1: It is not so difficult, in fact for policy purposes I am recommending that of course there should be bank regulation that says that the left side credit is restricted – I mean yes, you probably want some consumer credit but not so much that it needs to be limited – and the financial credit I think we don’t need at all because the speculators can fund themselves from other sources, from the efficient financial markets right? From the efficient capital markets. From this whole gambit of none bank financial institutions, from this dramatic expansion thanks to deregulation of none bank players, there, good luck. So there is no justification to allow them bank credit so I will recommend a simple rule which would end banking crises immediately – that banks are not allowed to create credit for transactions that do not contribute to GDP.
How do we know this in practise? Actually the national income accountants have split all the transactions out when GDP was designed and it has been fairly defined by now so every transaction can be classified. There is basically a list and the bankers before they give out a loan it is one of the key pieces of information they ask the borrower – what will you use the money for? And they tend to even monitor have you actually used it for this, whether it is property or other things, it is a key question so the information is there, you just need to link the two, get the bank regulators to impose this list on the banks, they must pass it down and the staff need to be trained a little bit but ultimately it could be automated so they type in what it is, what the credit is used for and you have a list and it is either yes or no, if it is for none GDP transactions which is all the asset transactions where you are just purchasing and you are borrowing in order to purchase existing assets then there is no justification to create new money for that and therefore that shouldn’t be allowed with bank credit.
Speaker 4: So no more mortgages?
Speaker 1: Well you want to have a certain amount of mortgages for policy reasons but I think you would find that you can create quite a different mortgage, or property, market where property prices are not always rising and rising because of course they are driven up by these mortgages. You would have stricter loan valuation ratios for those mortgages that you allow but that would be something that should be discussed and a democratic decision should be made about this because it is fundamentally creating a problem and there are costs that, so one has to be aware of that and there need to be limits such as a maximum loan valuation ratio. In some countries like Germany there is a 60% loan to value ratio and there hasn’t been a property bubble in 90 years or something. But there clearly are other factors, so it is not so easy but yes, that is one issue one needs to look at, how one needs to handle it because of course you want to allow young families or people that need a house to be able to obtain a house, perhaps the rental market needs to be expanded but better still have a monetary system where you can get your house from say the local community because they are creating local currencies. We will come to that. So basically once you start to look at these policy options, you need to be aware of the whole framework of policies available, bigger policies, and of course monetary reform is the fundamental issue and once you have a different monetary system it will be quite easy to deal with these policy goals where you want certain people to be able to have a house clearly but there may be better ways of enabling them than just a mortgage based on newly created money.
Speaker 5: What are your thoughts on bitcoin?
Speaker 1: Yes it is an interesting development and basically if done correctly it is clearly challenging the banking system but at the moment it is early stages and the particular bitcoin venture, we don’t know whether it will survive but the idea I think is interesting. What I am arguing for and I have got a few slides on is to have if anything, money creation in a decentralised form based on local communities. They should have their own money creation. There is a danger in having even monetary reform when you give a central bank all this power to create allocated money because effectively nothing is going to change. If you think about it and I thought about it, what if the Bank of England they put this out in March, Financial Times wrote about it and so on, what if they decided okay, let’s have monetary reform, let’s stop the banks from creating money, but if the money is all issued by central bank what will have changed? And then the banks are passing on this money, yes you get a bit of a small change in the role the banks play clearly but if you had previously considered the central bank and the banks together then really you would really have the same set, the central bank and the banks. Banks now of course are in a weaker position and being only intermediaries but still intermediaries of the central bank and working together with central bank.
I don’t know who owns the Bank of England, do you? The shares are held in a nominee account which is a classic way of hiding the true owners if you read about tax havens so I don’t know who owns it.
Speaker 6: The treasury solicitors.
Speaker 1: Well that is – people say some things like that but how do we know? Okay I will quickly wrap up on the presentation because I see there are lots of questions so we can come to the question and answers. So basically once you split credit into these streams, what you see on the right side is the good credit, credit for productive purposes and it is always possible to have more growth even at so called full employment if you have productive credit creation because all you need is good ideas and you create credit to implement them and the credit mechanism is the one to reassemble given resources which is why it is so powerful and why of course there is no need to have unemployment ever except voluntary unemployment which we are being told there is a lot of – I am not so sure. So the good credit is productive and sustainable and the bad credit is actually unsustainable and leads to problems and crisis. There is Japanese data on that, this is explains Japanese GDP, when you have credit for GDP transactions, GDP credit for financial transactions, property credit, it explain property prices and it is leading unlike interest rates, you get credit moving first and then asset prices and the same with GDP, so that is a bit more convincing than the interest rate story I think. But whenever credit for financial circulation rises as a share of total credit you get more of the speculated credit this ponzi scheme, it is unsustainable, you must get a banking crisis, in Japan this moved from 15% of total credit to 30% whilst total credit was also expanding. So as a general rule whenever broad credit grows faster than nominal GP you know it is not fuelling nominal GP so it must be going to asset markets so you are getting a bubble. This is broad credit here in the red line, and nominal GP is the thin line. Spain, Ireland, Portugal all these countries you have credit creation rising 30% – 20%, 30% for years between 2004 and 2007 way ahead of GDP so it was very clear this had to result in the crisis. So banking systems are prone to recurring crisis and instability because banks maximise their profits, benefits and bonuses by growing quickly and they can grow quickest by creating credit for financial speculation. That is what you earn money fastest on as a banker and that is of course why we have had so many banking crises. It is possible to avoid financial banking crises when bank credit moves in line with GDP for example the same period in 2000, in Germany bank credit moved very much in line with GDP and there are several ways to achieve this. One is the one I mentioned already where you have the bank regulator telling the banks you are not allowed to create credit for speculation purposes, but there is another way of doing this and that is when you have a banking system that is designed such that the banks only want to create credit for productive purposes then you don’t really have to micro manage the banks. So what do we learn from this? Historically bank credit creation occurred fraudulently and even today it is not clear if it is actually legal what they are doing – there is certainly no law explicitly allowing them to do what they are doing. The misleading nature of banking continues, which is not an ethical approach to business. The banks have usurped the public good, the prerogative to create money, which belongs to the public and they are in the control position, the pole, pivotal position in the economy but do they have the public benefit and welfare in mind? No. Is there any accountability? No. So clearly that is not a good system and also the question of interest, usury is an important one and once you study the way the bank really works you realise there is no justification for usury because for bank credit being combined with interest because it is money created out of nothing by banks but it is effectively our purchasing power that is being effected there because it is of course fixed and finite as resources are, so really they are taking from our resources and they are charging interest for this. It cannot be justified, bank credit creation can only be justified if it is for the public benefit. Let me just quickly move ahead, perhaps just at the point of interest, the Babylonians, realised that there is a problem if you charge interest for lending because you will get an accelerated redistribution from the many to the few. Interest and the banking system are at the centre of this concentration of income and wealth in particular and they had a solution and so it is funny, we have copied their banking system, it is 5000 years old, credit creation by banks by interest but we didn’t copy their solution to some of the problems this creates which is periodical cancellation of debts. Our way of dealing with this is banking crises but they tend to, the way this is being handle, increase public debt and therefore just accelerate the redistribution from the many to the few. So we need to have a better mechanism here and of course monetary reform is one.
Also the other point I wanted to mention here is the speculative buyers in the economy. Why are we constantly under this pressure to deplete finite resources? It is because of interest and money being created as debt and therefore there is pressure to constantly grow even when it is unnecessary and also we know from physics that this is not really growth because of course there isn’t really growth, what we have is a constant addition of energy – well partially addition – of energy from the sun, some of it is being absorbed and stored, most of it is not used and that is it and the rest is a closed system we are just transforming energy and of course using up old stored energy and what do you call growth in that? Well it has been defined to get a positive figure by not counting the depletion of finite resources in order to justify usury because how could you justify interest when there is no growth, no ostensible growth. It would become pretty obvious, well hang on, that is just a redistribution of wealth here isn’t it, therefore we need growth and that is why we have the GDP definitions that we have. So that is also the source of these problems, the environmental problems is also our banking system, our monetary system, credit creation linked to interest rate and inequality as I mentioned. There is no justification for interest, it is just a pure transfer payment but for a service that is actually a public good, namely this money creation. So what is the other policy that you could have, if you don’t want the regulation on banks you could have a banking system that consists of banks that do not do the bad stuff and that actually work more for the public good. In Germany 70% of banking consists of not for profit local banks and they are embedded in the local community, there is more transparency and accountability for what they are doing, the locals are watching, they are part of the local community. There are no bonuses, bankers don’t have bonuses. It is a public utility and it is not for profit and as a result what you find is these banks create credit mainly for productive purposes, they don’t lend for asset speculation as a result of the banking crisis these almost 2000 small banks were not affected, they increased lending, they also lend to small businesses, ordinary families, small business, the local borrower whereas big banks by tendency want to lend big money to big borrowers. So changing the structure of the banking system is another policy that we can implement ourselves, we have spent a big part of the last 20 years trying to convince policy makers of even not really radical solutions within our system, how you can quickly end crisis and reflate the economy, turns out they came to the conclusion that actually the job of central banks seems to be to create crises. The central banks have known this for a long time, the Bank of England of course knew for a long time, like all central banks and banks create money of course but it is the central banks that have funded this false economics. There is research that demonstrates how much money central banks have been ploughing into economics as a discipline to ensure it’s the wrong type of economics, leaving out banks and so you wonder why. So central banks have the knowledge but they are usually not using it in their own models and again the hypothesis that we are being told is the job of central banks is to create stable growth, stable prices, stable currency, stable anything. If you do a keyword search of speeches by central bankers for the world stable and stability, all over the place, it is all stable stability. But what is the empirical evidence for this? Well they are certainly not delivering that are they? Well the alternative hypothesis is that the job of central bank is to create cycles; economic cycles, boom/bust cycles, crisis. While the empirical evidence suggests well yes, that hypothesis seems well supported they seem to be doing a good job and if that is the bank of the world we live in then clearly we can’t say let’s have monetary reform, let’s give central banks all the power to create money. Also it is clear that it is going to be an uphill struggle to change the system but there is one thing that we can do and that is set up local banks, so we have started doing that. I am chair of local first community interest company in Winchester and the goal is to set up a network of not for profit local banks across the UK. We are starting off with Hampshire, the Hampshire community bank, but there are several others where we are talking to local stakeholders. The idea is that these are banks owned by a charitable foundation, routed in that local community and they create money for the public benefit and it is all given back to the public which is what in Germany the majority of local banks are doing and that is something which basically we cannot be stopped if we go for this. A particular policy that we have adopted here is to ask local authorities to put in money and we have found them very, very open to this idea and very supportive because it creates jobs, we can show how this works in Germany, there is close cooperation with local authorities and if they put up 5 million pounds to set up a bank, which is all you need at the moment, there is a window of opportunity because Vince Cable likes this idea too so he will double the money and with 10 million, 12 million you have the right minimum capital to have a decent conservatively run local bank and the bank will earn the money to repay the 5 million or 10 million to investors, it will earn its own keep and then the local community has this money creator which can reshape the economy because these decisions by banks are so crucial and you get a different economy.
So I had better end at this, there is much more and I have many more slides but I had better end here so that we have some time for questions, thank you very much.
Speaker 7: Well first of all have you heard of the bank of Dave?
Speaker 1: Oh bank of Dave, yes I have heard of it, I have met Dave actually.
Speaker 7: My real question is when you were talking about the Babylonians and the cancellation of debt every six or seven years, well I was thinking that the monetary side is not the only way to deal with cycles of boom an bust, there is also the fiscal side, would you agree that land value tax is also an important tool?
Speaker 1: I must admit that I don’t know, still, enough. I have been too busy looking at the monetary side and really last time I thought I must read up more on land value tax but it seems reasonable and sensible to have different tax system that looks at land and I also find the argument convincing that the benefits of land in say urban areas and therefore the justification for the high price is due to the people living there and then therefore they should get the benefit, that is similar to money creation so I find that also a very good argument.
Speaker 8: You are an inspiring teacher I know that because I have met so many people who are involved with Positive Money who clearly either directly or indirectly have been influenced by you or by your students. My question is why is Positive Money seemingly still unaware of a very, very – and it clearly is a very important part of your policy recommendation which is rather than to carry on with a concentrated form of money creation that we actually use the power of the state to enable local authorities up and down the country, you have clearly been investing an enormous amount of your personal energy in that, with all those people I have met, you have influenced them strongly, is there any chance that you could persuade them that they would be more convincing, they would reach a wider audience if they were to adopt that key final element in what you had to say this evening?
Speaker 1: Well thank you very much. I don’t know what the reason is but it seems that, I said this the very first time I encountered – actually it was possibly even before it was founded – Ben Dyson and I think it was actually here, maybe, how many years ago? At one of the meetings?
Facilitator: Two and half years ago.
Speaker 1: I thought it was longer. And I said it was risky to give a central bank so much power. I have spent a lot of time criticising central banks for what they have done and they have clearly been tools by insiders to manipulate markets and it is very easy for a powerful institution like that to then create a smoke screen and hide what they are really doing which is what the interest story is about, it is a diversion basically. So yes, I don’t know what the real reason is but they seem from the beginning to really want to do that.
Speaker 8: Maybe I will say to my good friends in Positive Money, I heard Richard talk about this the other day, would you care to get in touch with him and listen to what he has to say?
Speaker 9: The Positive Money argument is I think about what they were saying is that you would have a money creation committee that would have the ability in carefully controlled situations so basically if the increase in the money supply was under 2% then they could increase the money supply and it would be separated from the actual people who allocate that money, do you not think that that is sufficient safe guard?
Speaker 1: Central banks were founded in inequity and sin – well most of them – their whole history is one of manipulation cycles and the economy and everything and I feel that because they would still have control over resources themselves that if they felt that power is being taken from them they could have counter measures and smoke screens available. Common smoke screens central banks are using is to argue, when things go wrong and they go wrong all the time right? And yet as I predicted in my book 2005, there is a whole list of predictions I made as to how the next banking crisis would happen but also what will the policy response. Policy response will be once the banks are bust then people will say, now we need to tighten up on bank regulation and more capitol is demanded which will mean less credit and the recession gets worse and the other thing that will be done is tax payer money will be used so therefore redistribution and welfare cuts and so on, very predictable, always did that and give more powers to central banks – so every crisis they create they get more powers and that proves they are really well plugged into the power game so my fear is that they would as soon as there is something like this plugged into the horizon they would be in overdrive to make sure that they have the right people in this committee and the terms of reference may be changed maybe at the last minute or at some process so that there is – the things that they would ensure, would want to have in there would be in there and so on. So ultimately it is still a solution where you have centralised power over something which in the end is a decentralised or can be a decentralised decision – how much money is created and for what purpose and actually it is a fundamental question and that is why I think it is a good question. We are talking about power structures and constitutions and Germany actually has one thing in common with the UK, we don’t have a constitution just like the UK – but that is another story. We can give ourselves the right constitution. What would be the right constitution now a days which ensures that those who make decisions do it in an accountable way so that they can’t play games and manipulate things? Well the so called representative democracy survey is linked to old technology of voting, nowadays we don’t need to give away our voice we can keep it, we can vote once a week on important issues, we have the right technology why do we have to have a representative? That was in the days when you had to take your horses and whatever and travel a few days to reach parliament and of course a select few only could do that and they had to speak for many people, there is no justification for that anymore. We can have a system with transparency and true accountability and ultimately the best structure will involve decentralisation of these powers because that creates checks and balances and also the problem that there will be basically you could use your resources better, there is a better chance to control the decision makers if their power is actually limited and restricted to a certain geographical area and so on.
Speaker 9: That is very interesting, one more question on the Positive Money thing do you think that they would at least remove the money creation from the debt creation process?
Speaker 1: I think it is possible that it can be done but fundamentally again I think that it is better to do this on a local level. One thing we can do now is set up local banks – step one – but step two would be to have the local authorities issue money on the basis of work provided and then the money is actually something that people have earned, they have already done the work for it and it is the opposite of the debt based thing where you still have to earn it. That sort of system and again I think that works in terms of it being more immune to take over by interest groups if it is decentralised.
Facilitator: We could go on all evening but I can see the clock is moving, maybe just one last question?
Speaker 10: I just wondered, could you say why you think the Bank of England has published the truth about money now and what is the likely outcome?
Speaker 1: I am still puzzling about this so the first question I can’t answer. I can tell you that, as you know, there were two articles and the first one they did quote Where does money come from? And my co-authors from the New Economics fFoundation have been engaged with the three authors of the papers throughout the last two years. They also did come to my conference – well one of them and I guess the others were briefed – came to my conference I organised in Winchester, the next one is actually on the eighth of October in Winchester Guild hall, we have Charles Goodhard and John Kay as keynote speakers but we will have various different groups, we have to have some sort of semi-main stream people as well so it will be quite a nice mixture, but so the Bank of England always came to those, they were sponsors of the last conference and so they were clearly engaged and we did nudge them. Also when this book was written we constantly asked is there anything wrong in here? What is wrong? What is your comment and we got lots of comments and so what was published they agreed was correct and so then of course the next question is why don’t you write about this if you say this is correct? And so, especially my colleagues in the New Economics Foundation, they have been quite patiently, constantly nudging them and so perhaps that was the reason but I don’t know. That is maybe not enough of a reason, maybe they did it under the radar, maybe it is an official real change in policy I am not sure. It is still true that the FT wouldn’t publish my opinion pieces which they haven’t for the past 20 years I have been trying to, so certainly their policy hasn’t really changed although they allowed Martin Wolff to put in his articles on this. Sorry what the second part of your question?
Speaker 10: What are the likely consequences?
Speaker 1: Yes it is very hard to say. So far nothing seems to have changed of course and that includes the journals. I have used this to propose special issues in maybe a dozen leading journals, using the Bank of England article as something, they are saying this, banks create money, well we need a special issue on banks as money creators and I was offering to be involved in editing that, producing that and all them said no we are not interested or we can’t now we are full or this, that or the other but so far none has seized that apparent opportunity so I don’t know. I wonder. We will find out. I am still not sure whether it is really a deep change, but it certainly has the potential of a change and we should try to make the most of it, I think that is the main message. We should try to make the most of it and see what happens.
Facilitator: I think that this could go on all night but it looks like we are about to be thrown out by the caretaker and the clock is moving on. I think the only resolution is that we just have to invite you back on another occasion. I just feel we have spent an evening with someone who actually knows what they are talking about, who has worked his way through this sort of morass of misinformation and untruth and so on and I think someone who we sort of all share in something in the area of the heart and I detect behind us a sense of love of truth, somebody who has been motivated by really wanting to get to the truth of the matter. I am really impressed by how what you finished on is a simple, practical application that is actually underway so thank you very much it has been a most useful, most impressive evening.