Last week I introduced you to the “Sovereign Money” movement. An international network of organisations has sprung up since the last financial crash campaigning for monetary reform. The most positive and interesting aspect of this is that when the next crash happens this movement will be ready and prepared to immediately start pointing out the causes – it is a phenomenon that has not existed before.
I think it is a mistake to get bogged down in debates about whether their proposals are the perfect solution – or indeed to seek that one perfect solution. What is most important is to have a thorough understanding of the system, based on scientific analysis of the empirical evidence. If economic policies were based on rational analysis of evidence (not political ideology), then societies could gradually refine and improve those policies as experience provides more data and insight. I therefore want to give you a flavour of the plurality of ideas that are out there.
As 3 weeks ago I gave a summary of Steve Keen’s new book, it makes sense to start with his proposals. An alternative to “Sovereign Money” proposals, in which banks can no longer expand the money by making loans, is to regulate the manner in which they do this. At present, banks prefer to make secured loans, and hence most new money is funding housing and financial assets, whereas economic growth is stimulated when this funding goes to businesses. Keen advocates regulation to limit bank lending to a multiple of its income earning potential (e.g. ten times the annual rental income in the case of a mortgage), so that lending cannot fuel house price bubbles. Richard Werner has gone further, and argued that banks should not be able to make loans to fund purchase of financial assets.
To encourage banks to actually make loans to businesses, Keen also advocates ‘Entrepreneurial Equity Loans’, in which banks receive an equity stake in the business, rather than just issuing a loan (but still funding this through an expansion of its balance sheet – the liability of the funding to the firm balanced against the asset of equity held in the business – so that the money supply increases). Those businesses that flourish will provide a better return to banks than a loan, balancing out the downside to banks of businesses that don’t perform.
You might have noticed that all these proposals involve regulating the allocation of credit – a repeated theme of the first part of this blog was that these decisions are fundamental to the path the economy takes, so it should be no surprise that there is a need for such regulation.
As well as having a systemically flawed monetary system, we also have the current problem of crisis-inducing levels of private debt in many countries in the world – we not only have to reform the system, we have to reduce these levels of debt. For this reason, you will regularly see proposals for either a debt jubilee or ‘helicopter money’. A debt jubilee simply involves writing off a proportion of private sector debts, and therefore is great news for debtors but you might feel hard-done by if you are a debt-free saver. ‘Helicopter money’ means the creation of new money by the Central Bank paid directly to citizens. Keen advocates combining these proposals by making such payments but with a proviso that they must be used to pay off debt first. So, for example, anyone with a mortgage would have to use this money to pay off a portion of that mortgage rather than increase consumer spending (to ensure that the debt/GDP ratio decreases).
Another idea that has widespread support, including within the Labour party, and from Steve Keen himself, is “People’s Quantitative Easing”. This involves creating new money that buys Government bonds, the proceeds from which fund investment in infrastructure projects that stimulate the economy.
As I write these brief summaries of these proposals it sticks in my throat that I am not pointing out all the technical challenges and difficulties that their implementation would involve, including the many possible negative side-effects and the ways in which these could be countered. I’m not advocating or supporting any particular proposal (though each is better to the status quo), but an exploration of their downsides and the technical aspects of their implementation, while really honing one’s understanding of the economic system, would take weeks and weeks of posts – it would test most people’s patience and actually detract from the main theme of this blog.
For as I have said before, while clearly we cannot create an economy that provides enough for everyone if we have a defective monetary system, and particularly one that causes cycles of boom and bust, even if you could eliminate this flaw it doesn’t mean that the resources of the world would then be put to use in a way that gives everyone a decent standard of living.
We need to dig deeper into the system, and understanding how money works is just a basic building block that is essential to understand the more complex areas we will explore next.
In the econoblogosphere you will find countless ill-tempered, interminable debates over technical details about the current system and how it needs to be reformed. But what all these debaters typically have in common is that in broad terms they do actually agree about what is wrong with the system and recognise the flaws in mainstream economic theory. Yet they spend their time arguing with each other on-line, like the Judean People’s Front and the People’s Front of Judea (for those who get the Monty Python reference). I am determined not to allow this blog to adopt such a tone.
However, there is one step that must be part of any future monetary system. It is not “the solution” – it won’t fix everything – but once we understand the need to increase the money supply as productivity increases, without continually increasing the proportion of private debt, logic dictates that this step must be part of a stable, functioning economy. And yet this step is pretty much a cardinal sin in the eyes of those who comment on the economy in the media, and therefore would seem shocking to the general public.
As it is likely that it will cause even you to recoil in shock, it is important that you come to terms with this idea as part of the baseline understanding you need before we head into more complicated territories. So I will cover this fully next week.
