Ellen Brown writes in Web of Debt …

Skeptics asked how a country with a national debt that was over 200% of GDP could be “strong and wealthy.” In a CIA Factbook list of debt to GDP ratios of 132 countries in 2010, Japan was at the top of the list at 226%, passing up even Zimbabwe, ringing in at 149%. Greece and Iceland were fifth and sixth, at 144% and 124%. Yet Japan’s credit rating was still AA, while Greece and Iceland were in the BBB category. How has Japan managed to retain not only its credit rating but its status as the second or third largest economy in the world, while carrying that whopping debt load?

The answer may be that the Japanese government has a captive funding source: it owns the world’s largest depository bank. As U.S. Vice President Dick Cheney said, “Deficits don’t matter.” They don’t matter, at least, when you own the bank that is your principal creditor. Japan has remained impervious to the speculative attacks that have crippled countries such as Greece and Iceland because it has not fallen into the trap of dependency on foreign financing.

Japan Post Bank is now the largest holder of personal savings in the world, making it the world’s largest credit engine. Most money today originates as bank loans, and deposits are the magic pool from which this credit-money is generated. Japan Post is not only the world’s largest depository bank but its largest publicly-owned bank. By 2007, it was also the largest employer in Japan, and the holder of one-fifth of the national debt in the form of government bonds.

Score another one, then, for the high priests of fiscal rectitude. Harsh cuts, tax increases — this is by no means a recovery policy. The capital markets have got their pound of flesh. But Greece is no more able to reduce its deficit under these circumstances than it is possible to get blood out of a stone. Politically, it means ceding control of EU macro policy to an external consortium dominated by France and Germany. Greece becomes a colony.

Nor will the policies work, as the ’strict enough conditions’ imposed will further weaken demand in Greece and, consequently, the rest of the European Union. Furthermore, the rapidly expanding deficit of Greece has benefited the entire EU because it supported aggregated demand at the margin, and the sudden reversal contemplated by this package will reverse those forces.  (link to article)

Check out the discussion following the post by ‘Art’ and ‘Reality’ and Marshal Auerbach himself for a succinct overview of Neo Keynesian v Neo Liberal  viewpoints.

Here is a snippit

Reality, you should only retract government spending when it becomes inflationary, not because of some arbitrary idea that it somehow “distorts” the free market. The point I was making in the previous article on Greece was that the choice of these voluntary “funding” arrangements for governments that are not intrinsically revenue-constrained is always political and never financial. I argued that if citizens realised these were political choices only (reflecting ideology) then they would be better able to compare them with other political decisions such as the austerity measures. In making this point, I argued that once citizens had a better comparison and were not forced into thinking that the financial constraints were real then governments might be more carefully scrutinised and forced into making better decisions with advance public purpose rather than simply fall prey to the notion that the “markets are always right” and “always determine interest rates”.the notion of a “government budget constraint” only applies ex post, as a statement of an accounting identity that has no significance as an economic constraint. In an accounting sense, it is certainly true that any increase of government spending will be matched by an increase of taxes, an increase of high powered money (reserves and cash) and/or an increase of sovereign debt held. But this does not mean that taxes or bonds actually “finance” the government spending. They do not!See this if you want an explanation. Then you’ll be approaching your ‘nom de plume’ , “Reality”:

• http://bilbo.economicoutlook.net/blog/?p=1266

NB: By all accounts, Greece has an uneven taxation collection system and a crazy pensions policy both of which need reform.  But the case for not using savings from cuts in these areas to make productive public investments or for the pre-distribution of an emergency per capita payments has not been made by any commentator. Borrowing to spend on such a fair stimulatory package – following public sector and payments reform – could be justified and might even be supported by the bond market.

The very same critique could be made of the current discourse re Irish government policy. Why are the options only A) maintaining excessive public and semi-state salaries, pensions and consultants fees (promoted by the Unions) versus B)  cuts to the above (promoted by the employers and government). Smart Taxes want to  explore C) which is B) plus major public investment programme and an emergency citizen dividend.

Having said that, Marshal’s plan should be also be considered under whatever scenario A, B, and C.

Joseph Stiglitz, professor of economics at Columbia University: “A tax structure that does not reward short-term, very speculative gains would be good. If you were investing for a year or five years or 10 years it would be a small tax but if you were holding it for just one minute it becomes a very high tax. The important question is implementability. It’s designed to tackle high frequency activity for which it is hard to find any societal benefit. The only question is, can it be effectively implemented? Will it be circumvented? There’s a growing consensus it can be implemented, if not perfectly, effectively enough to make a difference.”   (link to article and video)

Nama was painted as a socially responsible undertaking that will be reporting to the Government ministers on the issues of ‘social dividend’. It will provide housing for the poor and will take off the market vast surpluses of unwanted properties. Nama will also deliver a healthy dividend by charging local authorities for this ‘service’. But the local authorities will still somehow come on top by saving money.

Perhaps mindful of having produced too much gibberish of the above variety, our public representatives have started talking up the discounts that Nama will apply on loans it buys from the banks. Just 6 months or so ago Nama enthusiasts were saying that a 12-20 percent average discount will reflect the ‘true long term economic value’ of the loans? Now we are into 30-35 percent haircuts and rising.

The iron logic of finance tells us that the greater the discount Nama imposes the greater proportion of the original loan will have to be written down by the banks as a loss. This will require fresh capital, of which the taxpayers are the only source for no investor will be willing to buy new shares in Irish banks voluntarily.

By my estimates from some 9 months ago, the Irish banks will require Euro 10-13 billion of fresh capital the minute Nama goes through their books. After months of ignoring this prediction, the Government now admits as much.  ….

This arithmetic is not escaping the ECB. Since December, we are painfully aware of Frankfurt’s intentions to close the discount window through which Irish banks have already pumped some Euro 98 billion worth of junk-rated assets in exchange for cash. By all Euro area standards, Ireland – a minnow accounting for roughly 1.8 percent of the entire common currency economy – has swallowed about 19% of all cash released by the ECB since the beginning of the crisis. More than any other country in absolute terms. Add to that the prospect of Euro 59 billion worth of Nama bonds, plus another Euro 10-12 billion for banks recapitalization, Irish banking system bailout can cost ECB up to Euro 170 billion in loans secured against, you’ve guessed it – unfinished estates in the middle of nowhere.

So understandably, the ECB folks are worried. By May they will start reversing junk securities they loaned against out of their vaults and back into the banks. Should they succeed, Irish taxpayers will be stuck for more cash to plug the new hole in banks balancesheets.

Which in turn will drive the quality of our collateral even lower. Mortgage rates will climb by 100-150 basis points for those of us who are still paying them down. Cost of credit for businesses will rise well into double-digit figures. Credit cards, car loans, consumer loans – all will become as rare in Ireland as polar bears in Sahara. Taxes and charges will increase – by 15-20 percent on average over 2011-2013. Instead of banks stimulating demand for credit, as Alan Ahearne suggests, Ireland Inc will be back on the slippery slope toward deeper recession.

Ultimately, it is the prospect of Ireland sliding back to rival Greece as the drag on the Euro that has been bothering my friends, as well as the ECB and the EU Commission. Sadly, their concerns are our last line of defense against Nama. (link to article)

“One World in which Many Worlds Fit.”
from OnTheCommons.org — Everything

The following remarks were delivered by Silke Helfrich of Germany, a long-time international commons advocate, to the World Social Forum in Porto Alegre, Brazil, on January 28, 2010. Entitled “The commons as a paradigm for social movements and beyond” (version 1.0), Helfrich’s speech offers a strong, far-ranging case for why the commons holds promise in galvanizing social movements and building a new vision of society.

We can only promote the commons as a new narrative for the 21st century if they are identified as a common denominator by different social movements and schools of thought. In my point of view, enforcing the commons is not only possible, but strategically intelligent. Here are fifteen reasons why:

1. The commons are everywhere. They determine our quality of life in great many ways. They are present (even though often invisible) in the social, natural, cultural and digital sphere. Think about the things we use to learn (read and write), the things we use to move (land, air and sea), the things we use to communicate (language, music and code), the things we use to feed and heal (land, water, medicine) or the things our reproduction depends on (genes, social life).

The commons are about how we share and use all these things. They are a vivid way of reproduction of our social relations— at any time. Therefore, they are better described with a verb (“commoning”) instead of a noun (commons). The commons are a special kind of practice of use and production of knowledge and material goods, where use value is privileged over exchange value.

Commoning is a practice which allows us to take our lives in our own hands, and to protect and widen what is common to us instead of witnessing its enclosure and privatization. Commoners’ rights are independent from formal convention and positive law. We just have them without having to ask anybody for permission, and we share them with others. The commons offer a different kind of freedom than the market. So the good news is — when we focus on the commons, we focus on how to shift things from the market sphere to the commons sphere, we focus on how to shift authority and responsibility from state bureaucracies to the many possibilities for users to “govern the commons,” and we focus on many issues and resources — as 75% percent of the world’s biomass — which are not yet commodified. This is encouraging.

2. The commons bridge sectors and communities, and offers a frame for the convergence and consolidation of movements. The issues we have to deal with have gotten overly complex. In order to reduce complexity, we have fragmented what belongs together. In the public political debate, there is a division into different realms of knowledge and authority. There are those who discuss issues related to natural resources (“the ecos”) and those who discuss cultural and digital issues (“the technos”).

The result is (overly) specialized communities for each of the hundreds of problems we are confronted with and many missing links. For the very diversity of the commons, this fragmentation will continue to a certain extent, but it also contributes to a loss of our common ability to keep track of the ongoing economic, political and technological processes and changes. This diminishes our capacity to react to theses changes and to carefully forward coherent alternative proposals. The commons can unify disparate social change movements, even those that have profoundly different dynamics, because they permit us to focus on what all common pool resources and all commoners have in common and not what separates them. Water is finite, knowledge is not. Atmosphere is global, a park is not. Ideas grow, when we share them, land does not. But all are common pool resources! Therefore none of them can be exclusive property of only one person. All are linked to a community. All are governed best if the rules and norms are self-determined or considered highly legitimate by the people how have to rely on those resources.

3. The commons recasts the ownership debate beyond the (sometimes fruitless) framing of public versus private. The claim for public ownership remains important, but have nation states really served as conscientious trustees of the commons? No. Do they protect traditional knowledge, forests, water and biodiversity? Not everywhere. There is much more than “public” and “private.”

A common pool resource can be possessed for short-term use (to reproduce our livelihoods), but we cannot do with it what we want. It is important to remember that the concept of possession for use is very different to the dominating conventional property. Possession doesn’t allow for alienation. Property does. And property allows for abuse and commodification, maximum monetization and the “externalization of costs” onto the commons — an ongoing process at the end of which all of us are worse off — even the richer among us who flee to gated communities.

4. The commons perspective is not a digital way of thinking. Its mode is not binary, 0 — 1, either — or. Nor does it focus on bottom lines like a single number of “success.” Our search is for solutions beyond opposite poles and beyond numerical metrics of “success.” It’s not simply private versus public, neither right versus left, cooperation versus competition, “invisible hand” of the market versus the plan of the State, pro-technology versus anti-technology.

From a commons perspective the focus is on the forgotten third element. It deepens our understanding about the commonly owned and the universal principles which work for people and protect their common pool resources. In the commons sector we privilege learning, and it is more about cooperation than about competition. The commons enhances self-determined rules and commonly developed and controlled open technologies instead of proprietary technologies which tend to concentrate power within elites and enable them to control us.

5. Talking about the commons means focusing on diversity. In the words of former Governor Olivio Dutra (Rio Grande do Sul) during the “World Social Forum: 10 Years Later” conference: “[The commons] enables unity within plurality and diversity.” The default but not defensive position is: “One world in which many worlds fit.” Doubtlessly, one of the strengths of this approach lies in the idea that there are no simplistic solutions, no institutional patterns, no “one size fits all” panacea, only universal principles such as reciprocity, cooperation, transparency, respect for diversity and others. Each community has to determine appropriate rules for how to access, use and control a common pool resource system based on such principles. This is complex — as the relationship between nature and society is — especially when we talk about global commons. There, the “community” is the whole of mankind, which refers us to the very necessity of a new multilateralism based on a commons approach.

6. Focusing the commons brings three “big C’s” into a new balance: Cooperation, Command and Competition. There is no cooperation without competition and vice-versa, but in a commons based society the recognition is gained by those who perform best in cooperation and not in competition. The slogan is: Out-cooperate instead of out-compete. The specific rules for cooperation in a commons system vary from setting to setting. Nobody can command them from above. From commons research and practice we learn, that all over the world many commons governance systems are self-regulating, that means: they are creating their own monitoring systems. Or they are self-regulating and coordinate at different institutional levels.

As far as “command” is concerned: Nobel Price laureate Elinor Ostrom advises: “It is better to induce cooperation with institutional arrangements fitted to local ecosystems than to try to command from afar.” At the same time “the systems from above” — governments, law, international bodies — can be critically important in empowering and facilitating the commons. But for doing this, they need a commons perspective inscribed into their logics and polity architecture as well.

7. The commons does not separate the ecological from the social dimension as a Green New Deal focus does. To a certain extend, it may be helpful to make the “economic value” of natural resources visible and it is certainly necessary to internalizes ecological costs of production into the whole production process. But it is not enough. Such a focus does not address the social dimension of the problem, it tends to deepen the market biased structures, linking the solutions with access to money. So who has, can afford the cost-internalization. Who has not, is worse off. Instead: the ecological and the social dimension find a common explanation in the commons. There is no such thing as a solution based on a commons perspective where those who haven’t are worse off.

8. The commons concept integrates different world views: There are attractors for socialist thinking (e. g. the common possession), for anarchists (the self-organisational driven approach), for conservative thinking (which values the protection of the creation), obviously for communitarian and cosmopolitan ideas (integral, diversity driven approach) and even for liberals (distance to state accountability, respect for individual interests and motivations in joining a community or a project). But it is quite clear that the commons cannot be a single political party program. That is its strength, and that is why mainstream political players so often misunderstand the commons or even try to co-opt the commons. If we care for a coherent commons discourse (see #9), they won’t succeed.

9. The benchmark for the integration of different political ideas within a commons paradigm is clear and threefold: (a) sustainable and respectful use of resources (social, natural, and cultural including digital), that means: no overuse and no under-use of common pool resources. (b) Equitable sharing of common pool resources as well as participation in all decision making processes about access, use and control of those resources and© the free development of creativity and individuality of people without sacrificing the collective interest.

10. The commons don’t have one, but many centers. Their governance structures are decentralized and varied as well. In other words: it is characteristic to the commons to be polycentric, which stands for a deeply democratizing approach both politically (principles of decentralization, subsidiarity and sovereignty of commoners and commoners rule making) and economically (the “commons mode of production” point makes us less dependent on money and market).

11. The commons strengthens an important core belief about human beings and behavior. We are not only, not even mainly the “homo oeconomicus” they made us believe we are. We are much more than selfish creatures looking for our own interest. We need and enjoy being embedded into a social web. “The commons are the web of life,” says Vandana Shiva. We enjoy to contribute, care and share. The commons strengthens the confidence in the creative potential of people and in the idea of inter-relationality, which means: “I need the others and the others need me.” They honor our freedom to contribute and share. This is a different kind of freedom than the market is based on. The more we contribute, more things we have access to. But note: it is not simply “access to everything for free.”

12. The commons offers analyzing tools that arise from categories different to those of capitalism, therefore the concept helps to “decolonize our thinking.” (Grzybowski) Commoners redefine “efficiency.” They ask how to “efficiently” cooperate and how to encourage and enable people to do so. They claim for (short term) usage rights to reproduce their livelihoods instead of limitless property. They honor traditional ways to protect the commons as well as traditional knowledge systems.

In short: the commons shed new light on many old political and legal regulatory processes. It makes a big difference whether I see the environment as a commons or as a commodity to trade with. It makes a difference whether water is understood as a commons, that means closely linked to the communities needs, or not. Or take seeds; conceive seed-diversity as a commons, means: harvesting self-determination and food-security. If society would recognize regional diversity of seeds as a commons, the State would put all available resources into independent, organic seed breeding and in protecting small farmers to continue their traditional way of seed-development instead of wasting taxpayers money for genetic manipulation and seed engineering.

13. In the commons sector, there is a great diversity and quantity of actors. Over the past several years, international interest in the commons paradigm has quickened. Several organizations and commoners now have significant transnational constituencies (Creative Commons, Wikipedia, Free Software and Free Culture Movement, sharing platforms, the anti-mining organizations, the alliances working for a Bem-Viver approach, the worldwide movements for sustainable agriculture, the Water Commons, community gardening, citizen communication and information projects and many others). Actually, it is a spontaneous, explosive growth of diverse commons initiatives. Since Elinor Ostrom won the Nobel Price in Economics (October 2009) many universities have rediscovered the academic interest in the commons.

14. The commons is an alternative mode of production. The problems we are confronted with are not problems of resource-availability. They are problems that arise from the current mode of production. Fortunately, in some areas, we are witnessing a shift from the capitalist mode of production (based on property, command, value exchange via money, resources and labor exploitation, dependent on growth and striving for profit) into a commons mode of production (based on possession, contribution, sharing, self interest and initiative, where the GDP is a negligible indicator and the aim is a “good life” (bem viver).

Many “Commons-based Peer Production” projects are developing successfully. This is especially true for the production of knowledge (Wikipedia, Free Software, Open Design). But there is a thrilling discussion going on about how principles of commons based peer production can be transferred to the production of what we eat, wear and move with, at least to a certain extent. I believe that this is possible. Firstly because knowledge makes up the lion’s share of each kind of production. All goods are latent knowledge products. There is no car production or egg production without a concept and a design behind (which make the lion’s share of its “market value”).

Secondly because there are many kinds of commons sectors (care economy, solidarity economy) which have not been commodified yet and where commons values and rules are deeply rooted. Those sectors are evidence that every day many of the things we need to live are produced outside the market.

15. The commons discourse is a discourse about cultural change. It is not a mere technological or institutional approach. Instead, it offers a new frame for political and personal thinking and acting.

Why now? Because the moment is ripe for the commons.

1. Given the historical moment of change, the commons are currently being rediscovered in many contexts. Market and state (alone) have failed both in the protection of common pool resources and in satisfying peoples needs. Actually, free market fundamentalism that now prevails is under siege. Its system of economic analysis, public policies and worldview is losing its explanatory value, not to mention public support. More and more people realize that it is not for the market that we enjoy biodiversity, cultural diversity and social networks!

2. New technologies enable new forms of cooperation and the decentralized production of what up to now have been monopolized core technologies of the industrial age. Today, we can relocate even energy or electricity production into the social commons (citizen solar power stations, home-power stations). We can decide which are useful news and information for the community and reproduce them ourselves with “the biggest copy machine” that ever existed: the internet. The ongoing major revolution in production allows for a change of rules. This is a major threat for monopolies.

3. The ongoing processes put the individual in a position to engage in a wider context. A modern commons perspective is not headed “back to the past.” The perspective is not one of mere re-localization, but the horizon is: local, decentralized and horizontal cooperation in distributed networks, so that people can self-enable to create things together, available for them and others — if they want. The aim is to widen the commons sector and commons based production as far as possible and lesser depend on the market.

This is only possible, if the new mode of production is able to solve even complex problems, if it is able to “peer-produces” artifacts even large companies would have difficulties to prepare for logistically, financially and conceptually. And it is! Just think about Wikipedia or an open source car. Maybe we would have developed VIPs (vehicles for individual transportation) based 100% on recyclable materials, which consume only a liter/100km if corporations would not have enclosed technologies and controlled the market. In a world where a commons-mode-of-production is general, there is no more centrer and periphery.

4. There are new legal forms to protect collective use rights and free and/or equitable access to the commons: the General Public License (GPL), ShareAlike licenses, ownership models for natural resources with an built-in mechanism to protect for speculation and avoid over-exploitation, stakeholder trusts on single common pool resources, the acequia water management systems in Mexico or the Johads water management systems in India or the Allemansratten (rights of each person) in countries of Northern Europe. Those are powerful tools we have to learn more about and develop further. It is an area where we need a great deal of creative legal thinking and innovation, and we need respect for the great variety of formal and informal rules to protect the commons worldwide.

5. Last but not least: once you put your nose into the commons, you discover astonishing new things. You connect with hundreds of dynamic communities. You have unexpected insights, you learn about encouraging projects and ideas and you multiply your networks. It’s energizing.

Did you know, that there is an OpenCola project? Or that the biggest lake in New Zealand, Lake Taupo, is full of trout? In the very touristic Taupo region, there is much “pressure on the ressource”, but the trout population continues enjoying the lake because the New Zealanders follow a simple rule: Fish what you need to eat (for doing so, you get a fishing permit from local authorities), but don’t sell the fish. So, you won’t find any trout on the menus of the hundreds of restaurants in the region. Remember: The commons are not for sale.

Or did you know something about open source biology and participatory medicine? Have you heard about the countless local seed banks — especially in the South — and the sheer incredible treasures they care for us? Do you know where the growing international open-access scholarly publishing movement is at in its effort to make sure that we will have free access to what has been publicly funded — knowledge production. Are you aware of the intercultural and the community gardens movement or of the commons regimes used by lobstermen in Maine/USA to prevent over-fishing of lobster? And what to think about the crisis commons, where hundreds of volunteers contribute their expertise and collect information using modern information technologies in support of disaster relief for post-earthquake Haiti?

The commons are something that brings enthusiasm back into political debates. Young people are all ears when they learn about peer-to-peer-production, because that’s what they do. The “ecos” are all ears when they learn about the copyleft principle which enables the viral reproduction of software and content. They learn that “this complicated license stuff” is to defend our freedom for access to knowledge and cultural techniques. That is precisely what they claim for in their field. The “technos” get motivated to use their amazing abilities for helping to manage complex natural resource systems. In other words: The commons widen the horizon, they bring a fresh breeze of non-dogmatic and dynamic collective thinking and practicing along.

The commons are a powerful, self-enabling and self-empowering concept to constantly recreate a dignified life. It is what we need to build a diverse and irresistible movement based on a coherent political and conceptual thinking.

Silke Helfrich
Porto Alegre (RGS), January 28, 2010

I’ve always taken exception to the constant reference to “stimulus” as the policy objective, because implied in that word is the idea that all one needs to do is to undertake one or more relatively short term spending sprees, on whatever happens to be available at the moment, and that this will somehow return the economy to its pre-crisis state, putting it on a path of what economists like to call “self-sustaining growth.” I maintain that in the present environment there is no such thing as a return to self-sustaining growth. There will be no return to the supposedly normal conditions, which were in fact, from a historical point of view, highly abnormal, of the 1990s and 2000s.

What one needs is to set a strategic direction for renewal of economic activity. We need to create the institutions that will support that direction. Those institutions are public institutions, which create a framework for private activity. This is the way it is done. It is the way countries have always developed in the past and, to the extent that they are successful, they will always do so in the future or they won’t succeed. Seventy years ago when we were in the Great Depression, they built a national infrastructure: roads, airfields, schools, power-grids – this kind of thing was the priority. In the post-war period, the creation and maintenance of a large middle class with social security, with medical care, with housing programs, universities – these were the priorities of the post-war period.

Now we clearly face an enormous challenge with energy and climate. It’s a challenge that requires us to think in very creative ways, in very ambitious ways about how to change how we live, so as to make life on the planet tolerable a century or two centuries hence. This is a huge challenge. It requires design, planning, implementation, something with enormous potential for providing employment because things have to be done, enormous potential for guiding new public and private investment because one has to provide people with the means of making it realistic for individual activity to support this larger objective. And that is the way to move toward a renewed economic expansion. This strikes me very far from being a stimulus proposal. It is a proposal for setting a new strategic direction for the economy and doing so over a relatively long time horizon with a view that you’re sustaining effort for 15, 20, 30 years. That’s the way I think you need to think about this.

Just to wrap up a long answer to a short question: Why can’t we go back to the pre-crisis period? The answer is that restructuring of the private household debts is an enormous task which necessarily takes a very long period of time. During that time, the pre-crisis pattern of increasing debt will not resume. The asset against which the American household sector collateralized its debt for 15 to 20 years, its housing, has radically fallen in financial value. The houses are still there but you can’t sell them for nearly as much as you could have three years ago. And that is a structural impediment to returning to the previous pattern of economic expansion. And that impediment isn’t going to be removed in any short period of time for the simple reason that the houses remain there as an excess supply on the market and they remain therefore as a drag on housing prices. (link to article)

The European Union and the European Central Bank should create a crisis mechanism akin to the US Federal Reserve to help debt-hit member-states such as Greece, Nobel lauriat economist Joseph Stiglitz said Tuesday.

“(There is) a lack of European macroeconomic structure to help countries with particular difficulties,” he told a conference in Athens.

“In the United States we have a huge national budget that can be allocated to parts of the country that are suffering,” he said.

While the European Central Bank regularly lends money to national banks at income rates lower than the international market, the same option is not currently available to governments, Stiglitz noted.

“If you are willing to lend to banks, why not lend to governments? Does Europe not have confidence in the governments that constitute it?” he argued.  (link to article)

Silly me. Here I had thought that world leaders would want to keep their nations from collapsing. They must be working hard to prevent currency collapse, financial system collapse, food system collapse, social collapse, environmental collapse, and the onset of general, overwhelming misery—right? But no, that’s not what the evidence suggests. Increasingly I am forced to conclude that the object of the game that world leaders are actually playing is not to avoid collapse; it’s simply to postpone it a while so as to be the last nation to go down, so yours can have the chance to pick the others’ carcasses before it meets the same fate.  (link to article)

“People find it hard to get their heads around this concept, but we must…or else we will fail to understand the financial system.

Before western societies invented bank money and institutionalised banking systems – there were often shortages of money in the economy as a whole. This was because money was linked to a commodity – like gold – which was limited, and indeed was used as an anchor, precisely to limit the availability of money.

Then some geniuses (including one John Law) discovered that it was not necessary to have the same amount of ‘money’ or ‘credit’ in circulation, as there was gold in the bowels of the earth. One just needed to create enough money equal to the amount of economic activity in the economy.

If one created less money than the amount of economic activity, the result was depression and deflation. If one created more money than the amount of possible economic activity – the result was inflation… So central bank governors were given the task of carefully measuring economic activity and then supplying enough money to enable that activity to take place.
Money is not the thing for which we exchange goods and services.

Its the thing by which we exchange goods and services.

And bank money is not tangible. You cannot touch it or smell it. You cannot even see it – except perhaps as a statement on your monthly bank account. What you do touch and smell is cash – and these days only a tiny proportion of the money we use is issued as cash. The rest takes the form of cheques (declining in number now, and soon to be abolished in some stores in Britain); bank transfers; credit card and debit card payments. (Not so in many parts of Africa where they do not trust their banking system, where they may not have developed a system of bank money with credit and debit cards, and so, in some countries, carry cash around in large bags!)
Now intangible bank money is one of the most wonderful things humanity has ever invented. It enables us to engage in economic activity. That’s all. It’s effectively incidental to that activity – because without economic activity that money would be useless.

But it is potentially also one of the most dangerous of our inventions – which is why credit creation must be so carefully regulated.

Bank money comes into existence in the form of credit, issued by the central bank, and then distributed by the commercial banking system. Credit creates deposits, and in England it has done so since 1694 with the foundation of the Bank of England.

This is the very opposite of what most people think – that only once you have deposits can you obtain credit. No, credit creates deposits in the bank.

So when you are a youngster, fresh out of school, your employer has invariably obtained credit from the bank to finance her investment, and she uses part of that to pay you, and you promptly pay that into the bank as a deposit – using some of it as cash.

That credit has stimulated or generated the first month of your productive economic activity. The deposits that the young person places in her bank account are then exchanged and transferred as ‘bank money’ invisible and intangible – but very useful when she is shopping on Ebay, using her credit card, or paying by cheque.

Until recently, most people could not bring themselves to believe in something intangible and invisible called bank money. But now we have a new phenomenon to discuss over our dinner tables: quantitative easing, or ‘Queasing’ as we joke in English.

Last year on 13th March, 2009 the governor of the US Federal Reserve, Ben Bernanke gave an interview to CBS TV, in which he was asked: “where did you find $160 billion to bail out the insurance company AIG? Was that taxpayers money that the fed was spending?”. “That was not tax money” replied the Governer. He elaborated: “the banks have accounts with the Fed, much the same way that you have an account with a commercial bank. So to lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed”. The Fed did what a commercial bank does when it provides you with a loan: they entered a number into a computer and charged it to AIG’s account (Watch CBS News Videos Online).

The fact is that the Federal Reserve did not even have to print 160 billion greenbacks – they simply entered a number into a computer.

And that is what the bank does when you apply for a mortgage, to buy a house for example. All the bank needs is a) your application for a loan b) the collateral of your property and c) your promise to repay at a certain rate of interest. Hey presto! The money is transferred – digitally – to your bank account and appears there as a deposit. You may spend 10% of that money on small purchases with cash (euros), but most of that will be paid by cheque or bank transfer.
Now the point of explaining this is as follows: the creation of credit is in fact an almost effortless activity. Different for example, from growing tomatoes. To grow tomatoes one has to depend on the weather, on the rain to fall; on the land and its fertility, and on labour, yours or that of another. All of these factors can disappoint or fail a farmer.

To create credit there is no need for our banking system to depend on the weather, on land, or even on labour. “Why then”, as John Maynard Keynes once argued in his ‘Treatise on Money’:
…if banks can create credit, should they refuse any reasonable request for it? And why should they charge a fee for what costs them little or nothing?
Keynes, 1930.

The ‘fee’ that Keynes is referring to here, is the rate of interest – the ‘price’ of a loan. And the point he is making is correct: the price of money should remain low – to enable people like entrepreneurs to borrow to invest; to enable governments to borrow to invest for example in de-carbonising the economy – something that requires major investment.

However, he also argued that while the rate of interest should be low – the creation of credit should be carefully regulated. In other words, bank money should be regulated so that it is lent to stimulate productive economic activity rather than speculative, inflationary activity.
We have just lived through three decades of financial de-regulation where economic policy makers have encouraged reckless, privatised credit creation. This in turn led to crazy speculation and gambling – in derivatives, collateralised debt obligations, and a range of other parcelled up, sliced-and-diced securities.

At the same time central bank governors and finance ministers succeeded very successfully in repressing the inflation of wages and prices – while allowing the prices of assets (property, race-horses, works of art, stocks and shares etc.) to rocket upward in an inflationary bubble.
However none of the economic gurus of the time – from US Federal Reserve Alan Greenspan, to European central bankers, to orthodox economists – while ferociously opposed to the inflation of prices and wages, ever complained about the inflation of assets.

Why? It is my belief that this is because it is the rich, on the whole, that own assets. The rest of us live by our wages, or by the prices we can obtain as farmers or small business women… The rich live on rent from their assets – be it property, stocks and shares or an number of assets. And orthodox economists allowed bankers and the rich to inflate the value of their assets with easy credit. This enabled the rich to enrich themselves over the period of financial liberalisation to an extent probably unknown in our history.  (link to full article)

..UNFCCC RIP I have not been fond of how the United Nations has been running all things climate. Both CAP’s Andrew Light and I have argued before, “we don’t need 192 nations to come to an agreement on mitigating carbon emissions in order to get the job done. We only need those countries responsible for 85% of emissions to move forward on the pathways identified by the IPCC with a promise to the world to do so in a responsible manner.” That’s why much of what 350.0rg founder (and occasional CP guest blogger) Bill McKibben doesn’t like about the Copenhagen Accord is exactly what I like about it. McKibben complains of Obama’s successful effort to prevent a complete failure at Copenhagen: * He blew up the United Nations…. * He formed a league of super-polluters, and would-be super-polluters…. Hurray!  (link to article)