Monday, 2 November 2015

Adair Turner Gets It

On CNBC, this morning, former head of the CBI, Adair Turner, seemed to get the point I have been making for some time, that the policy of QE rather than stimulating economic growth has been doing the opposite!  He quite rightly said that the story given in economic text books about the function of banks was a fantasy.

That function, as its described, is to lend money (actually, as Marx sets out, what is lent by banks falls into two categories - the provision of currency, i.e. liquidity, and the lending of money-capital) to businesses, who then use it productively to buy means of production and labour-power, which creates both demand and supply, and grows the economy.

However, as Turner correctly says, this is a myth.  This activity, for the modern banking system, only accounts for around 15% of the total operations.  The vast majority of bank lending does not at all go to the provision of such money-capital to stimulate economic growth.  The vast majority, i.e. the other 85% of the bank lending, goes simply to provide money for people to engage in speculation. That is it goes to enable them to compete for existing assets, rather than to create new assets or wealth.

Because this lending only goes to stimulate this demand for existing assets, whilst not increasing the supply of those assets, one jot, the inevitable consequence is that the market price of those assets rises sharply.  And, because the price of those assets rises sharply, it creates the illusion of rising wealth for anyone who owns those assets, and an inevitable desire not to miss out on future such rises, which thereby stimulates yet further demand for those assets, which causes their price to rise further, and so on.

As Turner correctly points out, this 85% of bank lending, which went for such purposes, did not build a single new house, yet it created ever inflated demand for existing houses.  That was also ridiculously stimulated further by successive government policies, such as "Help To Buy", which pushed up house prices even further; it did not build a single new factory, or machine, or employ a single new worker, in other words, it did not increase the amount of capital, and profit by a penny, and yet it increased the demand for shares, whose price is a function of those profits; it did not build a single road, school, or hospital that might have made the economy more efficient, and facilitated the state being able to increase its revenue out of the increased profits, and yet it pushed government bond prices, which are dependent upon the potential for future tax revenue, higher.

In fact, Turner was just one of a number of contributors to the programme this morning, who seem to have grasped the idea that all of the debt around the globe, is simply not going to be repaid.  And because it won't be repaid, the simple solution is to write it off, now.  That would mean that stock, bond and property markets would collapse.  But, at the moment these fictitious asset prices are being sustained at fantastic prices, at the expense of destroying the real economy.

The latest lunacy in that respect is being perpetrated by the Syriza government in Greece, which seems to be increasingly losing the plot, and opening the door to Golden Dawn, or a military coup.  The Greek banks, like all other banks across Europe, are bust.  They have, like all these other banks, balance sheets stuffed with fictitious assets - titles to property as collateral on mortgages, government bonds, shares - that are listed at fantastical prices.  Yet, in order to continue to function, they need even more capital.

The sensible thing to do would be to either tell the shareholders in these banks to stump up that capital, or else to let the banks go bust, bringing appearance and reality into alignment.  In other words, to recognise that the debt owed to the banks is not going to be repaid, and consequently that the debt owed by the banks to their shareholders, bondholders and so on, is also not going to be repaid.

Then the actual assets of the bank, the buildings, computers and so on could be taken over by their workers at knock-down prices, and the banks, on this basis, could begin to function effectively and profitably.  It would only require that the central bank provided any liquidity required to enable normal economic activity in the economy to continue unhampered.

In fact, a large part of the fictitious capital, on the Greek banks' books, is in the form of Greek sovereign bonds.  This is doubly ludicrous, because the Greek state is also bust.  The huge debts it has will never be repaid, and will have to be written off, as Turner and other contributors pointed out, and which the IMF has pointed out some time ago.  The only people who seem to think that such a write off is impossible, are sections of the Left, as illustrated by Eddie Ford's articles in the Weekly Worker, over recent months.

But, instead of writing off the Greek government bonds, held as bank capital by the Greek banks, and allowing those banks to fail, Syriza is now proposing to recapitalise those banks!!!  That is precisely the mistake that the Labour government made in the UK, with the nationalisation of Northern Rock in 2007, and of the other banks in 2008, which pushed up the government deficit and provided the Tories with the ammunition, on that front, they have used ever since, and then created the basis for the introduction of austerity.

The same thing was seen in Ireland, where banks that had gone bust, because of borrowing too much on the money markets, so as to lend in an ever more irresponsible manner to property speculators, were likewise bailed out by the Irish State, to such an extent that it virtually bust the state, again then requiring the imposition of harsh austerity on the economy, affecting businesses, workers, and consumers, simply in order to protect the speculators and the banks from the consequences of their gambling.

As another contributor pointed out, what is actually required, is an end to the QE, and rigged official interest rates, which encourage this speculation, and diverts such money away from actual productive activity, and instead, as Corbyn and others have suggested, to encourage demand, and productive investment, stimulated by it, by increased fiscal stimulation, as has happened in the US.  As I have set out many months ago, the key for the success of that is not huge, long term capital projects like HS2, but "shovel ready" projects that can be got underway immediately, as well as being completed quickly, thereby putting value back into the economy.

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