Money creation: a reply to my MP

A month or so back I wrote to my MP on the back of the discovery that 75% of our MPs didn't actually understand the role of banks in creating money and the lack of control the government has over the money supply. My MP seems to have passed the test somewhat, though her reply gave me some pause for further questioning. Here's what I wrote to her having considered things a bit.

Thank for your response of 5 November to my email about money supply and banking.

It was heartening to see that you had clearly given consideration to the issue and could articulate a position which reaches beyond some of the popular (mis)understandings. I hope you'll be okay to consider and perhaps comment further on a handful of further points that, it seems to me, arise from what you wrote back to me.

I was intrigued by your use of the phrase 'banks are technically able to create money'. I wasn't sure just what the hedging adverb was meant to convey. To be clear: 97% + of the British money supply is created by bank loans. These loans while not notes or coins can be converted to notes and coins (though only a tiny fraction ever are, hence the figure just quoted), and the money so generated is spent (mainly electronically) into the British economy. If by 'technically' you mean to make a distinction to 'traditional' money consisting of notes and coins then, fair enough. However, if you mean something else, some further explanation might be needed.

Clearly, and perhaps this was what you were alluding to in mentioning market forces, the making of loans is a supply-to-demand issue. So in that sense I would agree that there is a demand-limited element to the creation of bank-money. However, there is more to be said about this.

One thing is that the elasticity of the demand is not simply related to actual economic activity but to perceptions of future activity. And of course the sub-prime lending issue indicates that latent demand is huge but some of it needs to be resisted. It is this latter issue that has prompted the concern of Postive Money and a growing network of economists (who recognise that the failure of many economists to predict the recession does place a question mark against some of the discipline's modi operandi and assumptions). Currently this perception is left to banks to manage and respond to and therein lies a difficulty: their aim is not to manage the economy overall well but to make profit and so the slip into ever riskier money creation strategies becomes nigh-on inevitable. This should have been a lesson drawn from history looking back to the global financial system before the Bretton Woods accords. From that perspective it is no surprise that the crash took place. It was only a surprise from the point of view of the current orthodoxy.

In addition, commenting on your remark about management of bank-created money supply via the BoE base rate. I think that it is worth remembering that this only really factors into the thinking of banks when they have to go to the BoE for a loan to maintain liquidity and this is actually something of a marginal activity and generally very short-term. So this particular lever is not a very powerful one most of the time. So the idea that this is regarded as an efficient and effective way to run a modern financial system is both increasingly and rightly contested and also contradicted by the evidence.

Therefore the issue of monetary instability can indeed, as you say, be seen as largely due to irresponsible loans and debts. But the issue is not just to make sure they are repaid, but to limit the risk-taking behaviour and mindset that encouraged those loans in the first place. Currently, the way that the banking and finance system operates, there are real incentives not to address that until we go over the event horizon of a further crash cycle.

That means that (given that economies are complex dynamical systems) while it is true to some extant, as you say, that the lack of housing creates property price inflation, we should not lose sight of the fact that supply is always relative to demand and so demand-side factors can and do affect price. So while I agree with your implicit recommendation to increase supply of housing, I fear that it could be rendered relatively ineffective unless we address the issue that property is seen as an investment attractive to the increasingly rich financial sector. This increases demand and contributes, I would argue, significantly to housing inflation (personally I think that a land value tax, such as used to be Labour Party policy, ought to be considered to help address this and other issues related to rentier behaviour, but that's another conversation).

So, I think I agree with you about regulation of the banks and the restriction of lending. However, I am not sure that you are proposing to  significantly-enough pull back the ability of banks to, bluntly, create money. One thing that gives me pause for concern about your reply is the phrase “how much that money is leveraged”. To me 'leverage' means using a financial asset to create a further financial product or package. I wondered whether this was an allusion to fractional reserve lending? If so, I would have to say that it would be misplaced as, in effect, it is not the way that loan creation works any longer. I know that our economics textbooks often give it as an example, but it's out of date. There is no fractional reserve system. If you are talking about the run-away growth in derivatives, I tend to agree that action is needed there too.

Putting that aside to one side, I think that the real issue is of accountability (if you'll pardon the pun). Money supply should be seen as a public good and managed for the benefit of society as a whole and either not in the gift of private, for-profit, enterprises to arrange according to their own business plans and estimations of risk which are clearly blindsided at regular intervals and only tangentially and sporadically serve the common good. So, I think that we need to substantially return money creation to a democratically accountable system analogous to the legal tender approach to notes and coins but extended into the electronic realm.

Now it may be that what you have in mind in terms of regulation and controls might amount to that.  I'd be interested to hear your comments. In the run up to the election, I intend to ask all of the candidates for this constituency about this issue.

So that is what I wrote. On reflection, I didn't express well the issue about supply and demand in relation to bank loans. it would have been simpler to say, simply, that the banks' tendency toward profit pushes towards more finance tied up in riskier loans because demand is potentially infinite and only limited by price, in effect.

A further consideration I had thought about including but didn't in the end was to point out the disadvantage of money created by loans to be repaid at interest. Margrit Kennedy (free book outlining some of the issues here). In here book Occupy Money, she points out that by creating money as debt, we introduce automatically interest into the pricing of virtually the whole economic system. In effect, the banks are taxing us through practically every financial transaction. Her estimates are that in some cases this is compounded into quite significant price inflation. (Remember this next time banks propose to charge you to hold a current account). So restricting banks' ability to create money through loans could mean that we collectively subsidise the financial system's fat cats rather less.

Holy Through Thanks: Mindful Gratitude

 I found this blog post by Richard Beck very stimulating. First of all, I enjoyed the articulation of something that has long been a part of my spirituality that is spiritual practice.

 Thankfulness marks the boundary between the sacred and the profane.

In the Slavery of Death I argue that gratitude accomplishes this because the object in question--which includes not just possessions but also things like your time, attention, status and your very life--is relocated in the mind by thankfulness, making us able to "lose" and "let go" of the object as we live for and share with others. Thankfulness sanctifies the world because thankfulness creates the capacity to use things--by letting them go or sharing them--in holy ways. 

For me it has long seemed that blessing is first about thanksgiving. When Jesus blesses the bread and wine at table with his disciples, we understand that such a blessing involved the normal Jewish practice of giving thanks for the gift of food, and perhaps for God's mighty acts. This would have been the main content of the words of blessing. Consecration is first and foremost about gratitude and thanksgiving. This involves a recognition of the goodness of the thing (or person) and of its or their place in the purposes of God. In a sense this is to recognise that the thing or person is already consecrated. It is to become aware of something that is already true: that all things come from God and are meant to serve God's good will for all things. Consecration isn't something God does. It is something that we do in response to God's goodness and in recognition that we may play a part in God's good purposes by receiving and passing on appropriately what has been shared with us. If thankfulness marks the boundary between the sacred and the profane, then we know that the boundary exists mainly in and runs through our minds and attitudes.

And then it seems to me that gratitude, embedded in our outlook by the practices of thankfulness, is a fundamental means by which our ability to live in a godly fashion is bolstered and enabled in practical terms. What I have written as 'embedded in our outlook' is, I think, what Richard means by 'relocated in the mind'. Consecration by blessing (ie thanksgiving) is something that happens in our minds rather than in the world because it is actually a usually-unrecognised fact about the world (seen by the eyes of faith only). It is a re-orientation of outlook which by repetition may become a habit of outlook and a bedrock of the practice of the presence of God and of the discernment of grace in the world.

As such, we can understand it to be a mindful practice. And I mean that in something of the sense of mindfulness as the practice of giving sustained attention to something and of doing so in an open, curious and compassionate  (perhaps 'loving' or 'appreciative') way. It seems to me that practices of giving thanks are likely to be mindful in this sort of way. Whether these are practices of 'saying grace' over food and other things we consume or encounter in life, or whether this is something like the practice of counting our blessings or Examen. Each of these practices are ways, with repetition, to change our brains and hence our minds.

Experimental Theology: The World Is Made Holy Through Thanks:

Applauding St John's Nottingham for context based training for ministry

When I interviewed for the post I held at St John's from 2007 to 2011 as Mixed Mode and Practical Theology Tutor, in the bit where I got to ask the panel questions, I asked what the rationale for residential training was and why all their training was not mixed mode, contextually-based. I feel that question has, in a sense, borne fruit (though I am by no means claiming a direct causal link) in the developments that David Hilborn outlines in the statement linked to by this post. I do indeed pray for the wise implementation of this bold, brave, step and for its fruitfulness in the lives and ministries of lay and ordained people training and trained by St Johns.



It seems to me that perhaps this course of action could not be taken earlier because the conditions were not in place: the Ministry Division of the CofE was certainly not very comfortable with the approach of mixed mode training and St Johns itself had to adapt to that climate, having innovated to produce a mixed mode pathway in the first place. Something like this was needed to take it to the next level.



I don't any longer have an inside view on what more precisely it will all look like. However, I do hope that something more of the vision I articulated at my interview might be able to be expressed: that each student can find a high degree of customisation of their learning, driven by the questions, demands and live issues of their context, so that they can not only learn about things, but so that they can learn how to learn in ministry and develop skills and habits of reflection.



▶ A statement by Revd. David Hilborn, Principal of St John's College Nottingham - November 12th 2014 - YouTube

Propaganda? I think perhaps the government's tax-spend graphic probably is

The British government is putting out a statement to all taxpayers showing how their tax has been spent over the last year
At this point I can't find the official one online. However, this one appears to have the categories fairly similar especially in having 'welfare' as a single, huge, category.

The TUC has accused the government of propaganda. At first I though "Oh come on; they're just showing the figures, whether you like them or not ...", however, having seen the alternative graphic below, I've changed my mind.

Looking at that, where 'welfare' is broken down further, it becomes obvious that the choice to show it as 'welfare' is a political, propagandistic, decision. Even the fact that it's going with "welfare" is significant: redolent with the connotative meanings that we all pick up from USA TV which have the non-verbal subtitles like "scroungers" or "drag on prosperity". It is also mostly used when discussing what used to be called "social security", but look at what is included in reality: all sorts of stuff that people actually approve of -like health. And look at the proportions of expenditure on the approved stuff compared with the political-football stuff. Disingenuous or what?

So, do let your colleagues, team-mates, friends and relatives know: "they're hiding things under the labelling: it's propaganda for the Conservatives and it's paid for by the state and so isn't included in the restrictions on political spending in the year running up to an election". Very clever and rather cynical.

Why investigations into MPs shouldn't be in secret

It is being proposed that when an MP is accused of something like fiddling their expenses, the investigation should be in secret. My email to the committee ...

The MPs expenses scandal in 2009 contributed to a significant erosion of trust in MPs. It does seem to me that holding investigations in secret does nothing to help address the issues of public confidence. Quite the reverse; it reinforces a sense of a closed shop and a refusal of accountability. As such it seems to lack an awareness that MPs expenses are ultimately tax-payers' money for what are meant to be public servants accountable to the electorate.

While I am sympathetic to issues of reputation should an accusation of impropriety prove to be ill founded or even malicious, it seems to me that such accusations are unlikely to have been made privately and having a degree of openness about them is likely to build public confidence and help to clear the name of the innocent. A secret process, on the other hand is likely to give rise to suspicions of a cover up and leave a question mark in the public mind about any acquittal.

71% of MPs don't know how money is created

You'll pick up the details from this email I just sent to my MP. You might want to do the same (feel free to use this email a starting point).

I have been aware for a little while now of the findings of a poll by Dods Monitoring showing, shockingly, that only a minority of MPs could correctly explain who creates money in the UK and how.

I am concerned that nearly three quarters of MPs believe that only the government is allowed to create money, when in fact that only applied to notes and coins and, given that the huge preponderance of money is now electronic, it is banks that create the majority of money in the UK since the government in fact plays no real role in that part of the money supply (the rot set in with the retiring of the Bretton Woods agreement in the 1970's). This has fairly direct implications for the house price bubble and the risk of another debt-fuelled crisis.

Just in case you weren't aware: the government creates coins and notes, but these make up just 3% of money in the economy. The other 97% of money exists as bank depositswhich are electronic numbers in bank accounts. The aforementioned poll showed that just over 71% of MPs believed that only the government could create this electronic money.

In actual fact, banks create money through some simple accounting, when they make loans. This means that when people repay loans,  money disappears from the economy. It is worrying to me, as someone with some economics training,  that only 12% of MPs in the poll correctly gave this answer. I had assumed that MPs would pick up these kind of basics in the course of their political careers.

Just so you can get a sense that this is not just me passing on some fringe economic viewpoint, consider the Bank of England explanation from their March 2014 Quarterly Bulletin:

"[The] majority of money in the modern economy is created by commercial banks making loans. ... When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. … Just as taking out a new loan creates money, the repayment of bank loans destroys money." ( http://bit.ly/1rrwbnL )

Please could you confirm that you are aware that:
1. Around 97% of money in the UK consists of electronic bank deposits in people’s bank accounts
2. That banks create these deposits when they make loans
3. That when people repay loans, the money is destroyed and disappears from the economy.

If it turns out that you are one of those who didn't know this about the money supply, can I recommend that you read Ann Pettifor's book 'Just Money' which I suspect will resonate well also with your own political concerns.

Yours etc ...


Full poll results available

A hereby-open letter to the ombudsman re TTIP

In a recent email from SumofUs we learn:

The European Ombudsman -- the place where European citizens can lodge complaints about EU politics -- has opened a formal investigation into TTIP and its lack of transparency following pressure from civil society. We have only 7 days left to write to the Ombudsman and let her know how we feel about our rights being negotiated away in a secret trade deal.

 

Here's my hastily constructed email -do use it as a template yourself.

 

Dear Ombudsman,

I have to say that I remain very concerned about the TTIP negotiations despite cautious reassurances from my MP drawing on government documents. The reassurances, on closer examination have often turned out to be misleading or illusory: it is no answer, for example, to cite the paucity of successful legal actions by corporations on governments when what is at issue is the legitimacy of doing so and when there are in fact some not only successful actions using similar treaty clauses but ones which have clearly been to the detriment of civil society in those places.

While I understand the need a sensitive handling of negotiations in trade related deals, this should not extend to the actual bringing of the fruits of the negotiations into the force of law and practice. That part of the process needs to be fully open and subject to rigorous democratic scrutiny since it has implications for the powers of government and the balance of power between democratic institutions and corporate interests. The very real fear is that the latter may be about to gain considerable traction at the expense of civil society and to the detriment of the less powerful and relatively poor.

What we need is some kind of guide to what is potentially agreed and something to give confidence that it will not further erode democratic accountability and have the effect of sweeping away hard-won protections for labour, environment, safety and animal welfare. Many of us are very concerned that these valued rights and protections are endangered by the content and process of the TTIP negotiations. If there is nothing to fear then at the very least there needs to be a clear and robust confidence-building explanation to all the peoples of the EU which allows us to make an informed decisions about whether we do, in fact, wish to accept the TTIP treaty.