Wednesday, 1 July 2009

A Non-Economist Asks...

Anne Pettifor says bank money is not a commodity.
....most assume that credit = savings, and that only by mobilising savings or surpluses (generated by production of one sort or another) is it possible for banks or financial institutions to lend money to finance economic activity. In other words, that money (deposits/savings/credit) exists only as the result of economic activity; and those deposits/savings/credit then create economic activity.

On the contrary: it is bank money/credit that creates economic activity - and only then are deposits, surpluses and savings generated. And not the other way around.....

.....we do not have to beg powerful barons - or even rich country taxpayers - to hand over a portion of their savings. We simply have to “use the computer to mark up the size of the account” held by that poor country.

This is what banks were doing for their favoured private clients, and for the less-favoured sub-primers - with the active support of that great credit bubble-blower, Governor Alan Greenspan of the Federal Reserve. It explains why effortless and effectively costless credit creation has to be so carefully regulated. So that it is directed towards productive economic activity - not the kind of lazy, rentier ponzi finance capitalism of this past era when bankers lifted not a single productive finger but effortlessly grew richer and richer by the hour….

When you understand how easily credit/bank money is created, you realize that, unlike oil, or gold or Dutch Tulips, bank money is not a commodity.

Its a human construct, and all it requires to make a loan is for a man or woman to enter a number into a ledger/computer, and to check the loan against collateral and a potential repayment stream. As such there need never be any limit to the creation of bank money/credit."
Now in what sense is this true? Even bank money has a use value and an exchange value (interest rate), or so it seems to me. Help me out here people...and whilst you're doing so perhaps you might link your explanation into Willem Buiter's formidably technical exposition of the precise mechanisms by which the European Central Bank is propping up the big banks of the Eurozone. He appears - at least to my untrained eye - to be saying the banks have captured the 'State' (if the Eurozone can be thought of as a State which it isn't, quite) and that the 'human construct' of credit is simply being used to prop up the system as exists, at the expense of the people who live in it:

"...ECB’s enhanced credit support is mainly a slow and inefficient mechanism for recapitalising the banks - the ECB recently estimated short-term capital needs in the banking system of the Euro Area at about €280bn - without giving the taxpayers and other citizens of the Eurozone a claim on the banks in exchange, it turns the ECB into an agent of the banks (or more precisely of those in control of the banks and of the banks’ unsecured creditors) rather than of the 340 million citizens of the Euro Area."

1 comment:

  1. I'm not sure that opening quote is exactly right.

    Sure banks can create credit but it's not that straight forward. They are constrained by the state of their balance sheet and availability of funding to them.

    As for the ECB stuff. It strikes me as back hand quantitative easing. Lend the banks half a trillion dollars worth of cash on a one year term at 1%. Obvious thing to do is use that to buy government bonds with a safe yeild of 3.5-4%.

    Helps tofund massive bond issuance and helps rebuild bank capital as they take a 2.5-3% spread on a 'risk free' transaction.