It is my Friday lay day and I am quite distracted with other commitments. But at the London presentation a few weeks ago, I mentioned that I would scrap central banks and consolidate their functions within a division of what we now think of as Treasury departments (or Finance Ministries). Whenever you say that there is a ridiculous response from those who claim to know something about banking along the lines of either, it would cause hyperinflation or that the politicians cannot be trusted. Both arguments are as I say – ridiculous. There are some things that central banks do that are necessary, for example, maintain financial stability through the integrity of the payments system. They also, depending on the nation, manage foreign reserves although that function is unnecessary if exchange rates float. Yes (flame suit on) I know less developed countries face exchange rate volatility and have to import food to survive. Which brings me to the point. The first part of scrapping central banks is to eliminate their ideological/political function. They are bastions of conservative mythology – pick whichever one you like – expanding the money supply is inflationary, ‘printing money’ is inflationary, politician meddling in monetary policy is inflationary, financial markets will desert a country that does not have an independent central bank, etc ad nausea. Politicians also use the so-called independence of the central banks as a way of deflecting policy responsibility for mass unemployment. Modern Monetary Theory (MMT) does not advocated doing away with the functions that are legitimately performed within the current central banks. It would stream-line some and make other functions redundant, but what it would do away with is this incessant cycle of ideology that emanates from these institutions.
The other point is that there is a lot of conditionality in some of the policy suggestions I propose from time to time under the guise of MMT.
One proposal relies on another. For example, a nation doesn’t have to have a central bank running ‘exchange stabilization funds’ if it lets the currency float. Obviously.
But then what about poor nations who have to import food and fall prey to speculative attacks on their exchange rate by Wall Street investment banks?
First, a new international organisation is required to replace the IMF that would serve to provide poor nations with necessary foreign currencies to ensure they can maintain acceptable material standards of living if their exports fall or the currency depreciates too much.
Second, an overwhelming proportion of financial market transactions are totally unproductive and should be made illegal. Then the capacity of financial flows to undermine the viability of a nation with a floating exchange rate is rendered impotent.
You see the conditions emerging – this, then that, then that. Doing one thing without the other becomes problematic. A major reform agenda is required.
I will write more about this in the coming months (perhaps). Today I am just sketching the plan.
Which brings me to an Op Ed by British economist John Kay (September 8, 2015) – We Were Better Served By Old-fashioned Relationship-focused Bank Managers.
I don’t often agree with John Kay, but in this case the words have concurrence.
He waxes lyrical about his school days “in Edinburgh in the 1960s” where the banks were banks and not gambling casinos (my words).
He says that:
Banking was then a career for those who did not quite make the grades required by the good universities. If they joined either of these two institutions, they might with diligence become branch managers after 20 years. The bank manager was a community figure who would base his (they were all men) lending decisions as much on his local knowledge and the character of the borrower as on figures.
With the advent of financial deregulation, banking has changed dramatically and bankers are now, in Larry Summers’ words “good at solving very difficult mathematical problems that were involved in pricing derivative securities.” Out with the dowdy old banker in the suit and in with the financial wizzes who talk a different language to the rest of us (try going to a seminar with investment bankers!)
Kay notes that “these cleverer people managed things much less well than had their less intellectually distinguished predecessors. They were rarely as clever as they thought they were — or sufficiently clever to handle the complexities of the environment they had created.”
The GFC is the only evidence we need to cite to confirm the incompetence of these self-styled geniuses in the financial markets.
But more tellingly, Kay says that:
The growth in the size of the financial sector, the explosion of remuneration and the changes in the nature of financial activity were not to any large degree driven by changes in the needs of the non-commercial economy for financial services. These needs — the operation of the payments utility, the management of personal wealth across lifetimes and between generations, the allocation of capital between different forms of productive investment, and the pooling of risks — have changed very little.
In other words, these financial geniuses just invented a new playground for themselves which involved the “massive increase in secondary market trading of existing assets”. Nothing productive at all. Parasitic at best.
I have often said that the vast majority of transactions that go on daily in financial markets (over 95 per cent) are “self-referential … the primary activity of financial institutions is trade with other financial institutions”. They wealth shuffle and gamble against each other.
They use the largesse that has been taken from workers as real wages have lagged behind productivity growth and real firms (that is, non financial) have failed to reinvest the growing profits in productive infrastructure.
Rather, the increased profit share in growing economies has been increasingly channelled into the unproductive financial markets to give the geniuses some play money.
As Kay concludes:
… the ability most valued in the finance sector in the first decade of the 21st century was a keen appreciation of asset markets themselves. The deployment of such abilities by people with an exaggerated idea of the relevance of these skills, and an overblown sense of their own competence, plunged the global economy into the worst financial crisis since the Great Depression.
He implicitly suggests we would be better off going back to the old banking models.
This is core MMT policy. I wrote about it, in part, in these blogs – Asset bubbles and the conduct of banks and Operational design arising from modern monetary theory.
To repeat the only useful thing a bank should do is to facilitate a payments system and provide loans to credit-worthy customers. Attention should always be focused on what is a reasonable credit risk.
First, banks should only be permitted to lend directly to borrowers. All loans would have to be shown and kept on their balance sheets. This would stop all third-party commission deals which might involve banks acting as ‘brokers’ and on-selling loans or other financial assets for profit. It is in this area of banking that the current financial crisis has emerged and it is costly and difficult to regulate. Banks should go back to what they were.
Second, banks should not be allowed to accept any financial asset as collateral to support loans. The collateral should be the estimated value of the income stream on the asset for which the loan is being advanced. This will force banks to appraise the credit risk more fully.
Third, banks should be prevented from having ‘off-balance sheet’ assets, such as finance company arms which can evade regulation.
Fourth, banks should never be allowed to trade in credit default insurance. This is related to whom should price risk.
Fifth, banks should be restricted to the facilitation of loans and not engage in any other commercial activity.
Then the financial wizzes would get bored and perhaps go off and use their nearly infinite intelligence (not!) to cure cancer or help stop global warming.
Find Woolworths Catalogue
We would all be better off.
NEXT and minimum wages
And while on the topic of banks … which own various companies as speculative ventures (which would be banned under my proposal above), we read the following.
The UK Guardian reported (September 10, 2015) – Next chief says ‘national living wage’ could drive up inflation – which was just part of an emerging campaign by businesses in the UK to resist the increases in the minimum wage foreshadowed in the last British fiscal statement.
Apparently, the CEO of Next, Simon Wolfson (who is rather preciously referred to as Lord Wolfson – oh, those British!) claims the decision to increase the national living wage in the UK will:
… cost the company £27m a year by the end of the decade and risks creating a potentially harmful inflationary loop.
A fair proportion of NEXT’s workforce are “paid less than the national living wage at present”.
When the rise was announced earlier in the year, Wolfson claimed the existing Living Wage (of £6.70) was “enough to live on” and “a decent amount for a ‘lot’ of his staff” (Source)
Wolfson was earning just (a measly) £350 an hour at the time apparently.
He also claimed that there was no need for the company (Next) to raise wages because:
… the clothing chain had 30 applicants for every job advertised.
So keep unemployment high and suppress wages – the same old.
CEO was paid £743,000 pounds as his base pay in the financial year 2014/15. He was paid the maximum bonus of 150 per cent of his base salary because the “pre-tax EPS exceeded growth of 15%” which turned out to be £1,115,000.
The NEXT Annual Report 2015 explains that:
Pre-tax EPS growth achieved in the year excluding exceptional gains was 14.7%, which became 16.9% after making the prescribed adjustment for special dividends and was well in excess of the 15% EPS growth at which point bonus reached its capped level. Accordingly, a bonus of 100% of salary for the executive directors and 150% of salary for the Chief Executive was earned.
I like the use of the term “was earned”.
In addition, he was paid “Benefits” of £50,000, a contribution of £140,000 to his “Pension”, a “Salary Supplement” of £112,000, a payment under the so-called “Long Term Incentive Plan” (LTIP) of £2,500,000 on top of the base salary and bonus.
Total pay last financial year: £4,660,000 which I am sure Simon Wolfson would consider modest and rather frugal of the company to say the least.
He claimed that the pay rises would force the company to pass them on as higher prices.
The rate of growth in profits for the company has been above 10 per cent for the last two financial years (11.8 per cent 2013-14, and 12.5 per cent 2014-15) and EPS rose by 17 per cent in 2014-15.
What might not be fully appreciated is that the British government pays supplements to low wage workers (estimated at £11 billion a year) to the 22 per cent of workers who are paid below the Living Wage in Britain.
A Report released earlier this year from Citizens UK – The Public Subsidy to Low Wage Employers – is salutary reading.
The high EPS and bonuses and all the rest of it that Next report in glowing terms to their capital holders are in part just a dirty form of corporate welfare.
This UK Guardian article (April 20, 2015) – Taxpayers spend £11bn to top up low wages paid by UK companies – is about that.
There are various government schemes (tax credits, payments etc) that make up the public subsidy to low wage employers.
However the conservatives want to put it, these subsidies constitute:
… a direct transfer from the rest of society to some of the largest businesses in the country … Worse, this is a direct subsidy for poverty pay. If supermarkets and other low-paying employers know they can secure work even at derisory wages, since pay will be topped up by the state, they have no incentive to offer higher wages.
Companies like Next are in effect welfare scroungers.
It is estimated in Britain that “the total cost of benefit fraud last year was just £1bn. Corporate scrounging costs 11 times that.”
And the company is owned by various financial market investment banks etc – all very happy to be on the public teat!
ABC Radio Interview on Jobs data
I did this interview for the ABC national current affairs program PM late yesterday (September 10, 2014) – Jobless rate falls slightly but still above 6 per cent – in relation to yesterday’s labour force data release by the Australian Bureau of Statistics.
My analysis of the latest data is at – Australian labour market – flat and not looking very prospective.
You can also hear the segment – HERE.
First Dog on the Moon – Austria and Austr(al)ia
This is the First Dog on the Moon’s discussion about the differences between Austria and Australia – Welcome to Australia, where we greet refugees with open arms and hot drinks. Oh wait, that’s Austria. It appeared in the Guardian on September 7, 2015.
Please help to advance this issue – Sign the Petition
And now that you have read the cartoon here is something to do.
My homeuniversity has engaged Transfield Services to manage outsourced work for the institution. There is now a strong staff and community campaign designed to reverse this appalling decision.
Transfield Services manages the detention centres on Nauru and Manus Island in Papua New Guinea under contract to the Australian Government. Serious allegations of systemic abuse of detainees including child rape and sexual assault, victimisation of detainees and provision of mould-infested, substandard and unsafe living quarters were made against Transfield Services and staff at the recent Senate Select Committee hearing and independent Moss Inquiry. Despite these allegations, which Transfield has been unable to refute, the company has been granted a new contract to run the detention centres for five years. Professor Gillian Triggs, President of the Australian Human Rights Commission has condemned the granting of the contract.
Transfield has signed a five-year, $88million contract to “provide integrated facilities management and property services” to the UNIVERSITY OF NEWCASTLE. We urge the University to reconsider its decision to award this contract to a company with such a dubious human rights record. Maintaining this contract will imperil the good reputation of the University.
Please help by signing the petition and voice your concerns at:
The mind boggles at how the institution could think this was an appropriate thing to do. They pay high salaries to managers in the so-called ‘risk management’ area of the administration. What were they doing when this contract was being devised and discussed?
You might think this is just a local Newcastle (NSW) issue. But these sorts of associations all add up to undermine our global well-being.
This is a global issue!
Commentary on Australia’s Fantastic Federal Government
This 90-second speech appeared in the UK Guardian and sums up the first two years of the conservative federal government in Australia.
They have been woeful.
And after all that – there’s always music
I was listening to Toots Hibbert all morning while I worked. Toots and the Maytals are one of my favourite ‘up’ bands.
Here he is with a cast of many from all around the World singing and playing “Reggae Got Soul”, which was one of the band’s classic songs.
This is part of the – Playing for Change – project, which aims to connect the world through music. It does a great job.
So get those feet moving!
If you are in Melbourne Sunday, my band – Pressure Drop – will be playing at the Kindred Studios, Whitehall Street, Yarraville, Victoria from 15:00.
This is a great afternoon.
The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.