Posted by: Mike Grenville | 30 October 2008

Green New Deals and the Unreal Economy

A report called the ‘Green New Deal’ by a group that includes such luminaries as Larry Elliot Economics Editor of the Guardian, Caroline Lucas Green MEP, Jeremy Legget and others claims to tackle ‘triple crunch’ of credit, oil price and climate crises. It is a response to the credit crunch and wider energy and food crises, and to the lack of comprehensive, joined-up action from politicians.

But at this time of crisis Brian Davey questions whether it is the green response we need or has an opportunity to bring out some refreshing and useful new thinking been missed?

Seignorage* reform, Green New Deals and the Unreal Economy

I don’t get it. The new BIG IDEA is clearly going to be a ‘Green New Deal’.
Having just about propped up the banking and financial system…maybe…we
are nevertheless heading into a recession and all governments are recognising that they are going to have to increase public expenditure to reflate and create employment. And what better target for such programmes than the climate and energy agendas? That’s obvious. It’s difficult to disagree with that.

What I do find difficult to understand though is why the people who are now
calling for an alliance for this Green New Deal – should have put together
such an inadequate package. I’m talking here of the New Economics
Foundation, Ann Pettifor, the Green Party’s Caroline Lucas, Larry Elliott of
the Guardian and the others.

“New Deal” alliances should, as a minimum, have the programme to do the job

Of course, you can always criticise programmes for what they have left out. I
understand that when they wrote the Green New Deal they did it in a hurry and
in its present format it is not intended to be a finished document or
programme. But the key points have to be in when you release something and
perhaps the most important point of all is missing.

If you are going to have a document and programme about the banking crisis,
peak oil and climate change then you are effectively relating the finance and
money system to the limits to growth. All the stuff about peak oil and
climate change is about how the economy can no longer grow. Green growth is a
complete myth. That’s a core NEF idea and I thought it was a core Green Party
idea too. But if the economy cannot grow any more then you need a different
kind of money and finance sector. Lending money into circulation with the
expectation that it will be repaid back with interest pre-supposes that there
is extra output that the banking sector can share when they get those
interest payments.

The nef have been publishing booklets on this kind of thing for a long time.
It’s one of their core ideas. I have just read, for example, the pamphlet by
Joseph Huber and James Robertson, Creating New Money, published in the year
2000.

The programme without the key idea

Yet it is this absolutely central idea that is no where to be found in the
Green New Deal nor in any of the discussion about it. Instead what is there is
and extensive programme for restructuring to “shrink” the finance sector.
There is an evident keeness that a regulated sector should run with low
interest rates – otherwise there is no chance that investment will take place
in the new green technologies. Then there is the idea, that, to prevent a
decade long debt deflation, “societies ***might*** have to introduce a
global jubilee of debt cancellation, an extraordinary amnesty for debtors” (my
emphasis – BD).

But nothing is said here of the need to deal once and for all with the money
creating function of the financial system that has brought us this debt
crisis. The obvious response is use this old quote, which is often cited by
critics of debt based money:

“Bankers own the earth. Take it away from them but leave them the power to
create money, and, with a flick of a pen, they will create enough money to
buy it back again. . . . . . . . But, if you want to continue to be the
slaves of bankers and pay the cost of your own slavery, then let bankers
continue to create money and control credit.” Sir Josiah Stamp, director of
the Bank of England. Speaking at the University of Texas in 1927

What’s going on? Just at the time when there is an ideal opportunity to get
mass public sympathy and support for a critical look at the banking system
and the need for really radical reform – that gets to the root of todays
problems, the nef, the Green Party and others are organising an alliance
around a programme that is missing a key piece…the key piece…for they do
indeed appear to be prepared “to let bankers continue to create money and
control credit”.

That’s not to say that there is not lots of fine rhetoric about the behaviour
of the banks and finance sector in the GND. The banks have been naughty by
creating too much credit on an asset price speculation and so they need to be
regulated and the structure of the banking and finance industry change.
That’s the message. Then there is a strong suggestion that we will return to
what is described as a “golden age” – the period of Keynesianism of the 1950s
and 1960s, albeit with a green tinge.

Seignorage reform to deal with moral hazard once and for all

But there’s no mention here of “seignorage reform” – about taking away from
the banks the right to create money against debt and making the process of
money creation a public matter for control by a public body, in everyone’s
interest.

Let’s go back to first principles. In the last year there has been a lot of
discussion about “moral hazard”. But in none of this has there been any
credible proposals as to how to get off the horns of the dilemma which is
created by the fact that the banking system has the right to create most of
our money supply.

This moral hazard dilemma arises because we all have to use the money system
for all transactions. We are all dependent on money as a collective
arrangement that is the core to exchange relations within society. As such
the money system can be described as a social and cultural commons – no one
person or institution invented it or created it. It has been the result of a
historical process in which all of society participates. Yet this commons,
which should be managed as such, in the interests of all, has been privatised
and run in the interests of private corporations. The people who run the
banks know that because they are running a commons as their private fiefdom
they have the rest of us, as taxpayers, over a barrel. They have to be
rescued because otherwise all our arrangements for meeting our most basic
needs will collapse.

Now it seems to me that moral hazard arises here out of a structural fault in
the system – a commons is not being managed as a commons, it is being managed
privately. The real solution, the one that gets to the root of the problem,
is the one that makes the process of money creation a matter for an
accountable public body to fulfill in the interests of everyone in society
equally. That means forbidding to the banks or anyone else the right to
create money.

Closing the stable door……….

Instead of this we have a lot of chatter about (re)-regulation. This is
totally unconvincing. There have been banking and finance crises like the one
currently happening for centuries. In nearly all of them there are calls for
regulation so that it “doesn’t happen again”. The regulation and oversight
and restructuring duly takes place. After the dust has settled the bankers
behave prudently anyway – depending on how serious the crisis was so there’s
pretty little call for the regulation when it is actually imposed. And a few
years later the regulations are taken off the banks and other financial
institutions re-emerge as big players in highly leveraged speculation.
Regulation is something that is imposed when it is no longer needed to make
it appear that the politicians are really looking after our interests. When
it is actually needed, when confidence returns, too much confidence, the
politicians are busily taking the regulation off.

Of course, the dust hasn’t settled yet because the collapse is still under
way. Regulation under current conditions appears to be unconvincing too. This
is because there is still far too much hybris in the banking and finance
sector and they are still far too powerful and are able to get away with too
much. In this regard the point has been well made that hiring some bankers in
the FSA to regulate other bankers lacks credibility. You are talking about
people who will switch from poacher to gamekeeper after having worked in the
same offices, drank together in the same champagne bars as the people they
will supposed to be overseeing. I don’t think so. Or you can take the Nick
Leeson view. It will be remembered that he broke the Barings Bank. Here’s
what he says about regulation.

According to Leeson alongside the “best brains” in the trading rooms,
competing fiercely and taking risks, there are also ” the grey men of the
back office…. They do the paperwork behind the traders’ deals and run the
regulatory systems. It is their job to monitor the markets and ensure checks
and balances are properly applied. These bankers are invariably not up to it.
The front end of the business is far more profitable. The brightest and best
are seduced by the lure of big bonuses, leaving the third-raters and
burn-outs to take safe desk jobs in staid institutions such as the Bank of
England.”

And what are the “brightest and the best” up to in the meantime? Professor of
Organisational Ethics at the Cass Business School, Roger Steare, undertook
integrity tests on more than 700 financial services executives in several
major firms and came to the conclusion that “There is a systemic deficit in
ethical values within the banking industry. This will not change by hanging a
few people out to dry.” (BBC January 2008 Market culture ‘at root of rogue trading’)

The results of these tests indicate that as a group, they score lower than
average in honesty, loyalty and self-discipline, he said. He compared traders
to “mercenary hired guns”, who regularly switch firms to maximise earnings.

That’s London, but the situation is pretty much the same the world over. And
it explains why, after being granted $700billion for a bail out package, the
Guardian just reported that a whopping 10% of that sum has recently been set
aside for banking bonuses for the people who gave us the banking crisis in
the first place.

Who will earn money from the bail outs? Who will administer them? Who will
design them? Who will get the jobs as regulators? The very same companies and
people who gave us the banking crisis in the first place. Because the
ordinary people who have suffered at the lands of the predatory lenders will
be lucky to get a penny or a cent the chances are that no recovery will take
place anyway – so the “real economy” (as opposed to the unreal one that
parasites upon it) will start going down and drag the economy down with it.

Will the economy return to ‘normal’ anyway?

While the London chatterati are applauding the boldness of the
re-capitalisation of the banks it’s as well to remember that the huge sums
required for re-capitalisation are because it is anticipated that the bankers
are about to lose even more as the recession deepens. The fairy story for the
children with all this is that the taxpayer will eventually make money as the
economy “returns to normal” and the banks start making money again. But will
the economy return to normal? If not, we are at the beginning of a period in
which the state keeps shovelling money into a black hole – an imploding
banking system – perhaps because the credit default insurance market caves
in, pulling everything down with it.

We aren’t about to have an exact re-run of the 1930s. We are hitting the
limits to growth. Even if the political and economic elite give insufficient
attention to climate change there are severe resource constraints in regard
to energy and water from the resource end. Peak oil is one part of the triple
crunch. So the economy cannot actually keep growing.

The growth of material production is a result of stuff being processed and
transported which depends on the quantity of energy available times the
efficiency of its use in production and transport. The increment to output
that the banksters need to get their big cut is more and more difficult to
acquire – what’s more the mining of the biotic and mineral resource in the
eco-sphere is requiring even more energy as lower grade resources have to be
exploited. The increased energy that will be needed to do this isn’t there.
Indeed to create an infrastructure of renewables and big energy effiency
gains will require a huge investment of real material and energy resources
that will not be available for consumption or playing in financial
casinos. The banking vampire can only expand on the back of speculative
bubbles not on the basis of the real economic trend. The real economy over
the next few decades can be described like this – a rush to create a
re-localised economy based on renewables and energy efficiency on the back of
shrinking resources.

From credit crunch to energy crunch……. and back

Let me spell that out in different words. If the economy were to recover by
2010 to 2012 it would hit the energy crunch that the International Energy
Agency was predicting for that date just a few months ago. Oil and gas prices
would skyrocket again – except this time even higher, expecially as the
recession and finance crisis will have undermined energy sector investment in
new capacity in the meantime.

The times we are in demand an entirely different kind of financial system. The
risks and challenges of a transition to different economic structure are so
great that conventional debt finance is not going to be very useful anyway.
Risks in the real economy are going to be higher so only when capital
providers spread risks, have a deep knowledge of what they are investing in
(in local arrangements), and feel they can rely on state backing, are we
likely to see substantial investments in the transition. That is nothing like
the global securitisation and innovation trash that we have seen over the
last decades.

What we need instead are financial institutions with some responsibility to
local communities and real relationships where investors share risks in
equity stakes, rather than foisting all the risks on lenders and kidding
themselves by insuring these risks in derivatives markets.

In all of that there will be a place for financial intermediation between
savers and people involved in productive capital investment. But the
financial system cannot and will not be anything like the existing banking or
shadow banking system. The creation of money is too important to be left in
the hands of bankers. They have amply demonstrated that they cannot be
trusted to create the money on which we all depend.

A real Green New Deal would take that power away from them. Why oh why, at
such a crucial time did the NEF et al cop out of saying so?

Brian Davey

http://strategyforlosers.blogspot.com/

* Seignorage is “The amount of real purchasing power that [a] government can extract from the public by printing money.”

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Responses

  1. A comprehensive solution has to address everything from voluntary population control, security of income for everybody, interest-free finance for environmental capital projects and much else. That solution now exists and you are invited to visit

    http://www.binaryeconomics.net/

    or, for a one page document, the knol at

    http://knol.google.com/k/rodney-shakespeare/binary-economics/i2b1ciidsw5u/2#

  2. I see no Transition future in this kind of discussion. Even if we think we have clarified the issues and what needs to be done we are still in the power trap of mass institutions which effectively block any way forward. Brian seems to be a good man fallen among Fabians.

    What does need discussion is the Transition point of how local community financial institutions take command of the local scene, for only at that level, where human relationships take precedence, can the moral objectives of economic activity effectively be asserted. All this top-down theorising is part of the landscape we should be leaving behind us as the Totnes Pound is replicated everywhere.

    Best,

    JOHN PAPWORTH

    http://www.oxpc.co.uk/4wr/

  3. I entirely agree with John Papworth that what he calls “mass institutions” will block out discourse and ideas of this sort. Effectively one gets ignored with ideas like this. It was ever thus. However, even if it is not an intended effect of local currencies, Transition initiated complementary means of exchange have a significance which goes beyond the local. This is because the experience of creating and running local level complementary currencies may be the necessary stepping stone to a national seignorage reform of the banking and money system.

    In a global and national financial melt down we can expect to see national level political structures still in the thrall of the mega banks – shovelling tax money into a black hole to keep them going. I do not believe that just having a good case against them will be, in and of itself, enough against the forces of inertia and powerful and entrenched vested interests – I am no naive Fabian….and never was.

    In this context the launching and running of local systems, while being a valid process in its own right, has an added benefit – the indirect effect of creating a political-economic constituency which understands money well enough to be able to propose the needed changes to the existing structure of banking and finance system more widely- and which has the experience, credibility and confidence to counterpose alternatives that they know will work.

    This does not have to be an explicit Transition agenda – it can be proposed by people wearing different hats. From John Papworth I get a sense that only at the local level can one do meaningful things – if that is the implication he intends to convey then I could not disagree more. Given the dangers that climate change now represent, national and international level policies are needed to effectively cap fossil fuels with the force of law. Other profound reforms are needed too. This would provide a good framework in which Transition Initiatives could then operate in my view.

    In fact Transition Initiatives are ambiguous about whether they want certain legislative changes or not. All the talks I have been too, with Ben Brangwyn and Rob Hopkins and others, sing the praises of TEQs, which could not be implimented without national level legislated political intervention. (I’m a supporter of cap and share myself, not TEQs). Is this idea Fabian too? It certainly implies the endorsement of a specific national political agenda.

    A whole range of institutional and structural changes are needed that purely voluntary local efforts on their own will not achieve. Local level efforts can create the social capital and networks from which a new political force is born – even if the entrepreneurial and project focused movement of Transition Initiatives does not seek an explicit political agenda.

    Finally I did not originally write this piece for publication by and in the Transition Network as such – and it was not my suggestion that it be published here. I am glad it is however. I do not see things in the either-or way which John Papworth appears to do, IF, I have understood him rightly.

  4. I wrote a piece, albeit much shorter, for The London Paper along these same lines – see http://www.thelondonpaper.com/talk and scroll down for Corrina Gordon-Barnes. In the column, I suggest that the ‘recession’ is an opportunity for us to look honestly at what wasn’t working and bring forward new systems.

    The interesting point is that 96% of Londoners voted for me to write more. This to me says that people want to hear this kind of discussion – even if they can only express this anonymously through text vote. Without making anyone wrong, through seeing us all as fundamentally yearning for the same thing, we together can imagine and then create what we truly want and need.

    Thanks
    Corrina

  5. Good comments, Brian. Thank you for mentioning “Creating New Money”.

    My comments to NEF on their version of “A Green New Deal” can be seen at http://www.jamesrobertson.com/newsletter.htm#4
    I hope you have sent yours to Stewart Wallis and Andrew Simms at NEF

    Best wishes
    James

  6. A system: ‘the money system’.
    Problem: failure of liquidity, credit or currency in circulation.
    Proposed solutions:
    1. Government take back ‘seigniorage’ power of money creation from private profit-making banks.
    2. Local community currencies.

    In system terms, neither solution can meet all our needs, solve our problems or achieve our goals. Centralised currency creation will never be sufficient to unlock local assets to meet local needs. But local currencies will never be sufficient to build and maintain roads, schools and hospitals.

    Both solutions need to be subject to sound design principles, fair governance and excellent management to work well for most people most of the time. Beyond the grand statements and strategies we need people who know how to create and manage these structures in good times and in bad so that they become the norm in the sustainable societies of the future.

  7. I agree about keeping discussions as an open forum wihout getting into the old-world personal divisive stuff of the dinasuars.

    I just wanted to mention two things no-one seems to talk about.
    Firstly, if I am correct Harold Wilson tried to set up a post office banking system which would have essentially provided the potential means for government to control money. This was ridiculed and savaged in the Beaverbrook press (a million had been “wasted” in T.V. ads. promoting it, etc.) and Wilson resigned soon after. So how do you legislate to remove the power from banks without utter financial chaos in the meantime?

    Secondly, alongside Mosely’s black shirts before the war there was a group called “green shirts” who favoured a system called ‘social credit’ where the government made credit freely available and the actual cost of goods and production regulated prices. A version of this system was later voted in in Canada where it was hi-jacked by right wing groups, which speaks to a need to forsee outcomes. But it has some interestingly different financial thinking.

    Lastly, perhaps a crucial point is to change the way we view money. It has become tainted by the greed and exploitation and corruption which has followed its use. But if you make a conscious choice to view money as the means to share what we have and support each other in producing wonderful acts of creative inspiration, then like a river feeding a valley money becomes a beautiful thing.


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