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.”