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Bankers need to create a fairer society

Mark Carney is quoted as saying

“Consideration should be given to developing principles of fair markets, codes of conduct for specific markets, and even regulatory obligations within this framework. There should be clear consequences including professional ostracism for failing to meet these standards.”

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What are we trying to measure?

There was a lovely article on the news recently which said that the Italians were now including sex and drugs in their GDP figures.  I am afraid the only reference I can find at present is to an article in Bloomberg of 21 May.  But the point seems to be confirmed.  And indeed the UK GDP figures may also need to include whatever we can measure of prostitution and illegal drug sales.

This has made me wonder why this is something we are so keen to measure and get so excited about (when it goes up) or depressed with (when it goes down).  And why do we compare GDP and borrowing so much as a way of seeing if the borrowings are affordable. Continue reading

Debt 101

Aside

I am worried.

One of the blogs I watch is published by Steve Keen and he has recently (at the beginning of the month) published a three blogs looking at whether governments should run surpluses or not.  This was in response to a proposition from the Australian National Commission of Audit that the government should “live within its means.”

His three blogs are:

Should governments run budget surpluses?

Should Governments run Deficits? a Minsky Model?

Should governments run permanent surpluses? (2)

His conclusion (based on some numbers using his modelling software) is that running budget surpluses takes money out of an economy and effectively reduces growth.

On the other hand running a balanced economy (no surplus or deficit) will see public debt reducing.  But running a deficit has higher growth.

So is a deficit economy a good idea?

It matters because if we remove the possibility of debt (commercial lending) from an economy, then it must follow that a government cannot run a deficit – because it cannot borrow.

Or is lower growth a price worth paying for the advantages of taking debt out of the system?

 

It’s all the bankers’ fault

It is really easy to blame the wicked bankers for everything.  So I will.

One of the causes of the 2008 economic collapse was down to bankers lending money to people who could not afford it and then passing the problem on to other bankers.  By passing the problem on the “risk” was supposedly lessened (if you have one debt you could be unlucky and have the one that goes really really bad; if you have lots, they are only averagely bad), but the problem was then shared with all the other bankers and when it did go wrong, all banks shared the problem and they all went wrong together!

And then governments got involved because they were worried (probably rightly) about the effects of a banking collapse, so we the people, ended up footing the bill the bankers should not have created in the first place.

But the problem is not so much with individual bankers, but that bankers keep on repeating the same old mistakes – lending too much money when the market is about to collapse.

It is not that bankers are bad at seeing when the market is about to collapse (although they may well be as there seem to be very few of us good at predicting the future), but that they are driven to lend (because that is how banks make money) and driven to lend to riskier and riskier customers because “experience” has shown them that this works. “Experience” in this case comes from what has happened over the last few years – looking back at the successful years, rather than looking forward to the possible consequences of high-risk lending or looking further back to the effects it has had in the past.

So we end up with the South Sea bubble, or the great depression or the UK property crash or the dotcom boom or  the economic collapse we have just had.

In each case we had a speculative bubble as people expected prices to just keep on going up and so many were tempted to borrow to speculate on the future profits they expected to make.  And then there was a “correction” in the market – a collapse in th price – and the expected boom turned into a catastrophic bust.

How can we avoid these sorts of problems in the future?  I would suggest that we get rid of bankers – or rather we get rid of bank lending.  Rather than trusting bankers to lend responsibly when history shows us that they are incapable of knowing when we have moved into a speculative bubble, we stop them lending altogether!

I will talk about why we want banks and bankers and their role in the future in a separate post.

What I want to say in this post is that we cannot trust lenders.  I am not saying that they are inherently evil, but that we all seem to be blind to the consequences of lending and that the world is therefore a safer place by removing this activity, so that we don’t get it wrong.

This is like putting a speed limit on our roads – it is not that speed is inherently wrong, just that when we get it wrong, the effects of going too fast can be catastrophic.  Or it is like building a shield around nuclear reactors – they are dangerous and we need to protect ourselves from using them wrongly.