I don’t usually agree

with George Osborne, but when he announced that he wanted the UK to run budget surpluses, I had to agree that this would make my ideas much easier. If the UK reduces its national debt, the idea of getting rid of all commercial debt becomes much easier.

Even selling off Royal Bank of Scotland would help as changing the nature of banks primarily from lenders to holders of assets is easier if it does not affect the value of a government owned asset.

But

I am not sGeorge Osborneure that there is any economic justification for George Osborne’s stance. The UK was very badly affected by the 2008 banking crisis but the UK is a major financial centre with a significant number of international banks and what is more many banks (including those based in the UK) were involved in the sub-prime lending at the route of the crisis.

I am not sure that changing the country’s underlying financing would have made a major difference to the crisis – the banks would still have needed significant help and it was the downturn in the banks which lead the economic downturn – because our economies are based on debt and the banks stopped lending.

For most countries the route out of the crisis was for governments to lend money effectively replacing bank lending and run deficits and, despite government rhetoric, the last Conservative/Liberal government also ran deficits every year.

So

I don’t agree with the justification of this new economic restraint on the government but I am happy for it to go ahead.

So much for ‘expansionary austerity’ solutions

It all went pear-shaped in 2008 but it is getting better now. Except the graphs tell a different story – but hey who cares about the facts…..

LARS P. SYLL

Unemployment rates in Europe, Japan and US
Unemployment_rates_EU-28_EA-18_US_and_Japan_seasonally_adjusted_January_2000_January_2015

Source: Eurostat

If this is recovery for Europe, well, I’ll be dipped! Some years ago unemployment rates at these levels were considered totally unacceptable. And then came the Reagan-Thatcher turnover and price stability was everything and being unemployed was something people freely chose to be …

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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.