Scotland's 5th Estate

The Production of Money: how to break the power of bankers

Ann Pettifor is on the money. From a talk at LSE on the subject of her new book “The Production of Money” (Verso 2017). Yanis Varoufakis has called it: “a book that shatters the fantasy of apolitical money and the toxic myth that monetary policy must remain a democracy-free zone. This book is now a reality.’

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8 Comments

  • John O’Dowd 2 months ago

    This is a very timely intervention by Ann Pettifor – ahead of the next great banking collapse (2007-8 wasn’t fixed- just contained by printing money, giving it to bankers and inflating more assets – mainly property and fictitious capital) . I read Pettifor’s “The Coming First World Debt Crisis” in 2006.

    She was one of the few economists, including Michael Hudson. Hillel Ticktin, and Steve Keen and not many others, to predict accurately the nature and timing of the collapse – which is yet to work its way out.

    This, after all, was just the latest of many crashes that have afflicted capitalism since its inception, but was all the more poignant since it occurred at the very moment of ultimate hubris, where in Prime Minister Gordon Brown’s hilariously infamous utterance when as the Chancellor of the Exchequer, presiding over the greatest financial bubble (so far) in history (this present one is even bigger), he declared that there would be would be “no more boom and bust” .

    The plaintively astonished echo of this imbecilic pronouncement was heard in Queen Elizabeth’s agonised question in November 2008 to the distinguished professors at the London School of Economics, when she asked about the banking crisis: “Why did no-one notice it?” .

    It was a reasonable question for multi-billionaire hereditary landowner Elizabeth Battenberg née Saxe-Coburg-Gotha (aka Windsor) to ask in an august national institution that boasted on its website that “16 Nobel prize winners have been LSE staff or alumni”.

    To be fair to those who were asked, few of its denizens, and none of the neoclassical economists in the UK’s leading school of economics, could either have predicted, or thereafter explained, a crash that was both unsurprising and inevitable to people who have a better insight into how the economy really works – and for them to have done so would have been to renounce the most sacred elements of their cult: to betray their faith in the very entrails of their mystical theology.

    But to suggest “no-one had predicted it” was somewhat inaccurate and unfair to the likes of Ann Pettifor, who in 2006 had published “a modest little book which the publisher insisted on entitling ‘The coming first who along with others such as Michael Hudson, Steve Keen, Nuriel Rubini, Joseph Stiglitz,, Dean Baker, and Robert Schiller – were nominated in the Real World Economics Review roll of honour , for the Paul Revere award for Economics.

    The poll’s purpose was to identify economists who, in the judgment of fellow economists, first and most cogently warned the world of the coming Global Financial Collapse. Although coming from diverse standpoints ranging from Marxist through Keynesian, ‘post-Keynesian’ and adherents of Hyman Minsky – as well and other heterodox economic creeds and none, what these prophets have in common is a total disbelief in, or a healthy scepticism of, neoclassical economics, particularly of the Marshall/Walras/Stigler/Samuelson school of economic credulity and fraudulent axioms that dominates the mainstream economics taught in our universities, and practiced within key sectors of the economy, national treasuries and international banking and finance.

    In fact, I had read Pettifor’s book when it was published, and found it disconcertingly and terrifyingly persuasive. Thus when the crash came, just about the same time as Ms Windsor asked her famous question, I was able to write (in The Herald):

    “The issue of “bank money” by ledger entry at interest with infinite exponential potential, to be serviced by the product of a finite real economy, carries within it the structural inevitability of “meltdown”. It is not “if” but “when”. For a very clear explanation of the present mess and its causes and remedy, read Ann Pettifor’s superb book The Coming First World Debt Crisis, published in 2006.

    Even if Fred Goodwin had read it, understood it and acted upon it then, things would still have turned out as they have. Unless and until we move away from a debt-based money system, there is no possibility of overcoming our present predicament. The only problem about this is that those politicians who in the past have tried to do so have been removed from office. This may be why Gordon Brown’s only remedy is to try to get the banks lending again. We might just as well fill firefighters’ hoses with petrol”.

    . Letters: The Herald (Glasgow, Scotland) – Friday, February 13, 2009,

    In fact, I did better than that – I predicted the crash myself in 2007 (in response to a letter to the Herald (Glasgow) by a Mr Jackson):

    I cannot agree with Mr Jackson that the government was right to bail out Northern Rock, or that it would be right to bail out other monsters of the mutation of building societies into “banks”, often with the participation of erstwhile denizens of the mutuals who sought to gain from the transformation of a public good into yet another expression of the ultimate stage of capitalism’s pathology, Finance Capitalism. The government had no right to use our money to shore it up, firstly because it’s not its money, but mainly because there are others out there waiting in the wings for public largesse.

    Those who place their life savings in banks such as Northern Rock, presumably because of the high returns on offer, need to look out for themselves and be aware of why and how returns like these are offered, rather than asking others to underwrite their gamble. Nor do I agree that Alistair Darling was lucky this time. The Chancellor knows what a good old-fashioned bank run looks like, and, as in 1929, the bank owners and the government are frantically trying to calm down their customers by reassuring them that their money is safe. It is not.

    Mr Darling and the Treasury will know that something even worse is about to descend on the United States, where many of the banks have been engaged in the same practices and are using the same business model as Northern Rock. Investors are no longer buying anything related to real estate. No-one wants it, whether it’s sub-prime or not. That means that US banks will soon undergo the same type of economic gale battering the UK. The only difference is that the US economy is already listing from the downturn in housing and an increasingly jittery stock market. This will have a knock-on effect in the UK, as Mr Darling must know, and is why he should not have bailed out Northern Rock, even while crossing his fingers and relying on “structured finance” touted as the “new architecture of financial markets”.

    Structured finance, designed to distribute capital “more efficiently” by allowing other market participants to fill a role which used to be left exclusively to the banks, is, in practice, probably the most expensive hoax of all time.

    The transformation of liabilities (mortgage loans) into assets (securities) through the magic of securitisation is the biggest swindle of all time. As John R Ing, president and chief executive officer of Maison Placements, Canada has recently written:

    “The origin of the debt crisis lies with the evolution of America’s financial markets using financial engineering and leverage to finance the credit expansion . . . Securitisation allowed a vast array of long-term liabilities once parked away with collateral to be resold alongside more traditional forms of short-term assets. We believe that the sub-prime crisis is not a one-off but the beginning of a significant sea change in the modern day financial markets.”

    John J O’Dowd, – The Herald (Glasgow, Scotland) – Tuesday, September 25, 2007,

    My point in citing this is not to claim that I am some sort of financial guru – I am not.

    Rather it is to point out that the evidence that the banking and finance house of cards was about to collapse was clear for all to see –even non-economists like me – and had been for some time. The people who chiefly failed to do so were the neoclassical economists – whose nostrums for the economy were, and are, about as useful and science-based as blood-letting for anaemia (and have largely the same effect on the patient) – and the super-rich whose interests they serve –or rather those among them – like poor, ill-educated Elizabeth Windsor – who weren’t in on the swindle of the century.

    My awareness arose from the fact that I read, and still read, online sources such as ZNet, Counterpunch, Michael Hudson and Global Research, and academic journals like Critique, where the finance crisis had been openly predicted for some time, and more recently, Real World Economics Review, in which heterodox economists and others have found a voice.

    It is good that Ann Pettifor has published this book – which I will order immediately. The next crash cannot be far away – and this one will be bigger that the last, since the shit of that is still in the Banking Augean Stables – and its consequences, including Grenfell and all other consequences of ‘austerity’ are there for all to see – if they can get past the propaganda from the likes of the BBC, Guardian et al.

    Reply
  • Mike Fenwick 2 months ago

    2 questions:

    1) Would what is termed “Regulatory Democracy” be any less authoritarian than a Central Bank is suggested might be, and no less likely to include bureaucrats amongst its staff?

    2) Why advocate that only Banks can be the recipient of deposits (which when deposited are then legally the monies of the Banks) and argue against a Central Bank also being a place for individual deposits (which when deposited then remain the property of the depositors). Why deny choice, and in particular one which is already under research at the Bank of England?

    We arw where we are, and looking for change – I am not sure on those two questions we have found the right answers.

    Note for Mike Small: The name and e-mail boxes came prefilled with what appeared to be a troll’s details.

    Reply
    • John S Warren 2 months ago

      I do not wish to suggest or imply that the two questions you raise are not eminently reasonable, but I am not sure that they are the most important issues that Ann Pettifor’s lecture raises.

      Is depositor “choice” really the key issue here? I suspect that “security” is the central reason for the depositor interest (as it is with Gilts). Your proposal would give the Central Bank a substantial competitive adavantage for depositors, compared with commercial banks (if I understand you). I do not say this because I wish to protect the current vested interests of existing commercial banks. For example, if choice and equality of treatment is your goal,to achieve your purpose would it not be easier, why not propose simply nationaliinge the commercial retail banks? In a sense TBTF implies they are semi-nationalised already; the British public is effectively carrying the lender-of-last-resort risk now.

      From an ordinary depositor perspective, i think my concern rather, would be to de-monopolise the retail banking sector (too few, too big banks) and create genuine consumer oriented competition by establishing a large number of small-scale local/regional or sectoral banks (as we had in Scotland alone for example, especially before Big Bang and before the slow consolidation of Scottish banking after WWII – although I accept in the 21st century we cannot bring that particular solution back).

      Reply
      • Mike Fenwick 2 months ago

        Hi John … I simply chose two aspects where I believe there is room for debate, and yes, the eventual “choice” of any outcome is relevant imho. Essentially by whom might the decisions be exercised? However, I agree, as you have pointed out, there are many such areas for wider debate.

        On much the same theme, I might also have chosen to question what exactly is envisaged in the term “Regulatory Democracy” – as we watch the likely watering down of Dodd-Franks in the US, or QE here … would it be fair to question the level of democratic involvement? Do we as ordinary individuals have a voice, is it likely to be heard, let alone effective?

        Reply
        • John S Warren 2 months ago

          Hi Mike,

          I agree with your sentiments, but I think the solution in banking requires a fundamental overhaul of the system. There are serious disputes in the economics profession about the nature of money, deposits and credit. In a sense these issues are even more fundamental than “democracy” because they go to the heart of our understanding the nature of reality; or is that “reality”, in our monetary system. Democratising is meaningless if we do not understand the fundamentals.

          I am much persuaded by the ideas of such as Steve Keen, Ann Pettifor, Richard Werner, but that is where I start: understanding. We have not been well served by ‘economics’ (the profession), by Central Banks, by bankers, by Regulators, or by Government or politicians (who clearly do not understand the system for which they are responsible). This is fairly basic, and it very, very unsatisfactory. Sanctifying this by waving a fairy wand of ‘democracy’ at it just does not cut the mustard; I could claim that democracy has singularly failed us with the banking system; indeed I might even claim democracy was manipulated to trash the system by people who, at best, had no idea what they were doing.

          Following ‘understanding’ (and all citizens should attempt to understand the nature of the system, because it has not served us well), I would place ‘regulation’ as my second critical issue. We require a banking and monetary system that represents reality, and that is regulated to protect first, the security of a well-founded system, and the public.

          “Choice” is an issue much beloved of uncontrolled free-marketeers. But it is usually a seduction of the consumer, and not quite what it seems. Why do I say that? Primarily I do not attend a doctor for a ‘choice’; I attend a doctor for a diagnosis and a cure. If I receive both I have little interest in ‘choice’.

          My first requirement of a currency and bank is that I can trust them (not least to diagnose and cure malfunctions or manipulations of the system). I expect the system to be secure, to be well regulated, and to protect the public from crises or moral hazard. Once I know the system is secure and well regulated; then I will consider matters like ‘choice’. A secure system should be able to offer choice, but not above security, and security requires sound regulation.

          Reply
  • Mike Fenwick 2 months ago

    John … slight diversion I need to start by publicly thanking Mike Small for helping me kick start this project – thanks, Mike!!

    What project?

    This: https://www.facebook.com/thescottishhand/

    It started when I was one of those who was asked to speak at YES Rutherglen on the subject of “currency” (a very deceptive word) in August 2016 … a lot has transpired since then.

    I hope (I can’t know) perhaps some of the posts and details may gain some approval from you? There are few of your thoughts which do not parallel my own.

    The project is very deliberately being taken forward in stages and for me perhaps the most important aspect is the engagement of ordinary individuals across the length and breadth of Scotland, which I believe is due to that staged approach.

    NB: In my original post I mentioned research underway at the Bank of England. The stages involved in this relate to that research, but set against a Scottish landscape, and again I can’t know this, but I do have contact with the Regulators, and have had for more years than I care to remember. Interestingly, that might explain why there are more follows of that facebook page from London, than elsewhere??

    Reply
    • John S Warren 2 months ago

      Hi Mike,

      I commend your efforts. We have been here before. The first great Euopean monetary theorist was John Law (1671-1729), as Ann Pettifor noted. He remains instructive, and he had remarkable ideas regarding the Scottish currency, credit and banking that were turned down by the Scottish Parliament in 1705.

      As follow up to some of the ideas discussed by Ann Pettifor, I commend Richard Werner (a wonderful communicator of the important ideas) and Steve Keen. I would also direct you to specific papers (on Fractional Reserve Banking and its failings) by Federal Reserve economist Seth Carpenter and academic economist Selva Demiralp,”Money, Reserves, and the Transmission of Monetary Policy: Does the Money Multiplier Exist?” (Federal Reserve Board, Washington D.C., Finance and Economics Discussion Series, May 2010). And on Intermediation by Zoltan Jakab (of the IMF) and Michael Kumhof (of the BofE), “Banks are not intermediaries of loanable funds — and why this matters” (Bank of England, Working Paper No. 529: 2015). Both these papers give context to the ideas of Pettifor, Keen and Werner (I should hasten to add that I am not sure how closely they would all agree on every issue – but that is hardly the point).

      Reply
      • Mike Fenwick 2 months ago

        It seems to be my day for thanks … thanks John, all noted!

        Reply

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