In an article published by the Guardian today John Quiggin discusses whether “Socialism” may find new support now that the flaws in neoliberal economics are becoming impossible to ignore.
A lively discussion of this article appeared on Macrobusiness that included the following comment.
“The private banks that offer cheap mortgages supported by an independent central bank will be at minimum curtailed. In their place we’ll have a central bank working hand-in-glove with the government to print money into existence via buying the sovereign bonds that fund various forms of agreed public income generation – infrastructure investment, basic income, digging holes, filling them in, etc.”
This over complicates the reforms that are required.
Perhaps we will eventually find ourselves rebuilding a large public sector with technocrats running more sectors of the economy or distributing incomes as they see fit but there is so much we can do/try before throwing the baby out with the bathwater.
Yes, the RBA could buy government bonds directly from Treasury for the purposes of funding new activities of the government, but a simpler starting point would be to buy the bonds directly from Treasury and just fund tax cuts for the lowest income earners (raising the tax free threshold or earned income rebates) and some increases to social security recipients.
That would increase money in the wallets of the people who need it most. They are more than capable of working out how much they can afford to save and how much they need to spend now on health, education, food, transportation etc.
No need for a Basic Income any time soon
Plus until there is a clear demonstration that all the important tasks that need doing are being done by robots we should NOT be assuming that we cannot fully employ all able bodied people in a productive manner. An income earned doing productive work beats an unearned income every time.
As Japan with an unemployment rate of 2.8% and heaps of robots demonstrates, there are lots and lots of jobs for people to do right now and sentencing that resource to bean bags and Smokey Dawson easy risers with a basic monthly income guarantee is simply nuts. That we have an unemployment rate of close to 5% is a failure of policy and a political choice not because we have a shortage of things that need doing.
Reducing taxes while maintaining the current level of government expenditure will generate fiscal deficits as large as we require and WITHOUT an interest burden if government bonds paying 0% are sold to the RBA directly and they remain non-transferable.
And yes unproductive capital inflows MUST be tightly restricted to ensure that the exchange rate reflects our trade performance and not our capacity to sell off assets and claims on our future incomes (public or private). Restricting unproductive capital inflows is an essentially part of any reforms (click here for more on that subject).
Restricting private bank credit creation
As for the activities of the private banks, the curtailment of their credit creation operations will be necessary simply because if they continue to create credit as they presently do we are likely to suffer from a rising rate of inflation due to the combination of the larger directly financed fiscal deficits and private bank credit creation. The only reason the out of control credit creation activities of the private banks has not led to inflation recently is because it has been directed heavily towards unproductive asset price speculation and the government insists on flooding the labour market with high rates of immigration.
The simplest way to start limiting the Private Bank credit creation operations is to regulate those operations to ensure that any credit they do create is limited to the creation of new productive capacity. That means loans where the security is existing assets will be limited either by price, volume or availability. There are plenty of non-bank methods of securing loans using existing assets and that is the way forward for those who wish to borrow using their existing assets as security. The price of those loans will reflect that they are not getting an effective taxpayer subsidy which is what happens when private banks create credit secured by existing assets. Credit creation by private banks is a privilege and it should not be used to pump up the price of existing assets.
The private banks will be increasingly restricted to credit creation that involves new productive capacity with lending secured by existing assets heavily regulated and/or left to the non-bank lenders.
Ending private bank credit creation completely
If needs be, and I think it is likely as the understanding of and confidence in direct monetisation of fiscal deficits grows, private bank credit creation could be abolished completely and all lending and investment would then be conducted by non-bank financial organisations.
Let the market determine the price that borrowers pay to secure the acorns of the savers.
The government can always intervene in any of the markets for ‘borrowings’ if it sees fit by making available funds to the non-bank intermediaries that bring borrowers together with savers. It would in effect be increasing the supply of ‘savings’ to a market for a particular type of loans. This may not prove to be necessary but it remains an option where market failure is identified or public purposes require.
For example: The government might choose to make available resources at lower cost for new housing construction or servicing new land. It could do so by making a suitable budget allocation available to loans for those purposes.
None of the above is difficult or involves radical reform.
In essence the system we had prior to the effective deregulation of private bank credit creation was close to such a system.
Looking to the past for new solutions not old
A lot of people overlook that prior to financial system deregulation we had TWO major ways that the public sector could create ‘money’ and room for them to do so was created by careful regulation of how much money the private banks created via their lending decisions.
The two methods were
1. Fiscal deficits
2. Credit creation decision by publicly owned banks like the commonwealth bank.
Lending decisions by the old Commonwealth development bank for example were designed to encourage the creation of new productive economic capacity.
The sale of all the publicly owned banks during the deregulation period removed Option 2 and in doing so limited the option to fiscal policy and deregulated private bank credit creation.
In addition the balanced budget mania meant that two options effectively become a single option – private bank credit creation. The result of this process was more asset price booms and busts, the GFC and is the reason we are 10 years down the road with few signs of real economic recovery. We simply refuse to accept that the neoliberal model for money creation and allocation is a dismal failure.
We could bring back Option 2 – publicly owned banks – but a more practical approach from this point of time is likely to be:
1. Directly monetised fiscal policy
2. Private bank credit creation restricted to clearly productive purposes
3. Other lending left to the non-bank sector.
4. A public savings bank option so that savers have a public option for a secure location for their savings – Australia Post could supply these services.
This debate will not advance if people insist on running hysterical hyperbole about the alternatives or over complicating what is required.
Fixing the obvious flaws in the obsessions of economic neoliberalism especially with regard to the banking and monetary system do not involve crashing the economy or unleashing the four horsemen of the apocalypse.
It is about draining an abscess and encouraging the regrowth of healthy economic tissue and habits.
The reforms proposed above are not difficult and we need to start talking about them now.