An invited talk by Adair Turner* and panel discussion with Steve Keen and Chris Giles (journalist) at Methodist Central Hall hosted by Positive Money, chaired by Fran Boait, sponsored by Rebuilding Society, 7th Sept 2015
Fran Boait introduced, noting the level of ignorance about the monetary system: over 70% of MPs thought loans made by private banks were financed by the BoE and economists also ignore the source of new money. Debate is needed to release the potential for innovation to drive prosperity and stabilise money supply, including on Corbyn’s ‘People’s Money’. A Treasury Money Commission is required, to examine the money system. Positive Money now has over 30 groups, including abroad, trying to achieve a rethink of mainstream ideas about money supply.
Adair Turner agreed with Positive Money that bank loans create extra purchasing power from nothing and that such debt must be controlled; but he prefers return to larger fractional reserves (85%) rather than full reserve banking. The assumption that bank loans merely reallocate other people’s savings is still prevalent. On the explosion of private debt and overleveraging for real estate (2000-2007), he noted that debt doesn’t go away, merely changing into public debt. He attacked the macroeconomic orthodoxy that controlling inflation was enough and debt irrelevant, citing Japan in 1990. Despite low inflation, increasing purchasing power was dangerous because over 80% of it did not represent capital investment. What matters is how much extra is created, for how long and for what purpose. Turner advocated ‘helicopter money’ (and mentioned ‘People’s Money’) on a temporary basis (as Friedman had) to maintain adequate effective demand and growth; but permanent reliance on extra money to stimulate the economy, as in Japan, was dangerous. A Central Bank must be independent (within rules) in determining amount and distribution of extra money; there are better ways to distribute QE of £375bn and this is a political issue. Both states and markets can fail without proper regulation .
Panel Discussion. This ranged over how the hegemony of mainstream economics prevented useful debate; whether money supply fuels house price rises (Keen) or is not the main driver of demand (Giles); need to limit private debt to 15% of GDP (Turner and Keen) and to cancel private debt by a dividend to all while state maintains a small permanent deficit (Keen). Banks lend on real estate rather than to business because it is less risky for them ; we are still in crisis and China has followed the same doomed path of a credit boom in real estate (Turner). QE is not the same as helicopter money, in which government would inject money into the economy by for example adding £1000 to each person’s bank account (Keen).
Questions to panel
‘Why are large bonuses paid out when banks are receiving QE? ‘ ‘Community Banks are an alternative to the national banks, run on a not-for-profit basis with any surplus used for the benefit of the community [Unity Trust Bank says it operates in this way- JG]. ‘People’s QE would help and the public want to buy bonds to fund infrastructure’ [Richard Murphy]. ‘Why isn’t economics taught better? [anon]. The assumption that GDP growth is desirable must be questioned, in view of finite natural resources and global warming driven by rising CO2 ruining lives and economies; rising inequality must be tackled too, so what kind of money system will best save the planet and reduce inequality [Natalie Bennett, applauded]. ‘Why not an allowance to all for education and healthcare?’ [Rebuilding Society rep]. ‘Rise in inequality fuelled excess debt; more progressive taxation required’ [Stewart Lansley]. Is QE best for emergency or for decades as in Canada where it boosted employment? [Josh Ryan-Collins, NEF]. Why not give everyone with NI number money in their pocket? They need such money because of cuts to welfare, wages and conditions, which have necessitated debt [Barb Jacobson, CIT and Basic Income UK].
Responses from panel
Turner. Economics must be taught better, especially to remove the myth that a nation’s economy operates like a household budget. Most economists didn’t see the crash coming despite the best qualifications; should have read Minsky. Politicians can create mechanisms via laws, as with the Climate Change Act. Legally binding CO2 targets are necessary, with monitoring to hold governments to account. Likewise for Central Bank: elect technocrats with tasks and targets. QE should be used as necessary but the amount controlled as 1942-51 in US. BI is an option as a one-off or a regular payment.
Giles. The money supply must be in the hands of an independent body, not politicians, but technocrats screwed up. On climate change, a different money system wouldn’t help, not the solution; we must use traditional public policy. We must ensure rise in demand is not too much greater than rise in productivity. Cutting VAT would be a quick fix to increase effective demand.
Keen. A growing economy needs a growing money supply but we need to control the banks. Because politicians are generalists they use technocrats to adjust money supply but must not cede democratic control to them. A public deficit of 3% pa is fine long term and BI could be paid to all to reduce private debt. We are burning the planet at the rate of 1.5 renewable planets each year. The private sector sees no profit in preventing this – only states can do it.
*Turner has a recent book ‘Between Debt and the Devil’.