Category: economics

Housing crisis created from money produced from thin air

By Daniel Margrain

Switzerland is set to hold a referendum to decide whether to ban commercial banks from creating money. This follows a move by over 110,000 people in that country who signed a petition calling for the central bank to be given the sole power to create money within the financial system. The campaign is designed to limit financial speculation by requiring banks to hold 100 per cent reserves against their deposits.

Banks will no longer be able to create money for themselves (euphemistically termed fractional reserve banking), rather they will only be allowed to lend money that they have accumulated from savers or other banks. Currently banks are able to lend money that they don’t actually have and then command interest on the non-existent money.

This is akin to x offering to loan y a sum of say, £100,000 that the former hasn’t got. The way around this conundrum is for x to then lodge the sum with another financial institution who happens to be in on the scam. Y then pays x interest on the money that x has never been in the position to lend in the first place. Switzerland is now considering whether or not to do something about this fractional reserve banking racket. If successful, the bill will give the Swiss National Bank a monopoly on physical and electronic money creation.

The idea of limiting all money creation to central banks was first touted in the 1930s and supported by renowned US economist Irving Fisher as a way of preventing asset bubbles and curbing reckless spending. It’s the former that most accurately characterizes the current financial system. The rising cost of housing is an example of a major asset bubble underpinned by a Tory government housing policy that is geared towards satisfying the asset diversification needs of the super rich rather than to meet the human need for homes for ordinary people to live in.

So the motivating factor determining the government’s housing policy is not to end the housing crisis but to bolster the investment opportunities of the rich which will make it worse. This is what David Cameron’s announcement yesterday (January 10) regarding the governments’ intention to demolish council homes and replace them with private housing is all about.

This is also the precursor to the newly proposed Housing and Planning Bill (voted on today, January 12) which will force families living in social housing and earning £30,000-£40,000 in London to pay rents nearly as high as those in the private sector. It will also compel local authorities to sell ‘high value’ housing, either by transferring public housing into private hands or giving the land it sits on to property developers.

The 126 MPs who declared that they receive rental income from property, represent over 19 per cent of the house, the vast majority of whom are Conservatives. The voting through of the bill, which almost certainly represents a major conflict of interest, will lead to soaring rents meaning that ordinary people will find it increasingly difficult to afford to live in the capital. As the statement on a flyer that promoted a protest against the bill argued:

It [the bill] takes public funding away from affordable homes for rent and does nothing to improve security or control rents for private renters.

This is turning back the clock, taking away security and pushing up rents. It would force the selloff of council homes on the open market, to pay for housing association ‘right to buy 2’. Councils and housing associations will not be able to build replacement homes for rent.”

The exponential growth in the construction of new tower blocks throughout London and other major cities are not intended for local residents to live in, thereby helping to ameliorate the worst excesses of the housing crisis, rather they are being built for foreign investment funds and billionaires to buy on mass as financial safe havens.

Greenwich Mean Time (GMT), a relatively favourable temperate climate, convenient geographical location, the establishment of law and order, good schools and infrastructure, minimal history of revolution and good transport hubs and networks, means that London is a particularly attractive place for the rich to increase their property investment portfolios.

However, these investments in houses and apartments are essentially made of cards built on sand predicated on a financial illusion of which the Swiss example described is symptomatic. The context of the illusion that the Swiss people are soon to vote on is historically tied the the Swiss National Bank (SNB). Since 1891 when the SNB was established, the bank has had exclusive powers to mint coins and issue Swiss bank notes. But over 90 per cent of money in circulation in Switzerland now exists in the form of electronic cash which is created out of nothing by private banks. In other words, nearly all of the money in Switzerland, and arguably the world, does not in reality exist as a tangible entity.

In modern market economies central banks control the creation of bank notes and coins but not the creation of all money which occurs when a commercial bank offers a line of credit. Iceland, whose bloated banking system collapsed in 2008, has also touted the abolition of private money creation and an end to a practice in which a central bank accepts deposits, makes loans and investments and holds reserves that are a fraction of its deposit liabilities. Fractional banking means the production of money from thin air.

The entire financial system and the laws on which it is governed that many believe to be an exact science is, in reality, based on a gigantic illusion. The fact that Britain’s banks are paying far less in corporation tax than before the crisis, despite their profits improving and global tax payments staying constant, is illustrative of a flawed unscientific system that society has nevertheless hitched itself on to. Rather than the Cameron government investing in a productive based economy in which tangible things are made, bought and sold, it has focused disproportionately on financialization – an abstraction predicated on smoke and mirrors.

The money illusion stems from the Bill of Exchange Act of 1882. Effectively, money is created the moment a loan document from a bank or any other financial institution is signed. Having created a financial instrument as a result of any signature, the bank or financial institution then lends the money created in the form of a bill of exchange which in effect becomes a promissory note. The customer then gives the power of attorney within the signed document to the bank to then lend the said customer the money that has just been created as a result of the signature.

By removing the requirement of the government to insist upon the amount of gold being equal to the amount of currency in circulation (gold exchange), they created a debt based economy (Fiat currency). So by not basing money on anything material whatsoever, central banks are able to create limitless amounts of it effectively by pressing numbers on the keyboard of a computer. The origins of the promissory note stem from the promise to pay a physical sum of silver (subsequently gold) in exchange for the promissory equivalent (sterling was originally based on sterling silver).

The purpose was to prevent individuals from having to carry large sums of silver around with them. A silversmith would simply weigh the silver and give the owner a promissory note which could then be cashed in at a later date to be spent on goods and services. Up until the 1930s, governments’ were required to have in their possession an amount of silver or gold equal in value to the amount of promissory notes issued. This requirement was removed in the 1930s which then gave banks the right to create money out of nothing. This is a legacy that continues today. Will Switzerland be the catalyst for a paradigm shift in this state of affairs?

The Rich Need To Be Forced To Pay Their Way For The Benefit Of All

Leading American venture capitalist Nick Hanauer has argued that the actions of capitalists’ need to be reined in through a system of planned and coordinated regulation in order for the capitalist system to be sustainable. This is what he said in a BBC TV interview in front of a live audience:

Capitalists have the idea that THEIR things will be bought by everybody else as a result of higher wages paid by OTHER capitalists. But this logic of paying higher wages to staff to help improve business activity more generally, doesn’t seem to apply equally to them since they will insist on paying THEIR OWN workers next to nothing thereby not absorbing the costs themselves resulting in them gaining a competitive advantage over their rivals. The simple truth is, if a higher minimum wage was introduced universally, not only would it be affordable, but something like 40% of American’s would be able to buy more products from everybody thus benefiting all capitalists across the board. Business is challenged today because fewer and fewer people are able to buy things [1].

The implication, in other words, is that the capitalist system needs to be regulated by governments’ in order to save it from the rapacious actions of competing capitalists driven by their insatiable need for profit maximization. This rationale was long ago grasped by Karl Marx who understood that the essence of the capitalist system is, in his phrase, “accumulation for accumulations sake.”

So why don’t capitalists insist on using free labour and make their workers work all the hours under the sun? After all, wouldn’t that lead to higher profits? And one might also ask why their representatives within the elite political establishment would bother to spend any money at all on welfare? The simple but correct answer is that where they have a choice, they don’t. Where labour supply is low, the state is in effect forced to intervene on behalf of capitalists by introducing welfare as the means of preserving and reproducing labour.

But where labour is plentiful, the state rarely feels compelled to introduce health and safety, minimum wage laws and welfare.The rationale for this is that if a worker dies of malnutrition or has an accident at work, he or she can be easily replaced by another worker. Under such circumstances, the state regards these kinds of misfortunes as a price worth paying. Consider this account of the conditions of child labour in the lace industry in Nottingham in 1861 by a local magistrate:

Children of nine or ten years are dragged from their squalid beds at two, three, four o’clock in the morning and compelled to work for a bare subsistence until ten, eleven or twelve at night, their limbs wearing away, their frames dwindling, their faces whitening, and their humanity absolutely sinking into a stone-like torpor, utterly horrible to contemplate [2].

Compare and contrast that to a recent study of the conditions of life for rural migrants in contemporary China:

The trafficked children] came from faraway Liangshan in Sichuan and most of them are not yet 16. The overseers sought and recruited them from families mired in poverty, promising them high wages; some were even abducted and sent off in batches to Dongguan and from there distributed by the truckload to factories across the Pearl River Delta. On unfamiliar soil these children are often scolded and beaten and have only one proper meal every few days. Some little girls are even raped. Day after day they undertake arduous labour. Some children think about escape, but the road is blocked. The overseers threaten them and warn them that if they try to run away, there will be a price to pay [3].

What the above illustrates, is that the plentiful supply of labour power was as pertinent during the early days of the industrial revolution in Britain as it is to present day China. In both cases the introduction of welfare as the means of preserving and reproducing labour was not a concern for capitalists or the state. Consequently, welfare provision is as scant in China today as it was in 19th century Britain.

Similarly, while the deaths of more than 1,100 garment workers in a factory building collapse in Dhaka,Bangladesh, in April 2013 [4], most of them women on subsistence wages, is an unspeakable tragedy for their families and friends, it is of much less significance, other than concerns about negative publicity, for companies such as Primark for whom they were producing cheap clothes, simply because there are plenty more desperate workers who will take their place [5].

Where, however, the supply of labour is less plentiful or where labour becomes more skilled and consequently more expensive, losing workers through injury or disablement, or through working them to death doesn’t really make economic sense. But that doesn’t mean that capitalists in Britain or America wouldn’t insist that their workers work all the hours under the sun in the short term for peanuts if they thought they could get away with it.

One of the contradictions inherent to capitalism is that the system as a whole needs to spend money to make profits, yet every individual capitalist wants to spend as little as possible. The lengths to which giant companies like Amazon, Google and Starbucks will go in order to avoid paying tax shows how that dilemma is played out.

In the longer term, having workers working 14 or 16 hours a day for peanuts is very wasteful. It’s like over-exploiting the soil. However, given that individual capitalists themselves won’t do anything about it for fear of losing their competitive advantage over their rivals, the state as the representative of the capitalist class as a whole is forced to step in.

This brings me back to the wisdom implicit in the Nick Hanauer quote at the beginning of this article. Hanaeur’s argument about the necessity of the United States government to substantially increase the legal minimum wage across the board in order to save capitalism from itself, is in principle, no different from the minority of capitalists in 19th century Britain who argued in favour of the introduction of the Factory Acts of the 1830s and 1840s which set down a maximum length for the working day.

An advanced low wage and minimal welfare provision capitalist state like Britain is the modern equivalent of its counterpart during the industrial revolution prior to the introduction of the Factory Acts. What is required is a radical re-think with regards to our current direction of travel.away from the failed neoliberal economic model of austerity which economist Paul Krugman describes as:

A con that does nothing but harm to the wealth of this nation. It has been discredited everywhere else: only in Britain do we cling to the myth.[6].

It’s in Britain where the redistribution of wealth from the bottom to the top continues at apace, much of it as a result of huge subsidies paid to the richest landowners [7]. As inequality continues to rise so does the potential for public disorder. At present, the richest tenth pay 35% of their income in tax, while the poorest tenth pay 43% [8]. Is it too much to ask that those with the deepest pockets pay their way, thus creating the potential for the kind of equitable society in which everybody wins?

This is not pie in the sky stuff but a pragmatic solution to the problems we face. Individuals as politically and ideologically as far apart like Jeremy Corbyn, Caroline Lucas, Nick Hanauer, Joseph Stiglitz, and other top economists and capitalists, understand what’s required to get us out of the mess we’re in. It’s a pity that people like Duncan Smith, Cameron and Osborne prefer to put ideology before pragmatism.

The Rich Get The Carrot And The Poor Get The Stick

The juxtaposition and double standards in our society between those at the top and those at the bottom is stark. The gap between the rich and poor continues to increase to the extent that the top earners in the footsie 100 companies’ earn a massive 183 times more than the average earner [1].

The argument of some of those who attempt to justify this massive discrepancy is that the top of society have to be incentivized in order to increase their performance. That’ll be news to the bosses of the publicly subsidized privatized railways and loss making banks whose performances in many instances are found wanting.

Nevertheless, those at the top are invariably given inducements to work better. But that rule of thumb never seems to apply to those at the bottom. Why don’t we try, as Jeremy Corbyn has proposed, “a bit of quantitative easing” for the poorest instead of the richest [2] so that the former will be incentivized to kick start the economy?

But to do so would be an admission of defeat and would therefore undermine the ideological consensus that exists between the New Labour hierarchy and the Tory establishment. If there are good and well paid jobs for people to go into, it would mean that the Tories proposed introduction of their inappropriately named “boot camps”, would not be necessary.

Chris Grayling, the Tory welfare spokesman, has stated that these “boot camps” are in reality compulsory community service programmes for young welfare claimants aged between 18 and 21 aimed at improving work discipline and giving them basic skills to get a job [3].

The term “boot camp” is intended as a soundbite whose aim is to give reassurance to the Tories’ natural constituency of middle England Daily Mail reading voters that they intend to come down hard on “benefit scroungers”.

Why does the establishment always appear to give the impression of using the “stick” approach when it comes to inducing a prescribed behaviour among the poorest in society, whilst the rich are incentivized with the carrot?

If you were to look beyond the headline, the boot camp proposals are, to a limited extent, likely to be beneficial to young people who have difficulty with numeracy, literacy and basic communication skills. But that’s as far it goes. The boot camp idea, in other words, is necessary but not sufficient.

What the concept does not address is the fundamental issue relating to the lack of government investment in proper training and apprenticeship programmes that lead to the opportunity for stable, skilled and well paid jobs, thus giving hope to our young people instead of alienating them.

The Tory language is invariably about “toughness” and “coming down hard” on young people as opposed to the language and policies of hope. Not so for the richest in society who are always offered the “carrot”..

Public Coffers Hammered

 Impressed: An image provided by West Ham which shows how the stadium could also be used as a concert venue after the Games

The new English Premier League football season begins today. As as life-long West Ham United supporter my expectations for a successful season are typically low. If the Hammers finish in a top eight position and have a good cup run I’ll be happy. With our move away from our spiritual home at the Boleyn into the Olympic Stadium at Stratford, east London next season, it’s imperative that we maintain our premier league status.

With a new manager and former player (who appears to be finally attuned to the  entertainment ethos of the club that the fans demand) in place, all is relatively good on the playing side of things. As far as the fans are concerned, off the park shenanigans are good too given that those who run the club plan to substantially reduce season ticket prices in an an attempt to fill the stadiums 54,000 capacity – a model that other clubs are encouraged to adopt (1).

But here’s the problem. West Ham United are paying just £15million towards the £272million cost of converting the Olympic Stadium despite the fact that, should the club still be a Premier League next year, it will – under the terms of a new TV deal – be entitled to a payout of at least £99million (2).

Small business people, many whom whom run their businesses on extremely tight margins, might be wondering how the elite within football, like multi-millionaire lady Brady, who brokered the deal are apparently immune to the kind of market forces that the former are compelled to adhere to?

As far as the super-rich with contacts to the top echelons of political power – whether they be premier league chairmen or City bankers – are concerned, it would appear that the kind of business risks the rest of us are prone to, is not applicable to them. The Premier League football racket is akin to the banking racket.