December 9, 2008

Reforming the financial markets - part 2

In part one of this article I examined the credit crunch and how this has brought the world to the brink of financial collapse and began to look at proposals for recovering the situation.

Bad news continues to arrive. Today there are worrying figures for the UK economy, suggesting that industrial output has fallen by 5.2% compared to a year ago. The television news is tracking how many thousands of jobs are being lost every week. The country is officially in recession as the Gross Domestic Product (GDP) is falling. There is also the fear of deflation - that is goods becoming cheaper. This is bad news because if the new HD TV I've been planning to buy is likely to be cheaper in 3 months time, I'll wait to buy it. If people put off purchases, the economy will contract even more.

Nobel laureate for economics, Paul Krugman, puts the necessary action in simple terms: "Policy-makers around the world need to do two things: get credit flowing again and prop up spending."

This has seen governments take shares in banks to improve their financial position and to put pressure on them to lend. Central bank interest rates have been cut to make loans, and particularly mortgages, cheaper so people have more money to spend. Various governments are trying 'fiscal stimulus' packages - tax cuts, again to put more money in people's pockets in the hope they will spend it, so boosting the economy. In the UK, the government is trying to make homeowners feel more secure - and so able to spend - by promising help with paying mortgages if they become unemployed or suffer a drop in income.

At the same time governments are planning public works. Plans are not yet announced, but there is talk of investment in green infrastructure projects to reduce carbon emissions. In the US, car manufacturers who are all but bankrupt are being offered funds to re-tool to produce energy efficient green vehicles.

To fund the investment and the tax cuts, governments are having to borrow money. They do this by issuing bonds. These are offered to investors. They do not pay the highest interest, but are supposed to be attractive because they are safe : governments don't default on loans. There is a problem, however, with many governments trying to attract investment as they may have to offer higher returns to be sure to raise what they need. If these rates go up, it will feed through to the mortgage rates. There is an analysis of this situation in The Guardian at:

Now the Monetary Reform proposals put forward for inclusion in the Simultaneous Policy suggested that instead of borrowing money in this way, governments should simply receive the money from the central bank, which creates it out of nothing for spending into circulation. This has an attraction for governments and tax payers, but what would the wider implications be? I imagine that if a government was creating money in a way economist thought was diluting its value, then the currency would fall against others. That is already happening to the pound with the increased borrowing. Perhaps other policies put forward for inclusion in the Simultaneous Policy would prevent this, such as the Tobin Tax on currency exchanges (aimed to dampen speculation) or the International Clearing Union, as proposed by Keynes to ensure companies balanced their imports and exports. It would be great to hear from Monetary Reformers how their proposals would work in the current situation and why this would be better than the methods being followed.

The methods that are being followed are geared to getting people spending, to get the GDP figure up and to ensure there is sufficient demand for goods and services to stop prices deflating. The strategy is to get back to business as usual in the shortest possible time, which the most optimistic analysts seem to say will take a least a year.

But what if we look at the crisis as an opportunity for restructuring how the economy works? The Simultaneous Policy approach allows us to think radically about what we might do.

So here is a possible set of policies that could be implemented. They are offered not so much as a manifesto to be pursued, but more to show that if we remove the old boundaries set around policy making, we can address a wide range of apparently intractable problems. I hope others who are more knowledgeable than me will be inspired to put together something more sensible.

For me there is something terribly wrong that the response to the credit crunch is to try to get people to borrow more money and spend it to keep the GDP figures up. Isn't this what got us into the mess in the first place?

Let's question the basic assumption here that increasing GDP should be the aim of policy makers. The human race is already using more resources than the Earth can provide - a UN study suggests we need 1.2 Earths for current consumption patterns, and because we only have one Earth, it is suffering irrepairable damage and non-renewable resources are being exhausted.

The third most popular policy proposal in recent voting was 'Beyond GDP' - which calls for "health, social and environmental statistics" to complement wealth statistics in providing the measure of the economic well being of the country.

I didn't initially see the point of this proposal, because there is no explanation as to what difference it would make to policy making or why policy makers would look to this figure rather than the conventional GDP figure. But recent events have shown the great weight that is put on these numbers.

The calculation of such influential numbers is controversial. A thread in the discussion forum suggests that the US government has cooked the books to improve GDP figures and that on a proper measure, the US economy has been in recession since 2000. This chimes with an analysis of the US economy by journalist Larry Elliot, who describes how the US economy was been held up by cheap money coming from countries that had taken over much of the US manufacturing base and fuelling the credit boom. See:

Well, let's try cooking the number another way to include the 'Beyond GDP' factors. While the economic slow-down will reduce this number, less consumption and less travel will actually benefit the environment, so that will improve the number.

Policy makers can look at boosting the 'Beyond GDP' elements in addition or instead of the economic part. Investing in green infrastructure would be good for both - and the 'Beyond GDP' figure should perhaps be suffering a major reduction while the economy is based on unsustainable energy use and harmful greenhouse gas emissions. Anything to counter this will start to make things look much better.

All the same, the economy is slowing down and people are being made redundant. A war has been a way to turn this around in the past, so it is perhaps a sensible precaution to remove weapons spending from the GDP calculation, as has been proposed and supported by Simultaneous Policy Adopters in voting.

To ensure full employment, policy makers could take the step of cutting the working week to 30 hours or 4 days, as a permanent change. This would mean for every 4 employees, a business would take on an extra worker. If people were paid for the hours they worked, then the costs to business would be the same.

What about employees, forced to cut working hours and pay? Well, firstly in parallel to the restructuring of the working week, investment could be made in community projects to provide activities for the free day. For example, parents could easily form a rota for walking kids to school, cutting out the school run. Those that volunteer for say 6 months, could be eligible for coordinator roles, with payments attached.

Extra staff could be taken on at schools to provide adult education and sports for parents on their extra day off. With the olympics coming up in the UK in 2012, there could be a national programme for a people's games to take place after the international event, where amateurs winning local heats will compete on a national stage.

There could be a new national allotment scheme, with community workers helping people use their extra free day to grow food locally.

Indeed, local life will be promoted, to build up the sense of community and volunteering once more. Grants can be made available for communities that want to organize refurbishing or constructing local amenities. If more adults are around during the day, this will have a positive impact on anti-social behaviour and crime. This will all reflect well in the 'Beyond GDP' figures.

Some people would find it hard to manage with a 20% cut in income. But in some respects life will be cheaper. If polluter-pays taxes are included on transport, for example, people will switch from weekend mini-breaks in cities across Europe to local trips, so saving money and carbon emissions. That particular party has to come to an end.

But there are steps that could be taken for managing a transition. People who need to maintain income levels could work overtime on their 5th day. The cost to the business will be higher - time and a half, for example - which could be offset in the short term by tax cuts. But these would gradually be phased out, so in the longer term staff will adjust to the four-day week.

So we come through the recession with less consumption, more time with family and strengthened communities, progress towards sustainable energy use, full employment, populations eating and exercising more healthily and a measure of the economy that values more than money.

Investors will look to the rising 'Beyond GDP' figure for the UK and see it is a country with a bright future.

There are no doubt other implications of this approach and perhaps better action that could be taken. We need to talk about them.

The conventional approach of getting people to take on more debt to continue consuming more than they need and more than the planet can provide is surely not a better option.


Anonymous said...

i think you should get involved with the money reform party at as you point out in your artical someone should be puting reforms forward and they are certainly trying to. thanks for the time you have spent on your blog i enjoyed hearing your veiws this is the first comment i have left on a blog

Mike Brady said...

Thanks, anonymous, but the latest news on that site is from the beginning of 2007.

It seems to me the Monetary Reformers are missing a golden opportunity to capitalise on the interest in financial matters and explain their analysis of the current financial crisis and how their proposals would make a difference.