Further evidence that government and investment don't mix...

****

Via the fabulous Leeds Citizen blog:

An investment fund set up by local councils to overcome “market failure” in the banking system and help kickstart the region’s economy looks like it’s having difficulties of its own.

And the difficulties are that, a year on from starting the fund:

...while there has been “a degree of interest”, no funding applications have been approved yet.

So the Councils in West Yorkshire who run the fund are trying to recruit expertise from the banking sector to try and make the fund work. The budget is £120,000 - the good investment bankers aren't going to spend time in Leeds for that sort of pittance!

Another 'we can do better than the private sector' scheme. And another failure!

...

Bitcoin and the end of big government...

****

There's a great article about Bitcoin over at ASI where Michael Taylor concludes:

The exponential rise of Bitcoin will no doubt start to generate some heat from here on in. It’s only a matter of time before we see the traditional gatekeepers start to cry foul. No doubt we’ll see a lot of anger and rage in the courtrooms. At least in the west. In Africa and Asia we’ll probably see things take off a little quicker. I predict it will only be a few years from now before we see Bitcoin (or other similar digital currencies) emerge as the exchange of choice for the majority of people otherwise denied access to the established money structures. And when that happens, prepare for the world to shake.

There's no doubt that the opportunity to eliminate transaction costs and ensure that the transaction is private is very appealing. Not simply because it makes the word a better place or that it begins to undermine that banking hegemony but also because it disrupts the basis of government finance.

Which is why the apologists for the current finance system and other fans of big government keep talking about drugs. It's all they've got!

Me I hope Taylor is right in his prediction and we can get the monkey of big government off our backs.

....

Transforming Finance Charter - the worst sort of 'curate's egg'

****

It all starts so well the Transforming Finance Charter:

The banking sector needs to be transformed in the following ways:

• There should be no bank in the system which is too big to fail, so the taxpayer is not underwriting their costs with an implicit subsidy.
• Retail and investment banking should be regarded as entirely different businesses and separated accordingly.
• There should be increased competition and diversity within retail banking allowing for frequent new entrants, and exits, multiple ownership models including mutuals, credit unions, local banks and sector banks

Not quite sure how you actually separate retail and investment banking but I can see the point. And the idea of more competition, easier market entry and greater diversity is a great one.

But then our friends go and spoil it:

• Banks should ensure they invest a far higher proportion of their balance sheets to the real (non-financial) economy and for productive uses. Policy should be actively used to reduce speculation and the creation of asset bubbles.
• There should be a permanent and legitimate role for the state in banking, at a local or national level, either to reduce the cost of risk capital for socially desirable activities and innovation, or to influence the overall allocation of credit to the economy.

With one hand we open up the market and extend choice and competition. While with the other we dictate to the banks how they should invest - as if it's not bad enough having agents of government fix the interest rate these people then want to subsidise it for "socially desirable activities". It was this sort of stupidity, not speculation, that created the financial crisis in the first place.

But then the proposal is from:

The Finance Innovation Lab, along with founding signatories, New Economics Foundation, Share Action, Positive Money, Move Your Money and Friends of the Earth...

Link this bunch of nonsense-peddlars with the egregious "Tax Justice Network" and it's no surprise at all that any good ideas are swamped by stupid proposals for state-directed finance.

....

Cooperative chutzpah..

****

It makes me smile to hear the Coop justify its bail out and fire sale:

“Lets remember that the bank has always been a PLC and it always has had the ownership structure of a mutual organisation around that. That remains.

“We still have the majority stake in our bank and that provides us with the opportunity to lead our bank in an ethical, community-based, responsible way and that is a core part of our business plan going forward.”

The sort of ethical and responsible way that leads you to bad due diligence and the calling in of 7,000 ordinary folks' savings? The sort of 'ethical' that thinks it fine to rob the pensions of ordinary, risk-averse people who thought the Co-op a righteous safe haven for their cash?  That sort of ethical, the sort of ethical we'd only see from a mutual! Or are they just like all the other banks?

Such chutzpah is a delight.

....

In which an ex-central banker inadvertently explains what's wrong...

****

John Gieve, opining in the Financial Times, manages to capture what's wrong in his headline:

Who is in charge of the British economy?

This is a revealing question since it assumes that Mr Gieve and his ilk were - indeed are - somehow "in charge" of the economy. Think for a second what we mean by "the economy" and the sheer hubris of this man's belief becomes apparent. The British economy consists of the choices made by nearly seventy million people and millions of business. It's the sales made by the corner shop, the decision we make about this year's holidays or whether to go to B&Q or IKEA.

Yet this ex-central banker, undaunted by the scorching of his feathers as he flies ever closer to the sun, says stuff like this:
 

...the UK is now pursuing three macroeconomic objectives – steady growth, low inflation, and a stable supply of credit – with three sets of policy instruments. In the long term, the goals are compatible. But in the medium term there may be trade-offs. A new framework should explain how and by whom those trade-offs will be made and how the three sets of policy tools will be combined to best effect.

Impressive stuff I'm sure you'll agree. But it's wrong and not just because it's barely comprehensible. It's wrong because only a deranged idiot would think he (or a claque of him and his pals) can run the economy. It is this outlook that is causing all the damage - this stupid belief that there are a set of levers in the Bank of England that if pulled in the correct order will usher in an era of growth, prosperity and prizes for all.

All the rest of us going about our lives buying, selling, sleeping, eating and dreaming, we didn't cause the problem. It was caused by people like John Gieve who, despite all the evidence, still believe they know better. They don't know better and no one is in charge of the economy (unless you're in North Korea).

....

It's not just theft, it's utter lunacy

The European Union has set out to lift 10% of savings from Cypriot bank deposits:

But in a departure from previous bail-outs, the country’s savers are being asked to make sacrifices.

The terms of the deal mean that Cyprus’s savers will sacrifice up to 10pc of their deposits in a move which will raise as much as €6 billion. 

That running sound is people in other EU countries that might be needing a bailout from Germany  the ECB rushing to take money out from the banks. It's accompanied by a whooshing sound as larger deposits scatter to safer havens - Germany maybe, perhaps the US or UK. Definitely a good day for those tax havens the lefties dislike.

And it won't be enough - the governments and the banks will have got the taste of blood. Nice savers blood, fresh and clean.

The EU has gone mad. It's beyond time to close it down. Call the men in white coats now.

....

Inflation and the ordinary man...and woman, for that matter

****

The Canadian superstar who is arriving to take over as boss of the Bank of England is dropping some hints about inflation:

...although price stability was central, there were “tolerances” concerning the speed with which inflation would be brought down if the economy was struggling. 

I'm guessing this is posh banker code for carrying on doing what the Bank and the government have been doing - ignoring inflation targeting. There's a really good reason for this, of course, as inflation is a sweet, back-door way of reducing debt. Let's call above trend inflation what it is (especially when it is deliberate as is the case here at the moment), a tax.

Perhaps instead of trying to blind us with banker bollocks, the government should say it's going to do something about the cost of living? Rather than listening to grandees in fancy Swiss ski resorts, maybe the government should come down the pub with me and talk to the people - people with jobs and mortgages - who are being screwed by these policies. People who say things like this:

 "It's all gone wrong - tits up, hasn't it" Says Lewis. In response to my request for clarity he continues, "the economy, the government. Everything has gone up, bread's like 50% more expensive and look at diesel. People can't afford stuff - come March there'll be a real mess. We've got to get prices down."

And I'm sure that I could introduce our lords and masters to a few others with the same problem. Yet the government, stuck in a nonsense of its own making, isn't listening. Or is listening to international banks with huge, dodgy debts.

....

How the state still wants to crush banking innovation...

****

Or something like that;
 

Ethan Clay, 31 years old, opened Whalebone Café Bank seven months ago in his shop, Oh Yeah!, a year and a half after he was hit with $1,600 in overdraft fees from a local bank where his account was overdrawn by a series of checks.

Mr. Clay says he wants to offer an alternative banking experience, and has accepted small deposits and made small loans. He claims he isn't subject to banking rules because his operation is a gift-card savings account.

"It's a strange case, we don't have the authority to go close an ice-cream store," said Ed Novak, spokesman for the Pennsylvania Department of Banking. "But we are going to do something. You can't mess with people's money."

Those people with their money - they've a choice between Mr Novak's approved (and failed) bank system and Mr Clay's creativity.

...customers who make deposits earn interest in the form of "exclamation dollars." A $100 deposit is worth $5.50 a month that can be spent on ice cream, waffles and coffee in his store. It works out to be a straight 5.5% monthly interest rate, he said.

Whalebone Café Bank also loans money. Two weeks ago, Ryan Howard, a 33-year-old designer and photographer who occasionally works for Mr. Clay, said he needed $510 to attend a therapy workshop. He borrowed the money from Whalebone Café Bank, and is paying the money back at $60 a month, and will be charged $25 for the loan.

Mr. Clay said he has $550 from depositors and has loaned $1,700, an amount that includes some of his own seed money. "My goal is to get to $100,000 in deposits by Dec. 21," he said. "This is the prototype, but I hope to become the neighborhood bank."

This innovation and creative - capitalism at its finest - must be crushed by the grand alliance between the big banks and big government. A pox on them!

....

Competition in banking? Now that's a radical idea...

****

In that irritating way of today’s politics, the newspapers are report on a speech that Ed Miliband will make tomorrow. And Ed nearly gets it right for once:

The Labour leader will call for the big five banks - Barclays, HBOS, HSBC, Lloyds TSB and RBS/NatWest - to become seven, with privately-run "challenger banks" to buy up to 1,000 existing branches. It is hoped that this will increase competition and choice for consumers as well as reduce bank charges.

I say ‘nearly’ because firstly banking isn’t driven by branches any more. For sure I have a ‘branch sort code’ but that’s pretty virtual these days and it’s a fair while since I actually visited that branch. And the future of banking lies in this virtual world not in grandly portico’ed high street branches.

Secondly, I should get to choose where I bank – if Ed’s banking reforms force me to change because they’ve forced my bank to sell its Bradford branch to a newly formed “challenger” bank, I shall be just a tad annoyed.

The problem with banking is that we have made it more and more difficult to operate as a retail bank let alone start up a new one. It didn’t use to be that way – governments passed laws that made it so:

As a result of these legislative changes, provincial limited-liability joint-stock companies started picking off private banks. After lengthy negotiations, three of the largest Quaker-run banking firms--Barclays (which had become Barclays, Tritton, Ransom, Bouverie & Company after a merger in 1888), Jonathan Backhouse & Company, and Gurneys, Birkbeck, Barclay & Buxton, along with 17 smaller Quaker-run banks, agreed to merge and form a bank large enough to resist takeover attempts. Barclays took its modern form in 1896 when the 20 private banks merged to form Barclay and Company, Ltd., a joint-stock association with deposits totalling an impressive £26 million. This marked the beginning of Barclays' tradition of service to farmers and fishermen.

And we have – for all sorts of reasons, good and bad – continued to pass laws regulating the activities of banks that acted to make it harder to start up a new bank. That made banks a special case in capitalism – because market entry was so hard, because banks could offer free banking to retail depositors, because banks had what we believed to be an essential partnership with government – for all these reasons banks had no good reason to focus on being the service businesses that they were once (and that their advertising still claims them to be).

While the big banks were careful cautious and focused on the day-to-day job of lending, holding deposits and such, this lack of competition didn’t really matter much. The public got truly awful service – banks elevated saying ‘no’ to a semi-religious status – but the banks weren’t threatening the foundation of the economy.

But then someone discovered the money tree and introduced bankers and governments to its wonders. By the wonders of this thing, banks and governments – in cahoots – could shower the economy with billions in “investment” while providing a bottomless purse of welfare, care and bacon paving. The essential partnership between banks and government was forged anew – in exchange for bankers making untold billions, politicians could bribe the voters with grand projects and freebies. The politicians would keep interest rates down (abetted as we now know by the bankers) allowing asset values to sour giving the illusion of great wealth and on the back of this higher taxes would allow for higher borrowing – more profit for the banks, more votes for the politicians.

We need more competition in the pretty straightforward job of taking my money, keeping it safe, paying it people I want it paying to and providing (at a charge) loans should I need them. It’s not a complicated business, there’s no reason why it can only be done by massive multi-national corporations. Yet that is the case.

If Ed Miliband had proposed such a real change – opening up banking licensing to the general market and allowing us to make choices about where we keep our money – that would have been interesting. Instead we get proposals to “break up” the banks and give us a choice of seven where there are now five. I guess that will suit the banks. And government still has that essential partnership with those banks. That hasn’t changed!

....

The Banker's Dance

It is like watching one of those symbolic war dances – a haka perhaps or more likely one of those morris dances with sticks. Lots of faux anger and great threat but in the end none of the participants suffer – the violence, the punishment or the attack never happens.

This is the Banker’s Dance – a stately affair involving bankers, regulators, civil servants and politicians performing to an audience of PR consultants, financial advisors and management consultants while us ordinary folk press our eyes to a crack in the fence hoping to catch a glimpse of the grand ball.

Today – on top of screwing small shareholders, excessive and unjustified bonuses, complacency in the face of crisis and crippling the economy to pay for their misdeed – these people, the bankers, regulators, civil servants and politicians, have revealed that they don’t mind fixing the system in their favour. We’ve known that politicians and civil servants have done this for years – responding to the clamour of public opinion through the temporary manipulation of markets. A tax rise here, an interest rate cut there, maybe a new road or an extra payment for pensioners – spending other people’s money to cadge a few votes.

But now the partners of those politicians and those mandarins – the bankers – are shown to be cheats too. And that their so-called regulators were either complicit or too stupid to care. We – by which I mean the man in the Ford Mondeo and the woman on the 8:35 from Beckenham Junction to Victoria – are shafted but these grand people do nothing except play the game of false anger, mock condemnation and contrived critique. The words are there:

 

“This is a scandal. It is extremely serious. They've had a very large fine and quite rightly. But frankly the Barclays management team have some big questions to answer,"

"It is clear that what happened at Barclays and potentially other banks was completely unacceptable, was symptomatic of a financial system that elevated greed above all other concerns and brought our economy to its knees."

But does anyone believe this is different from that Maori rugby player screaming death and blood at his opponent? After the game – after the Commons statements, frowny appearances on the BBC and “we will act” articles in today’s chosen Sunday paper – the people making these statements (Osborne, Cameron, Miliband, Balls) will be stood at the bar with the people they condemn.

The stately dance has become a dark ritual, a celebration of the demonic bargain struck by politicians with banks to allow them the means to use tomorrow’s tax (and today’s inflation) to bribe chosen groups of voters. Not satisfied with encouraging us to vote to spend other people’s money, we voted to spend money that didn’t exist, to create a magical money tree.

And all the while the dancers piled up cash, assets and power while we – the poor suckers – piled up debts. Yet we carried on- and as we’ve seen in Greece will always carry on – pretending (are we really such fools) that it isn’t us who do the living and dying round here – that the magicians of government will solve all the problems.

That dance – that black dance – was the deal that made this possible. And it was, is, will be a monstrous deception. The greatest of great lies.

The thing we thought was a money tree? It’s a gibbet. And those dancers will hang us from it.

...

...reminding us why the City of London is so important to Britain

****

From Mr Peston:

Talking to bankers and lawyers, there is growing optimism that the City of London will join Hong Kong as an offshore centre where the Chinese currency, the renminbi (RMB), can be traded - and that an announcement on all this may not be far off. 

If that were to happen, it would be quite a big deal - and would be the culmination of talks between the UK Treasury and the Chinese authorities that are said to have made significant progress on this issue last autumn. 

More export earnings for London showing yet again how important it is to our economy:

One City figure close to the talks told me he thought there would be a billion pounds of extra business and significant new jobs created almost overnight. 

Stick that in your pipe, Occupy London and the other 'banker bashers'.

....

On corporate social responsiblity...

I’ve always had something of a problem with “corporate social responsibility” – the idea that business has a wider duty beyond its purpose as a business. I have a still bigger problem with the confusing of this concept with “ethical behaviour”. Here’s Ken Costa, the man charged with finding a form of “ethical capitalism”:

“The present duty – on all boards to maximise shareholder value as the sole criteria for satisfying the return to shareholders – cannot continue... I am aware that this is a big change that will need detailed discussion, but we need to start with big ideas.  For some time and particularly during the exuberant irrationality of the last few decades, the market economy has shifted from its moral foundations with disastrous consequences. I cannot recall when public feeling worldwide has run so high, and even if only a minority takes its anger on to the streets, no one should imagine that the majority is indifferent to their cause.”

Now there’s a place for shareholders to discuss their expectations from Boards of Directors – those they appoint to represent their interests as owners of the business. It’s called the Annual General Meeting and, at that meeting, shareholders can appoint a board or directors that can take a different view that maximising the return on the investment those shareholders make. I’m pretty sure it won’t happen because the reason why shareholders invest is to secure a return on that investment – and we expect it to be the maximum possible.

The point I’m making here is that the corporation exists to serve the purposes of its owners and investors and that such activity is entirely ethical and moral. Indeed, were Directors to take it on themselves to reduce the returns to investors because of some other purpose – some wider “social responsibility” – they would be acting unethically. This is the dilemma of corporate social responsibility – if it is more than trading honestly and complying with the law, then it must be against the interests of the shareholders unless it is merely a marketing strategy or corporate positioning.

In all of this bear in mind that the owners of a business (or to be accurate 50% plus 1 of those owners) can do what they wish – including reducing financial returns in the interests of a wider social purpose.  But it would be wrong if directors acted without the approval of shareholders in taking such a course.

Ken Costa is right that many people are angry about a system they feel led to the problems the world faces right now. However, I am sure that the duty to secure returns for shareholders wasn’t the cause of those problems or the creator of some crisis in capitalism. What is central to all this debate is for us to rediscover the joy of the marketplace and to recognise that, for markets to work, people have to behave (in the strict sense of the word rather than its modern corruption) ethically. Ken Costa gets close to this concept:

Our task is thus to build up trust, both within and beyond the financial world, a slow, bottom-up, trade-by-trade business. It is to rebalance the equilibrium between risk, responsibility and reward. It is to re-embed the financial spirit, our drive to do well, with the moral spirit, our desire to do good. Above all it is to reconnect the various different silos of our humanity – economic, moral and spiritual – so that we live as whole people all the time and not simply as money-makers on weekdays and morally concerned citizens at the weekend.

For me the question is how do we have a system where the right behaviour – moral, ethical or whatever – secures the greatest reward. This isn’t about corporations or institutions but about people changing their behaviour. We cannot legislate for morality but we can educate people so moral and ethical behaviour is second nature.

Finally, we must stop seeking to condemn people for their success, good fortune or wealth – the “bash a banker” or “pillory a politician” approach. Nor should we turn our back on the idea or markets, enterprise and trade – these are fundamental elements of our humanity not some creation of mankind. Rejecting them would be as immoral as was their corrupting through the hubris that was the end to boom and bust.

Above all we must not place on corporations duties we do not place on ourselves – which is what “corporate social responsibility” means and it why it is wrong.

....

Will we still have banks? Pondering on the future of money....

This is a serious question about banks – in days to come will we still have banks as the businesses we love and cherish (so much we’ve given then billions of newly minted pounds and dollars so they didn’t have to cry any more)?

Now I don’t know the answer to this question – except to say that there will be a need to store money safely away from the burgling and thieving sorts (and perhaps the taxman too), there will still be investments made with aggregated funds and there will be an important role advising us on how we should be using the cash we’ve earned, inherited or squirreled away.

Firstly however we need to distinguish between the various businesses calling themselves ‘banks’ and the bank (and banking) itself. It is very likely those businesses will survive – or most of them will – but not as banks in as much as we understand banks:

The principle has been proved that innovation often occurs where the need for change is greatest. Look to Africa, where there are few banks, poor physical infrastructures and a rural population often dependent on remittances from the city. It is here that technology can really demonstrate value by offering a secure, efficient alternative to cash transactions. Such has been the success of products like M-PESA in Kenya that we are at a point where, looking forward to 2020, many experts, as well as the key players such as banks, governments and retailers, can see a world, particularly in emerging economies, where the majority of cash transactions have been replaced by digital ones – and where most of these will be made by our phones.

In the developed world we are lagging behind – partly because we have an extensive, mature and (wrongly) over-protected banking system and partly because consumers are very conservative in matters financial. In Africa people don’t have access to banks – you know those big buildings in the town centre – but are very likely to have a mobile phone:

In Ghana, for example, one in 20 people has a bank account. Meanwhile, one in three has a cell phone. 

So the mobile phone means that we are going to move our money around digitally and this money – the stuff the government prints – will be joined by a host of other forms of digital “cash”. From supermarket points schemes through coupons to ever more sophisticated digital bartering systems. After all barter is alive and well out there:

Watches, baseball cards, cupcakes and cookies, artwork, a journal entry, a bike and even a dog have all found new homes at Main Street Family Dentistry in Tupelo, Miss.

Dentist Harry Rayburn and his staff accepted the tokens as a barter from patients on a single day in exchange for fillings, extractions and cleanings, mainly from uninsured patients.

And it is but a short step from this situation to the creating of transferable forms of what amounts to “private money”. By this I don’t mean non-banking investment such as that from angels but de facto money that can be used instead of pounds, dollars and euros.

The problem with all this change isn’t that it isn’t possible – converting Tesco Clubcard points into transferable currency is simple and they could join emerging on-line approaches to payments such as Bitcoin, PayPal and so forth. It is that the authorities don't like it.  Where we previously had no effective competition in the administration and effecting of transactions – you used the government’s money – we now have a more complex, enterprising and creative system brokered on-line but (as we know from Clubcard) applicable in the real world too.

The problem with making this happen faster is that it isn’t what either the banks or the government want. After all, they will tell us, we can’t have just anybody setting up an on-line system for financial transfer and transaction – that’s what we have banks, banking regulation, banking lawyers and treasury departments to do.

Indeed, as virtual cash pops up the lawyers aren’t far behind (although, being lawyers rather than economists they don’t actually understand what money is):

Dax Hansen, an attorney at Perkins Coie in Seattle and one of the experts in this field, says virtual currency can be used to buy anything from a sword or armor in a game to a ring tone on a phone.

"It can be given away for free as a promotion," Hansen says. "It also can be given away as a marketing campaign if you provide some information. It has a value for which the marketer is willing to pay."

The trouble begins when that virtual currency can be redeemed for cash--particularly if it involves more than one company. At that point the financial services laws kick into gear, including those used to prevent money laundering.

Mr Hansen stills sees this emerging ‘money’ as a sales promotion rather than as a competitor to what he call “real money” but it is clear that we shall see challenges – indeed China has already begun:

In the latest wrinkle in the fabric separating reality from virtual reality, virtual money is being exchanged for real yuan on a booming scale. The practice is so widespread that it has raised concerns that virtual money could challenge the renminbi's status as the only legitimate currency in China. 

And not just a competing currency but one outside the control of the government. Which bothers American politicians too:

This has not stopped some American politicians from expressing grave concern about the virtual currency. Charles Schumer, a prominent Democratic senator, has inveighed against it, claiming it is just what drug dealers have been waiting for. All the clever cryptography means Bitcoin dealings are difficult to trace. But not impossible.

It seems to me that these people are railing against the dying of banking’s light – the industry has had a decent innings - latterly with the connivance of government in preventing new entry, controlling innovation and protecting the profitability of the existing system. However, just as the on-line world is transforming publishing, altering the dynamic of political discourse and changing how we communicate, we may see it first destroy banking as we know it today and then remove the state’s monopoly over money.

And this change will take place in places where government is weak – in Africa particularly – rather than in the developed world where government is strong. It will be interesting to see this play out and to discover how systems created to sell more tins of beans or allow gamers to buy a magic potion will challenge and perhaps replace the monetary systems of today.

....

Let's hope the lad's value holds up....

In what must be one of the more bizarre twists in the story of the banking crisis Christiano Ronaldo is being used as collateral. Or so Süddeutsche Zeitung reports:

The daily reports that the Bankia group of savings banks, which financed Real Madrid’s acquisition of the Portuguese player, is now seeking to borrow funds from the European Central Bank. In response to the ECB’s demand for guarantees, Bankio are putting up… Ronaldo and the Brazilian Kaka, who also plays for the Madrid football club. In 2009, Real borrowed 76.5 million euros to pay transfer fees of 100 millions euros to Manchester United, and 60 million to Milan AC.

Which (and those who make comparisons between Manchester United's financial position and that of the two big Spanish clubs should note this) is a pretty sound bet since:

Bankia would first have to become insolvent. Thereafter, Real would have to default on its loans, which are secured by advertising and television revenues. It goes without saying that Real Madrid is in debt to the tune of several million euros. However, in Spain football clubs have a history of obtaining publicly funded bailouts — just like the country’s banks.”

Real Madrid are, just like those big banks, 'too big to fail' so Ronnie's as safe an asset as you can get (so long as he keeps playing).

....

Mick and Gerard discuss the banking crisis...

****
Mick is a gardener – a fictional gardener to be sure but he could be real. Mick cuts grass, trims bushes, digs over and plants up flower beds and, for doing this, gets paid by grateful customers. Being an honest citizen, Mick tots up all he earns in a little book and subtracts from that the amount he spends – on diesel, maintenance and insurance for the pick-up, on gardening gloves, on the fuel for the mowers, on sharpening the tools (and replacing them when they’re broken or worn) and on a host of other bits and bobs he buys to do the job.


When he buys stuff for customers, maybe bedding plants or some compost, Mick adds a little margin for his trouble. Not a lot or else folk would stop asking him to buy things. And this is carefully recorded in his little book.

Once a year Mick gives the book (and a shoebox filled with receipts and so forth) to Gerard, his accountant, so the tax can be done. Gerard checks Mick’s adding up and subtracting, adds in a little advice (‘you do know you can claim for that, don’t you’) to justify the £300 he’s charging Mick (who will, of course, dutifully write that amount into his little book). Once all the form filling is done, Mick has a bill for taxes which he pays since, being sensible and organised, he’s set aside a little each week in anticipation of this tax bill.

With this done, and by way of thanks, Mick takes Gerard down to the pub for a celebratory (if the paying of taxes can ever be a celebration) pint or two. And they get to talking like you do when you’ve had a beer.

Now Mick knows that Gerard – unlike him – is an educated bloke, been to university and accountant school, knows some long words about money. And Mick, who as a good citizen, makes sure he watches the news most days, asks Gerard about the banking crisis. After all, not only is Gerard an educated bloke, but he’s an accountant. And that means money. Gerard must be able to explain what all went wrong.

However, Gerard isn’t at all sure. For him, the bank is just a place through which money flows – mostly away from him and his clients. For sure, Gerard knows about borrowing – paying a price for having something now rather than waiting until we can afford it was the way Gerard’s shopkeeper dad always described it. And he knows that the banking crisis is something to do with borrowing. Or rather, the consequence of borrowing – debt. So he tells Mick this.

Now Mick, too, understands borrowing and debt. He’s got a mortgage – not a big one – and he had to take out a loan to buy the pick-up he uses for work. Mick appreciates how borrowing means that – at a price – he can have something now, like the pick-up or somewhere to live that he would otherwise be unable to afford. But he has another question for Gerard: “where does the borrowing come from,” asks Mick?

Gerard takes a long sup of his pint – he would have sucked on the stem of his pipe but they banned that in pubs – and thinks. “Did you ever watch Jimmy Stewart in ‘It’s a Wonderful Life”, asks Gerard?

“Oh yes,” said Mick, “one of my favourite films – a Christmas classic!”

“Good,” replied Gerard, “then you’ll remember the scene with the run on the bank when all the Savings & Loan customers crowd in to get their money out?”

“Absolutely, and at the end Jimmy Stewart and the others dance round the room with Papa Dollar and Mama Dollar in a wire paper tray!”

“Well during that scene, George Bailey – he’s the Jimmy Stewart character – explains to the crowd that the money isn’t in the bank, it’s in other people’s houses and businesses. It’s been lent out and these folk are paying it back with a little added as the price of having the money before you’re earned it.”

“Oh yes,” smiled Mick, “and George used his wedding cash to pay out on the run and the Savings & Loan stayed open.”

“Correct, correct,” Gerard leant back on his chair beginning to relish the explanation, “the problem is that modern banks – unlike that in the film – have made a really big bet. They’ve bet that everyone won’t arrive at once asking for their deposits back and have lent £10 for every £1 they have on deposit. In effect they’ve magicked 90% of the money we use from out of thin air.”

“But people still pay back,” Mick was fascinated by this exposition, “so the new money isn’t a problem until that stops?”

“Yes, or until people want to take more money out. You need another pint?”

“I think so,” Mick’s mind was spinning a little – he could see how his little business worked. And even how the bank’s role in lending money worked – but how could they lend so much?

Gerard returned from the bar and Mick was straight in, “but how could the bank take such a big risk, make such a massive bet?”

“I think,” said Gerard, “that it’s to do with deposit protection. In the film, the deposits were at risk, people stood to lose their savings if the bank closed. Today, the Government guarantees the deposits in banks – your and my money simply isn’t at risk so the bank can take whatever big bet it wants with the money.”

“So it wasn’t just the banks, it was government too,” spluttered Mick.

“And there’s more,” explained Gerard, “not only did government guarantee the deposits so banks could lend £10 for every £1 they had on deposit, most of that extra money wasn’t lent to folk like you to buy pick-ups and houses but was lent to the government. The same government who set the rules that made the lending possible.”

“Now you’re losing me,” Mick frowned, “the government gets all those taxes from people like me, why does it need to borrow?”

“You know you keep that little book, the one you give to me once a year so I can prepare your accounts and your tax return?”

“Yes.”

“You know how you’re very careful to make sure that what you take in exceeds what you spend?”

“Absolutely, I’d go bust otherwise.”

“Well the government doesn’t think it has to do that..."

"You what?"

"...most years in recent times governments, here in Britain, in the US and in Europe, have spent more than they raised in taxes. I know that’s hard to comprehend given how much we pay in tax – nearly half of all we earn – but governments didn’t think they had to worry because they’d set the rules so those nice banks would provide the cash. Government simply borrowed more and more each year.”

“So the government fixed the banking system so the banks could lend more, then borrowed that money to fill in the hole in their budget? Sounds like a criminal enterprise to me! Why did it go wrong?”

“Just like in the film, people started wanting their money out. The banks all lent money backwards and forwards between them – like a carousel with dollars on. One day some of them decided to stop the carousel, to stop passing the money round.”

“And…?”

“The system seized up. Banks were threatened, for a minute the whole thing looked like it might collapse. But the governments had a plan, instead of getting the banks to create new money by lending £10 for every £1, they would simply make up some new money of their own, give it to the banks and then borrow it back.”

“Sorry, say that again,” Mick was amazed

“Yes,” said Gerard, “they called it ‘quantitative easing’ but all it did was provide cash for the banks so they didn’t have to stop lending. And the government needed that lending, not to help your business like they said, but because otherwise they’d need to make big cuts in public spending or have a huge increase in taxes.”

“So let me get this right, the government allowed banks to lend more money than they had on deposit by protecting those deposits, then when people wanted their money out, the government printed more money and put it into the banks so the same government could go on borrowing? Where do we live, fairy land?”

The mournful sound of the pub bell sounded as the landlord called time.

“Guess I’d better scoot,” said Gerard, “been great talking and thanks for the beer.”

“Cheers," said Mick, “I’m hoping for some afters so I’ll stick around. There’s a couple of people here I’d like a word with and the place needs all the cash it can earn to keep going. One last question.”

“OK.”

“So all this inventing of money by the banks and the government,” muses Mick, “at some point it has to be earned by someone doesn’t it?”

“I suppose so. Probably us. We’ll be paying a load of taxes just to pay the banks back for lending the government all that money the government gave to the banks to keep them lending.”

Gerard smiled wryly, stood up and left. Mick was left wondering. Maybe Gerard was wrong, perhaps the chatty bloke on the telly from the Bank of England was right and we’ve nothing to fret about, there’ll be some hard times but it will turn out OK. But maybe not, maybe if all the money goes on paying back yesterday's debts, if the government keeps on borrowing and even printing more cash, maybe we’ll never pay it back. And that would be wrong Mick thought. We have to pay our debts.

....