Easy Credit as cure for recession
This will not be popular, but I have to use the R word,
because we are probably in a massive recession already. The latest unemployment
figures indicate that. So I reread Robert Beckman's book Crashes , which gives us a bird's eye view of the most significant
market crashes since capitalism began.
A lot of people are saying that the banks were the chief
cause of the financial collapse, so they should not be feather-bedded by
government, or even rescued from collapse. But this attitude is not helpful at
all. We should remember that the banks ARE the financial system, and if all the
banks go out of business together there will BE NO financial system. So steady
on!
As in every crash, the banks get involved because their customers
involve them. They can not stay afloat in a competitive business unless they
service the demands of their principal business clients. So the blame for any
crash rests as much with the financiers of the big industrial and commercial
corporations as with their bankers.
This comes out clearly from a scrutiny of the crash of 1873.
The failure of the banks was then brought about by the runaway debt mountain of
the railway corporations. True, it was excessive debts (applied to unproductive
investments) that caused the crash, but the borrowers were not less guilty than
the lenders. However, as Beckman succinctly put it:
"Having conferred with the leading figures in banking
and business, the government" (meaning President Ulysses S. Grant and his
Treasury Secretary, W.A.Richardson)
"came to the same conclusions that the Governor of the Bank of
England had reached in the Panic of 1857 and that John Law had reached just
after the Mississipi Bubble burst. The
only way to stem the panic and stave off total collapse would be to ease
credit. Accordingly, the authorities announced they would buy back government
bonds from the banks. "
Incidentally, I feel that John Law was a well-meaning and
genuine genius whose main fault was that
he had allowed the Prince Regent to take over control of the quantity of paper
money issued. If he had kept a free hand over monetary policy the crash might
never have happened.
But the main point is that, regardless of the causes of any
crash, you cannot rectify the situation without easy credit. It seems
irrational to cure excessive debt with more debt, but what is the alternative?
In the aftermath of a recessionary crash there are no buyers and no one wants
to lend or invest, so unless the government primes the pump who else will? The
government means organized society as a whole. That way the pain can at least be
spread more evenly. But we cannot escape the pain. It took twenty-five years
for the economy to recover the same level it had reached before the Crash of
1873, and everyone suffered – except Jay Gould, the skunk of Wall Street. By
the time he died he was the richest and most hated man in the world. He did not
have a single friend and had to creep about like an alley cat to avoid
assassination..
It was Barak Obama's misfortune to take over the government
just after the present Crash started, but he did the best he could, and he had
no alternative but to save the bigger banks first. Ultimately, longer term
measures must come on stream to repair the system failure, and he will have
enough time for those if he gets a second term. Roosevelt
used draconian legislation to repair the system and set up the Securities and
Exchange Commission. We need much more draconian legislation to prevent banks
from speculating with other peoples' money. We have to protect ordinary people
from themselves and their own false optimism by curbing margin on share
purchases and on house property mortgages and keep private borrowing to a
rational level, and not allow the gullibility of the ignorant to be exploited
by unscrupulous vendors of financial instruments thirsting after commissions at
all costs. We have to get back to the three C s of loans: character, credit,
and collateral. The most important of these is character. The lender must ask
himself, "does this gent intend to pay back my money or not?" If the
answer is no, the loan is futile.
Also the rating agencies have become a law unto themselves,
with an ivory tower immunity to any form of monitoring. How come that when the
scamsters in the big banks invented securitization of bundles of low-credit
mortgages, the credit agencies gave them an AAA rating? Are we going to let
them get away with that? It was one of the main causes of the crash. If the
banks are held to be culprits, then the rating agencies are also culprits? If
they are so smart how come they could not warn us about the coming crash, as
Robert Beckman, and Lord Rees-Mogg, and several other people did?
To me, it is one of the most astonishing features of the
last fifty years that a general impression has been created that loans never
need to be repaid. They can just be "rolled over". Chancellor Nigel
Lawson was one of those who promoted this concept. But you can't roll loans
over after a crash when there are no buyers and no lenders. The loans just get
written off. It is this airy-fairy attitude that produces snowballing mountains
of debt piled on debt that are the main cause of crashes, and distributes the
blame for them generally upon all who participate, not just the bankers.
People have been politically conned into believing that
economic growth can continue forever and everyone can get rich by the simple
expedient of electing this or that party. Unfortunately, once people believe
this, the winning party has to deliver, and when it fails it will fall from
power. Therefore, to save itself, it resorts to subsidies and deficit financing
to play for time and delay the inevitable failure. But, as Monjoronson says,
sustained economic growth is an oxymoron. You cannot have sustainability by growing
like Topsy forever. Instead, what we need is a higher quality of life that is
sustainable at a plateau in relation to the population size. In a healthy
economy people pay the real price of what they get, meaning cost plus operating
margin. If you subsidize anything at below cost, you have to rob Peter to pay
Paul, and you make sure that there will be more Pauls to pay, because the
demand will increase at the below-cost rate. In the end Peter will be bankrupt
and all the Pauls will be after your throat for destroying their dream.
Similarly, the Welfare State has persuaded millions that
society owes them a living whether they work or not. This is unsustainable and
unviable. It is also immoral. No one has the right to consider himself totally
exempt from honest service to society. In times of economic boom it is possible
to endure such aberrations, but, after a crash, we can no longer afford to. I
am not blaming the unemployed, but those who avoid work even when it is
available – the voluntary unemployed, some of whom have made themselves
unemployable by never trying to learn anything useful. They have chosen to be
burdens on society, but after a crash the last straw has already broken the
camel's back, and their very survival is in jeopardy. It is not the Welfare State system that is
immoral, but the way it is implemented can be. If the benefits are truly on
merit, the Welfare State is a stabilizing factor in the economy, because it
maintains adequate purchasing power to sustain the markets for agricultural
products and other basic necessities.
One difficulty is the enormous cost of its administration.
Because of that I am sympathetic to
Danny Moynihan's idea of reverse taxation. Administrative costs can also be
saved by simplifying taxation. There is plenty of scope for that. Instead of
the costly process of running the lives of the poor, the government should pay
them enough money to run their own lives. Some of them will waste the money on
drink and gambling but not all, and there might be less waste than the cost of
administration. I would be willing to bet on that. Poor people are no different
from others, and they can be trusted to look after their best interests as well
as any other sector of society. Furthermore, wrong methods of administration create
the scope for corruption, which enormously increases the cost, without benefit
to the poor. One of the best ways to reduce corruption is to simplify, and use
procedures that favor transparency and accountability. I know that the devil is
in the details, and it is easier said than done, but we are no closer to
abolishing poverty now than we ever were, so we must bend to the task. However,
benefits should be conditional upon an honest effort to find employment.
In a recent blog I wrote:
"For about 40 years the leading wealthy investors gave
up investment in turn-key productive projects and created the "acquisitive
society" by playing all kinds of dirty tricks to take over other peoples'
corporations, not to promote industry so much as to indulge in asset-stripping
for the sole purpose of making more money without any regard for the betterment
of the industry or the welfare and security of its employees. They showed that
their God was money."
This was the attitude that brought about the Crash of 2008. It
blunted the thrust towards innovation, investment in new technologies, and
efficiency, so that the main street economy was not only robbed but deprived of
all dynamism. As a result American business priced itself out of the global
market, and the high financiers abandoned it by out-sourcing investment to
low-cost labor countries. And that was not just ordinary labor but management
costs as well. These were the most over-priced item in America . The banks were about as responsible for such
happenings as the rest of us. Above all it requires a vigilant society and a
vigilant legislature to monitor such depredations and change the law to prevent
them. Capitalism, as it exists at present in most capitalist countries has not
invented a strong enough Companies Act to prevent such malpractices as I
mentioned above. Law reform should be a high priority in the second
administration of Barak Obama to block all the loopholes that still exist and
bring about an era of fair play in the investment field and in the ownership of
the means of production. I hope David Cameron will also continue his efforts in
this direction. If there is one thing the unwritten British constitution is
good at it is making radical changes fast, and 2008 proves that needs to be
done.
Above all we must end the disconnect between the back-room
financiers and main street commerce and industry. This has lasted since the
beginning of capitalism, and it has exacerbated every boom and slump since. Adolf
Hitler was no slouch as a peace-time economist. The Nazi system did not allow rentier capitalists to collect rents
without building up industries. I think we could learn something from him. And,
to my mind, one of the greatest mysteries is how Joe Stalin managed to built
tens of thousands of T34 tanks and heavy guns and mobile artillery and other
military capabilities before 1941 without anyone finding out. The true story of
the Soviet Union has yet to be told in the
West. There is so much we still need to find out!
How could a genius like Sergei Topalov feel so patriotic
about the Soviet Union even after he had done
a long stretch in the Gulag? There must have been something good about it.
Single-handedly, he carried the Soviet space program on his shoulders, and when
he died it almost collapsed. In the West we tend to see the Cold War in terms
of black and white, but we should remember that the defects of our capitalist
system are just as repugnant to the Sergei Topalovs of the world as their
system is to us. In reality there is good and bad in every system, and we
should be objective enough to combine the good points of them all.
In the Eurozone as in America the present crisis cannot
be solved without as much credit as required to sustain employment at 95% of
capacity. This must be done AT ALL COSTS on a WAR FOOTING. Has any war yet been
lost for want of money? When war starts people always find enough money for
killing each other. So why can't they find enough money for full employment in
peace time? It is only because they lack the political will to do so. If you
get close to full employment first the money market will just have to sort
itself out. That's what Hitler did with the rentenmark
flotation. The previous inflation was not caused by too much money. As John
Maynard Keynes had predicted in The Economic
Consequences of the Peace, in 1924 the German economy collapsed because it
had too little money, and the wild use of the printing press to create more
destroyed the value of whatever was left. Reflation of an economy should be
carried out mainly in context of the latest technologies offering maximization
of profitability for self-financed expansion. The early railways were like that
– self-financing -- before Jay Gould took them over. Therefore it should be done in areas such as
alternative energy, nano technology, biochemical technology, medical industry,
electric cars etc etc.
Signing off at Malbazar on Sept 12, 2012
John Robert Thwaytes
