On Aug 4th, 2008, Anthony Hilton, Financial Editor of the Evening Standard, wrote:
Reliance on financial services has at times made the UK economy look like a giant hedge fund and made us – both citizens and government – predisposed to spend the money without thinking too hard about where it came from or how it was being earned.
Had we looked more inquisitively we would have seen that the financial sector has grown bigger than the world economy needed it to be, and as a result was filling its days inventing ever more exotic products that it claimed made markets more efficient and added to economic growth but in fact contributed little to either.
Finance had become a machine to slice up and repackage old wealth for the fees it could earn, rather than a service to help others create new wealth. The consequences of that have now become apparent. When finance slows there is not enough to fall back on.
Economics has run ahead of politics across the world. Finance and markets and business have become global and respond to global pressures. Politics is still nation-based, local and unable properly to respond to the demands of the new world order. This is bad news because the actions of politicians – and it must be said the wishes of voters they represent – threaten to prolong the crisis.
Nowhere is this more obvious than in the seemingly endless succession of bank bailouts and rescues. The financial sector needs to go back to basics, renounce its addiction to gambling and rediscover its purpose as a facilitator of economic growth in others. But that means it will have to be smaller and less well paid. Getting back on that even keel means letting some of those banks go bust – but the politicians are too scared to do it.’
Over the past sixty years the pound in people’s pockets has been replaced by deposits in companies’ bank accounts[i]. The official measure of cash (M0) has shrunk from 30% to 3%[ii]. In the face of the fallout from the Credit Crunch the job of Parliament is two-fold. First it has to look after the Real Economy and ensure there are adequate safety nets in place for the people who elected the Labour Parliament.
Secondly it should take the once-in-a-dozen-generations opportunity to sort out the structure of the Money Economy and bring it under the sovereign control of the King in Parliament. No Parliament may bind any future Parliament[iii], but this Parliament can do future parliaments a big favour by ensuring that they do not find themselves in a similar mess two generations hence as the Kondratieff Cycle returns at fifty to sixty year intervals and the private credit creators use the opportunity to have their losses repaid from the public purse and their profits accumulated into private property…to be hid off-shore or like the Dutch and English protestants in the 17th Century converted into private Art Exchanges and Antique Pawn Brokerages. We live from harvest to harvest, so the maintenance of accumulated capital as Improperty…to use Tawney’s term…is its own particular art form.
Corporate entities have been blessed by past parliaments with favourable bankruptcy laws. Their limited liability permits them to legally dump millions of pounds of losses onto thousands of small traders, putting them out of business[iv]. In The Great Turning: From Empire to Earth Community, which places corporate globalization within the context of 5,000 years of organizing human relationships by dominator hierarchy, David Korten argues that the human species must turn away from the dominator way of Empire to the partnership way of Earth Community, as defined by the principles of the Earth Charter. In a recent presentation to a seminar of Associates of the International Forum on Globalisation in San Francisco and in his article The ABC’s of Finance Capitalism[v] Korten summarizes the form, dynamics and ramifications of what he calls the economic disease of finance capitalism[vi].
[i] There are a large number of anti-society consequences of distributing spending power through the banking system to firms that meet their arbitrary criteria…collateral and profit maximising objectives. Bank lending is heavily skewed towards property-rich legal entities and results in the banking system creating housing bubbles through its requirement that people’s homes should be offered up as collateral, a practice avoided by adoption of Grameen banking principles. The practice condoned by the banking industry of pyramiding up mortgages and real estate loans also has anti-society consequences such as second homeowners crowding out local dwellers in rural areas and the house builders working in cahoots with the banks to pump up a Buy to Let markets in yet another case of mis-selling by financial institutions. [PE]
[ii] The slack has been taken up by the fractional commercial banking system. The ratio of deposits to loans should be raised from its current ratio of below 0.10 to the present Chinese level of 0.15. From there as Public Credit is increased so the degree of fractionality in the commercial banking system can be reduced until it reaches a parity at 1.00 at which point the country no longer has a fractional banking system. The Grameen Banks have found it prudent to go further. Their ratio of deposits to loans is 1.50…12 times that of the UK commercial banks who have been pumping out money and credit as bank loans and overdraft for commercial businesses to pass on as private property (through dividends, pensions and the like) and for fuelling property bubbles and the financing of the shift from Financial Capitalism to Resource Capitalism. [PE].
[iii] This principle seems to be lost on New Labour and on Gordon Brown in particular, who as Chancellor of the Exchequer routinely spread his sheets out into some far distant future. The Public Private Initiative is one example. Under the dubious guise of keeping Brussels off his back by doing the Labour Party’s bidding and investing in public services, he has stripped liabilities from the balance sheet of today’s tax payers by loading them onto future Parliaments and future generations. [PE]
[iv] The banking system also distorts the natural working of trade credit by their arbitrary withdrawals of loans and overdrafts from the small businesses that are already being squeezed in turn by the largest corporate entities which are jerking them around on the end of fluctuating payment terms which always extend out from 30 days to 120 days whenever money is in short supply as a result of another strike by the owners of capital. Capital strikes are much more damaging to the real economy than labour strikes. Parliament should put a stop to all this. [PE]
[v] Dr. David C. Korten is a leader in the global resistance against corporate globalization. He is probably best known as the author of the book When Corporations Rule the World. Korten is president of the People-Centred Development Forum and author of When Corporations Rule the World, as well as A Post Corporate World-Life after Capitalism. He was a former official of the United States Agency for International Development (USAID) in the Philippines. [Ed]
[vi] Korten argues that even global corporations can be dominated by this system, as they find themselves forced to maintain distortedly high profit margins to stay attractive to financial investors. The losers are the rights of workers and the environment. This will bring us full circle as the subject of judicial persons was hotly debated by the American Fathers with both Thomas Jefferson and Tom Paine insisting that only real people should be equal before the law. Their misgivings are turning out to be well-grounded. [PE]