Sunday, November 1, 2015

Will Hutton: Back to the Future, part 1/3 (2015)

From the Socialism or Your Money Back blog

It was with a sense of irony that I read Will Hutton in the Comments and Debates section in a copy of Guardian Weekly (16.10.15).  It was the previous week’s edition and the irony was that I was reading it on Back to the Future day (21/10/15), which summed up the economic views that I was reading.  Hutton wants to go back not to 1985 but to any date before the rise of what Hutton calls the ‘Anglo-Saxon political right’  in the US and UK which put Keynesianism out in the cold (usually identified by the left with the bogeymen of Thatcher in Britain and Reagan in the US).  Now I thought that the political reach of Anglo-Saxons had ended a thousand years ago but I will leave that particular question mark to one side.  Hutton argues that the roots of the 2008 financial crisis and current crises in China and other ‘emerging market economies’ lie in a ‘world financial system that has gone rogue’.  At the heart of this argument is Hutton’s claim that the power of banking to ‘create money out of nothing has been taken to a whole new level.’ 

This is an up to date version of a theory that has been doing the rounds since the early 1930s, that of fractional reserve banking; the argument that banks by holding on to a fraction of its deposits (to ensure that withdrawals can be met) can create multiples of credit, that they can essentially ‘create money out of nothing’.  The crude version of this theory assumes that multiples of credit can be created from an initial deposit of £1000 with a fractional reserve of, for example, 10%, £900 could be lent (paid out as a cheque or transfer and deposited with the bank) expanding the initial deposit in one act of lending to £1900 of bank deposits.  If a loan of £900 was carried out 10 times the end result of the initial £1000 deposit would be £9000 in loans and £1000 in reserve, in 10 quick steps an initial deposit of £1000 has been turned into £10,000 – money has apparently been ‘created’ as credit from the scribble of a pen or the tapping of a keyboard.  However, this view of banking does not hold theoretically or empirically. Two quick examples (there are more) will show why the theory doesn’t hold.  Firstly, this model assumes that there will not be a cash withdrawal on the initial deposit during the whole series of transactions, a false assumption but necessary to prevent the theory’s instant collapse.  Secondly, the appearance of the creation of credit is created by standard double-entry book-keeping where when a bank lends, for example, £1000 this is recorded initially as a deposit of £1000 and a loan of £1000, apparently ‘creating’ £1000 (until the loan is withdrawn). Empirically we can also demonstrate that banks in fact do not operate in the way described.  If they did they would be able to create immense amounts of credit from relatively small deposits (pushing interest rates to very low levels).  This does not happen and banks back their lending not just from deposits but from money they themselves have borrowed – something that had increased to risky levels before the 2008 crisis (and interest rates do not fall to very low levels).

Hutton appears to hold to a less crude version of ‘credit creationism’ as he says that ‘the system depends on the truth that not all depositors will want their money back simultaneously… some of the cash banks lend in one month [will] be redeposited by borrowers the following month: a part of this cash can be re-lent, again, in a third month’ and so on.  This is just saying that some of the money that is taken out as loans will find its way back into the banking system as deposits, which can then be used to make further loans.  Unlike the crude version of ‘credit creationism’ Hutton acknowledges that money is constantly being deposited and withdrawn but this still does not mean that banks create money in the way that Hutton suggests.  According to the economist Paul Samuelson (who developed a more sophisticated version of credit creationism): ‘As every banker knows, he cannot invest money that he does not have; and money that he invests in buying a security or making a loan soon leaves his bank.’  That is, loans can only be made from deposited or borrowed money that is currently held - a fractional reserve in an individual bank cannot create multiples of credit.  Samuelson’s theory (and Hutton’s) is that, while multiples of credit cannot be created from a fractional reserve held by an individual bank, an initial deposit of £1000 (again with a fractional reserve of 10%) will eventually be multiplied to £10,000 across the whole banking system by constituting in circulation the basis of deposits in banks.  This theory describes in a simplified way the actual process of circulation of money and how a loan will, in circulation, be the basis of further loans but it does not demonstrate that money is ‘created’ as credit. 

Rather than by ‘creating money’ a bank takes money from real deposits and pays an amount of interest on it.  It then lends this money at a higher rate of interest.  Hence banks compete for customers deposits.  Why bother if it is so easy to turn a deposit into multiples of money out of thin air?  Rather, banks provide credit, they advance money at interest.  Marx held to this view that a bank ‘makes its profit in general by borrowing at lower rates than those at which it lends.’  Banking has an intermediary function, it does not create money but takes it from savers (from cash deposited and from money lent between banks) to lend to borrowers at interest.  By facilitating the transfer of money from where it is accumulated to where it is required in the process of production banks take a cut of the profits of the productive economy as interest. 

Hutton is attributing to banking a power it does not have, holding it responsible for turbulence in global finance that results in economic dislocation – the financial tail appears to be wagging the dog of the productive economy.  The reality is the reverse, turbulence in global finance reflects dislocation in the productive economy…

                                                To be continued…

For more detailed articles on fractional reserve credit creationism see:


Do the Gods Ever Change Their Mind? (2015)

The Halo Halo! column from the November 2015 issue of the Socialist Standard
Does a God who is all-knowing and all-wise ever need to change his mind?
Believers who pray for God to bring peace to the Middle East, for example, obviously assume he can be persuaded to take some course of action they fear he may not otherwise be planning. Or if they pray to him to cure Mrs Jones of her lumbago, how likely is he to say ‘OK, I’ve seen fit to let her to suffer for ten years, but as you asked nicely, I’ll cure her?’
Don’t they ever suspect that God isn’t there, or isn’t listening, or that maybe he just doesn’t give a sod about what’s going on down here?
Following the double disaster at the Islamic hajj this year, when 109 people were killed by a collapsing crane and then over 700 more in a stampede which, apparently, he could have prevented – if he’d wanted to – there was the usual hand-wringing and prayers for him to halt the carnage and have mercy on the victims. And let’s face it  – even without being all-knowing he should have seen this coming. Stampedes at the Hajj have caused many hundreds of deaths in recent years, often at the stoning of the devil ritual (and obviously, the devil is going to be a bit hacked off about that).
In Christianity, too, the logic is no better. Their all-knowing, all-merciful god is quite happy to allow the odd flood, earthquake or some other disaster to occur without lifting a finger to prevent it, but they then fall to their knees in prayer expecting him to suddenly feel remorse at what he, in his infinite wisdom and mercy has allowed to happen. And in spite of this indifference to human suffering there’s nothing like a mass shooting or some other disaster to get the believers on their knees.
‘My prayers are with everyone in Oregon. May the peace of God, which transcends all understanding, guard your hearts’ bleated one politician following the October mass shooting in America. And the Presidential candidates lined up, offering their thoughts and advice to God, and anyone else who was listening, as if they had some influence over the invisible man in the sky.
Part of Barack Obama’s statement was, though, perhaps unintentionally, more to the point: ‘Each time we see one of these mass shootings, our thoughts and our prayers are not enough. It does nothing to prevent this carnage being inflicted’.
Exactly. So what is the point? If we assume for a moment that a god who ‘transcends all understanding’ does exist and knows, more or less, what he is doing, isn’t it a bit optimistic to ask him to change his mind halfway through some divine act of carnage in his plans for the world which, of course, he is carrying out for our benefit anyway?
Religion must be the biggest fraud ever to have been carried out to keep the masses docile and in their place. As the French revolutionary Camille Desmoulins put it – ‘The Great only appear to us to be great because we are on our knees. Let us rise’.

Editorial: Climate Change and Capitalism (2015)

Editorial from the November 2015 issue of the Socialist Standard
Since the industrial revolution there has been a significant rise in the average temperature of the Earth's atmosphere and its oceans, and scientists generally agree that the main contributor has been the burning of fossil fuels that generates CO2 and other greenhouse gases. Not everyone is convinced that this is the case, and there are many who make it their business to deny it. Nevertheless, world governments and other global institutions have taken the issue of climate change sufficiently seriously to come together and attempt to find ways of tackling it.
The major milestones, so far, have been the establishment of the United Nations Framework Convention on Climate Change (UNFCCC) at the Rio Earth Summit in June 1992, a non-binding agreement to stabilise the levels of greenhouse gas emissions in the atmosphere, and the signing of the Kyoto protocol in June 1997 which committed the developed countries to binding targets in reducing greenhouse gas emissions by a 5.2 percent reduction from 1990 emission levels by the year 2010.
Yet there is little to show for these efforts. According to Naomi Klein in her book This Changes Everything: Capitalism versus the Climate, preliminary data shows that in 2013, global carbon dioxide emissions were 61 percent higher than in 1990. The United States government, looking after its oil and coal interests, refused to ratify the Kyoto Protocol. Canada, one of the original signatories, withdrew from the Kyoto Protocol in 2011, primarily to avoid possible financial penalties due to its failure to meet its agreed emission targets, mainly because of the extraction processes of its lucrative tar sands industry in Alberta. A clause within the Kyoto Protocol allows countries to meet their emission targets by purchasing quotas from other countries.
The main obstacle to reducing global warming is capitalism, where production is geared to profit, and production costs have to be kept to a minimum. Measures to curb emissions may increase the latter and place firms at a competitive disadvantage. Also, in many cases, it is more cost effective to import materials from abroad, which requires the burning of fossil fuel in transporting them. Nation states and trading blocs also seek to compete with each other on the best possible terms, and in some cases endeavour to protect their profitable extractive industries. Naomi Klein also noted that in the same period that these international summits were taking place, moves were made to expand world trade through the establishment of global bodies, such as the North American Free Trade Association (NAFTA) and the World Trade Organisation (WTO), which would encourage higher levels of fossil fuel consumption.
The 2015 Paris Climate Conference is due to take place this December and will attempt to set up a new binding agreement to control global warming. Judging from the record of previous summits, the prospects do not look too promising. Attempts to tackle climate change in the context of a world market economy will, at best, achieve only limited results. In socialism, where production can be rationally organised according to human need, we'll have the best chance of successfully curtailing global warming.