Financial Stability News

News about financial stability and central banking

Making finance servant, not master of the economy

This heading seems like a good companion post to the previous one on hedge funds speculation against the euro countries. It is the title of a presentation by Ann Pettifor at a conference on Just Banking (for program, see here). She gives a good overview of the problems in Europe and then draw extensively on Keynes in her proposal for a radical alternative to the current austerity approach:

Keynes’s six tools for recovery:

First, independent monetary policy: liquidity created by both public and private financial institutions should be directed towards sound public and private investment in productive, job creation activity. Any attempt to divert liquidity/credit into speculation had to be curtailed.

Second, fiscal policy: Keynes understood that it was not enough simply to create liquidity. That money had to be spent, and spent wisely. Today economists and politicians like David Cameron (“.. a fiscal conservative and a monetary activist”) rely simply on monetary policy to inject liquidity into zombie banks. This helps the banks, but does precious little to direct lending to firms and to stimulate recovery.

Third, managing debt de-leveraging: Keynes understood that the vast bubble of debt had to be de-leveraged in a managed way. Some debts inevitably have to be written off, with debtors granted a jubilee – as Steve Keen argues – simply because a high proportion of private debts are ultimately unpayable.

Fourth: regulation of credit creation. To ensure that credit created by the private banking system was aimed at the real economy, and not speculation, Keynes advocated wise regulation of the credit creation powers of private banks (‘tight money’). In other words loans had to be carefully assessed for their ability to generate income to finance repayment; and for their ability to generate sound employment and economic activity.

Fifth: permanently low interest rates. This was one of the central pillars of the Keynesian revolution. It was also the one that invited the greatest hostility from private bankers – whose profits and capital gains depend on exacting high rents from the effortless activity of creating new loans, and from speculative activities.

Six: capital controls are important for a number of reasons. One of the most important reasons for control over the mobility of capital is that management of financial flows gives democracies the freedom and autonomy to conduct their economic policies in the interests of society and the economy as a whole. In the absence of capital control, democracies are subject to the whims and interests of unaccountable global financial elites.

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