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Time to put an end to the power of banks, time for a happier society, time for a revolution in thinking! Part I of the City Grump's tribute to James Featherby's wonderfully thought-provoking Of Markets and Men.
Our financial elites are running out of answers; it's not surprising that politicians are wobbling with them.
Reshaping finance for a new season is the subtitle of James Featherby’s seminal new book, Of Markets and Men. I make no apology for making over this City Grump article, and the next, to some truly excellent extracts from it.
In part one, below Featherby highlights how debt is enslaving us all, how quantitative easing should be used for putting an end to the unhealthy power of banks and bondholders, and what we should be replacing that debt with to finance employment and a more productive and happier society. Time for a reset! Time for a revolution in thinking!
"Government debt is no more than a promise made by the government to the bond markets to tax the citizens of tomorrow to meet the promises made by government to the tax payers of today. Politicians have not learnt how to put a cap on their welfare promises and are always tempted to kick the can of repayment down the road towards tomorrow. The government cannot issue equity, only debt.
In a season when governments are anxious to fund themselves, some see more than a coincidence in the changing regulatory landscape that requires pension funds, insurance companies and banks to hold an increasing level of debt and in fiscal policies that maintain downward pressure on interest rates. However, one cannot get the better of bond markets forever, and at some point the markets may decline to continue funding ever decreasing yields and ever decreasing sovereign debt qualities.
Lawrence Summers, a former United States Secretary of the Treasury, sums up the current overriding objectives of governments,
'Government has no higher responsibility than insuring economies have an adequate level of demand. Without growing demand, there is no prospect of sustained growth, let alone a significant fall in joblessness. And without either of these there is no chance of reducing debt-to-income ratios.'
How sad that our collective dreams have been reduced by the political and economic establishment down to a simple desire to see us consume in order to reduce debt-to-income ratios. The lack of choice that this agenda suggests denotes modern day slavery: work simply to pay debts. Excessive debt has imprisoned our paradigms and our possibilities.
Excessive debt produces inflation, injustice and the modern day equivalent of slavery, where the economic futures of men and women are committed to a debt they cannot repay. Excessive debt centralises power, fuels speculation and turns others into a means not an end. The current economic climate can leave us in no doubt that we need substantially less debt. Government reforms to date might or might not make banks safer. They have done little, however, to address the quantum of debt. Reducing the level of personal, corporate and national debt will make our personal, corporate and national finances more stable, more equitable, more sustainable, and more enjoyable.
Our forefathers were cuter than we might have imagined. They recognised that debt had a tendency to enslave both economically and psychologically. Even before banks were creating money, and debt, on the current industrial scale and even before debt based economies were fashionable because of the previous distaste for lending money with interest, our forefathers recognised that every now and then it was necessary to step in and cut the Gordian knot if poverty and slavery, including the sense of alienation and hopelessness to which they give rise, were not to become permanently institutionalised.
Simply cancelling debts in the modern economy would cause too much chaos: the insolvencies amongst those to whom the debts were owed, and amongst those to whom they in turn owed debts, would cause widespread problems. A further alternative, at least on a national basis, may be a variant on the quantitative easing (QE) theme.
At present QE appears to be boosting bank reserves without resolving wider problems. Instead QE could be used, and effectively without creating more debt, to give money directly to every private person in the country. This would be on condition that it was used to repay their debts, and that those receiving payments (for example banks) in turn repaid their debts (for example to bondholders).
Those with no debts would still receive the gift and, although not central in the scheme, they could be encouraged to spend the money in ways that boosted the economy: preferably through investing in businesses that create employment or are looking to increase productivity. A beneficial by-product would be the shrinking of bank balance sheets back towards their pre-credit boom size. It was a sleight of hand that produced money/debt. Maybe it will take another to reduce it.
Debt finances the familiar since the familiar normally has an asset base that can be provided as security. It does not finance innovation since innovation offers little by way of security. In a knowledge and service based economy such as ours this is a particular shortcoming.
The pressure on profitability is, among other things, likely to spur the investment banks on in their promotion of the debt capital markets as an alternative to traditional bank lending, since the investment banks are the controllers of the bond issuance process and can earn fees accordingly.
Only 12 investment banks control 58 per cent by volume of the global bond issuance market. They are positioning themselves such that only they have the necessary knowledge, international relationships and underwriting strength to act as book runners on major debt capital market issues. The control by an even smaller group of global banks of certain derivatives that accompany bond issues is even stronger. An oligopoly is growing over one of the world's major sources of finance.
A signpost towards a lower debt economy would be the abolition of the favourable tax treatment currently given to debt, which in practice results in a tax subsidy being given to one set of taxpayers (mostly business borrowers) by another set of taxpayers (everyone else)…The favourable tax treatment given to debt disincentivises equity investment, which is more stable and risk sharing.
The UK banks have persuaded us that we must not endanger growth by restricting the ability of banks to lend. This argument would hold considerably less water if equity investment were able to compete on a level playing field. This would be less inflationary and would lead to greater willingness to invest in productivity and innovation…Equity investments could be further encouraged through a more favourable CGT regime for equity securities compared to debt securities, including by gradually reducing the level of tax payable on gains the longer equity securities are held.
The key to kicking the habit of excessive debt is to believe that it is worthwhile and that it is possible. That creates the space needed to imagine things differently, and it provides the energy to find solutions to the objections of those who say it cannot be done. Surely if anything proves that taking money/debt out of the system, and of creating a system in which money/debt cannot accumulate as it has before, it is the events of the last few years. Those preserving the status quo are the ones who need to prove they are not living in the asylum.”
This extract was taken from James Featherby's new book Of Markets and Men.
For more than 30 years, the City Grump has had experience of senior positions in most aspects of city life. These include stockbroking, stock exchanges, fund management and corporate finance.