Dear readers…another post on the broken banking system…This time on the Guardian’s ‘Comment is Free’…..Below you will find my version. And at the Guardian, the edited version…..
Public discourse, cheered on by the BBC, amplifies George Osborne’s assertion that the deficit ‘is like a credit card’. That cuts in government spending are needed to reduce the deficit.
If only government deficits were like our own. To pay down a credit card may require no more than a cut here and a tightening of the belt there. Perhaps we might supplement our income, with a part-time job. But with cuts and additional income, it is possible to regain control, and pay down that card.
Not so for government deficits. They cannot be managed like that.
Believe it or not, the now all-powerful UK Treasury cannot cut the deficit.
Those axe-wielders can only cut government expenditure.
Whether or not the budget deficit comes down, depends entirely on how the rest of the economy reacts. If confidence falls, private investment stalls along with cuts in public investment; if public and private sector unemployment rises, then government tax revenues will fall, welfare payments will rise – and the deficit will soar.
Regardless of cuts in child benefit or defence spending.
That is why the ruthless determination of the Treasury to inflict pain on the poor, on women and children, on the middle classes, quangos and the army, is so poignant to watch.
For it may all be to no avail.
And that is why the debate is not between deficit cutters and so-called deficit deniers.
It is between ‘cutters’ and ‘spenders’ – between spending cuts and fiscal stimulus.
‘Cutters’ believe they can bring down the deficit by slashing government spending. ‘Spenders’ know that cuts cannot do it. Only by the public sector stimulating the private sector, can we reduce the deficit.
But this leads us to the elephant that looms in the hall of public debate, but is widely ignored.
The broken financial system.
The fact is: it is the banks that are broken. Not government.
Think of the economy as a three-legged stool. One leg is public sector investment. The second, private sector investment and activity. The third, the banking system which oils the wheels, so to speak, of the first two.
The banking system exists to serve the real economy – but has been shattered by the theories of neo-liberal economists.
As a result of liberalisation (including the 1971 Competition and Credit Control Act) the system as a whole has been burdened by bad debts and is effectively bankrupted. Banking debts worsen with every personal and corporate bankruptcy, every US home foreclosure (and there were more than 100,000 last month); and with the now inevitable fall in UK house prices.
The consequence is evident everywhere: in the hoarding of cash by bankers; in their failure to lend to the private sector for investment in economic activity. In the way pensioners, savers and taxpayers are lending to the banks – at what for some, are negative rates of interest.
In a truly bizarre twist, the banking system has become a borrowing machine, not a lending machine.
Rather than serving its purpose of lending to the real economy, the banking system is leaching wealth – from taxpayers, savers and entrepreneurs.
According to the Bank of England’s June Financial Stability report, in terms of balance sheets, the UK private sector is repaying more to the banks than the banks are lending. Over the past five quarters net lending was positive only once. The latest quarter showed the highest repayment of lending on record. If repayments by other financial corporations had been included, the position would be much worse.
In other words – pensioners, savers, companies, households and individuals – are lending to the banks.
It’s the economics of the lunatic asylum.
It gets worse. For the banks have chickens coming home to roost – known in the jargon as the ‘funding gap’ or ‘funding cliff’. According to the Bank of England’s Financial Stability Report in June, banks need to refinance or replace around £750 billion to £800 billion of term funding and liquid assets by end 2012. That implies they need to raise over £25 billion every month for the next two and a half years. This is much more than the £12 billion monthly average raised so far.
A banking system burdened by bad debt and liabilities, with a funding cliff looming; a system that is a borrowing machine, not a lending machine – is one based on the economics of the insane. And yet economists – and politicians – have nothing meaningful to say about this failure of economics, and of institutions designed to underpin the real economy.
Instead economists, politicians and Treasury officials engage in a form of displacement activity, fiddling with child benefit and quangos. All the while the private sector, instead of doing the government’s bidding and investing in economic activity, lends to the banks, and, starved of affordable credit, contracts its own activity.
Because of the failure of the banking system, the private sector will not be stepping in to compensate for the Osborne cuts. As a result, expect the budget deficit to rise. Pensioners, depositors and savers will continue lending their precious savings to bankers earning bonuses – in return for derisory rates of interest.
And while this is happening, all eyes are on the innocent mouse that is child benefit.
It’s economic madness.