Opinion: Liberal Democrats should debate ways of liberating our economy from the power of the banks

“Stronger Economy Fairer Society” was the strap-line that took us into the devastating General Election of 2015.  Some members wanted a fairer society that would support a stronger economy but regardless of which way we place these adjectives and nouns, it’s still unachievable without liberating the UK economy from our five major banks.

As long as our five big banks have the power to create money when they make loans, and lend it back to us at a profit, it is very difficult to see how our economy can achieve anything other than consolidating wealth into the hands of a few.  The Bank of England (BoE) and business generally is having less and less influence on how our economy expands and grows. Not only do we need to challenge this ‘status quo’, we need to radically overhaul the system and liberate the banking monopoly so that our economy functions to support our marketplace.

Properties in London have been sliced and diced according to an economic system that is essentially controlled by five big banks and this has overly inflated prices – driving up rents and sales. Homes for families are now filled with rooms for rent that are advertised as flats. We have less than 20 square meters for a bed, cooking and toilet facilities and are charged £800 per month rent. Generation rent (typically graduate students), are unable to save to buy a home due to ‘market rents’ sucking every penny from their incomes.

In the UK we have essentially five banks running 97% of new money in the economy and they continue to throw 40% of that created money at our housing market.  When that created bubble bursts – we bail them out! The QE that was washed into the economy by the BoE propped up the financial markets and expanded the economy not on tangible commodities that are bought and used like bikes or solar panels for energy, but on financial tools that only a few could trade.

Five banks shrinking and expanding our economy for enormous profits makes a mockery of our trust and commitment to markets. It sucks the heart out of our ‘working’ souls and the money from our pockets. It steals our dreams of a home and family. It is an injustice to every working person trading their labour for an income. It is a monopoly, and we are crying for freedom.

That one area of our economy is in the hands of so few banks, causing misery to so many of us, is simply a monopoly begging the Liberal Democrats for liberation. Debating why only 78 Board Members control the wealth of a country needs you!

I will be speaking at a fringe meting discussing these issues with Positive Money at the Social Liberal Forum Conference, on 4 July 2015 at  Amnesty International, in London.  You can register for that event here.

* Teena Lashmore is the Vice Chair London Region Liberal Democrats and writes in a personal capacity.

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97 Comments

  • Simon McGrath 19th Jun '15 - 11:10am

    Almost everything in this is wrong. Property prices and rents are going up because a) the population of London is very rapidly increasing as the strength of its economy attracts people from around the world b) interest rates are very low so people can afford to borrow more.
    ” Homes for families are now filled with rooms for rent that are advertised as flats” – what has this to do with banks?

    There is certainly an argument for more competition in banking but how would that deal with any of these problem?

    The population of london is increasing by around a million every decade. We need to build more and build higher.

  • david thorpe 19th Jun '15 - 11:12am

    spo rpeusmably you support the massive unprecedented spending cuts needed to eradicate the deficit immeidiately-because the banks finance it now by lending the UK the money to pay for it?

    And then there is the question of the 10 per cent of GDP that coems from the banks…..the banking market is changing as cahallenger banks take market share-but more can be done- to have mroe banks not less…

    the housing crisis is caused by a lakc of supply-which li9b dems exascerbate by opposing the actual building of mroe hosues in the places people want to live…

  • There are real problems but this argument is too confused to get to the root causes.

    More competition in banking would be welcome, more building of homes (reforming the green belt), more infrastructure in regions to aid clustering, a land value tax (substituting other taxes) to reduce dead weight costs, abolishing stamp duty to make moving cheaper. All would be good but this article seems to suggest there is some kind of intentional conspiracy, simply not a credible position.

  • It is always good to read something from Teena Lashmore because she gets to the point and she does not feel the compulsion to dress everything up in the language of The Westminster Bubble.

    This point leaps out from what Teena says —
    “…Homes for families are now filled with rooms for rent that are advertised as flats. We have less than 20 square meters for a bed, cooking and toilet facilities and are charged £800 per month rent.”

    This is the reality of life in London in 2015.
    Out here in the suburbs the free paper that comes from local Estates Agents pushes house sales and rented “flats”.
    Four properties advertised for sale on the front page — the prices are as follows –
    Victorian terrace, £1,450,000
    1930s semi-detached £799,950
    Victorian house with garden on ‘corner plot’ £2,150,000
    Edwardian house £2,100,000

    To put this into context the first house that I bought in this area (Victorian semi detached) cost me exactly £8,000
    Who can afford to buy a house today?
    Who can afford to rent?

    Despote this crisis, only one of our leadership candidates seems clued up about the housing problem even though he is from the constituency furthest away from London.

  • Samuel Griffiths 19th Jun '15 - 11:34am

    Good for you Teena. This is actually the sort of individualist thinking we should be promoting! Liberalism must be about a society that promotes equality of opporunity, without the restrictions that finance-lead economics creates. Unfortunately, I’m not sure you are going to gain much support on this (especially considering the last 5 years) but it has still cheered me up to read an article I can whole heartedly agree with.

  • Sorry Teena, this is wrong on so many levels.

    @Simon McGrath and @Psi are right and I generally agree with their comments. There are, of course, many things that, as liberals, we can address, especially to encourage the building of more homes, and in particular affordable homes. We should take a close look at the planning regime, and actively campaign against Nimbyism (when too often the easy approach is to go for the populist approach and support the Nimbys in our communities). We should also actively support and encourage other forms of lending (social lending, etc.).

    But, to blame the banks makes no sense at all. My bank provided me with a hugely useful service, at my request, in providing the money that allowed me to buy my family home, which would never have been possible for me without mortgage lending.

    Moreover, if you really want our party policy to be to stop, or restrict, the banks from offering mortgages for the purchase of family homes, then you are advancing a policy the effect of which would be to create a crash in the housing market. Noting that something around 60% of the UK population still live in owner/occupier homes, what chance would there be for the party to get elected with such a policy?

  • Christopher Haigh 19th Jun '15 - 12:12pm

    Well done Teena. House prices seem to be a function of how much a bank is able to lend out.The housing market in London must consist of bankers selling houses to themselves, premier league footballers and Russian billionaires. How can a house costing £8k in 1970 have escalated to £1.25 million only 45 years later ? This is an example of the free market going wrong big time. How is the economy sustainable for people to pay these prices. I can only see big crash written all over this problem.

  • Christopher Haigh

    “This is an example of the free market going wrong big time”

    Where is the free market in the housing market?
    Supply: Artificially restricted by planning law (along with other anomalies affecting size)
    Demand: Artifically raised by help to buy, QE etc.

    “The housing market in London must consist of bankers selling houses to themselves”
    Careful, put the foil down…

    “How can a house costing £8k in 1970 have escalated to £1.25 million only 45 years later ?”

    Not the right measure, you shold look at the price as a multiple of median earnings, but it still shows over valuation so the general thrust is valid.

    These articles are popping up suggesting it is a problem related to some conspiracy, it is not it is the effect of polices adopted, it is easily solved. Build, we have done it before we can do it again.

  • Teena Lashmore 19th Jun '15 - 12:45pm

    Hi Mark.
    Many thanks for responding. I am chairing this fringe and we have the Policy Officer speaking. I think your observations will be fully addressed and clarified. I am not ‘bank bashing’, I’m hopefully developing our knowledge with actual evidence of how banking actually works today. In my view five banks is a monopoly. In Europe, five banks are not running economies. May I be bold and ask you attend the fringe and have your views tested by experts in the subject as I’m sure the evidence will win the day and I hope encourage us to develop our value / policy on modern economies. Is this OK?

  • Teena Lashmore

    “In my view five banks is a monopoly”

    I’m not sure the description is exactly true, but it is certainly dysfunctional and a long way from a liberal idea of a free market.

    I wouldn’t attached the discussion of banking reform too much to housing, the housing market has a number of policies that should be implemented to make the market work and produce other liberal outcomes but to attach the argument of banking reform and housing too closely together make the argument sound confused.

    There are many reasons to reform Banking and breaking the domination by a small number of major players so better to open it out more broadly.

  • Teena Lashmore 19th Jun '15 - 12:55pm

    Hi Simon. Mmmmm so I can count on you to be at the Fringe and have your observations challenged by the actual evidence of how our banking system is actually working today? Really good to have the debate with the experts that are endorsed by our BoE and FT. I hope I Chair/ facilitate a great debate that may lead to inform our views and party’s view on our modern economy. Is this OK?

  • Peter Bancroft 19th Jun '15 - 1:06pm

    Like others, I think this article is unfortunate in being sweeping rhetoric rather than an assessment of what things are actually like on the ground. I hope that the fringe is a bit more reality-based and explores the actual issues. What do we think about having just five high street banks (which is called an oligopoly)? Do we really want to continue to regulate so strongly against new entrants? How do we address the rise of the grey market in lending? As liberals can we support funding circles and other non-bank based funding?

    Housing is an even more important topic, but blaming London house prices on the banks which allow people to buy them is mis-informed, as others have said. House prices react to supply and demand, but (like banking and other financial services), the market isn’t meeting our needs as a society thanks to extreme levels of centralised regulation.

  • Eddie Sammon 19th Jun '15 - 1:12pm

    Two problems with this:

    1. The banks can’t create a penny of money and the “Positive Money” attention seekers should be ignored. Not Teena, but the people behind the group. If people want to ban fractional reserve banking then it will be the end of free bank accounts.
    2. It is hard to produce a trade surplus (not a tax surplus, a trade surplus) unless we focus on comparative advantage and our strategic industries.

    I am pleased to see other commenters see the flaws behind Positive Money’s conspiracy theories.

    By the way, Positive Money will often link to people like Paul Krugman to gain credibility, but he is now an embarrassment to the economics profession and should be ignored too.

  • Eddie Sammon 19th Jun '15 - 1:15pm

    By the way, Leena does make a good point about QE. But it is not always bad. But we need to go back to fundamentals and accept that if people want free bank accounts then they need to accept a risky banking system. I would say that you cannot eliminate boom and bust so there is no point panicking about it.

    Regards

  • Simon McGrath 19th Jun '15 - 1:19pm

    Teena whether or not 5 banks are a monopoly ( they might be an oligopoly) is not really relevant to the point you are making.
    Can you clarify why you think if there was more competition in banking the new entrants would not be lending money to house buyers. There really isnt the connection you are suggesting between the amount of competition in banking and the london housing market

  • Eddie

    This is not something I would normally do but, in defence of Paul Krugman:

    You have to separate the two personas of him.

    Firstly there is Paul Krugman the academic who does research and publishes, academic published work is peer reviewed before publication in journals and can be critiqued based upon reason and evidence.

    The other Paul Krugman, who he once self retfered to as “Krugtorn the destroyer” is the one who writes in NYTimes and other mainstream media outlets. He is ridiculous and I always imagine he is writing his articles with his underwear on the outside of his trousers and his coat attached only at the neck like a small child. This persona’s writing can be disregarded as they often contain misrepresentations of other people’s arguments, fiddled data and other issues you get if the only quality control is “Ohhh, it’s Paul Krugman lets publish.”

    It is worth taking the work of the first persona seriously (even if you don’t agree with it), but the second appears to be a way for an old man to blow off steam so can be safely ignored. The issue is the media confuse the two (thinking the toe curling Newsnight where they devoted a whole show to hero worship).

  • *“Krugtron the destroyer”

  • Eddie Sammon 19th Jun '15 - 1:44pm

    Lol, thanks Psi. My opinion of him is generally that his ideas add up in theory, but are unelectable, so wouldn’t work. But regardless, I mentioned him because I have seen him support the money creation theories.

    What it comes down to is people calling an increase in the “money supply” “money creation” and I would not use this language and prefer to focus on the monetary base (which is part of the money supply).

    Finally, I meant to say Teena, not Leena. Just a bit of a typo. 🙂

  • Geoffrey Payne
    A Nobel prize does not exempt you from having use honest argument and logic in your argument. Or presumably you think all labs should be forced to be single sex?

  • Quick correction it was “I’m Krugtron the Invincible”
    See here:
    http://krugman.blogs.nytimes.com/2013/04/28/knaves-fools-and-me-meta/?_r=0

    “Destroyer” was someone else.

  • Eddie Sammon 19th Jun '15 - 2:15pm

    Geoffrey, I think Krugman knows the maths and theories as much as anyone and certainly a lot better than me, but I still know a political argument when I see one (or click-bait).

    I don’t want to turn this article into a debate about Krugman, I regret mentioning him, but yes there is no great conspiracy going on and if there were then banks wouldn’t be getting rid of jobs, having struggling share prices and sometimes going bust.

  • David Allen 19th Jun '15 - 3:58pm

    Eddie Sammon,

    “if people want free bank accounts then they need to accept a risky banking system”

    Personally, I’d be happy to pay £5 per transaction, if that meant we didn’t have The Crash!

  • David Allen 19th Jun '15 - 4:09pm

    “blaming London house prices on the banks which allow people to buy them is mis-informed”.

    Perhaps it would be better to say that the banks are far from being solely to blame. Yes, there is real demand for housing. But there is also demand which is driven purely by financial speculation, witness the number of billionaire properties which are left empty while they accumulate capital value. There is also the role of the banks in promoting ever higher lending ratios. There is also “Help to Buy” which is Osborne’s backdoor economic stimulus applied by artificially encouraging a rise in house prices and values, which in turn encourages the rich to spend and hence promotes growth, but at the expense of all those who are priced out of the housing market. If Labour had adopted Osborne’s housing policy, Osborne would be calling it “economically illiterate distortion of the free market” no doubt.

    All these factors together add up to a deliberate policy of help for rich mansion owners and to hell with everyone else. That is our erstwhile partners in government for you. Until we break with our wrong-headed past, we are nowhere.

  • Roland Lyle 19th Jun '15 - 4:18pm

    This article hits the nail on the head. The single biggest factor behind house price rises is the fact that banks create 97% of our money supply, out of nothing, and allocate about half of this into mortgages.

    Lots more money chasing a more or less static housing stock = rampant house price inflation!

    The supply / demand idea focused on building more houses completely misses this fundamental point.

    Good 2min video, plus supporting data here:
    http://www.positivemoney.org/issues/house-prices/

    @Eddie Sammon – your suggestion that ‘the banks can’t create a penny of money’ is simply wrong. But you are not alone in thinking that – and that is a big problem I think we need to address. Helpfully, the Bank of England have issued a short clear bulletin which explains it, called Money Creation in the Modern Economy.
    http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

  • Mike O'Keefe 19th Jun '15 - 4:42pm

    The thrust of Teena’s argument is slightly off the main issue :- It is not the banking oligopoly that has caused the problems (whether we have 3 or 30 High Street players will not rectify soaring London house prices) it is their ability to create money out of nothing. Or, rather by expanding their balance sheets by putting us into debt. Structural reforms that put credit-creation back in the hands of a public interest body (as opposed to the whims of the private banks) and remove the pro-property (and anti-production) distortions of the current regulatory framework are sorely needed. Mark Posen may thank the bankers for loans enabling him to buy. The alternative is to blame them for the exorbitant property price escalation that puts him and all would-be home owners even deeper into debt.

  • Eddie Sammon 19th Jun '15 - 4:42pm

    David Allen, I am actually very interested in old style banks that act as “vaults” rather than lending machines, but I think we can have both.

    Roland Lyle, I have read that PDF before. It is quibbling about semantics. The Bank of England don’t believe we should have a 100% reserve system. Which is what matters.

  • Frances Griffithstow 19th Jun '15 - 4:56pm

    Great article Teena. You’ve hit the nail on the head. It is obvious to me that if banks create lots of money for the purpose of buying houses, then the prices of those houses is bound to rise. Build more houses and more people will be attracted into the market and the prices are will still rise. In fact, over the country as a whole, in recent years we have built 2 new homes for every 3 extra people. At the same time the amount of money created by the banks as numbers in borrowers deposit accounts for mortgages has grown nearly 3 times as fast as wages. Apart from the effect on house prices though, can it really be right for banks to manufacture our money with a few strokes of a keyboard , and charge us for the temporary use of it? Would you really dare to admit to people that you know banks create our money supply and lend it to us to make a profit out of the interest but that you think that that’s all right? No one I know thinks it’s all right when I tell them our money is not created by the state, but by private companies that pay their senior executives enormous salaries and bonuses on the strength of it.

  • Roland Lyle 19th Jun '15 - 5:06pm

    Eddie, if you’ve read and understood the BoE bulletin, I am surprised that you still think banks can’t create money!

    The bulletin is pretty clear:
    – Thisarticleexplainshowthemajorityofmoneyinthemoderneconomyiscreatedbycommercial
    banks making loans.
    – Moneycreationinpracticediffersfromsomepopularmisconceptions—banksdonotactsimply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.

    Not sure what happened with the spacing but you can read it I hope.

    I accept that there are different options to improve the current system – and that debate is healthy – but they must be based on an accurate understanding of it. Currently we don’t even have that! For example, only 1 in 10 MPs know that banks create money.

    People are catching on though. Last week the FT published this:
    “Why everything you were taught about banks is wrong and why it matters”
    http://www.ft.com/cms/s/3/0945e8d0-0b6f-11e5-994d-00144feabdc0.html#axzz3dWZtxK00
    (If you hit the ft paywall, you can get to the article by googling the above phrase)

  • Eddie Sammon 19th Jun '15 - 5:11pm

    Roland Lyle, obviously if a bank receives £100 and lends out £90 then suddenly we have £190. Money creation. But I think people get confused with this and think if a bank received £100 then it is suddenly able to lend £190. The way it is put needs to be clearer, rather than presented as some kind of conspiracy.

    Regards

  • Jenny Barnes 19th Jun '15 - 5:12pm

    ” It is an injustice to every working person trading their labour for an income.”
    Your target is incorrect. Capitalism works like that.

  • Before returning to topic,

    Geoffrey Payne

    I was very clear that Krugman has made a serious contribution and agree or disagree that should be taken seriously as it does drive our understanding forward. However there is also the role as a columnists which is not a serious role where people file week in week out and therefore are often of dubious quality, the quality of the New York Times articles is poor and even among those who are sympathetic to his view point can be rather embarrassing.
    Niall Fergusson describes the NYT behaviour in three articles:
    http://www.niallferguson.com/journalism/miscellany/krugtron-the-invincible-part-1
    http://www.niallferguson.com/journalism/miscellany/krugtron-the-invincible-part-2
    http://www.niallferguson.com/journalism/miscellany/krugtron-the-invincible-part-3
    You may believe that a Nobel Prize gives someone free pass to behave however they wish but I would suggest it you attack others while attempting to whitewash your own record, you can expect to be mocked.

    Anyway to pull this back to topic, in one NYT article Krugman did criticise the Positive Money argument (can’t find link right now), however as it came in a NYT column I didn’t think it didn’t really add anything to the discussion.

  • Roland Lyle 19th Jun '15 - 6:00pm

    Eddie, thanks for that

    I think we can be clearer though. They way you’ve put it might lead people to believe that banks need deposits before they issue loans. That is not the case – they create new money through the process of lending and reserves follow that. The BoE paper makes that clear, and this has also been empirically proven by Prof Richard Werner: this is the reality of how banks operate.

    Whether or not you agree with their proposals for change, the Positive Money videos provide clear explanations to how the money system works now.

  • I’m not so sure banks really create money. They create the illusion of money. If you borrow say £100 based your future earnings but then can’t pay it back then the bank loses without the money ever having really existed. The money is actually based on the expectation of a return in the form of interest. Basically you are borrowing on your future earnings and the banks are reliant on the interest which you are paying them. There’s little real money creation involved, The crash of 2008 involved more money than there ever was in any bank because it was future money not actual physical cash in a vault.

  • Scott Egner 19th Jun '15 - 7:26pm

    Hi there seems to be a bit of confusion here. Some People are referring to monetary base and suggesting that deposits create loans via fractional reserve banking. This hasn’t been the case since the 80s. There is no reserve ratio.
    It’s important to realise that LOANS CREATE DEPOSITS, not the other way round.

    Also simply referring to supply and demand to explain the rise in house prices is really missing some major factors. This was the topic that came up again and again during the election and had me shouting at the TV. More than 50 % of banking money issued (no I won’t say lent) was pushed into the mortgage market, creating inflation. It’s not difficult to imagine that this caused a major house price hike…
    http://positivemoney.org/issues/house-prices/

    The FT also recently reported on the govt’s help-to-buy scheme which has actually helped to push house prices up even more.

    Well done to Teena for bringing up such a hugely important topic.

  • Eddie Sammon 19th Jun '15 - 7:29pm

    Roland, thanks. I think I understand pretty well how a bank works, but not absolutely everything. However I am sure you can appreciate that if people start the argument by saying the whole banking system is flawed and needs to go then people are going to jump onto the defensive.

  • Lester Holloway 19th Jun '15 - 7:44pm

    It was (is) Lib Dem policy to create Community Banks, with a view to increasing lending and support to small business. On slightly different tip Vince Cable (remember him?) has made similar points in a way to Teena about the stranglehold our big banks have and has suggested we break them up. I assume he knows what he’s talking about! I certainly think we should continue the conversation Vince started in his absence re banks having too much power.

  • John Tilley 19th Jun '15 - 8:05pm

    For those who have not seen today’s Guardian yet, here is another illustration of the madness of property prices in London in 2015.
    http://www.theguardian.com/money/2015/jun/19/70000-shed-withdrawn-from-auction

    I look forward to reading the excuses and justifications of the £70,000 shed in  Walthamstow from  those who criticised  Teena’s original article and rushed to the defence of the banks and instead blamed it all on “planning restrictions” (a classic Conservative argument is ever there was one).

  • Maybe we could call them something other than Community Banks. How about Building Society?

  • Fran Griffiths 19th Jun '15 - 8:19pm

    Glen, the banks don’t create cash, but notes and coins comprise less than 3% of the stuff we call money and use for paying bills, wages,taxes and generally buying things. Some 97% of what we use for money is electronic these days. Call it an illusion if you like. I prefer to think of it as numbers in a deposit account. If a borrower fails to pay back a £100 loan then there will be an imbalance in the banks accounts. Originally the £100 deposit which the bank created for the borrower, and which was a liability for the bank, was balanced by an asset of equal value, a loan contract, signed by the borrower, promising to repay £100. In the event of a default this asset is completely without value. The resulting imbalance will have to be made up from shareholder equity.
    If the borrower repays the £100 the money he uses to repay it will have been created in exactly the same way, as a loan to some other borrower,as his own loan which he no doubt used to pay for some good or service just as if it had been part of his wages.
    It is a sad fact that if you track every pound in circulation back to its source , in 97 cases out of 100 , that source will be a loan from a bank. If we all made a big effort and tried to live within our means, living very frugally and using all our income to pay off our debts, there would be no money left and the economy would very quickly grind to a halt. That, of course is what tends to happen in a recession, resulting in a slowdown in the economy, and calls on the banks to start lending again.

  • Lester

    “On slightly different tip Vince Cable (remember him?) has made similar points in a way to Teena about the stranglehold our big banks have and has suggested we break them up. I assume he knows what he’s talking about!”

    I imagine every Lib Dem believes Banking in the UK is too concentrated. I imagine the disagreement would come when the question of how to change that is discussed.

  • Eddie Sammon 19th Jun '15 - 8:48pm

    Scott Egner, so what is your policy? Ban banks from lending to each other? Nationalise all the banks? Permanent QE?

    This is why it is a waste of time debating with the Positive Money people. They research banking to the nth degree and then come out with far left solutions and claim conspiracy when they aren’t taken up. No one should take them seriously and my best advice to Teena would be to leave this group alone.

  • Fran Griffiths 19th Jun '15 - 9:02pm

    Joe, you are right that Quantitative Easing was a completely wasted opportunity because the money created in the process, by the BofE was directed into the financial markets where it merely inflated asset prices and further enriched the already wealthy. See positive money.org/how to waste £375 billion.

    Positive Money would be like Quantitative Easing but for the benefit of us all not just the few. PM proposes that the commercial banks should no longer be allowed to create monet to lend. They would only be allowed to lend existing money that savers had deposited in investment accounts, or money that the central bank had created and lent to the banks to lend on to house buyers and businesses etc. This sovereign money creation ,where the BofE creates money for the government to spend into circulation, would be quite different in its effect from Quantitative Easing where Bof E initiated money was used to buy back government debt (bonds), thus inflating their price. while doing nothing to make money available for investment in businesses and the real economy.

  • Eddie Sammon 19th Jun '15 - 9:07pm

    Fran, I just watched half of Positive Money’s “three simple proposals” video and switched it off after the first proposal. It says banks nor politicians should be allowed to create money, so who should? A dictatorship of the proletariat? It is ridiculous and contemptuous the way the whole thing is packaged as a conspiracy and the solutions aren’t even explained properly. You are basically saying we should ban bank lending and have the whole thing done by some sort of committee, which conveniently can’t include politicians, so I don’t know this is meant to be accountable.

  • Eddie Sammon 19th Jun '15 - 9:28pm

    Fran again, you say banks should only be allowed to lend existing money, so what you are saying is if you stick £1,000 in a five year term account and the bank lends £900 of it then you should see your balance go down to £100. What difference will this make to the economy? The bank still owes you the original £1,000.

    “Positive Money would be for the benefit of the many” – Most of it would be eaten up by inflation and I don’t care if people think it wouldn’t happen because it would and it is actually one of the bigger reasons why we have an asset bubble – because all the new money has gone into the housing and stock market, which you agree with, but then you come up with daft proposals and packaged in a misleading way.

  • Eddie Sammon 19th Jun '15 - 9:35pm

    Just blocked Positive Money on Twitter and I refuse to debate this with them anymore. They want to debate it forever and don’t listen.

  • Fran Griffiths 19th Jun '15 - 9:35pm

    Eddie Sammon, “far left solutions”! claim conspiracy “! This attempt to sideline Positive Money by painting supporters as left wing and batty is just not going to work is it? There is no need to rely on debates in comment sections for your information about what PM is proposing. There is an excellent website where it is all set out very clearly. As for left wing, did you know that Douglas Carswell is a supporter and Zac Goldsmith ? Did you know that the back bench debate on money creation, in November 2014, which Positive Money worked hard to make happen, was hosted by Steve Baker, a conservative MP? Like any organisation, PM probably hags its share of left wingers and conspiracy theorists, but they are by no means representative. 🙂

  • Fran,
    It depends how you see money. To me it’s all IOUs really. they owe you the credit that goes into your account and if you borrow for a house you owe them. To me this is debt creation not money creation and it creates more debt because servicing that debt means you have to charge more for say your house than buyers can pay, which in turn means they have to borrow more than they earn until you end up with housing that is said to be worth this that or the other, but in fact simply isn’t selling because it costs too much. You see, I’m not convinced the “housing crisis” is being driven by a lack of supply. I think it’s caused by debt and the need to service debt. If you built a million new homes they would be sold at the existing price which would keep driving prices up rather than down because debt can look a lot like profit. Hence I say it’s the illusion of money.

  • Fran Griffiths 19th Jun '15 - 11:39pm

    Thanks for explaining Glenn. I do see what you mean. I agree that the main driver of house price inflation is not supply.It is our debt based money system.

  • Christopher Haigh 20th Jun '15 - 12:00am

    @Eddie Sammon Hi Eddie I agree that over the lifetime of a bank loan it ends up being economically neutral to the money supply in the overall market economy. However in the short term it exerts inflationary pressure on whatever it is spent on (eg housing sector) and in the longer term deflationary pressure to other sectors of the market economy as the the loan instalments are repaid (eg people can’t afford to go to the pub or buy clothes etc). The banks can create upfront credit for the purpose of their own profit making but the customer always has to pay the loan among back.

  • John Tilley 20th Jun '15 - 6:32am

    Eddie Sammon 19th Jun ’15 – 8:48pm
    “…Scott Egner, so what is your policy? Ban banks from lending to each other? Nationalise all the banks? Permanent QE?”

    Eddie,
    If I could take just one of your questions to Scott Egner — ‘Nationalise all the banks?’
    Could I turn that question back to you and ask – “why not?”.
    We have a nationalised army, a nationalised road and sewer system, we have a nationalised health service, why not banks?
    What is your case for private banks?

    Is the UK better off because one of the major banks in London is owned and run by a bunch of anonymous capitalists from Communist China (HSBC) ?

    Did private banks work so well that they did not require £ Billions of taxpayers’ money to bail them out?

    What is so good about a privatised banking system?

    Unless you are a banker fiddling the Libor rate and paying yourself an obscene annual bonus, why would you defend private banks ?

  • R Uduwerage-Perera 20th Jun '15 - 8:50am

    Teena,

    Simply and well said!

    Ruwan Uduwerage-Perera
    Chair – EMLD

  • I think the biggest long-term economic problem we will face is the increasing automation of work. There just isn’t enough paid work to go around and there will be even less paid work in the future. Some kind of citizen’s income will be the minimum that is needed to address this looming problem.

  • Joe otten’
    It’s not a moral argument. Its why I think houses aren’t selling. Did I say anywhere that I think charging interest is inherently wrong.? You are attributing an argument to me I did raise. My actual argument is that house prices are too high and that this is debt driven. No one can afford to let the price drop because they paid more than they are worth and they aren’t selling because the price is too high. I That is not a moral judgement. Also the banks were claiming record profits during the early to mid 2000s and it turned out a lot of them were pretty much insolvent which is why governments stepped in and why we now have interest rates no one is willing to raise. Personally, I think bad business men should lose their shirts and that if you paid too much for your home and it is no longer worth that then why should you expect to sell it at for even more than you paid. I am a capitalist, but I think this kind of capitalism just isn’t working and stores up problems. I’d let interest rates rise like the Major government did in the 90s not keep them artificially low to protect bad investments. I certainly would not be using public money to artificially inflate house prices or to fling at incompetents. Maybe there is an argument for Roosevelt style New Deal, but certainly not the utter rubbish I believe is being foisted on people at the moment.
    Interest rates are virtually zero, so maybe instead of attributing arguments to me I didn’t make you should be asking Mark Carney and Osborne when they got some old time religious economics?

  • Fran Griffiths

    “As for left wing, did you know that Douglas Carswell is a supporter and Zac Goldsmith ? Did you know that the back bench debate on money creation, in November 2014, which Positive Money worked hard to make happen, was hosted by Steve Baker, a conservative MP?”

    That is a bit misleading. As I understand it Carswell and Baker support the Libertarian approach of Free Banking. So they are not supporting the ideas of “Positive Money”

  • John Tilley

    ” ‘Nationalise all the banks?’
    Could I turn that question back to you and ask – ‘why not?’.”

    RBS

  • David Allen 20th Jun '15 - 1:05pm

    I want to say something about the “conspiracy theory” put-down that is used in this thread – as usual – by the Right against the Left.

    When Adam Smith taled about the “invisible hand” of the free market, whereby the self-interested actions of independent individuals tend to work together to produce what looks like (but is not) a deliberately planned outcome, was Smith a conspiracy theorist?

    I would say “No, he wasn’t. He did however explain why something can look very much like the outcome of a conspiracy, when in fact it isn’t.”

    Smith happened to believe that his “invisible hand” tended to do good things. Peronally I wouldn’t entirely disagree with him, but I think – as many do – that it can also do bad things. It can for example create house price bubbles or other bubbles which make money for the promoters and then crash the economy for everybody else.

    Smith’s description of an “invisible hand” gets closer to reality than the unjustified slur of “conspiracy theory”. Whether or not the Left have got everything right, they are not being obsessed by visions of evil conspirators in smoke-filled rooms, and it is dishonest of the Right to claim that they are. Instead, they can see Adam Smith’s “invisible hand” in operation, and acting to do harm.

  • Eddie Sammon 20th Jun '15 - 3:40pm

    Hi John Tilley, I am not against nationalising some banks if they have incompetent owners and are willing to sell for a fair price, but I wouldn’t want to kind of confiscate them or pay over the odds for them.

    However it comes down to liberal economics: if we nationalise the banks then why not the rest of the economy? I actually don’t think there should be a rush to re-privatise RBS, but even Vince Cable thinks in general private companies are better than nationalised ones, otherwise he wouldn’t have sold Royal Mail and used legal and management structure as one of his reasons.

    David Allen, I have a lot of respect for new radical ideas, but they have to be explained clearly. In one section Positive Money are saying how this would radically change the economy and then we have a polite commenter above saying “there would be no long term difference in the money supply”. So I think the whole thing is a bit misleading.

  • Conrad Jones 20th Jun '15 - 4:01pm

    Well done Teena, you’ve correctly linked high house prices, high rents and shockingly inadequate “Flats” to the credit creation mechanism. For many years I could not understand why House Prices were increasing while wages were stagnant or only increasing by 2% or 3% while House Prices were increasing 15% or even 20% per year. Where was all the money coming from? The answer is found by studying how the Banking Industry works.

    Five years ago I thought this had something to do with Fractional Reserve Banking where the theory states that a Bank first accepts Bank Deposits from a customer then lends out a fraction of that to a borrower, but this didn’t make sense as people were short of money, Bank Deposits would reduce and therefore, lending would reduce. It turns out – thanks to the Research and hard work done by PositiveMoney, that Banks do not have to wait for deposits before they lend, they just create the electronic money in a Borrower’s Account and look for the Reserves Later – as much as four weeks later. This then explains how Banks were able to expand the money supply and direct 40% of it at the Housing Market.

  • Conrad Jones 20th Jun '15 - 4:02pm

    If we study recent history – Forty to Fifty years ago, money creation by Banks was far more restricted and this resulted in a stable market which could only lend 2.5 to 3 times the salary of one person in a Family unit. This meant that the mortgage was not forcing both Adults in a family to work just in order to sustain the mortgage debt, and as a consequence, House Prices were less. If the wage earner in a family unit became ill or had to leave work for a number of months, the other adult could then work and their salary would be positive addition to the income of the family. where as today, if one wage earner loses their Job, as both adults in the family unit are already at work and required to service the mortgage debt, losing a wage means that they will also lose their home with no additional wage to count on. The way Banks create money has changed since 1968, back then Banks had to have 20% Reserve Requirement, now it’s voluntary, Banks decide how much reserves they need and heavily rely on Interbank lending and the Lender of Last Resort to maintain a system which is essential on the edge of insolvency, relying heavily on Public Bailouts to prop up an Industry that should be a service industry but is hailed by many Politicians as an essential productive business.

  • Conrad Jones 20th Jun '15 - 4:02pm

    Banks are said to produce profits for the Nation and are often regarded as a key component of our export market. The truth is that in 2010, Banks received £120,000,000,000 (£120 billion) in implicit subsidies and only contributed £23,000,000,000 (£23 billion) in Tax Revenue – a net loss to the public of £97 billion. The benefits to the vast majority of people in the UK of just restricting Banks to create just 80% of the money supply (as was the case in 1968) would be immense. It would provide a windfall of seigniorage on 20% of the total money supply, as is received at present on only 3% through Notes and Coins creation by the Bank of England. To ignore the seismic shift that has taken place in the economy over the last forty years – due to handing over the rights to create our money supply to Banks, would be the greatest mistake that we have ever made and the greatest opportunity to address that mistake and correct it. Iceland, Denmark and Switzerland are currently studying the benefits of a Sovereign Money System.

  • Conrad Jones 20th Jun '15 - 4:16pm

    Eddie Sammon,

    PositiveMoney is proposing that an independent committee (similar to the MPC at the Bank of England) who’s policy is governed by Parliament and transparent to Parliamentary Debate, who will decide how much money to create based on Inflation Figures and the needs of the Economy. In the Sovereign Money Proposal, the Public will create the money through the Bank of England and a Money Creation Committee – interest free to the public. Banks will not be able to create money as they do today, they will have to attract deposits and then lend these out – 100% from an investment account (where the Bank and Customer share the risk and the returns), and 0% from a Transaction Account. You may remember — as I do – the excessive inflation we all experienced in the 1970s. This did not occur because the Government tried a Sovereign Money System – the inflation was caused by lifting Bank Money Creation restrictions (or Bank Regulations) on Reserve Requirements and also the lack of a Gold Standard – a Fiat Money System was created in 1971 – a perfect opportunity for State Created Money. Most Bank created credit is not of benefit to many people because 90% of fuels excessive House Price Inflation above wage growth (not seen prior to 1971), Financial Speculation, Commercial Property Speculation and Credit Card Purchases.

  • Conrad Jones 20th Jun '15 - 4:26pm

    Eddie Sammon,

    “Fran again, you say banks should only be allowed to lend existing money, so what you are saying is if you stick £1,000 in a five year term account and the bank lends £900 of it then you should see your balance go down to £100. What difference will this make to the economy? The bank still owes you the original £1,000.”

    With respect, your statement above is not correct. £1000 would be put into a an Investment Account for five years and the customer would not be able to withdraw this until the Five Years is up – very much like a Five Year Bond is today except that you can get your money but with Interest Penalties. I am afraid you confused Fractional Reserve Banking with an Investment Account which is wrong. The Bank/Building Society could lend ALL of it out – all 100% and the customer would see that they have £1000 invested in their statement – just like a Bond and they would receive Interest on that money. If they put that £1000 into a Transaction Account, they would not receive any interest and may be charged for the service – but the Bank could not lend any of it out – if they did – the Bank would be committing Fraud. Under this proposal, the Government would have control of the money creation process and would be able to direct that money at public enterprises, NHS, Education, renewable energies, etc and far less public debt.

  • Conrad Jones 20th Jun '15 - 4:29pm

    Eddie Sammon,

    “Just blocked Positive Money on Twitter and I refuse to debate this with them anymore. They want to debate it forever and don’t listen.”

    Eddie, really – you make comments about PositiveMoney’s proposals where it is clear that you don’t understand them. When people try and correct you – you get upset and throw your Teddy out of the pram and shout “I don’t want to play anymore – WAHHHHH!” – Grow up.

  • As nominal gdp grows the money supply must grow to accommodate it. When an imbalance is created i.e. there is a credit squeeze and commercial banks do not create new money by making new loans – growth is impeded and stagnation or recession results. When excess money supply is created inflation results – initially in financial assets like shares and property (that drive rents and mortgage levels) and ultimately in commodities that translate into prices in the real economy.

    London house prices are impacted by multiple factors. contributing to an excess of demand over supply.
    – increasing population; -safe haven investments;-planning restrictions;-the inflationary effects of zero bound interest rates and unorthodox monetary policy; development of public transport infrastructure.

    Competition in the banking and lending market is important, particularly for small business growth, but I think we have a reasonably competitive banking and mortgage market in the UK. I believe the solutions lie elsewhere and are at least Sixfold:

    1. An unwinding of quantitative easing as and when international interest rates settle at a more historically stable level.
    2. Public investment in developing brownfield sites (particularly TFL and NHS unused sites) equal to and concurrent with development of transport infrastructure such as crossrail.
    3. Allowing London local authorities to borrow for development of publically owned social housing stock without the restriction of limits on overall public sector borrowing and financed by No. 4 below.
    4. A Land Value Tax for London to replace initially the London precept and business rates and ultimately local authority council tax.
    5. A reassessment and relaxation of the zoning of the green belt along the areas adjacent to the main road and rail arterial networks emanating from London to the home counties.
    6. Withdrawal of capital gains tax exemptions for personal private residences and replacement with a housing indexation relief..

  • Eddie Sammon 20th Jun '15 - 4:50pm

    Conrad, if you want to put banks in charge of the “money creation process” or lending as I prefer to call it then who is to say a little elite centralised committee organising all the lending in the economy would achieve better outcomes? You have already said you want to put it into “social projects”, so no mention of military spending and I fail to see how this is much different from a Marxist technocrat planned economy.

  • Eddie Sammon 20th Jun '15 - 4:53pm

    I didn’t explain properly above. Basically I think it looks like some sort of Marxist planned economy and worse: I think it is packaged in a misleading fashion. That is my problem with it and I don’t have time to debate it constantly.

  • Eddie Sammon 20th Jun '15 - 5:05pm

    Finally, in life you don’t get dozens of attempts to explain your idea. You’ll have to come back another time and explain it properly, but for now the “de facto” meeting has ended.

    Regards

  • John Tilley 20th Jun '15 - 5:52pm

    Psi 20th Jun ’15 – 12:53pm

    So – what is your point?

  • John Tilley 20th Jun '15 - 6:07pm

    Eddie Sammon 20th Jun ’15 – 3:40pm

    Thanks, Eddie.
    Interesting answer and not entirely throne that I expected.

    You are probably too young to remember the Post Office Savings Bank. It was one of the best banks I have ever used. As a child I learned about earning interest by handing in my book at the counter in the local Post Office and seeing the calculations.I think I am right in saying that it was set up by Gladstone.

    Gladstone being a real Classical Liberal believed in some state run enterprises and was quite keen on nationalising the railways. He also “nationalised” primary schools instead of leaving them to the church, charities or private companies. Although the Coaliton and the present Conservative governments have been moving us closer and closer to privatised schools; no doubt the Centre For um will bring out a paper soon telling us that this is the future and that paying for a school is the real answer to everything.

    But your rather more pragmatic approach seems more reasonable. I agree with you about re-privatising RBS — it seems another example of handing £ Billions to rich people and corporate interests.

    In that sense it is a bit like the privatisation of Royal Mail (for which Norman Lamb is now claiming responsibility – although I think in practice it was neither Vince Cable nor Norman Lamb but Ed Davey; perhaps the answer will be in Lynne Featherstone’s forthcoming book; or perhaps they are all busy writing their own book.).

  • Christopher Haigh 20th Jun '15 - 6:38pm

    @conrad jones, Hi Conrad thanks for your explanation of the creation of massive amounts of instant credit. Would it be true to say that the only limit to the banks pumping instant credit into the economy (which will eventually somehow have to be repaid) is the amount of money consumers wish to borrow ? The fact that most of this is going in to housing is dampening down the rest of the economy and preventing a general inflationary pressures that you would expect from flooding the economy with loads of created money. As has been pointed out in this thread any increase of interest rates to calm any other revival of the economy could be disastrous for the banks in terms of defaulted loans and we could have another banking crisis. Ugh!

  • David Allen 20th Jun '15 - 6:39pm

    There are a number of popular ideas out there which are essentially mechanistic. Piketty says that capital grows faster than wage rates due to natural mechanistic reasons. Positive Money appear to be saying that banks can cause capital to grow for mechanistic reasons. I think all these ideas are incomplete. Things don’t happen in the economic world solely because of some mechanistic physical law. Things happen because those who have the power want those things to happen.

    This government wants house prices to be high and rising. They use QE and Help to Buy as deliberate policies to promote that outcome. There is no mechanistic reason why they should need to do these things, but they choose to do them. We should ask why.

    The main answer, I think, is because they believe in increasing inequality, in providing rewards for their rich backers, and the devil take the hindmost. Capital outstrips wages not simply because of natural mechanistic reasons, but because those who have the power like it that way. The Tory party exists to do what its oligarch backers want it to do, and since billionaires provide the great majority of Tory funds, they call the tune.

    High, rising house prices also have the effect of stimulating the economy. Hence Britain’s good performance and Osborne’s election victory. It is not austerity, of course. That is just a myth peddled to fool the public. Osbornomics is stimulus economics, but unlike a Keynesian stimulus which has a neutral effect on inequality, the Osborne stimulus promotes inequality.

    Finally, the marvellous thing about a high house price policy is that it is so dificult for its opponents to reverse. Policies which would seek to peg or reduce prices would help new buyers in the long term – but well before that ever happened, they would have caused economic stagnation, and lost the millions of votes belonging to owners whose assets were depreciating in value. So, now that the Tories have created a house price bubble, it will be hard for anyone else to come along and rectify the situation. Probably we have to wait for a crash – which, of course, the Tories will happily blame on the Left.

  • Teena thank your for your article and for writing it in an accessible way. I notice you say you will be discussing these issues with positive money, not that you agree with them. I have no knowledge of any of this but have thought that the banking system is in need of reform although I wouldn’t lay all of our current economic problems at the banks’ doors. I would like us to be able to discuss all of these issues without ill thought out labels being pinned on each other. If we carry on doing that we might as well say we’re the party of no change as we’ll achieve nothing. We have to think about things we may instinctively recoil from because out of that discussion may come a solution that is truly Liberal or it may stimulate a Liberal economist to work on a theory which enables us to prevent those on low incomes or benefits from always being the ones who pay for recession..

  • Michael Parsons 20th Jun '15 - 10:21pm

    It is not the population that pushes up nproperty prices in London because they can’t afford to. The monetarist attempt to boost the economy by creating huge sums of money fails because its simple argument (MV=PQ so higher M means higher Q) ignores the fact that Q has two parts: actual production against where most of the new bank money goes thefinancial virtual output; measured by adding noughts to ‘asset values’ such as land, property and shares that are mostly owned by the hyper-rich in any quantity. So the terms of trade between labour and capital becaome increasingly adverse to labour and the austerity trickle-up effect transfers ever more money from the poor to the rich; and the government cuts welfare entitlements although these are only transfers between citizens via tax, transfers from the rich to the poor, and have nothing to do with government budget deficits, but they cut them on the false claims that they are seeking to balance the books! Roll on the Revolution!

  • Pramod Subbaraman 21st Jun '15 - 11:57am

    Good piece Teena

    I have always maintained that heavy reliance on one or a few regions or sectors is always a recipe for disaster. Also monopolies be they state or private, or markets that act in the interests of a few players. Markets that can be manipulated by a few who may have privileged access.
    We need a wider discussion, but in this globalised world unilateral action cannot achieve much. We need to bring on all stakeholders .

  • Meral Hussein Ece 21st Jun '15 - 3:22pm

    Teena – well done for stimulating an important debate, & in particular highlighting how so much power in our banking system is concentrated in the hands of so few. House prices and soaring rents, particularly in London, are not sustainable, and we need some radical ideas and policies as to what we would want to see. Overseas investors are snapping up new properties across London in large numbers, leaving them empty, while Londoners who genuinely are struggling to save up for the large deposit needed before attempting to jump through hoops to even get a mortgage are left out in the cold.

  • Merlene Emerson 21st Jun '15 - 4:25pm

    Thanks Teena for raising this important issue of the shortage of housing which has been compounded by the tightening of credit by the big banks in the UK.

    I had previously blogged on this subject “Safe as Houses” on LDV, shortly after the sub-prime mortgage crisis in the US, brought about by easy credit. More bank lending for house purchase is therefore not the solution.

    Rising house prices are currently being tempered by higher stamp duties on a sliding scale. We could exempt people over 65 from stamp duty when they downsize from a larger property to a smaller one, in order to encourage them to move and free up larger properties that could be converted into flats.

    We should also allow local authorities to generate extra income through new/higher council tax bands (in lieu of the mansion tax). At present, the highest band is H, for properties worth more than £320,000 in April 1991. The extra income generated above Band H could be ring-fenced for funding new affordable housing.

  • Mohammed Sadiq 21st Jun '15 - 9:06pm

    Here, here well excuted Teena, one needs to think out of the box.
    The banking system has evolved over the centuries, its time to change direction, looking forward to debating old views with actual banking at SLF Conference hope to see you all there.

  • Eddie Sammon 22nd Jun '15 - 6:45am

    Thanks John Tilley. I am surprised that you are surprised. We should debate this topic another time. I hope you are OK by the way?

    Teena, sorry for typing too much earlier on. I need to learn to restrain myself better.

    Thanks for the article and starting the debate.

  • John Tilley 22nd Jun '15 - 8:18am

    Eddie Sammon 22nd Jun ’15 – 6:45am

    Eddie,
    happy to debate any time. I have had a view on nationalising the banks since winning an award for an essay as someone studying for an A-level in economics in ghe dim and distant past.
    Since 1968 the case for nationalisation seems to have grown much stronger. Although I do not claim to have had any ability to have foreseen that.
    I am OK, thank you for asking, just coming up to the first anniversary of my transplant and a shining example of everything that is good about a patient who has been kept going and looked after by the NHS. 🙂

  • RBS is an illustration of many things, politicians were lauding the massive expansion before the crisis, they were making political capital (while destroying tax payer value) post nationalisation, they have prevented the bank from designing any strategy due to political knee jerk reactions over they years.

    So you want to know may point, Government are not good a running private enterprises, often private management are not good at it easier but when private enterprise are bad they get wiped out and another market participant takes their place. When Governement run things more often then simply end up being an endless draw on government finances.

    The issue with banking was that it was too concentrated and also the insolvency laws were not suited at the time of the crisis to the institutions that were about to fail (I don’t know how much the steps taken since have really addressed that). I do remember the Post Office Saving Bank, and as a very vanilla basic bank for retail customers it filled a simple purpose, kit is not something that could have met the needs of many businesses, particularly those wanting hedging for price changes in raw materials or international trade.

    I don’t really have time to go in to all the issues with the “Positive Money” proposals, but there are many ways we needs to think about reforming the system. The mutual sector has been crushed over the last 20 years and new entrants are struggling break in. There are a number of reasons that small firms are struggling but the solutions are not some attempt to go beyond anything the 1945 government tried. Attempt to nationalise all financial services could fairly be described as Soviet style proposals.

  • Richard Underhill 23rd Jun '15 - 2:40pm

    It is not just banks who can print money. Any publicly quoted company can do so by creating shares and selling them for cash or exchanging them for valuable assets.

    Do we regret the demutualisation of most of the building societies?

    The words “bank” and “city” are brief in a headline, but the finacial industry is wider than that.

    Part of the crash we are still recovering from was caused by an insurance company trading in enormous quantities of unregulated derivatives from offices in Mayfair.

  • In order to address housing and banking competition I believe that it is necessary to bring back one of the key drivers of house building in the past and that is the concept of a Building Society with mutual ownership. How many Building Societies have we lost over the years? These vehicles did not have to make a return to shareholders. Building Societies were in the main small – some merged into the likes of Nationwide that remains mutual but many turned into Banks such as Halifax – this trend has I believe put the power into the hands of the big Banks that we see today.

    I believe that we should be looking at reinventing the Building Society concept for the 21st Century. The big challenge that traditional Building Societies faced was the cost of maintaining the branch network. However there are now virtual models available that could help address this. Peer to peer lending and crowdfunding are both models that I believe could be adapted at local levels to create modern day Building Societies that do not need to rely on a physical branch network. Clearly there would need to be safeguards and probably some tax incentives for the investor, but what is wrong with the idea that someone who has a piece of land that he wants to sell or develop working with a builder to achieve that development? Both on their own or together may not be able to secure funding from traditional lenders. However if the landowner was to put his land into the pot which the builder agrees to develop and then they were able to market the scheme through a form of peer to peer lending or crowdfunding then individuals may collectively be able to fund the development and then fund the mortgage for the person who wants to buy the resulting house. It is how the concept of Building Societies came about (the clue is in the name) and it is time to bring that concept back, whilst learning from history. If each building project were a funding scheme in isolation it would prevent what happened to Building Societies in that some grew bigger and swallowed others up to become faceless institutions.

    The concept of local people joining together to build things resulted in the railway boom of Victorian times. Yes there was an eventual bust but it did result in railway lines that probably would never have been built if it had relied on the Banks owing to the risk that was perceived at the time.

  • Eddie Sammon 27th Jun '15 - 2:24am

    Been reading the technical information from Positive Money. We both agree that banks create and delete money, but we have big differences in terms of tone and the amount changing this would actually change the economy.

    We should continue the debate another time, but I know if I am struggling to understand it then so the public will too and it would get ditched. Changing the system also needs to look less “scary”.

    I maintain that most of the growth in house prices is down to the central banks, rather than commercial banks, but that is an interesting debate to have another time.

  • Teena Lashmore 2nd Jul '15 - 1:16pm

    Only a few days to our debate in person! Thx for David Allen’s accessible response. Like Sue S detected, I’m merely the messenger. Free market banking means they have to fail just like other business but we as LibDems (apologies typo before), agreed that this would hurt our country and standing in international community. We supported bail-out. As LibDems, we must debate and if necessary follow Bernard Shaw’s unreasonable man to embrace change but most importantly we must develop the tools to explain the outcome/ decisions of our debates to our peers – the general public, most of whom do not have luxury to debate as we have. Whatever we do we must explain ourselves! See you Saturday!

  • Daniel Henry 8th Jul '15 - 10:18pm

    I attended Teena’s session at SLF and found it to be very thought-provoking. Some good ideas and I’d definitely like to see debate furthered within the party on this issue.

  • Daniel Henry 8th Jul '15 - 10:34pm

    I’m quite late to the party, but to address some of the points raised earlier:

    @Simon
    You attribute the rise in house prices to the rise in population out-stripping the rise in building, but while that undoubtably plays a part, it doesn’t explain the house prices on its own.

    A large part of the “demand” (in economic terms) is the rise of money available to make purchases due to the ability of banks to create money for “buy to let” mortgages. The availability of such loans has allowed sellers to charge much more than they would otherwise.

    Positive Money presented a graph that showed the rises and falls of house prices tended to be far more correlated to the booms and busts and bubbles in our economy rather than population pressures.

  • Daniel Henry 8th Jul '15 - 10:51pm

    @David Thorpe
    Restricting the banks from creating money is only half of Positive Money’s position – the other part is allowing the Bank of England to create money for public spending and for banks to lend to businesses.
    (a bit like QE but instead of being “lent” to bank reserves, the money is created then straight out spent in the real economy)

    The idea is that money creation can be good when used for certain purposes (e.g. public spending and business lending) but bad when used for others (e.g. inflating bubbles and causing instability when used to create buy-to-let mortgages or used to purchase financial assets)

    It may or may not be the best solution, but they at least seem to be tackling a problem that most political parties (including ours) seem unaware of let alone putting forward solutions of their own.

  • Daniel Henry 8th Jul '15 - 10:59pm

    @ Eddie Sammon

    Upon reading your first few posts I wanted to encourage you to read a bit more of Positive Money’s material so you could better understand where they were coming from, but it seems you didn’t need telling! With your last post, I largely agreed with your points, particularly that their messaging and communication cause misunderstandings and can come across a bit tin-foil-hatted.

    I think part of it is down to them being a relatively new organisation so are currently still exploring the best way to explain a complicated topic in an interesting way that’s easy to understand. I agree that work needs to be done on it.

  • Eddie Sammon 9th Jul '15 - 12:10am

    Thanks Daniel. As I said: after reading their technical document a lot of it seems to make sense, but the presentation needs to be greatly improved.

    The money deletion process needs to be part of the marketing, because instinctively people know that banking is not a freebie exercise where money is created and not ever deleted.

    The argument about reducing boom and bust is a good one, but it needs to be mentioned more and a good to way bring others on board.

  • Teena Lashmore 10th Jul '15 - 10:17pm

    Glad we are now debating this and I hope our party leader will support and encourage our party to have a ‘value’ statement on this specific topic. More widely I hope we can now, as a party, effectively argue that London will need a London solution for Housing precisely because the bubble is disproportionately affecting Londoners. We have some good housing policies but we cannot simply build our way out… Politics with values is the liberal response. Now let us respond…

  • Eddie Sammon 10th Jul '15 - 10:53pm

    Teena, you are right that we cannot simply build our way out of the housing crisis. One solution is a small increase in interest rates, but the people who vote and control the laws tend to be home-owners, so it is a hard thing to convince people to do.

    However in the budget George Osborne made quite a big “attack” on buy to lets, which is surprising considering the number of MPs and Conservative voters who are landlords. So there is hope.

    Of course, we should look at your idea too, but the important thing where we agree on is “building houses is not enough”. Not to mention we have to protect loved green areas too.

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