April 2, 2017

Financial Times expert on reforming the financial system

Martin Woolf, Financial Times, proposes reform of the UK financial system to produce better regulatory practice and better outcomes for the common good.

March 24, 2017

Caritas Justice Leadership Days - an inspiring experience

I've just returned from the 2017 Caritas Justice Leadership Day in Wellington.  This year the Wellington JLD was held in Avalon, Lower Hutt.

The JLDs are a once a year opportunity for student leaders to learn more about putting faith into practice and bring to life the principles of Catholic social teaching. Today's workshop again showed the energy and hope which characterize student leaders today. It was inspiring to be part of and I wish the students well with the various follow up actions they identified today.

The next generation will face more than its fair share of challenges including Climate Change, the impacts on culture of globalization and the erosion of community.  Justice Leadership days are an investment in the leaders of the future.

More about JLDs here.

December 1, 2016

Is the Chicago Plan the way forward on monetary reform?

Introduction

The recent election of Donald Trump and the Global Financial Crisis of 2007-09 raise fundamental questions about the state of the global financial system. Massive debt levels in both government and private sectors, housing bubbles, growing gaps between a wealthy elite and a growing mass of low income workers all raised questions about capitalism and global finance. 

Various advocates for monetary reform have advocated changes such as:
  • The issuance of social credit - "debt-free" money issued directly to citizens through a national dividend and or consumer subsidies from the Reserve Bank or a Credit Authority.
  • The enforcement of full reserve banking for the privately owned banking system.[10][11][12]
This article looks at the full reserve banking system advocated in the Chicago Plan and some of its critics.

 The Chicago Plan


In 2012 two International Monetary Fund (IMF) economists published a working paper called "The Chicago Plan Revisited" (Benes & Kumhoff 2012) . The basic idea is that banks should be required to have full coverage for money they lend; this is called 100% reserve banking, instead of currently prevalent system of fractional reserve banking. Under this proposal, banks would no longer be allowed to create new money in the form of credit in connection with their lending activities. Instead, the central bank should be solely responsible for all the creation of all forms of money, not just paper money and coins. The advantages of such a system, according to the authors, are a more balanced economy without the booms and busts of the current system, the elimination of bank runs, and a drastic reduction of both public and private debt.

"The Chicago Plan could significantly reduce business cycle volatility caused by rapid changes in banks’ attitudes towards credit risk, it would eliminate bank runs, and it would lead to an instantaneous and large reduction in the levels of both government and private debt. It would accomplish the latter by making government-issued money, which represents equity in the commonwealth rather than debt, the central liquid asset of the economy, while banks concentrate on their strength, the extension of credit to investment projects that require monitoring and risk management expertise.  Another advantage is the ability to drive steady state inflation to zero in an environment where liquidity traps do not exist, and where monetarism becomes feasible and desirable because the government does in fact control broad monetary aggregates. This ability to generate and live with zero steady state inflation is an important result, because it answers the somewhat confused claim of opponents of an exclusive government monopoly on money issuance, namely that such a monetary system would be highly inflationary" .Benes & Kumhoff (2012)

However, Auerback has criticised the Chicago Plan on the basis that:

"But you would have massive credit constraints and, in the absence of a countervailing fiscal policy that promoted more job growth and higher incomes, there would be the equivalent of a gold standard imposed on private banking which could invoke harsh deflationary forces.”Auerback

The origins of money are set out in the Reserve Bank of New Zealand's publication (2003).  Historically minted coins and notes were a much greater proportion of total money supply in the economy. In 1933 the New Zealand government legislated to bring the power to issue cash currency under the control of the Reserve Bank - rather than let it sit with private trading banks.  Now in the 21st century economy the bulk of the money supply is no longer notes and coins cash. It is computer-generated loans and bank deposits.


Private banks create most of our money supply


Bank of England report in 2014 acknowledged that:
  "The reality of how money is created today differs from the description found in some economics textbooks: Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits; in normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits."
However the Bank of England (2014) paper also maintains that there are limits to the ability of the banks to create credit, that for each new loan created there are new bank deposits which are assets for depositors and liabilities for the banks, and that the banks make their profits by maximising the difference between the costs of the deposits and reserves they need to attract versus the interest payments they receive on the loans they make. Banks must also manage the threat of competition for deposits from other banks and they must also manage the risks of borrowers defaulting on loans the bank has made.

The Central bank sets monetary policy to influence credit creation


Supporters of the status quo argue that banks do not control the money supply because the total supply is influenced by factors outside their control. For example the repayment of loans by households and businesses destroys credit created by banks. Also the central bank controls the price of reserves (interest rates charged by the central bank for reserves sold to banks) which banks need to maintain liquidity and to meet any regulatory requirements imposed on them.  Furthermore no one bank can set the interest rate for the market. That is determined by the rates charged by the various banks and by the cash rate charged by the central bank for reserves which the banks must hold and which cannot be on sold to non-bank customers.


Conclusions

The Chicago Plan would rein in the power of private banks to issue debt-bearing loans and would likely add greater stability to the global financial systems.  However, the challenge would be in the transition from a fractional banking system of today to a 100% reserve based system of tomorrow. The consequent reduction of money supply may create transitional issues that would need to be carefully considered.

October 5, 2016

Lib Dems Do God - Book Review

A book published in the UK and edited by Jo Latham and Clare Mathys sets out the case for Christians to be Liberal Democrats. 

LibDems are Britain's third party and were part of the Coalition government during David Cameron's time as Prime Minister.

Under new leader Tim Farron the party has rediscovered its anti-establishment, reformist, Liberal roots.  The book sets out some key themes that identify a strong overlap between Christian values and those liberals.  These include:
  • A deep respect for human rights and the dignity of all people;
  • Freedom of religion for all;
  • Respect for individual freedom;
  • Equality for all - through combating poverty;
  • Appropriate regulatory frameworks to ensure that markets serve the common good.
  • A humanitarian approach to global issues and an internationalist approach to issues such as Climate Change, Refugees and Migration.
For people of all faith traditions "Liberal Democrats Do God" (Latham & Mathys) is well worth a read and I recommend it to anyone that has an interest in politics or broader social issues related to liberty, equality and community.

January 25, 2016

TPPA is an unnecessary risk for New Zealand's sovereignty


If you want a quick 3 minute introduction to all the fuss about the TPPA then check out this video clip from Action Station. 


October 8, 2015

A liberal democrat view of TPPA

Ministers need to allow full public participation in TPPA review.
Free Trade
As a liberal democrat I believe that people should have the freedom to trade with one another provided that one person is not exploiting another. Similarly freedom to trade between countries is generally a good thing. It has tended to reduce the cost of living for people over the last one hundred years. For poorer countries increased trade has often been the means by which they have increased export income and increased living standards, healthcare and education. Conversely protectionist measures and import licensing are systems which have been fraught with abuse resulting in high prices for the public and big profits for a few private investors. Most New Zealanders who lived through the 1970s or 1980s can recall the high price of electrical equipment and motor vehicles. So free trade is fine where agreements are openly arrived at and no one group in society, particularly the poor and vulnerable, is made worse off.  However that does not mean that all trade agreements are good ones or that liberals should blindly support a bad trade deal just because its a trade deal.  When it comes to the Trans Pacific Partnership agreement (TPPA) there are several things that concern me and which don't appear to line up with some key liberal democratic principles. 
Open government
Generally liberals support open government and transparent decision making. Secrecy and behind closed doors commercial deals are generally not a good thing. In fact we have laws to prevent private companies doing that kind of thing when it comes to setting prices.  The reason we have laws against such secret arrangements is that they tend to be at the expense of the public and to enrich private interests.  Why then, with the TPPA, is it OK for the public to be kept in the dark - but for commercial interests and government representatives to meet in secret to make deals?  Such behaviour engenders suspicion and undermines confidence in public institutions. 
Proponents of the TPPA claim that it's nothing to worry about because "all trade deals are arrived at this way". But such an argument does not stand up to scrutiny.  If our negotiating position is being shared behind closed doors with other countries representatives and with corporate interest groups then why not with the public? In a democracy citizens are entitled to be informed. It is the government's job to persuade an informed citizenry that a decision is in the public interest. Depriving the public of the information is not a satisfactory alternative. 
Serve the public interest
Liberals also believe that the government has an obligation to serve the public interest or the common good. The common good is about making all people better off. Reducing the welfare of one group so that other privileged groups gain is not acting in the common good. A trade deal that increases the price of medicines for the sick but allows large agribusiness interests to line their pockets does not serve the common good.  A trade agreement which limits the ability of a government to regulate in the public interest does not serve the common good. 
The government has developed a reputation for commercial pragmatism. One can debate whether that is well-founded or whether an unprincipled pragmatism is something to crow about. But even from such a standpoint - where ugly sacrifices are made in healthcare treatments and our regulators are handcuffed lest they upset private interests - the huge benefits for dairy that we were promised in return seem to have disappeared like a mirage in the desert. 
Labour Spokesperson, Annette King, said: "The deal falls well below expectations with only disappointing crumbs for our dairy industry and extended patents on new drugs which will cost the taxpayer millions and leave New Zealanders without life-saving drugs.... New Zealanders must be told whether the government has traded away our right to further restrict foreign ownership of housing or farm land and what agreements have been made to allow foreign corporations to sue New Zealand for regulating in the public interest.
Commentator Colin James points out that Minister Grocer's arguments about the alleged benefits also include a hefty amount of gains that would have happened anyway under existing trade arrangements. "Tim Groser attributes the greater-than-forecast gains in sales to China since 2008 to the free trade agreement (FTA) when most of them might well -- probably would -- have happened anyway, given the spike in China's demand for milk products. (If he is right, then would the fall in the past year also logically have to be attributed to the FTA?)"
Democratic decision-making
As Colin James highlights: (TPPA) "and similar regional agreements are about regulatory convergence every bit as much as, and arguably more than, about goods trade access. That is why patents and copyright were top of the United States' list and why opponents bother a lot about patents and copyright costs here and about investor-state dispute resolution issues, which do not yet have a global supervisory mechanism."  (www.colinjames.co.nz)
Since 1984 New Zealand's (and many other countries') national sovereignty has been severely eroded by global economic centralisation - or what Pope Francis has termed the "technocratic paradigm". Government Ministers now say that New Zealand's influence is so small that we should join the TPPA club because being in, with a very tiny amount of influence, is better than being out on our own. However, in a democracy governments are meant to govern in the public interest. If the current economic model does not allow them to do that then they need a new model. 
The full text of the TPPA should be published now and a lengthy and comprehensive public review of the Agreement needs to take place . Otherwise the public confidence in the Agreement will be undermined and so too will be the basis of trust between citizen and government that underpins democracy. Abolitionist and liberal activist Wendell Phillips was quoted in 1852 as saying: 
Eternal vigilance is the price of liberty; power is ever stealing from the many to the few. The manna of popular liberty must be gathered each day or it is rotten. ... Only by continued oversight can the democrat in office be prevented from hardening into a despot; only by unintermitted agitation can a people be sufficiently awake to principle not to let liberty be smothered in material prosperity.”


September 27, 2015

A brief history of Liberal politics

British Liberal Prime Minister - David Lloyd-George
A liberal is someone who believes in liberty and equality. Liberals espouse a wide array of views, depending on their understanding of these principles, but generally they support ideas and programs such as freedom of speech, freedom of the press, freedom of religioncivil rights, democratic societies, and international cooperation.
 
Liberalism rejected the notions of hereditary privilege, state religion, absolute monarchy, and the Divine Right of Kings. The 17th-century philosopher John Locke is often credited with founding liberalism as a distinct philosophical tradition. Locke argued that each man has a natural right to life, liberty and property, while adding that governments must not violate these rights based on the social contract

Liberals opposed reactionary conservatism and sought to replace monarchist absolutism in government with representative democracy and the rule of law.

Although British classical liberals aspired to a minimum of state activity, the passage of the Factory Acts in the early 19th century which involved government interference in the economy met with their approval. In this period, the dominant ideological opponent of classical liberalism was conservatism, but liberalism later survived major ideological challenges from new opponents, such as fascism and communism
By the end of the nineteenth century, the principles of classical liberalism were being increasingly challenged by downturns in economic growth, a growing perception of the evils of poverty, unemployment and relative deprivation present within modern industrial cities, and the agitation of organised labour. The ideal of the self-made individual, who through hard work and talent could make his or her place in the world, seemed increasingly implausible.

During the 20th century, liberal ideas spread even further as liberal democracies found themselves on the winning side in both world wars. In Europe and North America, the establishment of social liberalism became a key component in the expansion of the welfare state. 




Lloyd George and Churchill passed the 1909 People's Budget, aimed at the redistribution of wealth.
Another early liberal convert to greater government intervention was Thomas Hill Green. Seeing the effects of alcohol, he believed that the state should foster and protect the social, political and economic environments in which individuals will have the best chance of acting according to their consciences. The state should intervene only where there is a clear, proven and strong tendency of a liberty to enslave the individual. Green regarded the national state as legitimate only to the extent that it upholds a system of rights and obligations that is most likely to foster individual self-realisation.

This strand began to coalesce into the social liberalism movement at the turn of the twentieth century in Britain. The New Liberals, which included intellectuals like L.T. Hobhouse, and John A. Hobson, saw individual liberty as something achievable only under favorable social and economic circumstances. In their view, the poverty, squalor, and ignorance in which many people lived made it impossible for freedom and individuality to flourish. New Liberals believed that these conditions could be ameliorated only through collective action coordinated by a strong, welfare-oriented, and interventionist state. The People's Budget of 1909, championed by David Lloyd George and fellow liberal Winston Churchill, introduced unprecedented taxes on the wealthy in Britain and radical social welfare programmes to the country's policies. It was the first budget with the expressed intent of redistributing wealth among the public.

 In New Zealand the Liberal Party was the first real political party.   It governed from 1891 until 1912. The Liberal strategy was to create a large class of small land-owning farmers who supported Liberal ideals, by buying land and selling it to small farmers on credit. The First Liberal government also established the basis of the later welfare state, with old age pensions, developed a system for settling industrial disputes, which was accepted by both employers and trade unions. In 1893 it extended voting rights to women, making New Zealand the first country in the world to enact universal female suffrage.

New Zealand gained international attention for the Liberal reforms, especially how the state regulated labour relations.[1] Of special note were innovations in the areas of maximum hour regulations, minimum wage laws, and compulsory arbitration procedures. The goal was to encourage unions but discourage strikes and class conflict.[2] The impact was especially strong on the reform movement in the United States.[3]

In New Zealand the Liberals enjoyed a brief resurgence as the United Party under the leadership of Sir Joseph Ward between 1928-30.However, during the 1930s Liberal parties began to be squeezed between left wing socialist parties and right wing conservative parties.  During the Great Depression and World War Two Liberal parties tended to join in Coalition governments in the interests of national unity.