Together with the Prime Minister of Greece, Mr. George Papandreou, I am going to give evidence to the EU’s Special Committee on the Financial Crisis in Brussels this Thursday, March 18th.

So today’s leaked report from the EU, arguing that Labour’s plans for cuts to public spending are not “ambitious enough”, has got me really het up.

Labour, it appears, is just not ambitious enough about its goals for cutting investment and exacerbating unemployment. It does not have punitive enough targets for cutting benefits to the poor and services for the mentally ill and frail.

In the “imbecile idiom” (to quote Keynes) of today’s financial fashion, the EU, it seems, would prefer for unemployment to rise, for people to live in hovels, and for government “to shut out the sun and the stars” – so that we conform to an arbitrary number set in Frankfurt by a group of bankers, under a pact unwisely signed by an earlier British government.

Continue reading the article…

4th March 2010

With Saturday’s Iceland referendum due in just a couple of days (6th March), Advocacy International’s directors have an op-ed article critical of the UK and Netherlands governments in today’s Morgunbladid, Iceland’s main daily newspaper.

English version> Icelandic version> Press release>

Full text of the article:

So the negotiations have broken down, British and Dutch “bullying” (FT 27 February, 2010) continues and the referendum goes ahead. What next?

We emphasize that this is not a sovereign debt crisis, even if the British and Dutch want us to think it is.

It is a crisis of EU regulatory failure, and of the Anglo-American economic model.

The people of Iceland have a deep democratic tradition, and through the referendum have the opportunity to assert their sovereignty and autonomy.

Their leadership and example will encourage people in other democracies to reject harsh cuts in public services and living standards made at the behest of the very people and institutions responsible for the crisis. For through the wholesale nationalisation of private losses, we are all – not only in Iceland – asked to pay the price of private, reckless risk-taking.

Co-responsibility

A key principle in resolving the dispute is co-responsibility. President Grímmson has made a similar point, referring to “a shared international responsibility”.

The previous Icelandic government allowed a deregulated financial sector to run wild.

The subsequent collapse of Iceland’s banking sector was not a sudden bolt from the blue. The risks were visible and widely reported, including by one of the authors of this article.¹

And the deposit guarantee scheme was totally under-resourced to deal with a systemic meltdown.

So Iceland cannot escape some share of political responsibility for the Icesave fiasco.

But Iceland was far from alone in this negligence. The political establishments of Britain and the Netherlands – indeed those of the European Union and EEA as a whole – encouraged financial deregulation and a more extensive Single Market in financial services, without almost any regard for the wholly predictable risks of large-scale economic failure.

The EU and Deposit Guarantee Schemes

The UK and Dutch authorities also failed in their duty of supervision under EU law.

Icesave in Britain was a branch not a subsidiary of Landsbanki. The European Union Directive 94/19/EC, whose inadequacy is now obvious to all, requires that EU states:

• “… shall check that branches established by a credit institution which has its head office out with the Community have cover equivalent to that prescribed in this Directive.”
  (Article 6.1)

Iceland may be a member of the EEA, but it is still “outwith” the European Community, and neither Britain nor the Netherlands fulfilled this supervisory duty.

So whether one sees the obligations as moral, political or legal, there is a heavy responsibility on the part of the British and Dutch governments.

Proportionality

Proportionality is a key principle of EU law – but one ignored by the British and Dutch governments.

In our letter to the Financial Times (7th January) we pointed out that the combined population of the UK and Netherlands is 76 million, compared to Iceland’s 317 000, and that:

• “repayment of the nationalised losses of a private bank amounts to €12 000 per Icelandic citizen…By contrast, the cost to Dutch and British tax-payers of the bail-out will be about €50 per capita.”

Not a sovereign debt crisis

The British and Dutch governments have, by political sleight of hand, given the world the impression that this is an issue of sovereign debt default.

This is quite false.

These governments chose for understandable reasons, to compensate domestic Icesavers whose deposits were at risk. They did this without consulting the government of Iceland. But from the start, they used economic and political force majeure to try to place the whole burden of compensation on to the state and people of Iceland. Only retrospectively, and through duress, was an agreement made with Iceland’s Depositors and Investors Guarantee Fund to compensate the British and Dutch governments for the cost of bailing out their own citizens.

This retroactive arm-twisting is now defined as a loan contract – even though the “loan” was not contracted at the outset by the borrower, but forced on it by the “lenders”. And the UK and Dutch governments’ fiercely desired, but missing, link of an onerous sovereign guarantee is still…. missing!

The terms

The proposed interest rate of 5.5% is particularly unfair, given that the UK’s Financial Services Compensation Service has, according to the UK Treasury, “financed its payout [to UK depositors] through a loan from the Bank of England.” ² The Treasury does not disclose the rate of interest on this loan – a rate over which it had absolute discretion. The Bank of England’s base rate is today 0.5% (1.5% in January, 2009). The ECB’s base rate was 2.0% in January 2009, yet the Netherlands government had even greater audacity in seeking, initially, interest at 6.7%!

What are the strategic options for Iceland and its people?

One option in the referendum is to accept the proposal based on force majeure, to pay the full price demanded (cuts in public services, unemployment, widespread emigration…) and hope to slowly rebuild the fabric of the economy. However this strategy will make recovery and reconstruction in the short run well nigh impossible. And in the long run, as JM Keynes argued, we are all dead!

All other options would be enhanced by a strong rejection of the UK/Dutch proposal, since the bigger the turnout for a ‘no’ vote, the stronger Iceland’s negotiating position will be, whichever option is adopted.

The dispute could be referred to the courts, to arbitration or (preferably) mediation. It is a striking feature of the story so far that the UK and Dutch governments have gone to great lengths to avoid legal resolution of the dispute, despite the Icelandic government’s constant denial of legal liability.

This may be sensible, since the 1994 Directive is badly drafted, and the outcome unpredictable for all.

Winning hearts and minds

After the referendum it will be vital that the government and people of Iceland inform and win over public and official opinion in Britain and the Netherlands, and the EU.

To date, the issues have not been clearly explained to the British and Dutch publics.

As a result, the two governments are under little public pressure to change their strong-arm tactics.

The voices of the Icelandic government and of Icelandic civil society need to be heard more loudly in more targeted campaigns in the UK, the Netherlands and EU. Coming general elections in both countries will make this difficult in the short-term, but in the long-term the Icelandic position is bound to prevail – if put across coherently.

Now is the time to spread more understanding of the issues – the shared responsibility, the flawed and excessive nature of UK and Dutch government demands, their impact on ordinary Icelandic citizens, and the positive ideas and proposals that emerge as a result of democratic debate in Iceland.

In this way we can lay the foundation for a just resolution of the dispute.

Advocacy International is working with InDefence, a civil society group of Icelandic citizens.

(1) “The coming first world debt crisis” by Ann Pettifor, Palgrave, 2006
(2)   HM Treasury Press Release, 9 October, 2009

7th January 2010,

Read Ann Pettifor and Jeremy Smith’s letter on why Iceland must NOT repay the debt in the FT today:

” Sir, The president of Iceland’s refusal to approve repayment to the British and Dutch governments should be welcomed (January 5). The pause gives the Anglo-Dutch governments an opportunity to withdraw their demand for full repayment from the government of Iceland, a country whose population at 317,000 is somewhat smaller than Leicester’s.

The UK and the Netherlands, with a combined population of 76m, should cease to use economic force majeure on a tiny country, and accept the principle of co-responsibility for the crisis. Repayment of the nationalised losses of a private bank amounts to €12,000 per Icelandic citizen, and will inevitably impact harshly on their lives and public services. By contrast the cost to Dutch and British taxpayers of the bail-out will be about €50 per capita.

We understand the strong desire of the present government of Iceland to restore the country’s tattered reputation.

But anyone reading the financial press in 2007 and 2008 (as opposed to the academic reports commissioned by Iceland’s chamber of commerce) would have known that Iceland’s banks were far from risk-free. That was why British and Dutch depositors enjoyed good rates of return on their deposits.

The British and Dutch governments have sound political reasons for protecting small savers lured into shark-infested financial waters. What is unjust is that the tiny population of Iceland should be forced to bear the full costs of the laxity of Icelandic, British and Dutch regulators and the reckless behaviour of private bankers and risk-takers. “

Read the letter on the FT website here.

Most economists (who should know better) confuse the government’s budget deficit with total government debt.

The distinction really is important.

Mixing them up is a little like confusing stocks and flows.  Or confusing your outstanding mortgage – say £200,000 – with your monthly debt repayments. They are quite different things, and if you were to lose your job, the flows (paid with your salary) come to a halt, and then it’s the stock – the £200,000 – that really matters.

Furthermore it is quite possible to increase your mortgage – and lower your monthly payments.  Many did this in the boom years of mortgage re-financing. Or even to decrease your mortgage and increase your monthly payments.

So, just as the movements in regular mortgage payments tell us little about the outstanding stock of debt, so government deficits tell us little about the stock of debt invested and the stock of debt outstanding.

The key point is this: the annual budget deficit is not a measure of the scale of government spending.  Instead it is a measure of the outcome of that spending. And that spending may not be evidence in itself of fiscal stimulus.

The annual deficit could rise because the government cuts public investment – and thereby increases spending on unemployment benefit payments and lost tax revenues from those made unemployed by the cuts.

In other words, it could just be evidence of the rise in automatic transfer payments – like increased unemployment benefits, combined with a fall in government revenues from taxes.

And if GDP is declining, then of course the government deficit rises as a share of that.

The right focus therefore is not on the deficit, but on government final consumption or total government investment.

But most economists don’t.

Instead they home in on the deficit.

It’s not clear why.  Anyway, this gives me a chance to reproduce once again the chart of the British government’s stock of debt since the 1850s – a chart which shows how low the government’s current debt stock is relative to earlier periods of crisis.

(for more on the public sector debt, see my post of 28 October, 2009 here

Dan Roberts has a great column in the Guardian today. He asks the right questions. First, why is the Treasury spending £8 billion of taxpayers money reinflating the housing market? Second, why is the Treasury encouraging this now nationalised bank to increase mortgage lending, when the productive sector of the economy – companies, small businesses et al – are being starved of loans from taxpayer-bailed-out-banks, or else having to borrow at usurious rates?

A superb report from the Centre for Research on Socio Cultural Change at Manchester  (“An alternative report on UK banking reform”) suggests the answer: The nationalisation of Northern Rock is being treated as an “equity style turn around”, with the overarching objective of protecting and creating value for the taxpayer as shareholder.

“It is not clear whether the banks have been nationalised or the Treasury has been privatised as a new kind of investment fund.”

It makes perfect sense doesn’t it, given that the Treasury is advised on these matters (some would say it has been captured) almost exclusively by bankers? Get reading the CRESC report -its excellent -  the first piece of independent, academic thinking on reform of the banking sector to have crossed my path.

As world leaders meet in Pittsburgh and then Istanbul (for the World Bank and IMF meetings) expect much self-congratulation and back-slapping for having got the world through the post-Lehman crisis.

But behind the cacophony of self-praise, watch out for three alarms flashing red:

• The escalating foreclosure and rising mortgage delinquency rates in the US
• The dramatic contraction of credit in the US over the summer – putting paid to any hope of the US acting as the ‘engine’ of a global recovery
• That big accident waiting to happen to the European economies –Spain

With the help of a great new book – about to be published in the US – let’s take a look at why there is no room for complacency.

“No way to run an economy” (Pluto Press, 2009) is by a man whose research and analyses I have come to respect and rely upon – Graham Turner of GFC economics. While the book is full of solid facts and data – it is eminently readable for those prepared to unleash their inner wonk.

Turner lived and worked in Japan through the last twenty years of debt-deflation – and now looks at the US and European economies through the prism of that prolonged deflationary crisis. And it’s not a pretty sight.

He first takes a close look at the Bernanke/Geithner/Summers strategy for reflating the US economy. There are, or at least were, five planks to this strategy – lower interest rates, the Public Private Investment Program (remember that?); mortgage modification; fiscal expansion and ‘stress tests’.

While free money and fiscal expansion, Turner argues, may have helped the Dow move up – it’s not reflating the economy. On the contrary, debt-driven deflation is the order of the day – reflected in debt defaults, falling house prices, rising foreclosures and mortgage delinquencies. But stabilising the housing market is key to bank solvency, to generating employment and to kick-starting a full recovery.

All the signs are that despite their massive collective brain power the Bernanke/Geithner/ Summers strategy will not give President Obama and the Democratic Party the sound economic recovery needed to win over the electorate in 2010.

So self-congratulation should be put on hold for a while…..

What of the Europeans? They will be at Pittsburgh to boast of imminent recovery, and to contrast their economies with Anglo-American economies. They will imply that in Euroland policy-makers were more cautious about lending, and that their economies are therefore less prone to Anglo-American-style bubbles.

That might be plausible – if it were not for Spain, Ireland, Eastern Europe and the European Central Bank (ECB).

For if the Federal Reserve has blundered – and it has – the governor of the ECB is guilty of criminal inaction and continued complacency. Indeed at the height of the crisis – in July, 2008 – the ECB actually raised interest rates! Consider one of the most disastrous impacts of that massive strategic miscalculation: the growing debt-deflationary crises in Spain, Ireland and Eastern Europe.

Of these the crisis in Spain is the most alarming. Just as in the US, real interest rates are still high – despite recent, belated cuts by the ECB – and remain well above falling and negative prices and wages. According to Variant Perception the Spanish real estate crash is worse than widely believed; banks are hiding their losses, and while Forbes magazine might argue that “Spanish banks are in Top Form” – that may be because Forbes has not looked closely at their balance sheets. Spanish banks are hiding their losses, it is alleged – by sophisticated accounting tricks, by not marking loans to market (i.e. valuing them higher than the market would) and by lending to what Variant call ‘zombie companies’ – mostly in the construction sector.

Sound familiar? Could this be happening in other parts of the global financial forest?

Spain, like the US is experiencing deflation. Prices have been falling for three months in a row. At the same time – and just as in the US – unemployment is still rising – heading towards a socially and politically disruptive 25% .

It’s worse in much of the rest of the European periphery. Prices in Ireland are falling at an annual rate of 5.9% – the highest deflation rate in the world.

The big losers will not just be the poor and middle classes of these countries: deflation will have ‘broad ramifications across the European banking sector’.

Why? Because countries on the periphery are net debtors, and the rest of Europe – including France and Germany – are net creditors. When the debtors stop paying their creditors – then Germany, France and other members of the European Union will face huge losses. On top of that they will need to re-capitalise Spain and the periphery economies – costly to their taxpayers.

When that crisis comes, Mrs Merkel may well have survived a German election campaign. But other G-20 leaders will not be so lucky.

Their management of the global economy and their legitimacy will have been severely tested – this time by voters.

I have just listened to the excellent Dr. Paul Woolley on Radio 4’s the Today programme…He of the aptly named Centre for the Study of Capital Market Dysfunction – like it.  But what bothered me was his remark that the finance sector only acts as ‘intermediary’ between those with savings and those needing investment….

The truth that will not speak its name is that banks do not even do that….I learned all this at the feet of Dr. Geoff Tily, author of an important book on Keynes as first and foremost a monetary economist.

Because banks are licensed to create credit, and because bank money is such a wonderful human invention – there is no need for an investor to dip into someone else’s savings – or to  hire an agent to act as an intermediary…..as I explained in a recent letter to the Guardian. (below my unedited version). I was responding to a piece by J Freedland, urging us all to join Zopa, and share our savings with those needing to borrow…..

“While I welcome Jonathan Freedland’s determination to sideline the banking sector, his remedy – the exchange of savings and loans via Zopa at interest rates in the region of 8% – is based on a profound misunderstanding of bank credit (Don’t howl with rage. Try an idea that does away with banks altogether, 19 August).

Furthermore, given the deflationary context in which Zopa loans are made, interest rates of 8% (plus its fee) strike me as very high, even usurious.

Freedland assumes that the dispensing of credit or new loans by banks depends on the existence of savings. It does not. Thanks to the magic of bank money – in existence since the founding of the Bank of England in 1694 – banks do not need a penny of savings in their vaults before they are able to extend credit. Nor do they need “reserves”. Bank money or bank credit does not exist as a result of economic activity – it does not exist because careful producers/savers have squirreled their surpluses/savings away in bank accounts.

Bank money exists independently of savings and creates economic activity. Credit issued by banks creates deposits.

All that banks need in order to wield this power is first, a licence from the Bank of England; second, a contract with a borrower pledging collateral and repayment; and third, a ledger/computer into which to enter the loan amount – which is then charged to the borrower’s bank account. Given the ease with which this credit is created, the interest on private bank loans ought to be very low. Instead, the deregulated and secretive cartel that is the British Banking Association sets the price of credit – or real rate of interest – high.

Freedland is not alone in misunderstanding the power of the banking sector – a power not granted to ZOPA. As Joseph Schumpeter noted back in 1954 “it proved extraordinarily difficult for economists to recognise that bank loans and bank investments do create deposits.”

However  the  ability to create credit – effectively out of thin air – was one of the great civilisational advances. (Without it, ‘quantitative easing’ would not be possible.) With this advance, it was no longer necessary for peasants, e.g. to rely on the gift of a loan from the lord of the manor – and it was no longer possible for the lord of the manor to fix usurious rates of interest. As Marx noted in Das Kapital (1894), “the development of the credit system takes place as a reaction against usury….it robs usurer’s capital of its monopoly……”

However, it only does so if this power is properly regulated and accountable to all sectors of society – industry and labour in particular. Thanks to de-regulation the private finance sector can now use these immense powers to hold society to ransom. It will take more than a co-operative website to re-regulate these powers, to lower rates of interest and hold banks accountable to society.

It will take more than a co-operative website to re-regulate these powers, to lower rates of interest and hold banks accountable to society.

Ann Pettifor

Motley Fool blogger TMF Sinchiruna spotlights the Times interview, describing me as “once ridiculed, later vindicated…” TMF Sinchiruna goes on to say: “Peter Schiff, Jim Rogers, Niall Fergusson, Ann Pettifor … these are the voices that I believe investors need to hear. Turn off the tv and look deep into the events of last year and consider for yourselves whether anything more than a hail-mary reflationary maelstrom has been heaped upon the fire that started it all.”

Read the Motley Fool article >

Also just did an interview for You and Yours on Radio 4 which was broadcast Wednesday. You can listen to it here.

Phil Thornton’s Times interview with me on the economy today.

“The economy is no longer in freefall and, as a result, there’s an enormous amount of complacency from politicians, in particular, about what will happen next. I believe politicians have given away the opportunity to restructure the banks and reconfigure the system.”

Read the interview >

“A single day, 9 August 2007, will go down in history as ‘Debtonation Day’ – the beginning of the end of the deregulation and privatisation of finance that marks the era of globalisation.”

I wrote these words on 13 August 2007, in anticipation that the great stock-market collapse of four days earlier presaged the end of the era of neo-liberal globalisation.

So it has proved.

Read Open Democracy article>