The picture above is not of some Regency building in Brighton, England. It is in fact the oldest (or so I was told) Trades Union Hall in the world – the Melbourne Trades Hall. Sure is impressive, and with a lovely relaxed, unbureaucratic feel to it….

We were up at the crack of dawn to fly to Melbourne from Adelaide…newspapers full of the crisis inside the Labor government.  Julie Gillard looks to be in deep trouble over the handling of Australia’s policy on refugees. And then found the appalling tale of Babcock and Brown – Australia’s biggest ever corporate collapse –  the Ned Kellys of this age…only Ned Kelly could never have dreamed of looting so much ‘swag’.  And Kelly – whose remains have just been unearthed (see here) – was at least caught by competent Aussie cops at the time, and tried by a competent judge.   As the Sydney Morning Herald noted, the Aussie ‘watchdog’ didn’t even sniff Babcock and Brown….

Went straight from the airport to the fine Melbourne university campus for a meeting with climate and sustainability scientists and university trade union officials – to talk about financing the transformation of the economy away from fossil fuels….Not at my best after a night of fitful sleep…Then, after a nap, a wonderful evening at the above mentioned Trades Hall – it was titled Babbling in the Bar -but was in fact a lively discussion of economic policy, the financial system and the policies that Australian trades unionists should be demanding of their Labour government…..From there to the famous Lygon Street,Melbourne’s ‘Little Italy’ – for dinner at – a Vietnamese….times are a’ changin in Melbourne. And finally, after a ride on a tram and train ….sleep!

Read about my speaking tour of Australia below – from the SEARCH Foundation:

The SEARCH Foundation is currently touring eminent British economist and author Ann
Pettifor around Australia and she is visiting our shores with a warning; the GFC inducing credit
crunch is not over and Australia’s banking sector is vulnerable.

Ms Pettifor is visiting Adelaide, Sydney, Melbourne, Canberra and Brisbane for speaking
engagements over the next fortnight.

“Before the Credit Crunch of 2008-2009 Brits and Americans were convinced that the good
times could last forever. Our orthodox economists, central bankers and politicians encouraged
us in that delusion. Today millions of the unemployed, homeless and bankrupt are paying
a heavy price for the failure to understand the role of the private banking system in causing
systemic and widespread economic failure.” Ms Pettifor said.

“Australians would be well advised not to fall into the same trap.

“At the same time, the increased frequency of extreme weather events is challenging the
widespread delusion that there is no limit to the rate at which humanity can go on polluting the
atmosphere and looting the seas and wider ecosystem.

“Australians, who have suffered more from extreme weather events than we have in Britain
would do well to take the lead in warning the world of a widespread delusion: that there are no
limits to the rate at which we can consume and ‘grow’.

“Instead we all need to address the most urgent crises facing humanity: the continuing global
financial crisis (it never did end in 2008); the threat of peak oil; the threat of climate change;
and now the rising threat of food and water shortages. That is why we, at the New Economics
Foundation first proposed the Green New Deal in July, 2008.

“We argued then, and we argue now, that societies must first fix the out-of-control globalised
financial system. We must strip the Masters of the Universe of their mighty power – after all
they rely on the world’s taxpayers to guarantee their profits and bonuses, and to socialise their
losses.

“Only then can we put the domestic banking system to work to help finance the transformation
of the economy away from costly globalised finance on the one hand and dependence on
fossil fuels on the other. Instead, tight but low cost-finance, generated by our domestic banking
systems must be put at the service of the transformation of the economy.

“We need massive investment in sustainable, renewable sources of energy and in the
conservation of the ecosystem’s resources.

“The banking system must provide regulated, low-cost finance for that investment. Just as
the banking system of the late 1930s and 40s helped finance economic recovery from the ’29

Crash; and then the challenge societies faced in 1939: World War.

“Such a transformation – a Green New Deal – will require greater self-sufficiency, and the
localisation of economies as far as practicable. It will also require the training and recruitment
of a ‘carbon army’ of workers – skilled and unskilled – to turn every building into a power
station, and to make every building energy-efficient.

“But just as central bankers and politicians turned a blind eye to the looming credit-crunch of
2008, so now they are turning a blind eye to the financial and ecological threats facing society.

“For example, right now, Australia’s mining boom is masking the vulnerability of her banking
system – and the threats that both high levels of household debt, and instability in globalised
capital markets pose to Australian banks – and therefore to the economy.

“Despite Mr. Glenn Stevens’ sanguine approach to the stability of Australia’s banks in his
recent testimony to the Australian parliament, insurance against the risk of Australian banks
defaulting – credit default swaps – climbed nearly 50% over August. That means that investor
expectations of Australian banks’ defaulting are on the rise. In addition, the cost of raising
40% of Australian bank funding ($100 billion) in global capital markets has been rising as a
result of instability in the Eurozone and US.

“The rising cost of this integration of the Australian banking system in the globalised economy
invariably means that Australian banks – and the financing of the current account deficit – are
more vulnerable to the whims of global investors.

“And as a result of the falling confidence in global capital markets, interest rates on loans
to Australian businesses and households will rise too – at a time when their customers are
snapping purses shut; house prices are sliding as Australians slowly pay down very high levels
of debt; and mortgage costs have been ratcheted up by the RBA’s raising of base rates to the
highest in the developed world;

“No amount of iron ore is going to fix Australia’s financial system. Australia needs a Green
New Deal.”

For media interviews with Ann Pettifor whilst she is in Australia, please call Peter
Murphy on 0418 312 301.
’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Note to editors.
1. Ann Pettifor a fellow of the New Economics Foundation (nef) in London, UK, and director
of PRIME economics, is visiting Australia on a two-week tour, sponsored by the Search
Foundation.

Ms Pettifor first predicted a credit crunch in September, 2003 on launching a book she edited
and Palgrave Macmillan published: “The Real World Economic Outlook.” Later in October,
2006, Palgrave Macmillan published her book: “The Coming First World Debt Crisis”. Then in
a Times interview in 2009, she warned that “the worst of the slump is yet to come.”
2. In his recent evidence Mr Stevens of the Reserve Bank of Australia said: “Major Australian
banks report being offered substantial US dollar funding offshore on account of their relatively
high credit standing. In any event, their reliance on such wholesale funding is much reduced
from three years ago, with the large increase in deposit funding at home and slower balance
sheet growth.” And yet in May this year, Moody’s downgraded all four of Australia’s major
banks, as ABC reported at the time.

It was wonderful to be, first of all at such a professionally and well organised event (congrats to Mark Letcher and his team). It was also fantastic to be amongst such an interesting array of speakers including John Gapper ‘the secret gardener’ who has spent the last 35 years propagating wild flowers in Brighton and Hove (watch his talk here) and Alice Ferguson and Amy Rose – two mothers with a simple but brilliant idea to get children playing outside (watch their talk here).

My talk was on how we can afford to finance the Green Transition – watch below:

Below is a short paper I wrote as part of work with Sir David King and the Smith School of Enterprise and the Environment:

“We are capable of shutting off the sun and the stars because they do not pay a dividend. London is one of the richest cities in the history of civilization, but it cannot “afford” the highest standards of achievement of which its own living citizens are capable, because they do not “pay.”

If I had the power to-day, I should most deliberately set out to endow our capital cities with all the appurtenances of art and civilization on the highest standards of which the citizens of each were individually capable, convinced that what I could create, I could afford….

John Maynard Keynes. “National Self-Sufficiency,” The Yale Review, Vol. 22, no. 4 (June 1933), pp. 755-769.

UNEP’s latest publication, Towards a Green Economy tackles the vexed question of financing the Green Transition and estimates that

“to halve CO2  emissions by 2050, requires investments of approximately US$ 750 billion per year from 2010 to 2030 and US$1.6 trillion per year from 2030 to 2050. The World Economic Forum and Bloomberg New Energy Finance, on the other hand, calculate that clean energy investment needs to rise to US$ 500 billion per year by 2020 to restrict global warming to less than 2ºC, while HSBC estimates that transition to a low-carbon energy market will require US$ 10 trillion between 2010 and 2020.” (Towards a Green Economy, page 33.)

The Green Economy team at UNEP make their assessment based on achievement both of the above carbon emissions target, but also the Millennium Development Goals, and estimate a range of US$1.05 trillion to US$2.59 trillion annually.

“On average, these additional investments amounted to 2% of global GDP per year over 2010-2050, across a range of sectors to build capacity, adopt new technologies and management techniques, and scale up green infrastructure.”

The report then proposes a range of potential ways of financing these investments. The UNEP team look to “institutional investors such as pension funds and insurance companies”; to “public financing” by which no doubt is meant taxation and government borrowing from capital markets; to global development institutions (e.g. the IMF, World Bank and other multilateral institutions); and finally to “stable and resilient capital markets.”

In this short paper I want to argue that the financing of a ‘Green Transition’ is affordable, and need not be drawn down from what can broadly be defined as ‘savings’: namely the share of income not consumed by individuals, households, firms, governments and global institutions, and instead ‘saved’ as taxation, capital, pension funds, and reserves.

Instead the financing of a Green Transition should be undertaken in much the same way as e.g. the financing of the Industrial Revolution, the Second World War, and the recent 2007-9 Bank Bailout: by the banking system’s creation of credit at low, sustainable rates of interest. This financing must then be used for investment in productive activity that substantially lowers emissions, facilitates the transition to a de-carbonised economy, and generates the income to repay the public and private banking system’s loans.

The annual sums required for the Green Transition are not excessive, when compared, for example to the intervention undertaken to support the banks in the UK, US and euro-area during the financial crisis. According to the Bank of England’s 2008-9 Financial Stability Report (June 2009, Issue No. 25)

“overall, the total value of actual and contingent support in North America and Europe rose to over US$14 trillion, equivalent to about 50% of annual GDP.”

UNEP’s requirement of 2% of GDP  for financing the Green Transition is modest by comparison to the financing made available by central banks to the private banking sector, and indirectly to governments (through the purchases of bonds/gilts) in 2009.

Savings not needed to finance the Green Transition

In this short note I want to re-state facts known to economists down the ages, but most clearly explained by Keynes, and then subsequently lost to the field of macroeconomics.

The nature of money is highly peculiar. It is very different from the point of view of an individual and from the point of view of the system as a whole. Individuals cannot magic money from nothing. But the banking system as a whole can magic money from nothing.

This money can be used to bring economic activity into existence. Credit creates savings/deposits. Economic activity generates saving, it is not constrained by saving.

Keynes’s predecessors, the Classical economists saw things differently.  According to Classical theory, saving was necessary prior to investment. Money – deposits or savings – existed only as the result of economic activity. These savings (or vaults of silver/gold) then created economic activity.

Keynes’s great contribution was to demonstrate the contrary: that saving, which is another word for non-consumption, or delayed consumption, is not necessary prior to investment. In other words, if a bank promises credit for an investment it really disposes of something belonging to the future: the coming saving. Credit creates deposits and savings. Credit creates economic activity.

Victorian constraints on finance

The economic theory that saving was necessary prior to investment came about, in part, because banks at that time were not adequate to the demands of rapid industrialisation, and firms could not easily raise funds for large-scale investment. Instead they relied on the savings of individuals. The saving habits of the time were therefore incorporated into Classical or Victorian economics and persist to this day in neo-classical economic theory – still dominant in our universities and think-tanks.

For the Victorians, banks were merely channels, passing money from lenders to borrowers; from individuals to firms and governments.[i] But as the banking system evolved, banks were able to create credit in excess of savings.  With time it became clear that neither savings, nor prudent savers were necessary or essential for investment.  Once society accepted banking systems and bank money, money was no longer a scarce resource.  Economic activity was, and is, no longer bound up with, and dependent on the few with savings in excess of income.

Investment was, and is no longer constrained by saving.

Today, to make loans, banks (both central banks and private banks) do not have “savings” or “deposits” – either theirs, or those of others – to extend to others as credit, and on which they charge interest.  The money for a bank loan does not exist, until the borrowers apply for credit. (The myth of ‘fractional reserve banking’ is just that: a myth.) Central banks do not need to tax the population, or to mobilise savings, before the creation of what is today known as ‘Quantitative Easing’, but was in the past known as ‘Money Market Operations’ etc.  

At the height of the financial crisis, Governor Ben Bernanke was asked where he had found $160 billion to bail out an insurance company, AIG. Had he raised the funds from taxation? No, he replied:

“It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account in a commercial bank.”

“So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.” (CBS 60 Minutes Show 15 March 2009).

In today’s economy, there is no tangible quantity corresponding to the aggregate of bank money in an economy at any point in time. Such a tangible quantity/quality is not a necessary characteristic of money. The acceptability and hence validity of bank money is due to its being able to facilitate transactions. ^[ii] To enable society, in Keynes’s terms, to ‘afford that which we can create’.

For investors that operate in today’s monetary economies, the relevant consideration is the availability of finance, not savings, and there need be no constraint on finance – because credit is not a commodity and there need be no limit to its creation.

This makes credit both a powerful resource for human development and protection of the ecosystem; but also a dangerous power if unchecked and governed by ‘light-touch regulation’.  If more credit is created by the banking system than there is potential for economic activity, then the outcome is inflation. If less credit is created than there is potential for economic activity, then the outcome is deflation. Furthermore, if loans are made at rates of interest above a sustainable rate of return, the loans become unpayable.

Supply and the price of money

Fortunately, bank money has a second great advantage, the very thing that had motivated its invention: lower interest rates. Public banks could increase the supply of money, and thereby lower its price: the rate of interest. Entrepreneurs were no longer ‘in hock’ to those with savings in excess of income, who were often usurers.

For unlike gold or oil, credit is not subject to the laws of supply and demand. And because it is not subject to the laws of supply and demand, its price – or the rate of interest – should always be low, and is necessarily a social construct. In other words, the price of credit is influenced not by shortages or gluts, but above all by committees of men and women, based in central banks, and in the private banking system, who determine the most appropriate rates of interest for the economy, or for the private banking sector. (Consideration is not, so far, given to the ecological sustainability of rates.) The 2009 creation of extraordinary levels of ‘support’ – $16 trillion – for the banking system was accompanied by decisions by central bank committees to push base or policy rates to the lowest levels in history. While rates across the spectrum did fall, central banks have unfortunately lost control over rates set by the private sector, now determined overwhelmingly by the British Bankers Association’s determination of the London Interbank Offer Rate (LIBOR).

Bank money was a remarkable and very welcome development; a great public good. Indeed capitalism owes much of its advance to the development of sound banking systems.

Using the banking system to facilitate the Green Transition

By increasing the amount of credit in circulation, bank money facilitated what we have come to regard as progress.  The development of modern technology (the light bulb and the steam engine) would not have taken place if entrepreneurs had not had their research and development funded by low-cost finance made available by bank money. Trade was made possible with bank money. The welfare state was made possible by bank money.  And financial crises have been ameliorated by the issuance of bank money.

The 2009 financial crisis demonstrated to the public that the relevant consideration is the availability of finance, in the form of Quantitative Easing, not savings, and there need be no constraint on finance. Society now needs to argue that just as there was no constraint on the financing of the 2009 bailout, so there need be no constraint on the financing of the Green Transition. Instead there must be careful regulation of that financing, and of the rate of interest attached to loans for investment in the de-carbonisation of the economy.

The financing and investment of 2% of global GDP in the Green Transition will in turn generate economic activity, and with it the deposits and savings needed to repay lending. There will be no need to resort to taxation, pension funds or other sources of ‘saving’. Indeed sound economic activity will generate additional savings for individuals, firms and governments.

[i] The US’s Treasury Secretary Tim Geithner believes that banks are merely channels. In testimony to Congress in September, 2009 he said: “Stripped of its complexities, the purpose of a financial system is to let those who want to save -whether for vacation, retirement or a rainy day -save. It is to let those who want to borrow -whether to buy a house or build a business –borrow. And it is to use our banks and other financial institutions to bring savers’ funds and borrowers’ needs together and carefully manage the risks involved in transfers between them.”   Financial Services Committee, Congress, 23 September, 2009.

Once again apologies for a longish absence. This is down in part, to smashing (literally) building works, to a little grandchild-minding, and to other writing commitments. But have been itching to comment on a) Greece and the EU b) Iceland (it seems the UK is easing up on the pressure); c) the progress of the global recession; and d) China-US relations…..so posts on a, b, c and d are on their way….promise.

In the meantime this is the text of a letter I signed and helped draft, published in today’s Observer, and yesterday (20 Feb 2010) in the Times. It is a response to the letter written to the Sunday Times last week by 20 conservative economists, including Ken Rogoff of Harvard, Lord Megnad Desai, previously a Labour peer, and Bridget Rosewell, who was Mayor Ken Livingstone’s economic adviser.

Our letter has a number of distinguished economists as signatories, as well as my pals in the Green New Deal group – all of whom I am proud to be associated with.    See below.

Sir,

We urge the UK government not to heed the siren song of the 20 economists who, having failed to predict the crisis, now seek to advise on its resolution. The world economy is in the deepest recession since the Great Depression. In the UK, output has collapsed by £70bn on an annual basis. Under such conditions, common sense tells us that the government must compensate for the collapse in private investment and address the high level of unemployment.

The only way to restore the public finances to health is to restore the economy to health.

And that means public investment (not cuts) to create jobs and income in the private and the public sector. Government should oblige the banks that have been effectively nationalised to lend to the public sector at low rates of interest. Consequent tax revenues raised and savings on benefit expenditure will reduce the public debt. As Keynes observed: “Look after the unemployment and the budget will look after itself.”

There is already a credible plan on the table. It is called the Green New Deal. Invest now and we could kick-start the transformation of the UK’s energy supply while creating thousands of new green-collar jobs, restoring the UK’s skills-base and building the recovery on the manufacture of necessary goods. We urge the government to act now and implement the Green New Deal without delay.

Andrew Simms

Policy director, new economics foundation, London SE11

David Blanchflower

Professor of economics, Dartmouth College

Dr Anastasia Nesvetailova

Assistant professor, international political economy, City University

Victoria Chick, emeritus professor of economics, University College London

Andy Denis, senior lecturer in political economy, City University London

Ann Pettifor, director, Advocacy International

Christine Cooper, professor of accounting, University of Strathclyde, Scotland

Colin Hines, convenor, Green New Deal Group

George Irvin, professorial research fellow, University of London, SOAS

Ismail Erturk, senior lecturer in Banking, Manchester Business School

Prem Sikka, professor of accounting, Centre for Global Accountability, Essex Business School

Richard Murphy, Tax Research LLP

Dr Stephanie Blankenburg, Department of Economics, SOAS

Stephen Spratt, chief economist, nef and six others

17th January, 2009.

This was posted on the Compass site on the 16th January.

I am shortlisted for the North West Durham Parliamentary Selection. A less likely candidate you would be hard pressed to find. I am not a local big wig and did not grow up in the constituency. I don’t have the backing of big hitters – either in the party, or in the unions. Nor am I a youthful 25-year-old, ambitious for power. No, I am far more ambitious than that.

I want the people (especially the young people) of North West Durham to have a sound and stable future. I want Britain to learn from the catastrophic debacle of the financial crisis, and ensure it never happens again. The hopes, aspirations, health, jobs, businesses and climate of Britain must not be sacrificed to pay for economic failure engineered by a small elite in the City of London.

That’s David Cameron’s plan: to deflect the terrain of political debate from the City and focus it instead on the public sector finances. Under this plan public services are targeted as the cause of the crisis; ‘balancing the budget’ the solution; and those least responsible expected to bear the long-term costs.

While the Liberal Democrats and some Labour Ministers have been lured on to this terrain, the British people as a whole are proving less gullible and malleable.

Cameron’s ‘austerity’ strategy has backfired – thanks to the intelligence and common sense of British voters.

That’s why I am standing, because British voters are looking for a resolution to this crisis that does not victimise, but compensates taxpayers; tames the perpetrators, and ensures that the crisis is not repeated.

I am standing too because I am ambitious for an effective, democratic local and national Labour campaign – using all the modern media – that encourages Labour’s core voters to join the party again. That mobilises disillusioned voters from the trade union movement, the Green movement, the NGOs and the faith organisations. A campaign that ensures that a Labour government and Labour MPs speak for, and represent the people that elected them – not the finance sector.

Then I want to help ensure that a new Labour government provides the resources and industrial framework needed to de-carbonise our economy and make our country more energy efficient. I want the people of North West Durham and their children and grandchildren to have a sound and steady economy, and a stable climate in which to live and thrive.

To achieve those ambitions we must support Gordon Brown’s determination to cut government borrowing.

Contrary to economic ‘groupthink’ cutting government borrowing is best achieved by investing in jobs, generating tax revenues, and cutting spending on unemployment benefits.

In other words by spending away the debt.

Of course that does not make sense to the economically illiterate Tories, and its anathema to many orthodox economists. But it makes sense to anyone on a first year course in economics, who understands the ‘multiplier’. To evidence my point see this chart – with data provided by the Treasury (Public finances databank, Table A10) and with thanks to my colleagues in the Green New Deal group.

This is a chart of Britain’s public debt as a share of GDP – from 1858 until 2002. (Please note the difference between the debt and deficit. The annual deficit is not a measure of the scale of government spending. It’s a measure of the annual outcome of that spending. The deficit (but not the debt) could rise because e.g. the Treasury cuts public investment, has to pay out more in benefit payments and loses tax revenues.)

Note that Britain’s debt today – as a proportion of the national cake or GDP – is about 55% and rising. It was twice that in 1858 – about 100% of GDP.

Government debt is expected to hit 70% soon. That’s largely because of the City of London bail-out which cost the government a massive £150 billion between 2007 and 2009.

In 1946 Britain’s debt was roughly 5 times what it is today – a staggering 250% of GDP.

At that point an extraordinary thing happened.

The heavily indebted Labour government began to spend – as soon as legislation was agreed by Parliament.

Labour invested in a bold and visionary project: – a publicly funded health service free at the point of use – the NHS. There was a slum clearance and housing programme. They revived the ancient universities, provided pensions and welfare to the poor. They trained ex-soldiers to become teachers.

To revive the economy, to protect the vulnerable, and to prepare the country for the threat posed by climate change – a Labour government must do the same again: invest in a Green New Deal.

What happened to the public debt in the 40s and 50s, you might ask, as a result of Clem Attlee and Hugh Dalton’s apparent extravagance and flouting of the economic orthodoxy? Did the deficit balloon, the bond markets blackmail the government, and did capitalism as we know it, go into free fall?

No. On the contrary. Look at the chart. What Lord John Maynard Keynes advised would happen, did happen. Government investment kick-started private economic activity. Tax revenues rose, expenditure on unemployment benefits fell, and government cut its borrowing, which fell dramatically as a share of GDP.

And the economy thrived.

Indeed 1945- 1971 is known in economics as ‘the Golden Age’.

The spending paid down the debt.

There was not much leakage, because ‘offshore capitalism’ – the kind of capitalism that dodges regulation and taxation – was not well established then. People in Britain were getting jobs and paying taxes in Britain – and so were employers, and businesses in which they spent their earnings.

Can a Labour government repeat this achievement, given globalisation?

I believe we can.

Labour will have to rein in the ‘offshore capitalists’ and bring them onshore. The government is already doing that, tackling abuse in its tax havens, restricting generous allowances for the wealthiest, and raising the tax rate to 50% for bank bonuses.

Next Labour must build on existing investment in infrastructure projects and mobilise a ‘carbon army’ of ‘green-collar’ jobs that cannot be outsourced.  Gordon Brown’s announcement of a new round of licences to support the growing offshore wind industry was a first step in that direction.

These actions will ensure a future for the people of North West Durham, and for the British Isles as a whole. Indeed with ambition, Labour could recreate ‘the golden age’. This time based on a steady-state economy. That’s my ambition, and why I have put myself forward for the candidacy of North West Durham.

Ann Pettifor

There has been much sturm and drang generated by the Guardian and others on the threat posed to government finances by the flawed and often irrational rating agencies, and by the supposedly despotic, vengeful and greedy bond markets.

Methinks they protest too much.

We at the Green New Deal group have long argued that there is no reason why governments should rely for their financing on the capricious private bond markets. Instead, we write in ‘The Cuts Won’t Work’ -  finance ministers should oblige the banks in which taxpayers have a substantial stake to lend to the Treasury at very low rates of interest.

That’s how World War II was largely financed in Britain – and no one was the worse for it. The loans were given a title: Treasury Deposit Receipts.  These TDRs – bless them – financed a war that saved Britain from the threat Nazism posed to its very existence. Today they could be used to finance the public investment needed to substitute for the collapse in private investment – and to stave off the threat posed by climate change.

Analysts on the Financial Times Lex column (FT 1st January, 2010) have obviously read our latest report, and describe our proposal as “an intriguing alternative” . Governments they write “may lean on the commercial banks in which they hold large stakes to take up the strain instead. Forcing them to purchase government bonds would help replace the market heft of central banks.”

Quite so. You read it first in the Green New Deal.

At the end of last month I delivered the prestigious EBOR lecture at York. My address was entitled:

“Credit, usury and political power: chasing the moneylenders from the temple that is our democracy”

Click on the link below to read a PDF version of the full lecture:

EBOR Lecture November 25th (PDF)

This is the press release from the new economics foundation:

“Two days ahead of the pre-budget report, and as the UN climate change talks open in Copenhagen – the second report from the authors of the original Green New Deal argues that the British Chancellor is likely to miss a historic opportunity to tackle public debt, create thousands of new green jobs and kick-start the transformation to a low-carbon economy.

The cuts won’t work, the Green New Deal Group’s second report shows how, contrary to the policy of all the major political parties, cutting public spending now will tip the nation into a deeper recession by increasing unemployment, reducing the tax received and limiting government funding available to kick-start the Green New Deal.

Instead a bold new programme of ‘green quantitative easing,’ rather than simply propping up failing banks, could help reduce the public debt and kick-start the transformation of the UK’s energy supply while creating thousands of new green-collar jobs.

Drawing on evidence from the great depression in the UK and the USA, the Group show how cuts in public spending then, before the economy had recovered, tipped both nations deeper into depression.
Now, the Group say, the Chancellor must announce a plan that updates the lessons from history for the challenges of the modern world, and spend to reduce the public debt by investing in the long-term restructuring of the UK’s energy infrastructure needed to meet the challenges of climate change and the inevitable peak and decline of oil.

To illustrate the potential of ‘green quantitative easing’, new calculations produced by nef (the new economics foundation) for the Group reveal that:

A sample of £10 billion in green quantitative easing invested in the energy efficiency sector could:

• Create 60,000 jobs (or 350,000 person-years of employment) while also reducing emissions by a further 3.96MtCO2e each year;
• This could also create public savings of £4.5 billion over five years in reduced benefits and increased tax intake alone;

A sample of £10 billion in ‘green quantitative easing’ invested in onshore wind could:

• Increase wind’s contribution to the UK’s total electricity supply from its current 1.9 per cent[i] to 10 per cent (39 TWhe) and;
• Create over 36,000 jobs in installation and direct and indirect manufacturing.
• This is a total of 180,000 job-years of employment – here we have described each ‘job’ as providing stable employment for an average of five job-years.
• Create a further 4,800 jobs in the operations and maintenance of the installed capacity and other related employment[ii] over the entire 20 year lifetime of the installation (equivalent to 96,000 job-years)
• And, if this directly replaced energy from conventional sources, it could decarbonise the UK economy by 2.4 per cent.[i] – reducing emissions from the power sector by up to 16 Mt[iii]CO2e[iv] each year  This corresponds to a £19 billion reduction in environmental damage

Or, a sample investment of £10 billion could:

• re-skill 1.5 million people for the low-carbon skills of the future, bringing 120,000 people back into the workforce, and increasing the earnings of those with a low income by a total of £15.4 billion.

The Group recommends:

• A £50 billion programme in ‘green quantitative easing’ in the short term to rebuild the economy. This is the amount of annual spending recommended by some of the most comprehensive analyses to date of the amounts needed to re-engineer the UK economy to meet the challenges of a low carbon future;

• Next, planning must begin for all of the new forms of bond finance detailed in the Group’s report to ensure the long-term stable funding needed for the long-term transformation of UK infrastructure.

Once spending on the green economy of the future has breathed life back into the deflated economy, the Green New Deal will require a whole new savings and investment infrastructure to meet the long-term investment needed to underpin the Green New Deal and to meet the needs of a new generation of investors who are fed up with all that has gone before.

This means secure new forms of saving which promise stable returns over the longer-term. The Group put forward a range of new measures to help public borrowing and encourage public investment by individuals, local authorities and companies in greening and reviving the economy. The foundations for these must be laid now. These include:

Measures on tax that are explicitly designed to re-gear the UK economy and transform energy infrastructure:

• Tax incentives on green savings and investment, so that future ISA tax relief – costing more than £2 billion a year – is only available for funds invested in green savings (tax relief for ISAs was more than the whole green stimulus package announced in the 2009 Budget, estimated to be worth just £1.4 billion).
• A general tax-avoidance provision to end the abuse of tax allowances. If just half of the tax avoidance in the UK was stopped by this provision, it would raise more than £10 billion a year.
• A Financial Transaction Tax, commonly known as a “Tobin Tax”. Such a tax, applied internationally at a rate of about 0.05 per cent has the potential to raise more than £400 billion a year. This could be the basis for a Green New Deal in the Global South, playing a significant role in enabling the majority world to adapt to climate change as well as breaking the carbon chains of fossil fuel dependence.
• New savings mechanisms that support the greening of the economy now, create thousands of new jobs and guarantee stable returns into the future:
• Green bonds, which will be issued by the government with the explicit guarantee that the funds raised will be invested in new green infrastructure for the UK. The bonds will carry conventional rates of return for bonds.
• Local authority bonds, to invest in energy efficiency and provide renewable energy for each of the country’s three million council tenants, as well as for all other local-authority-owned or -controlled buildings, such as town halls, schools, hospitals and transport infrastructure.
• Carbon linked bonds, to align investment returns with carbon saving and create a significant body of investors who will take the risk on there being carbon savings that can be secured.

A new publicly owned ‘Green New Deal Investment Bank’ to allocate the capital provided by green quantitative easing, and new bank lending to government:

• Green New Deal Investment Bank, a publicly owned bank to hold and disburse capital provided by ‘green quantitative easing’. It will be used exclusively to fund companies and projects designed to accelerate the transition towards a low carbon economy.
• Treasury Deposit Receipts, like those issued during the Second World War, a mechanism whereby banks were forced to use their ability to create credit to lend to government.

The Green New Deal group believe that despite the appearance of calm, the need for the implementation of the Green New Deal is greater than ever. When the Group launched their first report, new analysis suggested that from 1 August 2008 there were only 100 months, or less, to stabilise concentrations of greenhouse gases in the atmosphere before we hit a potential point of no return. The climate clock is still ticking and nothing like the scale of reform needed to rapidly re-engineer the economy has been implemented, anywhere.

This could be a real opportunity for the UK to show global leadership by implementing an interlinked package that recognises the need for targeted public spending in a downturn.  Not to further fuel an economy hard-wired into ever increasing use of fossil fuels, but to revitalise the productive economy and lay the foundations of the low-carbon infrastructure of the future.

The opportunity for action is even more pressing than it was when President Franklin Roosevelt instigated his bold New Deal programme that touched almost every aspect of economy and society. The timescale is limited by the urgent need to stabilise concentrations of greenhouse gases in the atmosphere before the risk of uncontrollable global warming increases significantly. Today, there is a plan on the table that could revitalise our damaged economy while also radically restructuring it for a low carbon future. Now the vision is needed to implement it before it is too late.
-    ENDS –

For more information, or to arrange an interview with a member of the Green New Deal Group, please contact:

Ruth Potts, co-ordinator, the Green New Deal Group, on:

t: 020 7820 6357         m: 07749 026 203       email: ruth.potts@neweconomics.org

Quotes from the Green New Deal Group:

“There is a pervasive and infantile notion that government budgets are like household budgets. They are not. By spending and investing in jobs, governments generate tax revenues, reduce welfare payments – and cut government debt into the bargain. Government must spend away the debt – on flood defences, on alternative energy and energy efficiency.  By investing in green-collar jobs that can’t be done in  China, government spending will pay for itself, fill the economic crater caused by the collapse in private investment – and lead to a recovery in public finances.” Says Ann Pettifor, nef fellow and Green New Deal Group member

“In the bad old days of medicine, there was a popular belief that draining blood from the sick would help them recover. More often it hastened their demise. The idea that widespread cuts are necessary to help the economy recover and pay back the public debt may be appealing as a knee jerk reaction but it makes no economic sense. An economic transfusion of resources to build a low-carbon economy is what we need to get the patient on its feet. Do this and we will create jobs, raise revenues, cut carbon and increase our energy security. It is not a time for the economic policy equivalent of medieval bloodletting.” Says Andrew Simms, policy director of nef (the new economics foundation and Green New Deal Group Member

“This is about using fiscal policy - government spending, borrowing, and tax revenue – to create real jobs,  real investment and real energy security in our economy – and all of it green. That’s not just being green, that’s about working, financing, governing and sustaining green – all in a plan that works across conventional policy boundaries to show that the Green New Deal group doesn’t just talk about integrated thinking – it delivers it too” says Richard Murphy, Director of Tax Research LLP and Green New Deal Group Member

“Its time for the Bank of England’s quantitative easing programme to stop magicing money out of nothing to prop up the banks. Instead it should use this form of money to fund green jobs and business opportunities on a huge scale. Also people are saving not spending, so the Government needs to see ‘savers as saviours’ and provide inducements for them to use such savings to fund a Green New Deal”. says Colin Hines, convenor of the Green New Deal Group

Notes to editors:

1.    The cuts won’t work: Why spending on a Green New Deal will reduce the public debt, cut carbon emissions, increase energy security and reduce fuel poverty is the second publication of the Green New Deal Group. Meeting since early 2007, its membership is drawn to reflect a wide range of expertise relating to the current financial, energy and environmental crises. The views and recommendations of the report are those of the group writing in their individual capacities. The report is published on behalf of the Green New Deal Group by nef (the new economics foundation)

2.    The Green New Deal Group’s first report, The Green New Deal: Joined-up policies to solve the triple crunch of the credit crisis, climate change and high oil prices was published in July 2008.

3.    The Green New Deal report will be delivered to the Prime Minister, Gordon Brown, the leader of the Conservative Party, David Cameron, and the leader of the Liberal Democrats, Nick Clegg, with a letter signed by the members of the Green New Deal Group demanding a response to its proposals.
The Green New Deal Group are, in alphabetical order:

Larry Elliott, Economics Editor of the Guardian,
Colin Hines,Co-Director of Finance for the Future, former head of Greenpeace International’s Economics Unit,
Tony Juniper, Environmentalist and Campaigner,
Jeremy Leggett, founder and Chairman of Solarcentury and SolarAid,
Caroline Lucas, Green Party MEP,
Richard Murphy, Co-Director of Finance for the Future and Director, Tax Research LLP,
Ann Pettifor, former head of the Jubilee 2000 debt relief campaign, Campaign Director of Operation Noah,
Charles Secrett, Advisor on Sustainable Development, former Director of Friends of the Earth,
Andrew Simms, Policy Director, nef (the new economics foundation).

Article Published in the Times, September 1st 2009. Photo by Jon Enoch.

Ann Pettifor predicted a painful end to the good times. Now she says that only radical action can prevent further gloom

Phil Thornton

Ann Pettifor is a member of a select club — the seers who saw it all coming. Now the economist, who predicted the credit crunch as far back as 2003, believes that the worst is yet to come unless there is radical reform of the financial system.

Six years ago she parodied the International Monetary Fund’s annual economic forecast with her own — The Real World Economic Outlook. Then, in 2006, her book The Coming First World Debt Crisis, warned that rich countries were heading for a debt crisis that would overshadow anything seen in the developing world. Both were ridiculed.

With the British and world economies languishing in the worst recession since the Great Depression and with once-mighty banks reliant on government life support, she could be forgiven for being a little smug. Not a bit of it: “No, being Cassandra is not something I wish for. I hate this role of being a gloomer and doomer, as I’m an optimist by nature. But I am very pessimistic now.”

She is dismayed that politicians have failed to seize the opportunity that the crisis has given them to embark on tough reform of the banking system. Stock markets have rebounded and house prices have stopped falling, but Ms Pettifor fears that politicians and households have started to relax prematurely.

“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.”

She likens Alistair Darling, the Chancellor of the Exchequer, to a high-wire artist. “He thinks that if he can just keep his eyes closed he will get to the other side. Yet underneath him is this vast debt that has not been cleared off the banks’ balance sheets. Many of the banks are still insolvent and this has not been addressed.”

Ms Pettifor, executive director of Advocacy International, which advises countries on debt management, made her name spearheading the Jubilee 2000 campaign to cancel the debts owed by the poorest countries. She believes that there are only three solutions to Britain’s woes: write off these debts as unpayable; convert the debt into equity; or use the benefits system to raise people’s incomes so that they can meet their debts.

She is baffled that the Government has used billions of pounds of public money to rescue the banks without insisting on any change in behaviour.

She highlights an admission by the Treasury that one company in three is paying interest rates more than nine percentage points above the base rate and is furious that banks such as Barclays feel able to offer bonuses reminiscent of the pre-crash boom. If the banks do not change their ways, she says, the Government must simply withdraw the insurance guarantees that have kept them alive.

Instead, public money should be used to bail out households and businesses threatened by bankruptcy. “The banks are not using the money productively, yet what we need is for the Government to spend more productively,” she says. “But now there is a consensus that governments should not spend any more in this crisis. That will tip us into a big depression.”

Ms Pettifor, who is a fellow at the New Economics Foundation, a left-leaning think-tank, believes that it is not too late for politicians, regulators and even bankers themselves to embrace reforms that will prevent another cycle of boom and bust. She believes that a culture of easy but expensive credit, which she blames for the accumulation of unaffordable debts over the last two decades, should be replaced with a model of “tight but cheap credit”.

“Orthodox economists talk about cheap money being the cause of the crash. But it was not cheap — subprime homeowners were paying 19 per cent interest. It was easy money that was the cause.” This, in turn, led to the massive inflation in property prices — house prices trebled between 1997 and 2007. “We over-borrowed against these inflated prices. The rollicking times were rollicking and now we are getting a bollocking.”

She was baffled by a recent letter to the Queen — from other leading UK economists — after she reputedly asked why nobody had seen the crisis coming. With a voice bordering on incredulity, she reads out a passage where the letter-writers say “inflation remained low and created no warning sign of an economy that was overheating”.

“What about asset price inflation? We repressed prices and wages but turned a blind eye to assets,” she says, adding that central bankers must monitor asset prices in the same way that they track high street costs.

But how do we achieve cheap but tight credit? In terms of tighter lending standards, it means an enhanced role for bank managers. “When I and my partner took out a mortgage in 1970s we had to see the bank manager, who went through our finances with a fine-tooth comb,” she recalls. “That’s all you need — more bank managers making an assessment of risk.”

Since she believes that high interest rates were a key cause of the crash, she says that low interest rates for loans are essential.

Her prescription for achieving cheap credit is more radical — nationalise the setting of the London Interbank Offered Rate (Libor), which tracks the rates at which the largest banks are borrowing money from each other and is used to set mortgage and business loan rates.

She says that government intervention to keep real rates at a level at which businesses can make a profit would help to stem the rise in insolvencies that, in turn, leads to people losing their jobs and their homes.

This taps into Ms Pettifor’s long-standing worry over the “financialisation” of the economy that has allowed banks to become the “masters, not the servants” of industry at the expense of genuine entrepreneurial activity.

Future lending should be directed towards sustainable home ownership and business activity, rather than speculation.

At times her model comes close to a form of Sharia, the Muslim financial code that forbids the earning of interest. Indeed, in her 2006 book, Ms Pettifor urged society to return to the traditional religious approaches to usury as a way of curbing the excesses of capital market speculation.

The final element of her vision is a “green new deal” to create economic growth and the jobs needed to fill the “crater” of lost employment and output caused by the crash.

Ms Pettifor would take a leaf out of the Bank of England’s book on quantitative easing but would direct new money to the Government to support green projects.

Private banks could lend to the Government at low interest rates for the same effect. “The fact is that when the Government spends, the private sector is the biggest beneficiary. If the Government announces a home insulation programme, it will be the construction industry that will do it,” Ms Pettifor says.

Her forecasts of a crash have been proved right, but will her latest warnings receive a better hearing? She admits that none of the three main political parties is likely to adopt her policy prescriptions. “There is a weakness in being too far ahead of the game.”

Originally published in The Times, September 1st, 2009.