Tuesday, June 20, 2017

Richard Werner: Local Banks and Debt Free Money.

Recent discussions here about our money supply and MMT led me to do a search for Richard Werner's excellent discussion of how small public banks and credit unions, which are owned by their members, can greatly benefit the community. I found these two superb videos which are not very long and Neil will like them. Here Richard Werner says the big banks need to be broken up. He describes how in the past governments got around the problem of paying interest by using a tally stick system, but with modern technology it can be done much easier.

The interviewer says he did a search for a mortgage checker and found that for a loan at 5% interest paid back over 25 years the borrower would have pay back twice as much as they borrowed. Richard Werner says this is a massive problem for society and for the government which also borrows money from the private banks. This counters Steve Keen's argument who says the interest is not a problem because new money does not have to be found as old already issued money just gets recycled when it goes in and out of the banking system. Steve Keen has some impressive computer modelling for this, but some academics say he has got it wrong. I hope not, because this would be a massive problem for society as interest compounds. Michael Hudson talks a lot about this problem of compounding interest too. Its seems like an enormous free money give away to the rich and people would be shocked if they knew.

 I got into an argument with Minethis1 on YouTube about this problem of government paying interest to private banks on its loans. I was defending him against some libertarians that were arguing with him when he turned on me because he said I got the role of government debt wrong when I said that the government can create its own money without borrowing from the private banks and so did not need to be saddled with debt and interest payments to private banks (which increases taxes, I also said). Minethis1 got quite angry with me and said that I sounded like a libertarian, but he would not tell me what it was I got wrong despite asking him several times to explain himself.

I learnt later that government bonds are just sold so that the central bank can settle overnight interest rates and are not really loans to the government. The government can create the money at its central bank to pay back interest on bonds so its not a problem, but Bill Mitchell says this is an enormous free money hand out to the rich. But here Richard Werner is saying that the interest on money that the government borrows from the private banks is an enormous problem for governments. He seems to agree with my original premise.

Richard Werner: Local Banks - Their Vital Role.

In the UK the Coalition Government has for some time been pleading the banks to lend to small and medium-sized businesses - with the aim of kick-starting economic growth. But it has not worked. In this video interview Professor Werner shows how this failure is particular to the UK due to the size of the banks. There is a mismatch. These huge centralised international banks are not suited for lending to local and regonal businesses. This means that small local businesses are throttled and the shape of the economy is skewed in favour of large firms. A Government committed to localism and the participation of all under its Big Society banner should heed Dr Werner's clear agenda of what should be done now to provide Banking for the Big Society.

Richard Werner: Debt Free & Interest Free Money

Dr Werner discloses facts about money creation that are at the core of every modern economy. About how the creation of the essential money that is needed to sustain growth is founded on debt. This suits banks, of course. Governments have huge debts, to banks, and few people realise that it does not have to be like this. Taxes are needed for paying for decades of past interest on government borrowing. Banking is an extracting mechanism. It extracts resources from the economy, through interest payments and the taxation needed to cover the debt burden of the government. Why borrow from banks and pay interest when there is an alternative way of money creation and allocation? Governments could create the money and allocate it into circulation through its spending programmes. [Kaivey: This was the argument I was making when Minethis1 turned on me]

Nearly 1000 years ago Winchester in England was the centre of such a money creation system - debt free and interest free. The tally stick system was used. It expanded the money supply needed by government and it was without debt. Tally sticks were accepted for tax payments. It worked for centuries. The system was not popular with banks who prefer to create the money supply and charge interest and so their way has come to dominate. But with modern technology we have the possibility of launching an alternative money creation system without the burdens we suffer under, and which would be even better than the proven tally stick system


Neil Wilson said...

"and for the government which also borrows money from the private banks."

The government doesn't. Werner unfortunately gets himself in a complete muddle. He can describe the initial problem, but his solution is clueless.

And that's because Werner won't accept that the Central bank is under the political control of the government in a sovereign nation. In the UK it is literally owned by the government.

So in reality the commercial banks are *forced* to lend to the government sector at a fixed rate of interest (that is what reserves are). Government then voluntarily swaps that for a higher interest rate for reasons.

Ramanan said...

Yeah, Werner is a completely confused guy.

For example he claims that only bank lending causes growth, as if the fate of the whole economy lies exclusively with banks and the government can't do anything.

"The reason is that economic growth and national income are almost entirely determined by a factor that is decided at home, namely the amount of bank credit created for productive purposes. "


Bit of a quack.

Postkey said...

"For example he claims that only bank lending causes growth, as if the fate of the whole economy lies exclusively with banks and the government can't do anything."

I think that if you read his books:

Princes of the Yen: Japan's Central Bankers and the Transformation of the Economy

New Paradigm in Macroeconomics.

you would retract the statement - "the government can't do anything."

Ralph Musgrave said...

Werner has done some great work in the past, but I've noticed him getting more and more erratic recently. For example he's recently been advocating a large subsidy for families that produce more babies in Europe! Given the catastrophic environmental damage the human race does, strikes me a slow decline in the population would do no harm at all.

Tom Hickey said...

Ralph, a whole lot of white people have woken up to the fact that whites are not reproducing themselves and so the future belongs to another demographic and Western civilization" standing on the edge of falling into the dustbin of history. This is one thing that got Trump elected in the US and it is not only a US phenomenon. It is going to become more and more to fore politically.

Ramanan said...


In the quote (I started with) why does he say that?

Page 253 of "New Paradigm"


Confused discussion and claims on government shrinking demand.

Ralph Musgrave said...

Stop press: Richard Werner now says MMT is funded by Soros. This is good news. Who's got the money: Tom? Mike? What have you done with it?...:-)


Tom Hickey said...

Richard Werner now says MMT is funded by Soros.

I suppose because some MMT people as associated with INET.

The MMT economists cut ties with Roosevelt Institute to break the association with Peterson et al. In my view they should cut ties with INET, too, for similar reasons. It matters with whom one associates and who is funding it.

Postkey said...

"In the quote (I started with) why does he say that?"

Because of the evidence from Japan indicates that.

Ramanan said...


What I meant is: in the quote I started with (which had nothing to do with Japan) why does he say that growth exclusively depends on credit creation by banks. It's wrong.

About Japan: There are a lot of myths about Japan. He's just echoing mainstreamers. He is a fiscal hawk. Check his twitter conversations with MMTers where there seems to be disagreements on important things. (Although right now his TL is private. Maybe temporary but check when it's public again).