All week I’ve been reading that Labour were planning some big policy announcements soon. Ed Miliband gave his big speech today after pre-briefing the big announcement to the media which was [drum roll] to refer the banks to the competition authorities with an eye to creating some new banks… and that was pretty much it. Miliband strikes me as a nice guy and he’s not bad at political speeches. He made some approving noises about low pay, high cost of living, housing etc, but his party have no answers to any of these issues that are significantly different to what the government are doing. So while I despise the Conservative Party, all I feel about Labour is an ever growing sense of disappointment. As Miliband is fond of saying, “Britain deserves better than this”.
So his big idea today was on the banking sector. Would more competition be a good thing? Probably. Would it transform the industry? I don’t see how. Labour’s ideas about banking are already very much in line with what people like Vince Cable are already trying to do in government. There’s nothing radical or transformative about it. There are other options though. Here’s two that sound interesting to me.
The first may be known to some people, coming as it does from the Positive Money people. They favour removing the power from private banks to create money with a “full reserve system” which I think means that every £100 they lend out must be backed by £100 of deposits. I think they also propose a system where depositors (you and me) can decide if we just want the bank to store our money, or to lend it out and in return receive some interest payments.
Instead of the banks creating money then, they propose the government should just create enough money as is required to ensure the economy runs at full speed. And instead of politicians deciding how much money is created, Positive Money want it to be decided by an unelected committee (albeit one accountable to Parliament). Radical? Yes. Democratic? Maybe not. It’s an interesting idea, but I haven’t looked into it into enough detail yet. There’s a nice video here with more details for anyone interested.
The second proposal is outlined by Neil Wilson on his 3spoken blog. Taking inspiration from Minsky and elsewhere, Neil proposes that the role of banks should be significantly narrowed to the extent that their main purpose should be to underwrite loans to businesses and individuals who are going to do productive things and develop the economy. Banks would be allowed to go bust, which would happen if they don’t underwrite the loans competently. Such a system would promote competition because operators could be licensed by the state, with that license affording the operator an interest free overdraft at the central bank. So the better the underwriting, the more successful the operator. The money being created by the loans would be government money, but banks would determine how much of it is created and who it is distributed to based on demand. This system appeals because of its flexibility. As Neil writes:
“So with complete disintermediation by the central bank you can have several models – from a fully nationalised state bank with employed underwriters, through the ‘Provi Model’ where you have self-employed lenders and collectors, to the normal bank with employed bank managers.
The amount of state money injected is limited by demand – as determined by a highly distributed set of underwriters locally on the ground varying interest rates to suit local conditions and their own profitability vs the competition from fully match funded lenders.”
Narrowing the scope of banking and focusing on high quality underwriting would probably reduce the amount of credit available from recent levels, but this could be compensated for with lower taxes or higher conventional government spending. Read the whole thing as Neil raises issues of the payments system.
So both of these proposals offer a radically different way of doing things. In my view they are both well argued and warranting of wider discussion. But both are so far outside the mainstream political debate as to be almost unheard of by the wider public. So it’s worth saying again, while Labour and the Tories argue furiously over tiny differences, there are a whole range of potential options open to consideration. Options which could have an enormous impact upon the economy and which do not simply seek to tinker at the edges while maintaining the status quo.