debt money

It has been estimated that Fannie Mae and Freddie Mac between them underwrite debt of some $5,000,000,000,000 and that US losses from the current credit crunch could amount to $1,600,000,000,000.

The entire external debt obligations of the world's 40 odd Highly Indebted Poor Countries (HIPCs) is some $300,000,000,000 - that's about 6% of Fannie and Freddie's problems. So any bailout of the US mortgage system is going to amount almost certainly to more money than would write off all that, mainly African, debt (were that the best way to proceed, which I believe it is, with conditions).

By contrast the EU has today decided to support the idea of giving the surplus it has made on the Common Agricultural Policy as a result of rising food crop prices (so it has been subsidising less) to "African farmers". That's about €1,000,000,000 - or one three-thousandth of Fannie and Freddie's problems and two hundredths of Africa's problems.

But where did they get that money from, how did it arise? Robbing those very African farmers by denying them access to our markets and subsidising dumping on theirs. Tariffs are pure evil, aren't they?

So, whenever anyone says to you that it's difficult to find the finance for debt relief in the poorest countries, you'll now know that is total bollocks.  Just think of the scale of the US mortgage debt and what such sums could do for the 600 million or so poorest on the planet.

I spotted someone seemingly scouring my blog for articles relating to "citizens' Income" and came across this now seemingly very prescient post I did nine months ago about our tax policies hitting the mark or not.

They've been rumbled. The very shaky foundations of the entire house of cards have been exposed. The vast fraud against lower and middle income households that is the financial system, and, ultimately, government has been laid bare. Surely everyone can now see that? No? That doesn't surprise me. Just as there was very little outcry in this country when former Governor of the Bank of England Eddie George revealed that their commission on independence in 1997 was not just to maintain an inflation target but also to see to it that house prices continued to rise by keeping money as cheap as possible for as long as possible.

In my opinion, whatever the consequences in the short term, it would be better if Fannie and Freddie were allowed to die gracefully even as their lives have been a disgraceful deceit. What have they done that is so bad that a normally forgiving person like me would be calling for the corporate equivalent of the death penalty? The seemingly innocent practice of underwriting mortgages is in fact a key factor in the creation of the property price bubble and in the transfer of wealth from poorer to richer.  Yes that's right, redistribution the wrong way!  Without that underwriting the front line lenders would have been more cautious in their lending stabilising prices and not stretching households to the financial limits just to have a home over their heads.

Oh, what a clever idea, you still say perhaps - after all, it surely helps more people buy a home. And that's what Fannie and Freddie were supposed to do, by offering an implicit government guarantee people who would previously not have been considered for a mortgage got to join in the jamboree. And that's the problem - a government guarantee. They, the state, have pledged an eye-wateringly close to unlimited amount of money, that's *our* money of course, to make us have to pay more for our homes to the banks who effectively create the credit in the first place and line the pockets of landowners. And this in a nation that is still so relatively empty as to have marginal land in abundance so other land values should still be relatively stable other things being equal.

But those other things are not equal, the cycle of lending inflates the broad money supply so over time reducing the value of the asset that very system conspired to make you pay so much for in the first place. And all this is only possible because of the enclosure of land, the privatisation of the entitlement to and collection of the value that the whole of the community creates at any particular unique location.

At best, Fannie and Freddie are shining witnesses to the power of unintended consequences - I am sure the New Dealers whose brainchild they were earnestly believed they were helping: at worst, they can be seen as part of a conspiracy between government and those who own the financial system and its institutions to transfer vast amounts of wealth from Average Joe to the richest few. Add the evidence of Eddie George that in the UK the past ten years' property price boom was deliberate though unannounced political policy and it's harder to rule out conspiracy over cockup.

Either way, Fannie and Freddie should go, and go quickly, and, as they say, be buried in a closed casket to boot. It will unleash financial turmoil of unprecedented ferocity I am sure. But it will be the herald of death to a fundamentally flawed, corrupt and downright fraudulent system that continues to benefit a tiny few at the expense of the vast majority. I was introduced to a new, to me, term at the weekend, the Kondratiev wave. Looking at the vast amounts of money involved in the current potential crisis, the fact that the asset bubble is bursting as production is also slowing and there's ever decreasing amounts of money available to maintain existing economic activity, and I'm beginning to wonder if Kondratiev wasn't on to something.

This is a huge opportunity. An opportunity to reinvent a stable monetary system more suited to a globalised world of trade and increasing aspiration amongst a whole new world of consumers, a world in which, of necessity, economic activity is shifting relatively away from the west, from the existing reserve currency and its close followers and towards the east and the global mass of population.

And that, dear reader, is why I am likely to die waiting. An opportunity those who wield power would prefer us to miss.

Since the Vatican last week tried to redefine the "Seven Deadly Sins" and the events of the last few days in the financial markets I thought I would share a nice quote by a chap called Josiah Stamp, a liberal economist, tax policy expert, director of he Bank of England for a while, chairman of the LMS Railway company, and at the time reputed to be the second wealthiest man in Britain:

"Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money."

A number of others have kindly blogged about the interesting discussion at the ALTER conference fringe event last Saturday night. From the point of view of being on the platform for the first time it was all the more interesting for me. I wanted to pick up on some of the issues that were raised, not so much by the audience, though many were very insightful questions and observations, but the issues raised by both Tony Vickers in his introduction and especially by Vince Cable in his speech.

First, Tony Vickers introduced the whole event by saying that ALTER wanted to spend some time focussing on the second half of our acronym, Economic Reform more generally, rather than Land Tax which we have fixated on thus far. I'm afraid I rather brushed that aside with my little speech about our book, which will now focus more on land than anything else.

I have always taken the view personally that there is indeed more to the essential economic reforms we need to see in an equitable economic system that will benefit the greatest number of ordinary people than just land. I look to the great individualist anarchists and mutualists of the late nineteenth and early twentieth centuries, the fore-runners of the libertarian movement, who all held that there were four great monopolistic systems we needed to eradicate to level the playing field for all - land, banking, intellectual property and the state itself, or most especially the tariffs they use in pursuit of protectionist policy. Indeed my journey to understanding the land problem began with reading books about the debt-money system.

Colleagues involved in the editorial team for the book, whose economics education is far superior to mine, however, are more convinced that the land monopoly underpins all of these others, and whilst I am yet to understand their arguments fully I do I think see roughly where they are coming from. Essentially their argument is that by creating "free land" the power of the worker is increased by enough to offset the coercive power of debt money, that the ability of governments to manipulate a tax system based on market set values of land to effect protectionist policies is reduced and intellectual property becomes much more a negotiable part of an inventor's portfolio rather than something easily "enclosed" by big business as a result of the relative increase of the power of labour versus capital. At least I think that's how it goes.

But anyway, the upshot of all this is that the book will be more about land than about any of the other areas I have been interested in and which Tony suggested we would be looking at in the future. Though no doubt the chapters on each area of policy will show how "free land" feeds through into greater empowerment of the individual and worker.

Second, (we weren't ganging up on Tony, I promise!) Vince again turned the discussion around onto land tax. He said, I think, that we had largely won the theoretical argument on land taxes - that the party acknowledged its potential importance. But that there was much work to be done he said to produce "SMART" (my corporate bingo word, not Vince's) policies that can actually be sold to people (ie voters) and implemented. And on that theme I want to post a few separate thoughts of my own in separate posts in the near future.

James Graham rejoined that actually we need to make the "moral case" for LVT, what I would call, and agree with, the TINA (there is no alternative) argument - though my powers of persuasion in the housing debate on that position were clearly not very good! I could put it a slightly different way - "can we afford not to". And that, I think, is also shaping up to be the real message of the "Liberal Alternative" book.

I will end this introduction to a series of posts on "can we afford not to" with a thought on what seems to be a trait in Liberal Democrat policy making. Do we need to have such detailed plans for exactly how we would proceed from day one of a Lib Dem administration, or should we focus more on getting the "big messages" across. It seems to me that the last time we had a big ideological shift in British government, in 1979, that the Tories had a clear "direction of travel" but were not obsessed with landing in Number 10 with a full set of detailed measures to implement that. They may have had behind the scenes, ready to wheel out when the time was right, but the message to the public in the election was of the broad direction of travel.

This is not something we are alone in. Nowadays every party seems to have to have these details all thrashed out in order to give them credibility amongst the electorate that they would be competent to run the country. But I'm not entirely sure that that is what the voter actually wants - perhaps they want the big ideas rather than the detailed minutiae. I suspect this minute detail is a symptom of our modern managerial one-upmanship and the absence of ideological politics. But surely as a party we actually want to return to ideological politics that we think voters will engage with and be excited by.

I don't think I would be accused of disloyalty if I said that we are not going to be the party of government after the next election! So we spend a lot of time selling detailed policies that we will not get to implement before circumstances, most likely, change again. We have had most success with our "big themes" - we are known for PR, for opposition to war in Iraq, and for the idea, expressed through our previous tax pledges (though I hate to admit it in oh so many ways - not least that it will give succour to the likes of Evan Harris!) that we want "fair" taxation. We can sell LVT as "fair taxation" without minute details as to how it would be implemented, perhaps at most a broad timescale for a tax shift, as the Tories did with reducing income taxes in 1979 - something that actually took them three terms to really implement as far as the average voter would feel in their pocket.

Our detailed policy making produces a couple of not always welcome effects - that we are hostages to fortune - what we promise in one election might one day come back to haunt us several elections later when we make it to Downing Street, and it saves other parties a deal of work thinking for themselves when we create policies that they like to nick. We can of course take some pride in others wanting to use our policies, but people soon forget where they originated, and we risk being forever a glorified "think tank" rather than a party with the big ideas that will win us power. LVT is such an idea. We should not be afraid to tout it without trying to explain to people exactly how it would be implemented except in broad outline until we are closer to being in a position to do so. That will not stop the likes of us in ALTER, however, trying to show the party internally how it might work, but in the end, the detail is what the Treasury is for when we have control of the Great Court!

I caught in my logs the other day someone visiting my blog from Tristan's piece way back in October about his "Essential reads". He was very flattering about my blog, but I do remember now reading it first time and wanting to defend myself against his suggestion that I was possibly the "LibDem version of a gold bug, seeing LVT as a solution to many problems as a gold bug sees a gold standard".

I admit, occasionally (well maybe more than occasionally for some) LVT seems like a religious belief, and as such one can be very zealous about it and make claims that others feel unwarranted. I know that a much more vocal LVT campaigner (yes, there are some!), Labour Land Campaign's Dave Wetzel, managed to put off a member of their NEC who works in my office because she could not believe that something for which so many beneficial claims were made had not been properly tried before now. And it is also true that for many years, the Lib Dem's own campaign group on such subjects, ALTER (Action for Land Taxation and Economic Reform), of which I am secretary, has focussed more or less exclusively on LVT to the exclusion of other "Economic Reforms" - indeed it has been suggested that "Economic Reform" was only included in the name to make a better acronym!  read more »

The same chart as in the previous post but now with GDP and Average Earnings since 1968. - both at current prices, and both courtesy of the Economic History Network.