Tuesday, February 09, 2010

Crack down on banks and the socially useless bits will flee offshore - Stiglitz

The economist Joseph Stiglitz has a useful piece in the Financial Times, arguing that countries should proceed unilaterally if necessary in tackling the vested interests in their financial sector and making the reforms that are needed, without having to wait for global co-ordination to fall into place. As he notes:

"Even if we were to achieve co-ordination on the regulatory regime, Iceland should have taught governments that they cannot rely on regulators in other countries to protect their citizens and their financial markets.
. . .
Countries that proceed on this track will face threats of the kind already received – a rapid departure offshore. But the parts of the financial system critical to the real economy – those, for example, that lend to businesses – are not so footloose.

Any cost-benefit analysis of the loss of the gambling casinos offshore would surely conclude that if some other government wants to risk economic instability and big bills for bail-outs to its taxpayers, so be it – our task is simply to prevent contagion from these under-regulated jurisdictions. No country can fully insulate itself, but the best protection is a good regulatory structure at home."

Just as we have been saying.


Blogger Physiocrat said...

Stiglitz is almost right but not quite. The underlying problems are two sides of the same coin. If governments rely on the taxation of "movables" for their revenue, then they will lose revenue. And if fixed property ie land, is not taxed, it will become the object of speculative trading with the result that the natural cycles of the economy will become amplified and the result will be bubble/bust, regularly.

The proper function of banks is to arrange credit, provide cash handling and payment transfer facilities, and safe custody of deposits.

The proper purpose of credit is to facilitate production, for example to enable the farmer to buy seeds and support himself until the crop is harvested and sold, when the credit is extinguished. Provided that the ancient prohibition on usury is adhered to, there is no problem. Bankers can be paid for their professional services and risks can be insured, and thus there is no necessity for the charging of interest on such credit.

Banking goes wrong initially when the activity turns into a machine directed primarily to making money for its own sake, and the fundamental professionalism of bankers is degraded and thought of as a market, selling financial "products".

It gets worse when credit is given for the purchase of land, or of "assets" which comprise mostly land, since this credit cannot be the cause of any production since the land was already there. Such credit is nothing more than a release fee to an owner for permission to use the land. Worse still is when bankers absorb themselves in the practice of lending money for land purchase on the security of land titles, since the lending policy of bankers has the cumulative effect of driving up land prices (though not the real value of land, its rental income stream), thereby generating the kind of self-feeding bubble that occured in the run up to 2008, and the current bubble in "asset prices" which it is most probably the consequence of Quantitive Easing and will in due course collapse even more disastrously.

In conclusion - banking, practised properly and professionally in accordance with the ancient principles that govern such things, is a great blessing. When bankers lose their integrity and forget their fundamental principles and professionalism, it is a curse.

So, Stiglitz is right in his insight that banks should be returned to their proper function but even if they are regulated, other lending bodies will step into their place unless the underlying process of moneylending for land purchase comes to an end.

I suspect that he will also balk at the idea that banks should not be lending for interest.

12:15 am  

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