Religious fantasy

In one of the earlier text I quoted the ideas of Ann Pettifor. Now I would like to continue highlighting these ideas because I believe they have a socio-political value – if only some civil servants or politicians would listen.

In her book The Production of Money: How to Break the Power of Bankers (2018), she sets out in clear terms a few essential facts about the modern banking system. The book states, as also confirmed by the Bank of England, that banks do not need reserves for lending. The reserves that are referred to in relation to banks are not actually savings, as is so often perceived.  They are resources that are only available to bankers licensed by central banks. Their purpose is to facilitate payments between banks, etc. These central bank reserves never leave the banking system to go to the ”real economy”. 

So Ann Pettifor quite rightly argues that the idea of a minimum reserve system is wrong. This is an issue that I have seen arouse strong feelings on the Internet for and against. On the other hand, it is an issue that generates surprisingly little debate among citizens – whatever the country. Almost everything is mediated by money and yet almost no one is talking about its nature. Many politicians, for example, present themselves as financial wise or responsible stewards, but are still unable or unwilling to raise the issue of money as such. In Finland, for example, we have parliamentary elections coming up next spring, and I can already predict at this point that there will be a lot of discussion about money, but not about what money really is, what its nature is and how it brings itself into this world. I admit that I hate the world from this perspective. People talking about things without going to the roots. Is it stupidity then or fear of what might be found there? Fear of no longer being able to pretend ignorance and having to face the ugly truth and throw many political slogans and moralizations to the trash? 

But let’s continue the discussion on the actual topic. Instead of looking at economics textbooks, it is useful to look at what is happening in the real world. And I think Pettifor is doing just that when she says that central bankers and other regulators are no longer setting limits on how much money can be created. Nor do they care whether the credit given to speculation goes only to appropriate, productive and income-generating investment. As a side note: of course, this does not mean that banks cannot fail (we have seen various bailouts). Banks need to manage their assets and liabilities so that if a depositor wants to withdraw his/hers funds, the bank has something to give. But now we are only interested in the model, as if we were looking at a phenomenon in a laboratory without all the numerous variables. The purpose is to show the power that banks wield outside any democratic process: if you control money, you control almost everything in this world.

Indeed, Pettifor points to an explanation by former Bank of England director Mervyn King of how private commercial banks ”print” 95% of money (broad money: money in any form or on deposit). The central banks themselves create only about 5% of all money, but are responsible for the value of the currency and for issuing it. Yet, as Pettifor suggests, many neoliberal economists seem to overlook this printing of private money when talking about inflation, for example. They point the finger of blame for inflation at governments and state-backed central banks. We therefore have a problem in which numerous economists are using their influence but are not even very interested in the fundamental elements of their own field. 

Pettifor rightly makes the point that orthodox economists have a serious shortcoming: many of them are not really interested in money, debt and the banking system. This can be seen in their university lectures as well as in their analyses of the economy. She argues that many economists treat money as if it were something neutral or just a veil over economic activity. To them, bankers are just intermediaries between borrowers and savers. Interest rates are naturally formed by the supply and demand of money. Pettifor is prepared to argue that this is not the case. 

The author explains this blindness by saying that it is part of an ideology that sees the public as evil and the private as good. This ideology includes the notion that free and competitive markets are transparent as well as responsible, so that the global financial sector and the world economy can be counted on them. The only problem is that this is more or less a religious fantasy, which, moreover, is very often combined with contempt for democracy. I believe that Pettifor hits the bull’s eye here. She demonstrates how within economics there is a willingness to turn a blind eye to certain things, if only it suits one’s own world view. This is important to understand when an economist is dragged on to television to give an expert opinion. He or she is hardly on neutral ground, but can there even be such a thing in economics in the end? Isn’t the economy precisely political?

Pettifor Ann 2018. The Production of Money: How to Break the Power of Bankers. Ebook. Verso. London/New York.