We cannot rely on failed regulators to prevent banks from abusing the power to create money, reads the article by Ben Dyson in Open Democracy, 19th May 2014
Here’s a short extract:
“[Ann Pettifor] argues that we should leave banks with the power to create money, but use regulations to make them put the money they create into productive parts of the economy rather than bubbles and financial markets. But regulation is also set by a committee – a committee that is far less transparent, accountable or in the public eye than the existing Monetary Policy Committee. Such a committee would have to decide whether the current levels of mortgage lending are appropriate or excessive. They would need to adjust the regulation they set to encourage more lending to businesses. When they find that the regulation isn’t working as intended, they’d need to adjust it again. And ultimately they’d be trying to protect banks from their own biases and recklessness. This approach would place much more control in the hands of a committee – a situation that Pettifor finds to be ‘authoritarian’.
More worryingly, Pettifor’s proposal relies on a committee of regulators outsmarting the big banks. In contrast, our approach recognises that banks have the resources to run rings around regulators and that they will make stupid mistakes regardless. For that reason, we believe they can’t be trusted with something as powerful as the ability to create money. Leaving them with this power would mean that the taxpayer would once again be on the hook for bank failures. Profits would be privatised, but losses would be socialised. In other words, nothing would change.
More fundamentally, the idea that we can simply patch up the current system with better regulation ignores a much bigger problem. The problem is not just how newly created money is used; it’s also a question of how the money is created. Pettifor’s proposal still leaves us with a system where new money is only created if people go further into debt (because banks create money when they make loans). To grow the economy, we need households and businesses to borrow even more (or to run down their savings). In contrast, our proposals would allow the Bank of England to create money ‘debt free’, which could be spent into the economy (by the elected government) without anyone else having to go further into debt. Some of the new money could be used by people to pay off existing debts. This offers the greatest hope for reducing the amount of debt in society.
Ultimately, if we leave banks with the ability to create money, we leave them with the power to shape society.”