FT Alphaville: Seems We Touched a Nerve

Our article on the Guardian’s Comment is Free section sparked some intense discussion, attracting 350 comments – more than any other CiF article that day excluding the initial announcement of Occupy London’s Occupation of CiF.

It seems we touched a nerve at the FT blog though, where Izabella Kaminska has a few things to say. After a brief attempted character assassination, she makes some fascinating comments, which we’ve highlighted below.

First, the clumsy character assassination, which I can summarise myself:  rather than getting a degree in failed economic theories (like the economists who only saw the crisis coming after it had arrived), I quit after two years of study (got a first in both years, mind you). I then worked in a start-up for 2 years, before going freelance, and eventually starting Positive Money. If you really have nothing better to do, you can read the whole story here, but Izabella’s key point is that my lack of an economics degree means you should stop listening now.

Instead, you should pay attention to the same economics professors who only saw the crisis coming after it had arrived.

Still here? Then on to Izabella’s next point:

“Quoting Dyson’s website: “…If we tried not to go into debt, then the banks would be unable to create money and economy would grind to a halt.”

FT Alphaville readers (or anyone who has ever read Niall Ferguson or nearly every other economic historian, or taken even a passing interest in the unit of exchange they use on a daily basis) will, of course, know that that little revelation was probably last considered to be breaking news in 1913.”

I’m not sure of the readership of Alphaville, but I’m pretty certain that the bulk of the population, and most politicians, had no idea at all that our economy would grind to a halt if we tried to avoid going into debt.  I wonder whether  Prime Minister David Cameron was aware of this when he suggested that we pay off our credit cards to rescue the economy. Maybe Izabella could update him on the breaking news of 1913?

Izabella then goes on to make valid points about the complexity of finance and the crisis. We know all about this: it was that complexity that made it necessary for the authors of Where Does Money Come From?  to spend 8 months hunting down facts. (This book, it’s worth mentioning, was inspired after a BBC documentary producer called the Bank of England to ask for a clear explanation of how money was created, only to be told that there was no document that did this and she would need to do the research herself).

Then the article goes on to say that:

“The reason we can’t find a clear consensus on the debt crisis, is because the most obvious solution is clearly not a workable one.  At least not without a huge material impact on the quality of life of every living soul in Europe (or further afield). Something everyone is trying to avoid. The challenge thus comes in finding a solution which is palatable, above all.

That’s not to say the solutions to the crisis won’t necessarily be simple. They could very well be. But that’s not our point here.”

Of course, the solutions could be simple. Our solution is so astoundingly simple that most economists find it extremely difficult to understand. They seem to find it much easier to understand how, when people are struggling under the weight of greater personal debt than ever before, the answer is to ‘get banks lending again’, in other words, pile on more debt. That’s something I’m struggling to understand, but perhaps I should ask someone with an economics degree.

But then Izabella makes one of her best points:

“Our point is that we’ve all been lax. The media especially. We’ve failed to communicate the message correctly. The message should not be that all debt is bad. Rather that, some debt (and here’s a wacky idea), some debt, is actually good.”

Absolutely. I thought we’d made that point on this site. The type of debt that represents investment in productive business, and which makes up just 8% of bank lending, is brilliant. The type of debt which is to fuel speculation or inflate house price bubbles, which makes up the other 92% of bank lending, is not so good. (Some of it might have a purpose, but none of it contributes to GDP or growth).

“Without debt, after all, you can’t have money.”

Well, no. This little ‘factoid’ is actually not a fact. If you allow banks to create all money as debt, then yes, we (the public) need to go into debt to have money. But we are arguing that this is precisely the problem, and that the solution is to have money that is created free-of-debt. I can explain in detail exactly how this is done, for anyone who’s prepared to go beyond their undergrad economics textbook and give it up to 3 minutes of hard thought.

Moving on:

“[I]t’s not necessarily debt that is bad — since debt actually allows you to risk-manage your life…By borrowing from the future anyone’s life experience can be a better one.”

Agreed. But if you’re forced to borrow 11 years’ future income because excessive bank lending (and therefore excessive creation of money) has caused real house prices to double, relative to earnings, then your life experience is actually worse. You’re paying more for less. The house isn’t any bigger, but you’ll pay twice as much.

“Debt is thus a hugely efficient wealth distribution mechanism.”

Yes, hugely efficient. The problem is that it tends to redistribute it from the bottom 90% to the top 10%. I don’t know the salary of an FT Alphaville blogger, but it would need to be over £44,881 to get in that top 10% (2009 figures, sorry), which might sway the author’s enthusiasm for this ‘wealth distribution mechanism’.

“What Ben Dyson misunderstands is that no matter where the paradigm shift eventually takes us, it will never rule out debt completely. Or, for that matter, centralise its distribution at one focal point.”

Unfortunately, what Izabella Kaminska misunderstands is that we weren’t demonising debt. We were questioning a system in which the monopoly on creating the numbers that we use as money is given to the same banks that caused the crisis. We were questioning a system that forces the population into debt to the banking sector simply in order to have a means of exchange so that trade can take place.

It’s a simple question, and repeating the textbook fairytale of banking doesn’t count as an answer. But then, as Izabella points out, the media have been lax.