THE ANSWER (To Whom Do We Owe This Money, Exactly?)
Children have a terrifically simple way of exploring the limits of adult knowledge. They do so by asking a question, then responding to each new piece of data with “but, why?”. The almost inevitable ending to this line of questioning is either “because I said so” or “I don’t know, that’s just how it is”.
I seem to have a elicited a similar response when, on Friday, I posted the blog “To Whom Do We Owe This Money, Exactly?” Since then, that post has been read by 20,000 people on the blog (and many thousands more via a circulating viral email). I have received many hundreds of responses whether by direct comment, email, Facebook or Twitter. The blog has been re-tweeted 1,000 times and shared on Facebook 1,200 times – before being flagged as abusive! The responses almost universally accept that the research is accurate.
The answer is: we owe this money, primarily, to the financial sector we went into debt to bail out.
Broadly speaking, the reactions break down into four major categories:
- Other children like me, saying “I too have wondered. Thank you for asking!”
- People who seem to understand the issues better than me, sharing my outrage at the cyclical madness of the system, but at a loss as to where we go next.
- People presenting themselves as experts, expressing surprise at my anger, because the situation is precisely as it should be.
- A minority of folks calling me “disingenuous”, “sensationalist” or “some kabuki-obsessed drag-queen”.
All of the above answers equip me better, intellectually, and I thank them.
In many ways, the third group of responses (which claims this is all completely normal) is the most disturbing. Assigning a sophisticated term like “Quantitative Easing” or explaining that this is how “Fractional Reserve Banking” works, does not detract from the absurdity of the circle. If this business model did not have government support, it would be called a “Pyramid Scheme” and outlawed.
A consistent response has been this tale (and variants thereof) – big thanks to my good friend Melina:
It is a slow day in a damp little Irish town. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day a rich German tourist is driving through the town.
He stops at the local hotel and lays a €100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night. The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the €100 note and runs next door to pay his debt to the butcher. The butcher takes the €100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the €100 note and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmers’ Co-op takes the €100 note and runs to pay his drinks bill at the pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him “services” on credit.
The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the €100 note. The hotel proprietor then places the €100 note back on the counter so the rich traveller will not suspect anything. At that moment the traveller comes down the stairs, picks up the €100 note, states that the rooms are not satisfactory, pockets the money, and leaves town. No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.
This story is a superb way of describing the matter in a simple way, but contains two fundamental misconceptions. First, it assumes interest free debt. The reality is that the hotelier, butcher, farmer, publican and prostitute only managed to pay a small part of their debt, most of their repayment being interest. Second, it assumes no intermediaries – what if each transaction were handled by the Town’s Banker who skims €10 each time for his services?
My own, perhaps dramatic, but more accurate way of describing the situation involves a necessary transfer of blood between patients using a colony of leeches. The transfer of blood does happen, but there is considerable pain involved and the leeches feed from each transaction, fatten and multiply. This is what is affectionately known as growth. When the colony of leeches reaches critical mass (too big to fail) and there is not enough blood to feed them, some patients have to be sacrificed. This is what is affectionately known as a bail-out.
Yesterday, Sir John Vickers published the Interim Report of the Independent Commission on Banking. John used to be my boss at the OFT. I know him well and am very fond of him. He is a kind, compassionate man and a brilliant economist. The one aspect of him that bothered me then, is the same that still does. He tends to shoot for the middle; goes for the solution that will upset everyone as little as possible. The Interim Report is an expression of all his attributes, but also of that flaw. It seems to me to be suggesting the addition of a rather pretty lace trim to a tapestry that has been rotting for a century and fell apart spectacularly in 2008; suggesting that the taxpayer should pay, again, to invest in a system of slightly more efficient leeches.
I remember my first lesson in physics, as a kid. I was explained the difference between an axiom (something that is self-evident as truth) and a theory (something which required proof). Economics has become axiomatic; a religion. It has become the science of “because I said so” or “I don’t know, that’s just how it is”. It has done so in the face of incontrovertible evidence to the contrary. Creationist in its resistance to the truth. In my time at the OFT, I was part of a team that used free market theory and its many exceptions to explain the hundreds, thousands of cases referred to us; all of them cases of entities acting in a way that was contrary to free market theory.
Here is my counter-suggestion on Banks:
We have an absolutely unique opportunity in the UK right now. RBS is almost fully publicly owned. And yet, it is always talked of in terms of building up the value of our stock-holding then selling (so we can settle our debt to the Banks, including RBS). Why? How about running RBS as the publicly owned institution it is? An institution which does not have greed at its core, provides loans in the areas the government wants to stimulate at reasonable terms and ethical banking services to ordinary people. Then we would have an alternative. We could move our savings and accounts to this institution which is actually run for our benefit, with no hidden agenda. We, as customers, could punish the rest of the financial institutions in the UK until they mend their ways.
Don’t bother telling me why “we can’t”; that this is “very complicated”, “unworkable” or “unrealistic”. My answer is likely to be: “but, why?” We have flags planted on the surface of the moon and a particle accelerator under Geneva crashing hadrons into each other, that say “we can”.
There is a classic economist joke. It goes -
Q: How many economists does it take to change a light bulb?
A: None. If the light bulb needs changing, market forces will do it.
We have given this idea a real go, for more than a century. We are still sitting in a dark room. Maybe all we need is One Good Electrician.