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Bookmark and ShareJosh Ryan-Collins is a researcher in the Business, Finance and Economics team at nef.

The recession is over claim the newspapers.  Growth has returned.  House prices are  definitely on the up.  Let the good times role.

That’s the good news – at least, for anyone who doesn’t think the Earth’s resources are finite.  The bad news is we are probably entering in to another credit bubble, of exactly the kind that caused the last financial meltdown.  But are we really that surprised? If you neglect a child and let them eat so many sweets they get sick, the general advice is to set some pretty strict rules afterwards to limit further sweet bingeing. In contrast, the financial sector has just had billions of pounds thrown at it by governments (and taxpayers) and, in return, it has been asked to change very little about how it operates.

As this astonishing interactive graph from the New York Times shows, big finance, after shrinking from $1.87 trillion dollars market capitalisation in the summer of 2007 to just $290 billion in March 2009, has now tripled in size from this low back to to $947 billion. Some of the banks got knocked off along the way of course, meaning some of the survivors – such as JP Morgan Chase – are even bigger than they were before the crash. And the sector as a whole is even more concentrated and, arguably, poses more of a systemic risk.

Yet, suggestions by Lord Adair Turner and, more recently, the Germany Finance MInister, Peer Steinbruck, that perhaps it might be time to impose a tax on financial transactions are being given short shrift.

Steinbruck’s neat suggestion is that receipts for the tax could be used to repay the cost to governments of tackling the crisis, including the bank bailouts. That sounds like the kind of policy that might be quite popular over here, with both Labour and Conservative struggling to put together attractive election manifestos in the face of the huge public sector deficit, caused in no small part by the bank rescue packages. Alas there is little sign of enthusiasm for the idea from the other members of the G20 that will be meeting later this month.  nef, you won’t be surprise to hear, has been arguing for a tax of this nature for some time, most recently as step 15 in our From the Ashes of the Crash booklet published last year.

Meanwhile, back in the UK, its all about house prices, as ever. And thank goodness, they seem to be going up again. But here again, the rate of increase looks scarily bubble-like (see graph below). House prices have increased for 3 consecutive months now meaning prices are flat across the year. One explanation, suggested by recent data on lending, is that banks are finally starting to hand out credit again, but have a strong preference for mortgages. In contrast, corporate lending, which is need to kick-start the real economy of businesses making profits and creating jobs, was shrinking rapidly.


The danger then is that the government’s £175 billion quantitative easing program – which has involved buying 7% of UK GDP – may have got bank’s lending again but only to feed another damaging house-price bubble.  Its not surprising though, when you consider that interest rates are zero, there is a severe shortage of housing in the UK and property is still the only asset that doesn’t attract capital gains tax.

Instead of just handing the banks billion of pounds to do with what they want, the government should either be creating credit directly in areas that will be most beneficial for the economy and environment – such as a green energy, transport infrastructure and domestic energy efficiency – or at the very least introduce taxes to both financial transactions and capital gains in property to prevent us sleep-walking back in to bubble economics.

Bookmark and Share David Boyle is a nef fellow, a writer and the editor of nef‘s newspaper, Radical Economics.

OR008779 One thing we have all learned again about economics is that the booms always come to an end, the wise and financially revered are revealed as idiots, and the best laid plans, etc etc. But there is one way that this economic crisis is unlike others in history.

This time, governments have so subsumed their agendas to those of the most powerful businesses that they will no longer allow them to fail. No matter what happens, the wealthy will not be hung out to dry – even if it means printing money.

That is hopeful in one sense at least. We will not, as we were in the 1930s, find ourselves sacrificed to a desperate inactivity in search of economic orthodoxy.

But it does mean that we have to get to grips with one enjoyably heretical idea: the government creating their own money, or quantitative easing, as they call it these days.

You might not want to go the whole way with the monetary reformers (that banks should be prevented from creating money) – and I don’t myself – but this is both potentially dangerous and exciting at the same time. It means, potentially at least, a flow of interest-free money into useful projects. It means an end to the fantasy that money was somehow real (the gold standard fantasy). But it throws up a series of questions which radicals really need to discuss. Here are some of them:

  1. Who is going to control the amount of money created? Historically, governments and monarchs have a disastrous track record, but some kind of objective democratic control is going to be needed, otherwise it will just be determined by the inflationary whims of Mr G Brown.
  2. What is it going to be used for? If we are not clear that government-created money has to be used to transform the economy – making it socially and environmentally sustainable – then we will end up having the status quo propped up by funny money, funnelled into subsidising the airline industry or nuclear energy.
  3. How can we use this to shift the nature of money more permanently? The unsustainability of the economy is undoubtedly fuelled by money based on compound interest. But there is another model, mainly used in the Islamic world, which lends money in return for equity and fees, and which does not so inexorably pile up the power and privilege with the creditors. We need to mainstream it quickly.

I must admit, I don’t really buy the idea that all money should be created by governments. That is a monarchist and centralising myth – it is doubtful whether monarchs ever actually had a monopoly on money, and when they did they generally made a hash of it. So I’m sceptical about the 100% money solution (I say this just for myself). The challenge is now to find other ways of creating it, and to widen rather than narrow those sources – and to regulate the banks at the same time.

We need more money in circulation than we have. That’s not in doubt. The question is how we can create more, democratically and sustainably – and to funnel it in ways that can genuinely enhance human survival – but without finding ourselves as supplicants to big government money-creators as we are now supplicants to big business ones.


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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.