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British opposition leader advocates Glass-Stegall

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British opposition leader advocates Glass-Stegall

The Guardian Wrote:
Ed Miliband will make his boldest, most controversial policy commitment since becoming Labour leader on Sunday when he pledges to force the break-up of Britain's biggest banks unless they agree to revolutionise their operations and put ordinary customers first.

In an interview with the Observer, the Labour leader says he will confront the City of London with what is seen as the nuclear option for reform if the banks fail to separate their "casino" investment operations from services to account-holders, savers and businesses.

In terms that will incense the investment banking industry, Miliband says a Labour government, as one of its first acts, would push through a modern-day equivalent of the 1933 Glass-Steagall Act, which split the commercial and investment operations of US banks after the 1929 stock market crash.

The move is part of an attempt by Miliband to flesh out his promise to deliver a more "responsible capitalism" – amid signs that the public does not yet believe he is tough enough, nor has a sufficiently clear vision, to be prime minister.

Speaking ahead of Labour's annual conference, opening in Manchester on Sunday, Miliband says banks must concentrate on core functions such as lending to small businesses "rather than playing the international money markets". Such behaviour puts ordinary customers at risk of having to share the consequences of failed investments.

Echoing concerns expressed last month by Sir Mervyn King, governor of the Bank of England, who believes that reforms proposed last year by Sir John Vickers are being "watered down" after lobbying by the banks, Miliband said it was time to stop backsliding and change banking culture for good. The recent Libor scandal involving the fiddling of inter-bank interest rates and the £10bn scandal over mis-selling of payment protection insurance showed the culture was still rotten.

Miliband said: "Either they can do it themselves – which frankly is not what has happened over the past year – or the next Labour government will, by law, break up retail and investment banks.

"The banks and the government can change direction and say they are going to implement the spirit and principle of Vickers to the full. That means the hard ringfence between retail and investment banking. We need real separation, real culture change. Or we will legislate."

The coalition government says it will implement the majority of the Vickers report, which will be the subject of legislation due to reach the statute book by 2015. But the changes will not come into effect until 2019. The plans have, however, been watered down, with ministers agreeing that the ringfence will only apply to the UK operations of banks – even though many in the UK have vast overseas operations.

Vickers also wanted the government to insist that banks hold higher grade assets in their reserves to insure against another financial collapse. But the government relented after the industry complained that buying these assets would be expensive and the £1.3bn estimated cost would be passed to customers.

Miliband called on Saturday for the "rebuilding of Britain" and for 16-year-olds to be given the vote. Speaking to the Observer, he said: "It is incredibly important to show that we 'get it' on spending. We are very serious about understanding that the next Labour government is going to face difficult economic times."

But fiscal discipline had to be balanced with an appreciation that borrowing was rising faster because the government had cut too deep and fast. "If you don't have a growing economy, businesses aren't paying taxes, people are claiming benefits and it is not working. So it is a two-pronged approach."

Labour is a solid 10 points ahead of the Conservatives, according to the latest Opinium/Observer poll. Labour is on 39% (down 3% on a week ago) and the Tories are on 29% (down 1%).The Liberal Democrats are up 2% on 10%, the same as Ukip

Of course British politicians are notorious for making promises they dont keep, but at the very least its being talked about.

(I am assuming we all know what Glass-Stegall involves as it has been discussed here extensively)

"The beauty of free trade is that 1 and 1 can be 3" - Titian

"There is no conversation more boring than one where Globaltom speaks" - Triniterias

This post was last modified: 30.09.2012 10:05 by BaktoMakhno.

30.09.2012 09:58
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RE: British opposition leader advocates Glass-Stegall

I'll believe it when I see it. The labour party is a classic example of bought-out union leaders. Keep us posted.
Third-world peoples like the U.S. are religious because they are third-world. This is why Germany is becoming less religious and Helsworth/Commissar are becoming more religious.
30.09.2012 10:09
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RE: British opposition leader advocates Glass-Stegall

Unlike the EU, Britain still has monetary sovereignty. The commercial banks created by this separation become thus, national banks - in the sense that their activity will reflect the economic realities of their regions. If one will go bankrupt - it will simply enter bankruptcy reorganization without triggering a national or international domino effect of bankruptcies. If Glass-Steagall is to be initiated, the government must put the national bank under the supervision of the treasury. Practice a two tier credit system and give government charters to the newly created commercial banks - and give them the low-fixed discount rate for investments in agriculture, energy, industry and infrastructure. It's not necessary to print money for such projects, rather just issuing bills of exchange, checks and treasury bonds. Thus, the money won't leave the country.

We need today hamiltonian economics, not austerity and bailout experiments in favor of the financial oligarchy. Alexander Hamilton rejects the worldview that wealth is measurable in land, or precious metals, or even power over other nations. Rather, the wealth of the nation is dependent upon the physical economic development of the nation, including, most emphatically, the intellectual capabilities of its population for carrying out that development, more and more efficiently. In his listing of why manufactures must be promoted, Hamilton expresses this belief directly, when he writes: "To cherish and stimulate the activity of the human mind, by multiplying the objects of enterprise, is not among the least considerable of the expedients, by which the wealth of a nation may be promoted."

Certain people do not let themselves be inspired even by the most glowing speeches about the wonderful effects of the magnetic railway, the building of science cities, etc. Unimpressed, they pose two cardinal questions again and again: ``Who is going to pay for all of that?'' and ``How is it possible that they can pay all that; are they not broke?'' (What is meant by they, are the highly indebted countries of eastern Europe and the developing sector.)

With a little common sense, we can answer both questions once and for all. Take the first: It strikes me that last Friday, on the New York Stock Exchange alone, some people lost $130 billion--with this amount alone we could build the Berlin-Warsaw-Minsk magnetic levitation line!|...

As for the second question, one might reply that the U.S. automaker Chrysler currently has uncovered debt obligations in the range of $75 billion. Compared to that, the former Soviet Union, with its laughable $64 billion external debts, has an economy that is very solid. More than that, think of Chrysler's security--some aging models of cars, which no one will want in two years--while the nations of the former U.S.S.R. are endowed with an infinite potential for wealth.

Thus it is a very relative business, who gets money and capital. The money is ``lacking'' for specific sensible projects, while in other places it is squandered senselessly. Take an example from Latin America: While $70 billion is denied by the IMF for building a continent-wide drainage and canal system, still the individual nations are put under so much pressure, that in the last 10 years they have had to pay $400 billion in interest alone to the creditor banks.

That means that we need political decisions and state interventions, in order to guide a smooth flow of capital and credit in the right direction, so that necessary productive investment, for putting people, machines, and raw materials to work, is not left by the wayside for lack of capital.

This problem has been a topic of political-economic discussion for centuries. But there is hardly any question that has been so unnecessarily mystified, as the problem of credit creation. If the state gets involved in the creation of credit, it is claimed, then you will get the bogeymen of galloping inflation, astronomical taxes, and finally the complete ruin of society. Let us examine three historic examples, taken from discussions of political economy of the past 200 years.

Hamiltonian credit creation

The actual inventor of state credit creation of the modern period was the first secretary of the treasury of the U.S.A., Alexander Hamilton. After the victorious American War of Independence, he was faced with a similar problem as that facing Brazil or Poland today. This war had been financed by drawing upon internal and external credit, and the question was asked: When shall we pay all that back, and above all, how? To solve that problem, Hamilton made a brilliant move. He offered the creditors in various European countries to be paid, not in cash, but in Treasury notes issued by the U.S. National Bank. In this way, the creditors of the Old World were invited to participate in the future profits of the U.S. economy--a prospect so genuinely alluring, that almost all of the creditors went along with Hamilton. Indeed, in Europe the word got around that U.S. Treasury bonds were the most profitable paper to be had. This euphoria was absolutely justified, not because this paper had any kind of magical value, but because behind it, or behind the guarantee of the redemption of this paper, there stood a commitment to transform the U.S.A. into the most highly developed manufacturing state of its time. Investments in infrastructure, industry, and agriculture, had priority over all others.

That is exactly what we in Europe must do today. If the governments of Germany, France, Austria, Italy, and eastern Europe will unify themselves around the program of the Productive Triangle, then there will be a way to find the necessary capital for it, so that the countries of eastern Europe could pay their debts simply in the form of Treasury notes from their respective national banks. These Treasury notes might then be discounted by appropriate financial institutions in the framework of the European Monetary System, and thus transformed into new credits for financing great infrastructural projects.

Hamilton brought this method to bear also with respect to the domestic economy, by issuing Treasury bonds and notes to the domestic creditor, and thus provided the liquidity needed to stimulate the domestic economy. With this as background, he stated some basic laws on the question of debt. In the Report on Manufactures of 1791, he says:

``But though a funded debt is not in the first instance, an absolute increase of capital, or an augmentation of real wealth; yet by serving as a new power in the operation of industry, it has within certain bounds a tendency to increase the real wealth of a community, in like manner as money borrowed by a thrifty farmer, to be laid out in the improvement of his farm may, in the end, add to his stock of real riches.

``There are respectable individuals, who from a just aversion to an accumulation of public debt, are unwilling to concede to it any kind of utility ... who cannot be persuaded that it ought in any sense to be viewed as an increase in capital lest it should be inferred, that the more debt the more capital, the greater the burdens the greater the blessings of the community.''

Thus debts are actually very healthy, since it is only through them that we can broaden the capital base of society, to allow for great investments in our future. And finally, the whole society will be richer--as also the example of the farmers shows. Already we hear the warning, the alarm bell: ``Inflation, inflation!''

Now Hamilton says naturally also, that there are boundaries, beyond which the blessings of debts are changed into their opposite, namely if the credit is used to finance the ``will-o-the-wisp fantasies of some do-nothing,'' as Hamilton puts it. Thus Hamilton would warn against giving today's yuppies credits for building a new discotheque. Such purely speculative investments, without the creation of productive wealth, make it impossible even to pay the interest on the debt.

Thus let us clearly underline, that as long as debts are contracted for productive investments, they are actually ready money, which can be worked with. This fundamental statement should make clear the actual essence of credit: namely, that state debts are only a title to the future income of the state. That is, credit means nothing other than bringing on line now, future income, in order to make investments which are a fundamental prerequisite for future wealth. Thus managed, debts are in fact capital. If, on the contrary, the state incurs debts in order to cover current expenses, for example to pay the wages of state employees, then everything goes wrong. We must here clearly distinguish between the current costs of the state, which must not overstep a specific boundary, and credits that are created by the national bank and are investment credits. These, when used productively, do not mean any additional burden on the budget, nor do they lead to higher taxes. The problem today is that the state gets its money on the capital markets at overly high interest rates, which then adds to current costs.

The other cornerstones of Hamilton's policy are:

1. the creation of a special fund for state support of new industries, investment and other improvements of industry and agriculture;

2. tax breaks for development and improvement of agrarian and industrial production;

3. protective tariffs to foster domestic industry and agriculture;

4. subsidies for domestic raw material production;

5. state-fostered the improvement of transportation infrastructure.

In connection with these principles, the founding of a national bank was the decisive step for creating the money--in unlimited quantities!--for projects that should contribute to ``defense of the commonweal.''...

Germany: the program of Friedrich List

In Germany, the question of credit creation became acute with the building of the first railways. The creator of the German railways was Friedrich List, who spent 12 years in the U.S.A., where he was able to get to know the Hamiltonian system close-up. List had to face practically the same problem that we do today: Besides the skepticism and partial rejection of his railway project, the question to be cleared up was the financing. To do this, List wrote a treatise, ``On a Railway System in Saxony as the Foundation of a General German Railway System,'' which appeared in the year 1833:

``People say that we do not have, here in our region, any such an amount of capital, not so much ready money for undertaking such a gigantic national work.... As for the financial point, we need not fear any further objection from sensible people, once it is pointed out that the capital so used bears the highest interest rate of return in the country. With that as a premise, no expense can be found that is too great. Furthermore, Saxony, if it is serious about the undertaking, will have at its disposal more than a hundred times more capital and cash than required. That North America possesses more capital and more cash, is not even true; most of the settling of accounts there, is done with paper money, which we can create just as well here in Saxony. Here an amount of 4 to 6 million bank-issued bills of exchange make up one-third of the currency in circulation, while in North America, there are two and three times as many of these notes in circulation than ready cash.''

List speaks here of the creation of currency, of credit. In this creation of bank notes, he say, lies ``the great secret of the entrepreneur in the United States.'' The secret is that one does not fixate on an imaginary intrinsic value of money, but rather looks at it as an ``instrument for settling payment balances.'' Elsewhere, List says the following on this topic:

``People will probably ask me, where will Bavaria get the money to complete such giant works [railways]? I answer, that I have not yet seen any silver or gold in any of the canals or railways. To build them we use only consumer goods, steel, stones, wood, manpower, the power of animals. But is there not a surplus of all this in Bavaria? To the extent that we transform this surplus into canals and railways, which are not yet in existence, we create permanent and enduring value, we create an instrument which doubles the productive power of the entire nation. The money, however, does not leave the country, it only settles accounts.''...

This post was last modified: 30.09.2012 10:35 by Helsworth.

30.09.2012 10:35
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