monetary reform

At last, someone with a bit more radical idea about the sort of thing that needs to come out of this banking crisis. Colin Breed, Lib Dem MP for Cornwall, and a former banker himself, is calling for a radical shift to more local banking.

I still think my idea is better and more radical, and have fired off an email to try and make contact with Colin.

...a society made up almost entirely of mendacious megalomaniacal psychopaths, do declare that the causes of the current economic crisis are basically nothing to do with us:

3. During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.

4. Major underlying factors to the current situation were, among others, inconsistent and insufficiently coordinated macroeconomic policies, inadequate structural reforms, which led to unsustainable global macroeconomic outcomes. These developments, together, contributed to excesses and ultimately resulted in severe market disruption.

God it makes me sick. Lying miserable tossers. Understand this well. Maintaining low interest rates, in order to get more people borrowing more to put into a land price bubble which would enable others to borrow to spend our way out of a mini-recession at the beginning of the century was DELIBERATE PUBLIC POLICY. Deliberate public policy the effects of which were to make the poorest and weakest in society attempt to take on unacceptable levels of debt and risk just to prevent themselves from being ripped off even more in the future.

Not only that, but they knew at the time it would lead to problems later (Eddie George said: "My legacy to the MPC, if you like, has been 'sort that out',"). They simply hoped their successors could get us out of those problems. I think we should take their prescriptions for recovery with all the salt in the world's oceans.

The End is Nigh
Originally uploaded by Martin~

Or, why I am really a "geo-mutualist" and why I think you should be too!

The revolution has begun. In fact it's been building for at least twenty years. When history looks back it will not probably be able to identify a particular date, but it could do worse than choose Christmas Day 1990, the day a humble academic computing geek communicated with his server in something nobody had really heard of called "hyper text". Finally there was something useful to do with the "internet" that would eventually draw in users from well outside of the ivory towers and military research facilities that developed it. Users in every corner of the world; users of every age and race; users of every background.

And what will history say about this revolution? Will it be seen as a great leap in human freedoms, capable of finally fulfilling Cobden's vision that "peace will come to earth when the people have more to do with each other and governments less"? Or perhaps that it heralded an era of unprecedented interference in our lives by governments?

Actually, I think it is a one way bet; that eventually it will be a revolution in human freedoms, in co-operation and in innovation. Such are the players in this brave new world; hackers working to bust the Great Firewall of China and liberate a fifth of the world's population for example; Kenyans being the first to be able to make payments quickly and simply by mobile phone; privacy technologists working to keep us one level of information security ahead of the law; game players investing ever more realistic virtual worlds; their individuality and very lack of co-ordination in many cases makes it inevitable.

What politicians can do, however, is either to make the transition long and painful, or to smooth its passage for the "good of mankind" so to speak. We can choose to stick by the state and try and keep it working just as its citizens are less and less tied to it, which will inevitably lead to more and more monitoring and restrictions; or we can choose to look at how to build alternative civic institutions and mechanisms to fulfill our needs in an era when the state has much less power to intervene at least without the force that is endemic in state action becoming more and more obvious to the point of rebellion against it.

So what is the great weapon of mass destruction that is going to bring low the state as we know it? Why, tax, of course. I'll let you into a little secret: in order to function a state needs to be able to tax: in order to tax it needs to have the ability to track transactions or peoples' wealth and changes therein. And from the taxpayer's point of view, there is every incentive to try to minimize their tax liability. Up until now, or very recently, it has been only the global super-rich who have had the means and sufficient incentive to take advantage of loopholes and allowances that enable them to choose the lowest tax jurisdiction in which to crystalize out their tax liability.

But thanks to the global and interpersonal nature of this most recent communications revolution we are on the cusp of mechanisms being easily available to the big majority of people that will enable us to minimize our "financial footsteps". When most of us only ever relate to the majority of our money through pixels on a screen or numbers on a bank statement - a small minority of trade now relies on real metal or crinkly coloured paper currency - what does it matter what those pixels are called; pounds, dollars, euro, yen? What about a completely new, essentially fictitious currency perhaps, like the "Linden Dollars" of "Second Life"?

Add e-Bay and Tesco to Second Life for example and one could imagine a world in which most of your financial transactions are conducted entirely in cyberspace, in virtual worlds that know no territorial boundaries or tax regimes (or at least that could be relocated into a sympathetic tax jurisdiction quickly if necessary), but with delivery of goods and services in the physical world. That's not to say giants like Tesco and e-Bay would necessarily be best, or would necessarily even survive the upheaval.

Those widespread international (and local) interpersonal (and business-to-business) mechanisms for sophisticated modern-day barter are now within reach and threaten the very raison d'etre of many of our longest standing institutions - banking and currency, transnational corporations built in an era when intermediaries were necessary to trade with far off lands, and ultimately the basis on which the state is founded - its monopoly of taxation. At the same time we can form non-geographic communities of genuinely voluntary co-operation in which we can build trust relationships, quasi-legal ways of dealing with disputes and so on that make trade possible with people a few short years ago we would have never had a hope of even communicating with.

So, which side are you going to be on - freedom and co-operation or ever more intrusion, regulation and restriction? And how long have we got?

Some of these technologies fall into the category of "overestimated penetration at 2 years, underestimated at 10 years." I think the state will be lucky if it has another decade of relatively easily collected taxes based on productivity, sales and incomes. If people want the state to be able to function beyond that, without increasingly authoritarian intrusion into our economic lives, we need to be looking now at how to make it pay its way through user fees for any value for money services we want it to provide. And as soon as it does of course it must also open itself to competition - else it's a monopoly again whose only rationale is to use its discretionary power to rip off the very people who both fund and use its services.

Unsurprisingly any of the various forms of land value tax will do to start with and would be especially beneficial implemented soon, near the bottom of the crash in land values currently underway. The present situation in financial markets offers an ideal opportunity for new means of trading without the sort of money so invidiously inflated and deflated by the banking cartels. Again, these alternatives could operate either on a local scale or in an international, or non-geographic trading community. Land has the singular benefit of being immoveable. You can't virtualize land as easily as you can income - for we all still need to have a base somewhere.

There's another major reason for helping this process away from the power of and dependency on nation states rather than fighting it - the state is expensive. The sort of redistributive measures required to ensure that everyone gets a fair crack at opportunity - the level playing field - are getting more and more expensive. Our interventions into the affordable housing market for example, in the form of subsidy, will continue to rise when land values rise, subsidizing the already-haves in the name of assisting the have-nots. Far better to try to ensure the fairest of level playing fields for all than trying to play uphill on a steepening playing field.

So, when you find me criticizing the state and its acolytes, it's less about what has gone on in times past - I would say times of missed opportunity for sure - but more on how we will be able to live in future, a future I think is pretty inevitable, in which the very idea of a state with the power to tax fairly will be severely compromised. The elephant in the room needs to be dealt with, and dealt with soon. Will it be freedom, or more desperate attempts to maintain the ailing state structures? You choose!

A week or so ago Mike Killingworth challenged us on Liberal Conspiracy to show what "Lovable Banking" might look like in response to the daily emerging news that we've been shafted regularly by the banking system since, oh, at least 1695. Some of you will know that I have long taken an interest in things like local currencies and mutual finance and perhaps also that I've been looking into the use of the Limited Liability Partnership structure as a way of building multi-stakeholder less toxic alternatives to purist shareholder capitalism.

Well a couple of weeks ago I was contacted out of the blue by a chap, Frank Churchill, also in Oxfordshire, who has been looking at similar structures. In his case originally I think as a less toxic alternative to developing world microcredit systems (did you know that the effective interest rate including all charges and so on on Grameen or Kiva micro loans can get as high as 80%!) and as a way of monetizing voluntary work - mainly involving carers. We've both been steadily battling along on our own on this, trying to understand the structures and build solutions to common issues around them - in my case, mostly things like affordable housing and supporting local businesses.

And so we've got together and are, hopefully, on the verge of setting up a "think and do tank" (to coin a strap line from another - less popular amongst liberal economics followers - organization, the New Economics Foundation; but don't let that put you off - some of the issues are the same but we believe the responses are more mutual and liberals than theirs) in the form of a "Community Finance Partnership".

The Limited Liability Partnership structure was created, ironically perhaps, to get the professional firms such as accountants and lawyers out of being personally liable for the debts of their partnerships - the vast accountancy partnerships in particular were worried about the sort of "Enron scenario" of being held liable for multi-million pound lawsuits and were threatening to move their registered offices away from the UK if we didn't give them limited liability. But inadvertently they have created a beautifully simple mechanism for bringing all the parties to an enterprise - the providers of capital, landlords, customers, workers and suppliers and so on - in, if they wish, to share in the risks and the rewards of pooling their contributions to the success of that business as partners.

A partnership agreement can involve different classes of partner receiving different shares of the profits depending on the worth of their input to it - just as a co-operative structure does. Companies may be partners, or even other LLPs as well as individuals. And the partnership itself is tax transparent so each partner is responsible for accounting for the profit or loss in their own tax affairs. Some of you will be aware that I think limited liability in general is a Bad Thing that takes the personal responsibility away from business owners, but in this case it matters very little since every connection with the business could become a partner and share that responsibility explicitly.

The Community Finance Partnership can we believe fulfill a great number of roles, offering a portfolio of products for consumers and a steady return based on those to investors - the aim is to produce an index-linked rate of return in the form of a "rent payment" for the use of the capital partners' (investors) funds. "Customer partner" products might include interest free mortgages - called Property Investment Partnerships, personal loans such as with Credit Unions and business finance "repaid" through a portion of the successful businesses' turnover.

One "flagship" product we are hoping to develop is the idea of a local complementary currency, probably in the form of a Nectar-like loyalty card system that businesses with a base in the geographical area can buy into and which would be able to monetize currently unpaid work like volunteer carers whose value to the local community and especially health services is enormous. The possibilities are almost limitless. For example another idea would be to finance the equivalent of PFI schemes - for example if Oxfordshire County Council wants to rebuild some schools, but with local investors sharing in the reward. And such a structure could be used to provide the mutual finance system for universities I mentioned earlier today.

Think a cross between a loyalty card system, a credit union (more on the US or Irish style than the British), a mutual building society but with the ability to lend to business and not just on homes, and possibly a friendly society offering local mutual insurance and pension products. It's early days yet, and we're still working up what each product would look like in financial terms and the sort of prospectus we'd be able to offer investors, but I'm very excited about it! We think the time is ripe for a return to more human scale financial institutions that people can become a part of on a local more human scale.

We've seen much over recent weeks about how awful the City has been. How banks have made rash dodgy loans. Short sellers, overpaid executives and whatever else...

But I'll let you into a little secret: for every loan there is both a lender, perhaps a dodgy spiv with too high a bonus to be sure, but just as importantly there has also to be a borrower.

We have seen a little po-faced political bemoaning of the culture of consumer debt, but this unsecured credit - spending money - does not appear to be the primary debt that has caused this collapse. With few exceptions, when the banks talk about the sub-prime loans lying like a half-dead half-back at the base of a maul, they are talking about mortgages. Are not these borrowers to be condemned in equal proportion? Did the bankers force them to borrow? Are not they just as greedy, in their own way, as the bankers making themselves rich on those borrowers' seeming insatiable demands for more money? Maybe these are the real "sub-prime loons" that are really responsible for bringing our economies near to systemic collapse?

Of course it would be electoral suicide to lay so much blame on the ordinary "Joe Sixpack, the hockey mom". And indeed it would be quite wrong to do so. For most of those mortgage borrowers, perhaps especially what has become known, horribly disparagingly, as the "sub-prime" borrowers, were being completely rational. Rational, that is, in an utterly irrational system. And the results of that rational behaviour are now serving to highlight just how irrational the system is.

Indeed, it is so utterly irrational a system that those borrowers we might want instinctively accuse of being the least rational - those whose chances of paying off the large loans were the smallest - are in fact the most rational. Because in that mad upward spiral of house prices, those still left renting would be the worst hit. The urgency of getting out of renting and fixing your future housing costs at today's rates is all the more pressing.

Because here's the second little secret for tonight: we all rent.

This may seem counter-intuitive in a world where 70% of folk "own" their home and most of the rest want to. If you are, or can recall when you were, on the point of making the transition from renting to buying the first time, this will be easier to understand. One of the factors in your decision to stop renting and to buy instead will have been whether the mortgage payments, as compared with your current rent payments, are reasonable value, over the length of time you expect to be needing to use that property.

Of course there are many other factors as well. Some in favour of ownership, such as being able to improve, redecorate or even trash the property, and having the prospect of capital growth. Some in favour of renting, such as not being responsible for all the maintenance, or not being stuck with a mill stone if you can't sell it when you need to move. And of course the supreme benefits: a. you don't need to charge yourself rent - after all you are paying for it anyway and b. if you get to the end of your payments okay, you get it rent free for as long as you like and still get to sell the rights to it hopefully at a tidy profit.

But as tradable assets, our properties are valued on the basis of the yield it could achieve to an investment buyer now, and their view of how that is going to change over the time they expect to hold the investment. And when we buy a home, what we are actually buying is the right to collect the rent on that property for several years ahead at a "fixed" price today that we think will benefit us. Few owner occupier buyers will probably think about it that clinically. They might instead look at local comparisons to assess what they ought to be willing to pay. But so long as there is a rental market, and since there are some disbenefits to ownership as noted above it is likely that there will always remain a rental market, the money-value to the market is going to be based on its current and future rental potential and the overall yield over the time an investor would expect to hold that property investment.

So, what rising house prices indicate is that investors believe that there are going to be higher returns in terms of future rent potential. And if you are still a tenant, higher returns to the landlord mean higher costs to you. So if it is economic to freeze the rent payments at or near today's levels for the foreseeable future, you definitely want to do so. This becomes a bubble because the effect of future expectations compounds itself. Throw in relatively cheap loans and people can afford more in the present to secure those expected future gains.

Okay, now having, I hope, got you thinking in terms of "rent" I want to get you thinking about the different components of this "rent".

Take two identical, some might call them identikit, homes. Two same model "Barratt boxes". Only one is in Kensington & Chelsea, the other in Blaenau Gwent. I choose them because they are the highest and the lowest respectively local authorities by "land value" in England and Wales. Three bedroom, 100 sq m and with a rebuild cost of £1500 per sq m. On the face of it, they ought to cost about the same to buy, somewhere around £150,000, but of course they don't, do they.

If you managed to find the same little plot in K&C as in Blaenau on which to place your "Barratt box" you'd probably find that in Blaenau it would cost next to nothing - probably a couple of thousand pound per plot, for the trouble of clearing it! But in K&C it would cost several million and probably wouldn't be worth your while putting that Barratt box on it! In fact, in the recent purchase of Chelsea Barracks by the Candy brothers, which was reported as £959m for 12.8 acres, your average tenth of an acre plot would set you back a cool £7.3 million.

In fact, the Chelsea Barracks site is a good one to look at, since it will not involve criticizing the "poor widow" for not developing her prime land, but the government! What did the government, the Ministry of Defence do to make that barracks land so valuable? It certainly wasn't its former use as a barracks! It's not because it was a barracks that makes it an in demand site. But because of all the economic and social activity that goes on around the site. In fact, once upon a time, as a barracks, no doubt the site would have attracted the usual motley collection of military hangers on - whore-houses, bars and so on - it may even have depressed local land values initially, but certainly for the past few decades holding it out of its more productive use has meant other local prices have been pushed higher than they would be if all that land had been used productively.

In fact, the proportion of the "rent" due to the value of the building, the same sort of building as in Blaenau, is a tiny fraction of the overall rent. The rest is due to the location. The popularity of a location which is made up of dozens of factors, but centres around the fact that there are hundreds, thousands, of people who could beneficially make use of that location to be nearer work, social and other opportunities created by the surrounding community.

Now, here's the easy part to remember. What Land Value Taxers want to see, from David Ricardo, Adam Smith, J S Mill, Henry George to Lloyd-George, Churchill, Asquith and many others to the present day, is that the portion of the rent a property yields due to its location, and not the building on it, should be collected by the community and redistributed amongst the community instead of privatised by the highest bidder (or in some cases still the person with the most brutal land grabbing ancestor!), shored up by cheap bank loans. It is rent due to its monopoly as a good location that many people could make use of rather than any effort of the landowner.

In an LVT based tax system, when you "buy" your home, you'd be buying the right to collect the rent for the building alone. This is something you as an owner can affect, through your diligence or negligence in maintaining it or in building something of higher density on the same site. In the language that a typical home buyer will understand better, we want you to pay the £150,000 for the Barratt box to Barratt or the previous occupier, but you pay the remainder, the rent caused by its location, in annually assessed chunks, to the state instead of paying taxes on the earnings from your economically productive labour.

You can already, I hope, see the advantages. This bubble we have lived through over the past decade, the angst of people priced out of the market stressing about if they ever will get out of renting, the ballooning of borrowing that now threatens the very system that created it, will be things of the past. For as long as you can justify paying the location rent given the benefits that particular location gives you nobody can shift you. If that rent rises it is a sign that more and more people are being excluded from land that they might make more productive use of than you. Why should you be able to exclude them for as long as you like and then also reap a massive profit from having cost so many others much money "avoiding" your plot?

Instead of that home in Kensington & Chelsea costing you £7.35 million up front, it'll cost you £150,000 or so up front, which you can borrow to pay for if you need to, and a hefty annual location rent bill instead of both the remaining £7.2 m mortgage it would have cost you to buy the location up front and your income and other taxes on productive labour. Your disposable income is likely to be maybe 30% higher just for losing those income taxes. You can save in a wider range of productive assets for your future than just the monopolistic endeavour of owning a popular, or up and coming location. You may even choose to save so you can continue to pay the location rent when you stop earning for whatever reason - though most would probably find it just as good to save for an income in retirement and to downsize or move so that someone else can have the benefit of the local school you no longer use, the local rail station you no longer commute from and whatever other factors have made your location a popular one and for the proximity of which you would continue to pay even after you have stopped using them.

In the lingo, this is called creating "free land". Returning it to common ownership and paying as you go to occupy the bit that most suits you at any particular time of your life.

Even apart from the source of government revenue this would provide (though some of us would prefer to see the rent collected and simply doled out to all citizens in that community as a community dividend, a basic universal non-withdrawable income in place of most cash benefits) it fundamentally shifts the burden away from working and producing and onto inefficient use of scarce resources.

It is essential in an environmentally responsible regime, because it makes the choice of whether to live close and not pollute by commuting or to live far and spend a fortune in travel costs, more available to more people.

And it is essential in a liberal regime, as it gives people a choice in the "taxes" they pay - the tax savvy will soon work out that if they can spot an up and coming area that still meets their needs early they will pay less tax and watch the services there get better as others catch on, until it reaches some kind of equilibrium again. And it stop people making monopoly profits out of excluding others from what we all need access to - a location to base ourselves at.

This would be so much more than just a "tax switch" though - it would so fundamentally change the fairness, equit, economic justice for millions of people who, knowingly or not, are trapped in a system that takes money from them to line the pockets of landowners, the ranks of whom are getting ever more distant for many people all the time.

...it's more like 2% of our money that is actually real, tangible stuff.

You're lucky if you happen to have some of the real stuff in your hands in fact. Why shouldn't the good old coin counterfeiter have a go. The Masters of the Universe who are at this very moment plunging us all into financial depression are the ones who are really the counterfeiters. And on an unimaginable scale. So unimaginable that we would rather believe it's not been happening.

The fact is that what we think of as pounds and pence are really only represented in the real world by, at the last calculation, about £45bn worth of notes and coins. Yes, that's the sum total of what the state has ever issued in our name.

But add up what we all have in our bank accounts and the humungous numbers represented by our outstanding mortgage balances and so on, there are more like £1,800bn or one point eight trillion.

Is it any wonder that this house of cards is teetering? And the fraudulent pound coins and notes that sometimes inconvenience us when a shop assistant tells us we can't use the money we thought we had are only the visible manifestation of a fraud so much grander we'd prefer not to think it exists.

...and we still don't seem to know what to do about bankers!

The Bank of Scotland, whatever is now left of it, is 312 years old. That of England just two years older. Ever since the banking system has been built on state protectionism, corporate welfare, monopoly privilege and, at its heart, a gigantic fraud.

The fraud was that a goldsmith could give both you and I receipts for my gold stored in his vaults and make money on both - from me a fee for keeping my gold, from you interest on the receipt you had borrowed from him. Indeed they found they could duplicate this so frequently, fraud upon fraud if you like, that though gold is perhaps regrettably no longer the basis of our money, the "hardest money", real "hard cash", amounts now to just three per cent of our total money supply in terms of everything we all have collectively borrowed and deposited.

To be fair, most goldsmiths at least issued notes of their own. Customers - both depositors and borrowers - chose which goldsmith to bank with on their reputation. If they became overstretched, issued what was felt to be too many receipts for the same gold, their notes would be less desirable in trade, there may even be a "run" when all the receipt holders tried to get their "real" money, the gold, out of the bank, which of course had much less gold than he had issued such receipts for. Nowadays, however, what they create and destroy in their lending business is denominated in the national currency, a currency issued nominally at least, by the state and guaranteed by the state.

This means it is no longer a private affair between a bank and its customers as to whether their business practices jeopardise their customers' savings; it is a problem for us all. We have ceded control of the supply of money issued in our name to private businesses whose main aim is to make profit for themselves and who, in the course of that otherwise noble pursuit, play fast and loose with the very air the entire economic system requires to function. And states protect them, bail them out as seems about to be the case in the US to the tune of almost countless billions, because they have to guarantee the currency they have so little control over.

Regular readers will know I am very fond of a quotation from Josiah Stamp, Liberal politican, Chairman of the Midland Bank in the 1920s and reputedly second wealthiest man in Britain in his lifetime:

"Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again.

"However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits."

It rather seems to me that with the events of the past few days, we may be "taking the earth away from them" (or, more accurately and nauseatingly, buying it back from them) which they have stolen from us with their inflationary approach to money, but leaving them the power to create those deposits all over again with which, in the next bubble, they will buy it all back again.

Everyone seems to think that money has somehow been pretty constant. The way it works I mean, not whether we call it shillings and guineas or pounds and pence. But the current confidence trick really began with the depression of the 1930s and the work of two extremely wealthy, powerful men in the US who persuaded the government of their day to set up the system that enabled them to create "our" money according to their corporate priorities. The results of John D Rockerfeller and John P Morgan Jnrs' work was the Federal Reserve and the rapid ramping up of fractional reserve banking, and the eventual demise of real solid backing for that currency.

If the current crisis really does turn out to be the "big crunch" at the end of the cycle begun by that 1930s "big bang" we should be ready with policy to replace that fraudulent, anti-competitive, oligarchical system, designed by the very wealthy to keep them that way for little actual productive work with something different. Entirely different. I do not detect any mainstream politicians with the cojones to say so. Our governments and politicians are but eunuchs to the bankers, and the longer that continues, the more the vast majority of us will suffer.