Who is that economist working for?

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If you believe that . . .

Economics has been called the dismal science. Well, “dismal” it may be, certainly in the way it is used to justify the gross inequalities in the distribution of our planet’s wealth – but “science”? Possibly a “human” science, ranking with other notoriously imprecise fields of human knowledge such as psychology and sociology.

I have noted previously that Alfred Nobel did not include economics in his list of prizes. Not only did he think it unfit to sit alongside the true sciences (physics, chemistry, physiology, medicine), he didn’t even consider it as objectively assessable as Literature and Peace!

Bearing that in mind, then, it seems to me that I have as much right as anyone to have my ideas on the subject taken seriously. It could even be argued that the views of a high profile rugby player in New Zealand have greater validity than those of a former Governor of my country’s Reserve Bank.

We are all aware that high-level sport these days is mostly about money, and economics has inserted its dismal finger so that honesty, fair play, clean living and sportsmanship now rank well down the list of priorities. The home ground of Istanbul’s Beşiktaş football club, formerly commemorating the republic’s second president and close friend of Mustafa Kemal Atatürk, has recently been rebuilt and reopened as the Vodafone Arena, commemorating . . . the power of money.

banksters-300x199It’s a brave sportsman or woman these days who can cite moral principles to his or her paymasters as Sonny Bill Williams has done in New Zealand. Williams has the advantage of being an extremely valuable property, moving seamlessly between two rugby “codes” (league and union) in a way that would once have been frowned upon. So, when he announced that he would not wear a team strip emblazoned with the logo of the Bank of NZ, he opened a can of worms. Williams is, apparently, a Muslim, and follows that religion’s injunction against usury – the lending of money at interest.

A columnist for the NZ Herald, Brian Gould, picked up on Williams’s moral stand, writing an opinion piece entitled “Banking should be under closer Government control”. Supporting the Muslim rugby player’s position, Gould said, Most people believe, and it is a belief assiduously promoted by the banks themselves, that the banks act as intermediaries between those wishing to save and those wishing to borrow, usually on mortgage. . . But this benign view of their operations is inaccurate and misleading. The banks do not lend you on mortgage money deposited with them by someone else. They lend you money that they themselves create out of nothing, through the stroke of a pen or, today, a computer entry.”

The next day, the Herald published a reply from a gentleman by the name of Don Brash insisting that both Williams and Gould were wrong.

“Mr Gould is not alone in peddling this nonsense, but that certainly doesn’t make it correct.

How the Fed works

How the banking system creates MONEY. Money is not wealth, especially if you have to borrow it at commercial interest rates. (Source: Time Magazine)

“The banking system does create money. When Bank A lends money to one of its customers, the customer may use those funds to buy something from somebody who banks with Bank B. Bank B then finds itself with an additional deposit, a part of which it can lend out to its customers (keeping some of the additional deposit as a liquidity reserve). So an initial loan may end up considerably increasing the total lending by the banking system.

“If individual banks really could create money by “the stroke of a pen or a computer entry”, as Mr Gould contends, why do they bother paying interest on deposits, why do they borrow funds from parent banks overseas, why do they borrow funds in the international market, why do they need to hold some funds in government securities as a liquidity reserve, why do some banks occasionally run out of money when customers lose confidence in them?

As well as being a former Governor of the Reserve Bank, I now chair the small New Zealand subsidiary of the Industrial and Commercial Bank of China, the largest bank in the world. It would certainly make life very much easier if we could, “by the stroke of a pen or a computer entry”, simply create the money which we lend out to New Zealand borrowers. Unfortunately, we can’t.” (My highlighting)

Pinocchio

Would I lie to you?

So, according to Brash, Gould and Williams are wrong – but the banking system does create money. Huh? Look at the weasel words in the last sentence. OK, that’s not how they do it exactly, Don. And Bill Clinton did NOT have sex with that woman.

As I hinted above, Don Brash was Governor of New Zealand’s Reserve Bank from 1988 to 2002. He has held academic positions at several universities at home and abroad, sat in big chairs in large offices in several well-known banks, and even been involved in politics at the highest level. Clearly he, and the editor of the NZ Herald, and other naïve souls too for all I know, believe his words carry the power of gospel truth in matters of economics.

Look closer, though, and ask yourself if a guy who works at the upper levels of banking administration can possibly express publicly an unbiased view of the workings of the banking system.

Check the guy’s record, and you’ll see that he is a loser from way back. His first foray into politics was in 1980 as National Party candidate for the “safe” National seat of East Coast Bays. He lost, not to the main opposition Labour Party, but to an opponent representing Social Credit, a party whose main platform was exactly the view of banks expressed by Messrs Williams and Gould. That was a by-election. He failed to win the seat back in the General Election of 1981 and was dumped.

es514f00bfSomehow he managed to get himself elected as leader of the parliamentary National Party, despite his inability to actually win an electoral seat – holding the position from 2003 to 2006, then resigning from Parliament in 2007 to take up another academic post as economics guru.

He returned to politics in 2011 as leader of the right wing ACT Party, holding the post for seven months before resigning again after failing to make any impact in that year’s General Election. Clearly the average New Zealand voter is more perceptive than those who appoint general managers in banks or professors of economics at universities.

Brash is a hired lackey of the capitalist establishment, and a loser whenever he has offered his services to the New Zealand public. I’m not going to stoop to discussing his private life. If you’re interested you can get an overview on his Wikipedia page.

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8 thoughts on “Who is that economist working for?

  1. So you believe there is corruption in the ability to print money? You also allude to The Sveriges Riksbank Prize in Economics in memory of Alfred Nobel as if Economics were not deserving of it, or as if it were truly a nobel prize and not an award in his honor. You speak as though monetary economics were the only form of economics in existence, which is simply false. I don’t suppose I understand if you despise economics, or if you despise the branch of economics the central bank is primarily concerned with.

    • Thanks for taking the time to comment, Preston. If you want to understand my position on money and economists you can click on “economics” in the “categories” box, and you’ll find I’ve written a few other pieces. To briefly answer your points:
      1. If I print money I’ll end up in jail. Banks don’t actually “print money” as you well know. What they do is illustrated by the Time graphic above – a lot worse than merely “printing” money.
      2. My objection to the bankers’ prize in economics is that it POSES as a Nobel prize when, as you admit, it is NOT.
      3. Of course, the “science” of economics concerns itself with more than money, but in the end, it is money that controls all economic activity – and those with the power to create and cancel it control pretty much everything that goes on in the world.
      4. The title of my article was intended to suggest that most economists have a vested interest in maintaining this status quo by virtue of deriving income, directly or indirectly, from its operations.

      • 1. Forgive my choice of words, I mean to say ‘create’ rather than “print.” To your point, I don’t believe lending out a portion of deposits, as in the graphic, described as fractional reserve banking, is worse than 100% reserve banking (the alternative). If banks don’t lend a portion of their deposits, banking will not exist, since lending is the manifestation of the profit motive in banking. In that world all deposits would be in a government institution, or at home in the mattress.
        2. A humble Economist would accept that it is not a nobel prize. Though humble may not describe most economists.
        3. The ability to control the money supply doesn’t mean controlling the world. Though I won’t deny it does mean a great deal of responsibility.
        4. Central Bank Monetary Economists don’t derive income from conducting monetary policy that maximizes their personal welfare alone, they derive income from conducting monetary policy that stabilizes inflation and maintains low, stable unemployment.

      • Ah well, nothing much else to say, I guess – except that the point of that Time graphic, if you look at it closely, is to show that banks DON’T actually lend their deposits.They create money to lend in proportion to the amount they have in deposits. That’s a different story.

  2. Dear Alan Scott,

    Would you be interested in sharing an article with our emerging business writing community once every 10 days?

    We want to encourage more students to read business/economics news and write analyses, and it would be so great to have your articles published on our website, both to increase the number of readers and let you share your perspective on global issues and trends with aspiring students!

    Hoping to hear from you!

    Best,

    StudentNess (Students in Business)

    • I appreciate your request, and offer to publish my articles. I don’t think I could commit to writing something appropriate for your website every 10 days. As you can see from my blog, I am not writing primarily about economics (and I don’t have formal qualifications in that subject, though that may be an advantage sometimes in terms of seeing the wider picture). My main focus is Turkey and its relationship with the world. Nevertheless, having said that, I do have an interest in economics, and possibly an unorthodox perspective, so, when I do write something relevant, I’ll be happy to send it to you.

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