LIBOR and TED and the rebirth of the Mixed Economy

When banks lend money, they borrow from the interbank market. This is because even banks that issue their own notes, like the Scottish ones, actually can't break government rules about the issue of cash. So a good indicator of how bad the banks think things are, or indeed of how bad they really are, is the interest rate at which banks lend to banks.

Today, the rates of interest on interbank loans are growing rapidly. The banks do not think each other a safe bet. It is also the case that demand for money to pay off debts owed on the markets is growing from investment arms of banks. This means that the price of money for loans is going right up.

It also means, as this blog has been going on about for over a year, that even if banks are given a tonne of money by governments, they will simply absorb it or pay off their own debts with it. This is now especially true since there is an element of risk creeping into a traditional practice of buying US Treasury bonds as things which are meant to be insulated from problems.

The US is now borrowing so much and spending so much that there isn't enough demand in the world for an increasingly debased dollar. A cynic would say that the US authorities are hoping that the dollar falls so much that money flows to the euro, breaking that currency because of the inability of the euro-zone to deal with an appreciation of the currency given the terrible chasm between Mediterranean states and Germany.

If that doesn't work, the US will have to experience a very great inflation to deal with its excess money. The money will have to be debased, or the federal government will have to withdraw it and raise interest rates--which won't happen anytime soon.

Hence, conventional analyses in which banks need to be helped through a crisis and liquidity needs to be restored by giving the banks money are terribly wrong.

The Oil Drum is, once again, right. As I and many others noted last week, the basic problem is inflated house prices--in this country a direct legacy of the Thatcher administration flagship 'council house policy' in which public stock was sold off to the banks via the illusion that former tenants actually owned the majority equity in a home when the bank held their mortgage. The financial industry used this to expand the City of London's vampiric grip on British and global economies.

What should be done? I think that there are policies within view, sighted perhaps by Senator Chris Dodd and others in the US which are even more practical here, that may be able to forestall or ease the reckoning we are now very close too.

First, governments should eventually aim to purchase the unaffordable mortgages of the poor. It should then abolish them, and issue new, long-term ones predicated upon the value of the house and associated land. Money earned in the future should only go either to a national insurance fund for pensions or healthcare, or to national investment banks for business. These would be predicated upon a mixture of land values and long-term lending.

Secondly, governments should take back power over reserve ratios and raise them.

Thirdly, governments should divert money to new national investment vehicles which would repair crumbling facilities, funded by taxes on large businesses operating within their territory.

Fourthly, public utilities must be regulated and owned by their users with a socially accountable, tax-funded accountable authority running them.

Fifthly, cooperatives, which tend to be run for the long-term, especially in coal industries, should be encouraged into long-term relationships with the new national investment vehicles and given initially preferential arrangements with the new national insurance fund.

The aim should be a mixed economy with boring banks fixated on land values, long term finance, a slow and stable housing market with a substantial element of social ownership through local institutions, and money which isn't given over to worthless inflation behind the banking curtain. Proper trade and professional associations should be freed from government interference based on a silly, narcissistic consumer-rights culture.

The twelve million or so households without a mortgage, and the part of the 11 million or so with a mortgage who have a disposable income, should be encouraged to spend it on national investment bonds and national products in each country, and workers should be put before profit.

We face a new depression, made worse by wars spreading from the arcs of instability, the decline of oil, the rise of Islamism, and climate change (though possibly from global cooling rather than global warming). Globalisation and African commodity booms are now going to turn against the west for the first time in the past three centuries. Our political elite's don't get it. Those who consider themselves progressive and radical are stuck fighting for the sloppy-seconds leftover thrill of the Frankfurt school and other parts of the destructive legacy of the later nineteen sixties.

Surely it's time for some sense?