Chris Leitch: No snake oil here Bryce

Reserve Bank Governor Adrian Orr. Photo / Mark Mitchell

Opinion

COMMENT:

Bryce Wilkinson uses 'funny money', a term dreamt up by political opponents to discredit Social Credit 60 years ago, and adds 'snake oil' in an apparent attempt to do so again.

That "funny money" nonsense has gone the way of the dinosaurs as increasing numbers of international experts recommend the Social Credit concept of using the country's central bank (Reserve Bank) to fund government activity.

In using it Wilkinson denigrates them too.

People like Adair Turner, former chairman of Britain's Financial Services Authority, Anne Pettifor, advisor to governments and honorary research fellow at the Political Economy Research Centre, University of London, Richard Werner, economist and professor at University of Southampton and Steve Keen, head of the School of Economics at Kingston University, London, and Michael Kumhof, now a senior researcher at the Bank of England, who co-authored an International Monetary Fund report in 2012, strongly advocating it.

Let's examine Wilkinson's claim that conventional government borrowing does not benefit banks and wealthy investors.

Banks purchase government bonds (the conventional way government borrows), by creating a book entry in their accounts (in effect printing money) - the same method they use when they advance loans for the purchase of houses, cars, holidays, and for business expansion and overdrafts. Banks do not lend money that people have deposited with them.

As the Bank of England clearly states in its first quarter 2014 Bulletin, "Money creation in practice differs from some popular misconceptions. Banks do not act simply as intermediaries lending out deposits that savers place with them. How bank deposits are created is often misunderstood. The principal way is through commercial banks making loans. Whenever a bank makes a loan it simultaneously creates a matching deposit in the borrower's bank account thereby creating new money. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits."

The Bank of England is not alone. The German Central Bank and our Reserve Bank state it too, as do a plethora of international economists and economics professors.

Interestingly, despite this, NZ universities still teach economics students the old, disproven theory.

Banks purchase government bonds because it is profitable. It adds to the profit from their other lending activities and is paid out as dividends to their shareholders (about $5 billion last year), many of whom are domiciled overseas.

Profit on bonds comes from the government paying interest, using taxpayers' money.

Given four big Australian banks control the lion's share of banking here, and that it's highly unlikely people on average or below average incomes can afford shares in Westpac, for example, at $16.73 a share, it is demonstrably correct to claim that conventional borrowing benefits wealthy investors. It transfers wealth to them from taxpayers.

Wilkinson, of course, was one of the architects of the neo-liberal economic experiment that was unleashed on the country by Roger Douglas in 1985.

He is credited with writing the Treasury publication Economic Management which underpinned a raft of radical economic measures worked out in "Economics II" a group in the Treasury in the early 1980s.

Colleagues included Graeme Scott, Rod Deane and Roger Kerr, who played pivotal roles in the execution of the neo-liberal order in New Zealand.

That neo-liberal order has turned our country from an egalitarian society into a low wage one where inequality continues growing, increasing numbers of people live without adequate housing, and hundreds of thousands of children live below the poverty line.

From one where we used to own the vast majority of our primary and secondary industries and critical infrastructure, into one that exported jobs to low wage countries and made us reliant on imports from China, India, and Thailand, and where the income we earn from exports goes more and more towards paying the overseas owners of those former assets, the profits they extract out of the pockets of Kiwis.

Thankfully the ideas Wilkinson, the Business Round Table and its successor, the New Zealand Initiative, embrace - that the market, in which only those in the upper levels of income can freely participate, should dominate, and everything be measured in dollar terms as inputs and outputs – are in retreat.

People really do matter – and what matters for people cannot always be measured in dollars and cents and 'efficiency'.

The Social Credit proposal – that government should access funds direct from the Reserve Bank – to prioritise people and the environment ahead of the 'market' - takes all people, not just a select few, into account. It's actually 'efficient' because it doesn't allow banks and money market dealers to 'clip the ticket' along the way.

Payouts for the crisis, which may yet turn out to be a gift of 'helicopter money' to every adult of $2000 or more is about prioritising people and should be funded from the Reserve Bank.

Social Credit has never advocated the creation of money in an unrestricted fashion. A key policy is setting up a New Zealand Credit Authority with independence similar to the Judiciary, accountable to Parliament as a whole. Its task would be to assess the economy, measure its unused capacity and labour capability, and determine how much new money the Reserve Bank could safely create without generating inflation.

There is a tidal wave of opinion both internationally and locally that sees value in what Social Credit has been proposing.

They may not call it Social Credit, but that is irrelevant.

What is relevant is that judicious use of credit creation by the Reserve Bank can (and should) be used by the government reclaim our future and to do lots more things to benefit kiwis, and, that money paid by taxpayers for hospitals and schools should not go instead into the pockets of the overseas shareholders of the banks.

- Chris Leitch is the leader of the Social Credit Party.