Bankers' Bonuses: Time to Withdraw Banks' Licence to Print Money

In recent days there has been the annual universal condemnation of the greed with which bankers accept their excessive pay awards.

In recent days there has been the annual universal condemnation of the greed with which bankers accept their excessive pay awards.

This year is a little different because of initiatives taken by Greens in the European Parliament, specifically the work of Philippe Lamberts, who was the prime mover behind the introduction of the bankers' bonus cap. But to focus solely on the issue of bonuses overlooks other, even more important, questions: Where does the money come from to pay these bonuses? And who loses out when bankers claim such a vast share of the national wealth?

The answer to this is quite straightforward. A banking license is literally a license to print money and within a democratic society we can suggest that the decision to grant such a license to any corporation should be politically accountable.

Back in 2012, I launched a petition to call for Barclays to have their banking licence withdrawn following a series of scandals. It may well have been such a threat that led to the reluctant resignations of Bob Diamond and Marcus Agius.

Given the way that banks are presently engaging in anti-banking, i.e. refusing to lend money to small businesses and in some cases even deliberately putting them under pressure in order to gain control of their assets, we should think seriously about who we allow to hold a banking license.

The bank license system is itself evidence of the way that the function of creating money has been privatised. In its Quarterly Bulletin earlier this year 'Money Creation in the Modern Economy', the Bank of England explained clearly how banks issue money through the creation of credit. Holding a licence makes this legal; if you or I did it, it would be fraud.

This publication is something of a breakthrough for the monetary reform campaign, since it is clear evidence that the general political understanding of how money is created -- which is also the false view taught in most economics course -- is coming under challenge. Last week that challenge gained pace as Martin Wolf of the Financial Timessuggested what has until recently been unthinkable: that we should move to a system of public money creation.

The possibility of direct public money creation, seen as on the lunatic fringe only a decade ago, has become much more real as a result of the Quantitative Easing programme.

Between March 2009 and July 2012 the Bank of England moved into the money markets to purchase government debt from financial institutions, eventually creating £375bn of new money.

The idea was that this would increase liquidity in the financial sector, enabling banks to lend to small businesses who were starved of cash as a result of the credit crisis. In reality, the banks simply held onto the cash claiming that they were using it to rebuild their balance sheets.

Although QE is often referred to as 'free money' some groups in society are paying a very significant cost for this programme. Notably, as pointed out by the Bank of England in an earlier Quaterly Bulletin, the gains from the QE programme are heavily skewed towards wealthy asset-holders: "By pushing up a range of asset prices, asset purchases have boosted the value of households' financial wealth held outside pension funds, but holdings are heavily skewed with the top 5% of households holding 40% of these assets."

By contrast most pensioners are losing out as the availability of cheap money depresses the returns they receive for their savings.

The problem with the issue of money is that it is always somewhat abstract and therefore hard to imagine the steps towards liberating ourselves from the private banking model. Green MP Caroline Lucas has provided a useful service here in writing to the governor of the Bank of England to explore whether we might begin this move by creating money through allowing the Green Investment Bank to issue green bonds, which could then be available for purchase in any future rounds of QE. Mark Carney confirmed that this is indeed a possibility, and would provide a more positive source of new liquidity to the potentially destabilising Help to Buy scheme.

Public money creation is an important challenge to the austerity politics that have been the undeserved consequence of the financial crisis and impose the punishment for corporate financial failure on the vulnerable and weak in our society.

Liberating ourselves from the private credit model of money creation is a necessary first step on the path to a more just, sustainable society.

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