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Crises Have Disproven Mainstream Neo-Classical Economics

by Richard A. Werner and Stephen Lendman Tuesday, Jan. 19, 2010 at 4:35 PM
mbatko@yahoo.com

"According to Tax Commissioner Cory Fong: North Dakota has been able to weather the economic crisis.

Richard Werner is a professor at the University of Southampton School of Management.

"...To prevent banking crises, it must be ensured that the bulk of credit creation is used for productive purposes. Specifically, aggregate bank credit for transactions that are not part of GDP (something that can be easily verified by loan officers) needs to be monitored, and suppressed when it rises in excess of overall bank credit growth (see Werner, 1997, 1999). This simple measure would have prevented the credit bubbles in the United States, the United Kingdom, Ireland, Spain, and many emerging markets, which have now burst and caused the current crisis. It would also have prevented the Japanese depression since 1990 or the US Depression of the 1930s, among others. Central banks used to monitor precisely this but, following the deregulation advice of mainstream economics, they chose to abolish their "credit guidance" policies and instead let rip the unproductive bank credit expansions. Ironically, now the UK, French, and German governments want to monitor the allocation of new bank lending (to small firms) policy advice of the kind I have given consistently and repeatedly since 1991, but which was rejected as 'inefficient interference' in 'free markets'. This amounts to closing stable doors when the horse has already bolted.

Thus one also needs to ask why those institutions that could have prevented the bubbles have singularly failed to do so, although they had been given unusually strong powers with little accountability to democratic institutions—the central banks. They cannot feign ignorance: apart from employing the largest number of economists of any institution and spending vast resources on 'research' (none of it on the taboo topic of credit creation), I have also contacted many central banks and finance ministries and have in the past twenty years published many articles based on my credit model, warning of pending crises (such as today's UK banking collapse) and indicating that bubbles and subsequent collapses could easily be prevented by monitoring and restricting speculative (non-GDP) credit creation. Central banks - and governments for that matter - were not interested. This suggests that the very independence and lack of accountability of central banks has been a factor in allowing the creation of credit bubbles and the propagation of the current crisis. Central banks should be made to monitor credit flows and be more directly accountable to democratically elected assemblies for the macroeconomic results..."

to read his article on www.qfinance.com, click on

http://www.qfinance.com/macroeconomic-issues-viewpoints/viewpoint-richard-a-werner



Steve Lendman

SteveLendmanBlog

Daily Radio Show

The Lendman News Hour on RBN

Listen Live daily from Mo - Fr from 10AM CT on RBN The one hour program will provide cutting-edge information on major topics with noted guests sharing their expertise with listeners.







In late 2009, former Merrill Lynch economist, now with the Canadian firm, Gluskin Sheff, said the following:

"The credit collapse and the accompanying deflation and overcapacity are going to drive the economy and financial markets in 2010. We have said this repeatedly that this recession is really a depression because the (post-WW II) recessions were merely small backward steps in an inventory cycle but in the context of expanding credit. Whereas now, we are in a prolonged period of credit contraction, especially as it relates to households and small businesses."

Summarizing his 2010 outlook, Rosenberg highlighted asset deflation and credit contraction imploding "the largest balance sheet in the world - the US household sector" in the amount of "an epic trillion of lost net worth, a degree of trauma we have never seen before," even after the equity bear market rally and "tenuous" housing recovery likely to be short-lived and illusory with a true bottom many months away.

"According to Tax Commissioner Cory Fong:

North Dakota has been able to weather the economic crisis. "While other state governors and legislatures are looking for ways to raise revenue through raising taxes and cutting services, we just came through a historic session of funding both our important priorities and substantial tax relief....The winners are families, businesses and the State of North Dakota," because it's unique in one important respect.

It's the only one with a state-owned bank (The Bank of North Dakota - BND) that sustains its distinctiveness and strength. As a result, it had the nation's lowest unemployment rate of 4.1 at year end 2009 and created jobs throughout the crisis.

Established in 1919, it's been a "credit machine" ever since, according to financial writer Ellen Brown, delivering "sound financial services that promote agriculture, commerce and industry," something no other state can match because they don't have state-owned banks.

With one, BND "create(s) 'credit' with accounting entries on (its) books" through fractional reserve banking that multiplies each deposited amount magically about tenfold in the form of loans or computer-generated funds. As a result, the bank can re-lend many times over, and the more deposits, the greater amount of it for sustained, productive growth. If all states owned public banks, they'd be as prosperous as North Dakota and be able to rebate taxes and expand public services, not extract more or cut them..."

SteveLendmanBlog

Daily Radio Show

The Lendman News Hour on RBN

Listen Live daily from Mo - Fr from 10AM CT on RBN The one hour program will provide cutting-edge information on major topics with noted guests sharing their expertise with listeners.

xpertise with listeners.

http://sjlendman.blogspot.com/

to read Steve Lendman's blog from January 11, click on

http://sjlendman.blogspot.com/2010/01/recession-is-over-depression-just.html

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