Tuesday, 26 March 2013

Why student loans?

Is it logical that students should have to pay increasingly higher fees primarily through loans? Those promoting this view probably never paid fees and may even have received a payment for studying so why do they believe current students should not receive the same benefits?

If we look at the economy, there have been considerable changes in the way that it operates. Most of this change has occurred in the last thirty years. Neoliberal economics gained traction in the UK during the Thatcher lead Conservative government. At the same time other countries introduced similar regimes. New Labour continued the push of neoliberal economics. All the major parties seem to believe that this is the way the economy should run although there are some members in both parties who see alternative economic theories.

The basis of neoliberal economics is that the private sector is the creator of wealth and takes the risks that justify the profits (Boas & Gans-Morse 2009, Thorsen 2011, Mellor 2010). The public sector (government) is seen as a drain on growth and profit so it should not gain the benefits of seigniorage (the value of central bank created cash minus cost of production) and the first use of created money. The consequence is that there has been an increased emphasis on debt (money created by private banks) in the money supply and a decrease of central bank created money. In the UK, only 3% of the money supply is central bank created money (cash). The other 97% is all money created as debt. Over the same period government debt has increased rapidly since there has been minimal seigniorage received by government. With rising debt, the government has look for ways to redistribute the debt or reduce its expenditure. The other problem is that the interest on the debt also takes a larger chunk out of the government income thus reducing what it has available to speed on public services.

If we look at education, especially at university level, who benefits from the education. The argument is that it is the student and therefore the student should contribute to the cost of their education. But doesn't the country and business also benefit? Shouldn't they consider contributing to the cost? Isn't it to the nation's benefit to have educated people?

Since the government is looking at its deficit and growing debt bill, shifting some of the debt to someone else helps control the increasing deficit. If the student picks up an increasing amount of the cost of their education then the government has reduced some of the pressure on its budget. The government isn't concerned about the long term consequences on the student and their future. They argue that the student will be able to pay back the loan from their future earnings.

The neoliberal economic policies promoted cutting taxes for the rich, privatising state assets, deregulating labour, and reducing social security (Boas & Gans-Morse 2009, Thorsen 2011). The private sector and not the public sector is responsible for growth. Their view increasingly tries to lay the blame or responsibility on others as though they have the ability to pay or are not making the effort to advance themselves. It doesn't look at fostering individual potential or ensuring needs are meet. The neoliberal view places emphasis on the individual pursuing their own potential and also paying their own way. But there is a major flaw in this perspective especially when deregulation is removed and any technique for returning a profit becomes acceptable. Any risk becomes acceptable as long as there is a profit to be made. This attitude has seen a shift from a productive economy to an economy based on financial transactions. Productivity or at least financing production was not seen as profitable (Mellor 2010).

The high risk financial transactions has led to the current financial crisis but instead of questioning the neoliberal perspective and changing the economic structure, governments and central banks have continued to pursue the failed policies. As a consequence governments have taken their responsibility as lender of last resort seriously through refinancing banks and then applying austerity measures to recoup the costs from the public. Strangely, the private sector doesn't see themselves as failing to accept the risk of their transactions.

Under the neoliberal economic approach also enshrined in the European Union's Treaty of Maastricht, government spending cannot be directly financed by a nation's central bank (Ryan-Collins, et al., 2011). This forces governments to fund their deficit including the bank bail out funding through borrowing or increased taxation. It also means governments look for ways to remove expenditure. In the case of educational costs, this means transferring costs from the government accounts to those whom the government thinks benefits from those costs, the students.

A fundamental change in the operation of the economy is necessary if we are to stop these reoccurring economic crashes and an increasing burden of costs being transferred to the least able to afford those costs. One of these changes is restoring the right for government spending to be funded through the issuing of money by the central bank. But that is only the starting point. See the proposals of Positive Money.

Capitalism requires growth or expansion in economic activity. This drove the move to financial transactions rather than productivity. There is a need to question this emphasis on growth and look at sustainable communities but this will be the focus of a different paper.


Boas, T. and Gans-Morse, J. (2009) 'Neoliberalism: From New Liberal Philosophy to Anti-Liberal Slogan', Studies in Comparative International Development, 44(2), 137-161.

Mellor, M. (2010) The future of money: From financial crisis to public resource, London: Pluto Press.

Ryan-Collins, J., Greenham, T., Werner, R. and Jackson, A. (2011) Where does money come from? A guide to the UK monetary and banking system, London: New Economics Foundation.

Thorsen, D. E. (2011) 'The neoliberal challenge: What is neoliberalism?', Contemporary Readings in Law and Social Justice, 2(2), 188-214.

Thorsen, D.E. & Lie, A. (2006) What is Neoliberalism? Oslo, University of Oslo, Department of Political Science, Manuscript. From: http://folk.uio.no/daget/What%20is%20Neo-Liberalism%20FINAL.pdf

Saturday, 16 March 2013

Who is at fault?

I am strongly biased in favour of monetary reform and a backer of the Positive Money proposals. I see this as a real alternative to the austerity measures being promoted by the UK government and being forced on nations receiving bailouts in the European Union. I object to the theft of depositors money being forced upon the Cypriot people in the bailout package offered by the Economic Union. Was it the depositors who caused the banking problem in Cyprus.

My bias does influence how I read economic material but I notice that there are many politicians and economists who are equally biased in their belief that governments and the people in general should not benefit from the creation of new money. They hold firm to the belief in the market despite current evidence of the difficulties. The question who is really basing their argument on the real evidence and how the system currently works?

One of the positive money promotions clearly emphasises the role of the banks fuelling the house price boom through funding increasingly bigger mortgages for properties. However, there is another two parties to a property transaction and that is the seller and the buyer. When the seller and buyer see the transaction as an investment then they like the banking system are looking for increasing prices and a positive return on the transaction. We look for this gain even if all we will be doing with the return on investment is buying our next home. What influences our attitude in these transactions? It comes back to our understanding of market forces and our desire to move up the property ladder and improve our status in the world. Even when making home improvements, we are encouraged to think of the economic gains and not the improvements in living conditions.

Michael Rowbotham, the author of The Grip of Death in critiquing the debt based money system and the way that it fosters certain behaviours, talks in respect to housing how mortgages moved from being one or two times a person's annual income to being closer to ten times their annual income and how despite having a 25 year term the average repayment period was eight years where now we are enslaved for life to the debt.

For banks or lenders, property was a guaranteed return. Property prices increased faster than the rate of inflation. There was a guaranteed return on investment. Putting money into mortgages becomes almost a certain profitable bet. In contrast investing in a business seems higher risk. There is no guarantee that the business will be a success so why take the risk?

Mary Mellor (2010) describes how even the concept of profit places emphasis on growth or the need for the input of new money and an expanding market for capitalism to survive. She says money is “invested in commodity production with the aim of selling that commodity at a profit, that is, M – C – M+” (p 83). That is more money is required than is paid out for production. This was the argument of C.H. Douglas and the Social Credit movement. When you begin to include financial investment or financialised capitalism, “where money is invested in financial assets to create more money” then we have M – M – M+. That is we invest money in order to obtain more money. Capitalism by its very nature requires growth or at the very least continued expansion of the money supply. If that expansion is in the form of debt then we have to question whether the system can survive?

Rowbotham argues that this profit or growth emphasis causes us to produce cheaper products with shorter life and to export our unwanted surpluses simply to maintain profitability. The consequence is environmental destruction and as reported on a recent news item a desire to mine for what we see as essential minerals from the ocean floor even though this could cause high levels of damage to the environment.

We all behave in ways that are consistent with our beliefs. This is easily identified with politicians who argue that austerity is the only option. This is despite the evidence that suggests a reduction in government spending decreases economic activity. However, there perspective is consistent with the view that governments don't create value and therefore should not be involved in creating money. However, it also leads to governments having to borrow from banks while being the guarantor for customer deposits or in the current crisis guarantors that the banks do not fail. It also leaves banks in the position of creating money and then investing it for a return even though they are also not the generators of new wealth.

Although changing the way money is created and spent into the economy will help, ultimately it is our belief about how we work together and trust each other that will make the difference. Are we here to maximise our own advantage over others and the environment with a consequence of a reduction in trust or are we looking to the interests of others and the environment.


Mary Mellor (2010) The future of money: From financial crisis to public resource. London: Pluto Press