Wednesday, 7 December 2011

‘Stimulate the economy from the bottom upwards...we have paid homage to the Bank and financial institutions for too long’, says Roger Godsiff MP

Birmingham Hall Green MP, Roger Godsiff, called for an overhaul of the UK financial system during a general debate on the economy, yesterday.

Mr Godsiff said: “Ordinary people in my constituency who face massive pressures on their household budgets and look forward to a bleak Christmas are not too concerned about the blame game that is taking place between the parties, but there is a smouldering resentment of the financial sector, including the banks and financial institutions that have plunged the economy into recession, destroyed jobs and ripped people’s lives apart. That resentment is heightened by the fact that those self-same banks and financial institutions are once again acting as they did before they brought the crisis upon us. There are bonuses galore, and veiled threats that if regulations are introduced they will go elsewhere.

“It is three years since the financial crisis struck, but it needs to be said again and again that that crisis was not caused by nurses and teachers. It was not caused by public sector workers, or by people working in the private sector. It was not caused by small business men, students or retired people, or indeed by the majority of people working in the financial sector. It was caused by the greed and irresponsibility of a small, self-serving group of people who made the decisions and played the casino, and now everyone else is paying the price.

“Between 1992—when the United Kingdom was thankfully forced out of the exchange rate mechanism—and 2007, the British economy grew every year. It grew under the right hon. and learned Member for Rushcliffe (Mr Clarke) when he was Chancellor of the Exchequer, and it grew under subsequent Labour Chancellors. Public sector borrowing was consistently between 2% and 3% of GDP, which was perfectly sustainable. However, in 2008 it shot up to 11% because the financial crisis caused by those I referred to earlier had resulted in a full-blown recession and a collapse in tax revenues, and, furthermore, in the need for the Government to bail out the banking sector. I am sure that my right hon. Friend the Member for Edinburgh South West (Mr Darling), who spoke earlier, referred in his book to an interesting deputation that he received—when Treasury officials informed him that the only way of resolving the crisis was for him to nationalise the banks—and I understand why Mervyn King told the Treasury Committee that he was surprised that there was not more public anger about.

“However, we must look forward. Britain and the rest of the western world are witnessing the death throes of an ideology that has dominated for 30 years. The Anglo-Saxon neo-liberal market model has failed, and we must consider adopting different models if we are to have a financial services sector that is fit for purpose. We need to be more innovative: we need to try out new ideas rather than adhering to traditional recipes which we have already tried, which have been found wanting, and which have now been totally discredited.

“Why, for example, should we not use RBS as a national investment bank—or call it what you will? After all, we own 87% of it. Why should it not be modelled on America’s Small Business Administration, which has supplied 20 million small business men with financial help since its establishment after the second world war, or indeed on Germany’s state development bank, which lent €30 billion to businesses in 2010 alone? Instead of printing money through so-called quantitative easing and giving it to the banks—which do not lend it, but hoard it to rebuild their capital base—why should we not give consumers money vouchers that are time-limited and must be spent on household goods or on, for instance, car scrappage schemes? We should try out some new ideas. The fastest way to stimulate the economy is from the bottom upwards, and no job creation scheme could have a more immediate effect than bringing our high streets alive. All Members know of high streets in their constituencies with boarded-up shops, and where the only new shops are Poundland stores and charity shops.

“This is not revolutionary thinking. It has been tried before in America, Japan and China. People are looking for new ideas for the future, and they are prepared to accept radical and innovative policies. They do not want to be lectured by the Government or the Governor of the Bank of England, who can hardly be thought to have had foresight in seeing the recession coming given that he was arguing for increased interest rates right up until the end of 2008 in order to head off inflation, which he said was the biggest threat to the recovery.

“We have paid homage to the Bank and financial institutions for too long. We must construct a better financial system that is fit for purpose, and we need to do that sooner rather than later.”

At the end of the debate, the coalition government lost a surprise vote forced through by Labour whips.  Members voted against the government by 213 votes to 79.


  1. What was the motion that was voted on?

  2. I would like to congratulate you on these excellent comments.

    I share your analysis that banks are behaving as irresponsibly as they did before the bail-outs, hoarding the money we have so kindly given them or using it to over-inflate the property market rather than investing it in productive industry. Your claim that the Anglo-Saxon neo-liberal market model has failed seems justified. I am unconvinced that issuing retail vouchers would achieve any more than to temporarily re-inflate the fundamentally unsustainable consumerist bubble we seem to increasingly centre our society around, but I agree that we should consider new ideas and that banks such as RBS that have received significant public investment should now have social goals as well as financial ones. I would hope that RBS could be used to invest in reducing our precarious dependence on foreign oil and food imports, for example.

    I'm glad that you are raising these crucial issues at a time when the Government would surely rather we forget the billions we spent bailing out the banks and instead accept that drastic spending cuts were inevitable rather than ideologically motivated. However, I'd just like to check that you're clear on something many MPs still seem to be unclear on - the process by which money is created.

    I recently discovered that commercial banks effectively have a licence to create money literally out of nothing. They do this by 'extending credit' in banking jargon, or typing numbers into a borrower's account in plain English. The numbers in your account and mine were created not by the Bank of England, but by a high-street bank. I found this hard to believe at first, but quotes from the Bank of England and Martin Wolf, of the government's Independent Commission on Banking confirm that this is how the process works.

    Banks are able to create money only because the law that governs the creation of banknotes (the Bank Charter Act 1844) has never been updated to take account of the digital money that now makes up 97% of all the money in the economy. According to the Bank of England, the banks doubled the amount of money in the economy - through reckless lending - between 2000 and 2007 alone.

    No democratic decision has ever been made to entrust banks with the power and privilege to create money, and I feel that - given their performance over the last few years - now is the time when we should take this privilege away from them.

    I implore you to familiarise yourself with the explanatory information available at - their 3-minute video makes an excellent introduction.

    Would you mind confirming that you are now aware that banks have the power to create money?

  3. Dear Mr Godsiff,
    Thank you for these robust comments in Parliament. Jonathan Melhuish is right. As I see it the crucial issue is that we allow commercial banks to create virtually all our money supply. They tend overwhelmingly to allocate this new money to an escalation in the price of houses rather than to productive industry. Money creation is a breath-taking, unwarranted privilege that the banks enjoy and that we allow to continue largely because people don't understand what is going on. You and I are prohibited by law from creating money. Why should the businessmen who run the banks be allowed to create it and then to enjoy the ownership of that money?
    It seems most important that powers of money creation be taken from the banks and given to the Bank of England (BoE) to exercise in the national interest. BoE-created-money would be an asset of the nation rather than a interest-bearing debt by the nation to the commercial banks as almost all our circulating currency now is. The BoE Monetary Policy Committee should meet monthly (as it does) to decide whether more money is needed in circulation for our national life to thrive (not simply to control inflation) and if it concludes that we do need more money in circulation (and the governor has recent said that we do in this video with ITN ) the BoE should create it and give it to the government to spend on things that nurture a lively export economy that enables us to earn our living in the world and so replenish of national coffers and fund the activities of a humane, just society at home. Thus the government should spend such newly created money, not on hand outs, but on infrastructure, university and technical training and research and product development by British industry and probably on some utilities back under public ownership. EU rules don't allow central banks to create money and give it to their governments but we can try to change such rules in the public interest and the EU ethos that dictates the dominance of the market in public affairs. Like Mr Melhuish, I also applaud what Positive Money is doing and commend their website and videos. Rev Dr Dick Rodgers see:

  4. Thanks Dr Rodgers, I wholeheartedly support your comments. It seems all three of us have slightly different views on how any new money should be spent but I'm sure we can all agree that continuing to allow the banks to decide is surely the least democratic option.