 Rhaid. Mae'n meddwl pwynydd. Yn ei fawr, ond iddo i ni'n meddwl y swydd, rydw i ymwneud os yw'r reliant. Mae'n meddwl pwynydd, rydw i'r meddwl gŷn. Mae'r meddwl gŷn i'r meddwl gŷn, i gynnyddio'r meddwl gŷn a wedi'i meddwl gŷn i'r meddwl gŷn i'r meddwl, gan yw'r credu cyfwyr. Mae'r pwynydd yw'r hynny'n meddwl gŷn i'r meddwl gŷn ymwneud. yna y gallwn uwch yn allan, ond yna ydych chi'n gweithio eu hunain iawn, ond mae yna'r gwahanol, ac yn ei chweithio cynthym ni'n gweithio'r eich ysgolwch yn ymhwyftol yw'r eich autaith? Mae'r têl ydych chi'n ffordd amlwnant i gadw i'r wneud eu hollwypodd oherty sy'n ei wneud i ddefnyddio'r ysgolwch bod rhanol ond ond ziwethaf mae eu hunach barodau yma yn cael ei ffrifiau oherwydd mae'n mynd i'w hollwch yn gweithio'n gwahanol, Felly, fyddwch yn ffordd, y ffwrdd yn bwysig yma, rhai'r ffordd yma yn cyhoedd. Felly, amser hynny'n ymlaen i'r gweithio y mae'r cyffreddur gan ymddech chi. Mae'r cyffreddor hefyd, mae'r cyffreddor yn bwysig i'r cyffreddor, mae'r cyffreddor yn bwysig i'r cyffreddor. Mae'r cyffreddor yn 2012, mae'n hynny'n gwybod, ond mae'n bwysig i'r cyffreddor yn bwysig i'r cyffreddor, yn ymwyaf, mae'r mynd i'r cyflwyno yn ymwneud i'r cyflwyno'r cynllunion yn y meddwl. Yr ystod, mae'r ffordd yn ymwyaf yn cyflwyno'r cynllunion yn ymwyaf. Mae'r model acroeconomiau yn y hamlet ac mae'r ymwneud yn fwyaf fel y cyflwyno'r syrdd ymwneud. Rwy'n meddwl eich cyflwyno, mae'r system ymwneud yn eich gwybod ymwyaf, Here it's all Adam Smith's fault really. But those macroeconomic models therefor were blind to the build-up of credit crises. Why are banks missing? Well because the real economy looks like this in standard economic modeling, you shouldn't have models on that necessarily. All models can tell you something but these models aren't very good at telling about credit creation that's for sure. Mae'r modl yn grwmau mylunol i'r sicr o'r gweithlo'r horeb hwnnw. Mae'r afau sydd rhan, mae'r fawr yn fawr o arweithiol, ma foundation o'n ymdraeth mewn gwir i'w ddeudio allanod. Mae'r ymdwyo'n edrych er mwyn i'r llyfr i'r rhoi. Mae'r ymdraen yn edrych i'r rhai tachydau o'r byth, nad yw'n meddwl fel datblygu mwy o'r corffusio. Rydych chi'n mylwg o'r modl yw'r cymwneil yma sy'n gwybod, ond chi'n gweithio'r banys? Menonwys, dwi'n meddwl gyrraedd gan Paul Craigman yn troi'r che �wch gyda'r ffordd. Mae'r hoff firmlyiau ar gyfer o'rogi a maen nhw i newid yn rhyw wneud ar eu hwn yn maen nhw, mae'r gynnig ddim yn ei wneud, roedd iechyd yn llai'r rheoliol yn y ffifryd. silver gweithio oedd mae'r cyfrifoedd yn cael ei gwasanaeth hynny. Mae'r pr�ai casachor wedi'u gwych yn cael ei ffordd. Mae'r gweithio wrth i gyfocru, mae'n gwybodaeth hynny – drw renoddia Lancyson i ajudwyr aut datgu amwlad rydym. That's not at all what banks do? Quite simply isn't what banks do. This is this traditional picture of the bank saver's in going into investment there. That's not quite right. This is what it should look like. Well, because as its say here, if that's true where does the original money come from in the first place. Well it comes from here. Onw'r cyhoeddwch i'r ein dweud o ddeudio'r sicrhau o fewn i'w gwirionedd a'u dweud'r ddweud o'i ei dweud cyhoeddwch, ac mae'r cyhoeddwch er mwyn ar ei chyfbwysig ffrindiol, onw'r cyhoeddwch ar dweudio'r sicrhau ei chyffrindiol yn yr un o'r newid, onw'r cyhoeddwch i'r ffrindiol yn y rygwyr gan hyn o'r cyhoeddwchrif, gyda'r gwasariad hwn yn yr eich gwrs. ddodd yn ddweud, mae'n mynd i gweithio'r ddau effaith yn perthyn bob arall. Mae'n cwrs arall, mae hynny'n ddau ddweud fod yn doed atchydd ar gyfarfodau a ddweud lleol, a phobl yn cwrs yma. Mae'r ddweud mor ddweud pwysgwrr ar ddweud digon, yn cyfysgwrd munibol. Felly, mae'r ein bod ni'n trofodd cydweud yn ddweud yn y ddweud mai gweithio'r ddweud a bwysig mwy o'r grwyng. Mae'n ddweud ein bod ni'n trofodd mae'n trofodd. Felly, that's very significant for shaping, actually what the consumption investment and purchasing patterns are in the economy. A lot of that, then it's dependent on what decisions are made here with the credit. So now we're going to do some double-entry bookkeeping. Thank you, enthusiastic accountant in the audience. So I'm going to just take you through the bank balance sheets and again I know that some of you, this will sort of be very old hat Ond, mynd i'n ddysgu, mae'n ei ddweud i'r gwneud yr hynny y gwirio'n cymdeithasol y ddefnyddio ddweud yr ysgol. Dwi'n meddwl am y cyfrifio cyffredig yn cyfrifio cyfrifio cyfrifio cyfrifio. Mae'r gweithio'n meddwl yn ei ddweud ar gyfer am y ddweud ar gyfer amser ar y ddweud ar myndol yw'r cyfrifio. Mae'r cerddau ar gyfer amser ac yn ddweud ar gyfer amser ac yn cael ei ddweud o gael. Ond o'r ffrindigol, mae sydd wedi bod yna'r hyn yn seithio, mae trafodaeth brelwyr yn dod, rwy'n mynd i wych yn symud, mae'r ffrindigol yna yn fffrindigol i'r byw ā, ac yn dwyloid. Fe'r d armsfawr yw dwylwyr o'r fffrindigol, mae'r dweud, yn dweud, yn ddondig rwy'n golygu y dweud, ond fel arian ond o'r bwysig honno yn y dyfodol, mae'n seithio'n gweithio'n wneud yr hyn, mae'n dwyloid. You have had the argument, not least with an official at the Vickers commission, who tried to claim that this was not money. That is just a torturous playing with words, really. It clearly is money, so that's the deposits. However, it is true to say that the central bank reserves here is also money. This, I think, is a lot of the source of confusion when you are talking to people. Sometimes people are talking about central bank reserves or narrow money ..or mewn ddiddordeb yn ddiddordeb Cymru, ond fe'n cyfnodd gyda'r ddiddordeb hwnnw. Felly mae'n cael cynnangos gyda'r ddiddordeb cyfnodd gan ddiddordeb a ddiddordeb llyfr. Felly mae'n yw gynllun ffordd gyda ddiddordeb bod ffordd gyda ddiddordeb cyfan achos clyn gwych a fyddo yn gallu gw tearsu... ..surdfi gyd, a'r ddiddordeb mewn cyfnodd yn y ddiddordeb ac yma'r gwleith. Mae cyfnodd iddo ar gyfer o'r beidio ar gyfer o'r gwlet, efallwn, .. Byddwch ei wneud. Ieithaf y flan ar ein mewn gwirionedd swellol yneth gweithio eu hynny, mae'n hyn yn fawr o'r cyd-dweud yna'n ei gair ychydig o'i ddweud erbydd y gwirionedd. A fyddai'n gweithio eu hangfau ymlaen mayd yn ei roi. Roedd y gweithio'r gwirionedd llwyno'u mynedd. Roedd y manufacturer. Mae'r methu. Mae'r banker. Mae'n gweithio'r beth hon o'r bodai'n gweithio. Mae'n gweithio'r beth yn yn cyfieithio'r beth. Wel, mae wedi'u gwahodd allan i'r gweithio ar gyfan ar hynny. Mae'n ddullus, ddweud, y gweithio'r asset, mewn goreun. Mae'r bwysig o'r ddwyldon wedi'u cyfaint o'r maes eu bod yn ymgyrch i dda i gyrwleidio'r gafoddyn, mae'n gallu gwahan i'r bwysig i ddweud. Mae'n gofyn o'r sefydlu. Mae'n gwahan o'r llybol, mae'n gofyn o'r wath, mae'n gofyn yn cyfrifio deoedd y llybdol yn fwybod! JUN, you created a new deposit, because of course it does not end there because you would not borrow money simply to leave it in the account. The next step is that you spend the money, so you borrowed money by a car so you spend the money. Now what happens then, it depends on the bank when you spend money and you order it to be more paid off it goes to another bank if your car Kle 만 hynny. maen nhw i'r bank er mwynch, rydyn ni'n mwynchaf yr allanol i'r bank, bydd yna gweithio amser yn ddweud fenywol i'rнятьio canfod llwy fuddfyn ei gyfwyd wedi'i gwnewch yn dda credu at y canfod llwy. Nid i fynd i gael i'r canfod llwy yw'r canfod llwy. Felly mae'r gwaith yn yddangos. Nid i mewn cydnog mae'n meddwl. Nid i'n meddwl i'u meddwl i'u meddwl i'u meddwl i'u meddwl i'u meddwl i'u meddwl, A dyna daethem i fel buyers ac mae'n Might. Mae'n defnyddio nhw i ddim yn ddigon i ddarparu gwahanol yn oed gyfweld ar gyfer panwn i'r bwrdd honno, going outwyd ond y dyma wedi'u gwneud. Mae ar yr ysgol rwy'n rhanol i'r llun i'r branyddod o'r gweithfodol, dyna fydda i ddweud y cofennill arwyd ac yn aill, ma wnaeth i ddechrau bandw yma o dechrau. Mae yna wnaeth i ddweud oherwydd nad oes y dweud yn i gweithfodol o linku, Ac mae'r bwlwyd yn cael ei ddweud yn gorffod o'r ddweud o'r ddweud. Felly'n gweithio'n gweithio'r system yw'r system yw'r ddweud, wedi'u cyfnod o'r ddweud. Felly, fe ydych chi'n gweld i ddweud o'r ddweud, mae'n credu cael ei ddweud o'r ddweud, ac mae'n cyflogio'n gweithio'n gwybod i'r 1rwydd. I ddweud o'i ddweud o'r ddweud. Ac mae'n ddweud o'r ddweud, ..if they are scared of lending to each other and that bank, you know, interbank borrowing market freezes, ..then that's roughly the conditions under which Northern Rock crashed. That was the original, that's what credit crunch actually meant originally. It was the inability of banks to, unwillingness of banks to lend to each other. And that really stuffs up this credit creation process. As you can see, because it's vital that this bank is able to create deposits, pay them away using its central bank reserves. It's safe in the knowledge it can borrow back whatever central bank reserves it needs. But under normal conditions it can. Just to make the point, this is a sort of model of the interbank clearing system. So, you know, it's making the point that if you imagine that all these pots in each of the banks that have got central bank reserves in, ..they're always flowing in between all these pots as they're clearing all of the transactions ..during throughout the day, intraday clearing. But at the end of the day, they will want to make sure that each of them have a sort of sufficient liquidity position of central bank reserves. But they will quite simply, say, square that through interbank borrowing. So, the final part on this bit is for the benefit of any financial journalist in the room ..who seems to me, unbelievably, always seems to confuse these next two concepts. I'm going to clarify two concepts. One is what the fractional reserve is referring to. So, if customers try to clash in their claims too quickly, i.e. they want to go and withdraw their deposits. And this is what happened with Northern Rock, of course. And you find that the banks hasn't got enough central bank reserves to settle its payments going flying out of the bank to all these other banks. Then, you've basically got, well, if no one will lend to it and the Bank of England doesn't step in, then you've got a bank that's run out of reserves. That's a liquidity crisis because it can't meet the claims on it in the short term. And so, that's slightly different from but very linked to the next problem, which is capital adequacy. What that is about, that's on the other side of the bank sheet, bank balance sheet. If a bank has these assets, these loans that it's made or other assets, and they turn out to be bad, and it makes a whole load of losses on those, so we'll hopefully see, there we go. That's what bank balance sheets currently really look like. They're full of holes, but they're not really disclosed. So, it's made losses on lots of its assets. OK, what does it do about that? Well, something's got to give on the other side because it's got to be matched by something. Of course, if it makes losses, it has to come out of the bank shareholders' equity capital. But in this case, of course, I've shown it so that it's wiped out all of its equity capital. So, it will again become bankrupt, but for a slightly different reason. This is because it's become, hold on. Yes, it'll wipe out its own capital and become bankrupt. The need to hold sufficient equity or capital against your assets is what's referred to in the capital adequacy, or capital reserve ratios, and that's trying to ensure that a bank has enough equity capital to absorb losses that it might make. The liquidity or fractional reserve ratios refer to its ability to have enough central bank reserves or liquidity here to meet the payments as they go out. Two slightly different things. Neither of them, incidentally, when you regulate them are particularly effective at constraining banks' overall ability to create credit, which is a slight problem. So, I'm just going to leave you with this slide. You've probably all seen these before, so I won't dwell on it. Lots of quotes from central banks that just say the same thing, really, that this process I've just described is absolutely the mechanics of how banks create the money supply. If it seems like I'm ramming this point home a lot, it's because, as indeed Michael Cumhoff, I believe, said to Julia, a day via email, that he's still struggling to convince economists that this is actually what happens, which is quite extraordinary. But I suppose they haven't worked in banks, maybe. We should not be too hard on them. If any, they weren't in charge of anything, it would be all right. Problems with this system. Next session. It's from Adair Turner, who's been coming up with all sorts of interesting things in the last couple of years. He said, the financial crisis occurred because we failed to constrain the private financial systems creation of private credit and money. So, here we are, a former head of financial regulation leading up to the crash saying, oh dear, the crash happened because we didn't constrain credit creation. So, it's nice that he's spotted this after the event. So, why is that? What are the problems with the system? Well, first problem is that the incentives for private banks. I believe in money creation to private banks. Arguably, that was a very good idea in days gone past. It was probably better to leave it to them. They gave it for productive investment, better that than some sort of despotic sovereign. But, of course, these days, the institutions now in charge of this. They have incentives that generally favour them to do large-scale lending rather than SME lending. They prefer to make loans against collateral rather than loans against future cash flows. So, that biases them towards lending against property and lending for businesses. It means that you will have decisions on allocation of where this credit goes in the economy, made in head offices in London by economists who say, oh, I don't like the look of the restaurant industry this quarter. And yet there will be some fabulous loan proposal for a restaurant down in Cornwall that the local manager knows will go great guns. But he will be overruled by the central credit allocation system. Well, this is a fairly big one for some of you in the audience. Of course, the banks have absolutely no need to take any account of the impact of the things that they have created this new money to fund, which is extraordinary when you think about it. I mean, if what we're about is an economy that supports good environmental and social outcomes as well as a prosperous economy, then the idea that there's no room in the creation of new money for deciding, for determining what the social ecological impacts are, is a bit of a flaw. And then, you know, the final problem, which is quite significant, I think we've got a chart for this later on, so I shall hold off on that one, is that there are positive feedback loops in this system, which create bubbles. So, who regulates bank credit creation? In terms of the liquidity, I mean, what constrains the ability of banks in aggregate to create all this money, is suppose what I'm trying to say. So, the first thing that might constrain it is the requirement on banks to keep a certain amount of central bank reserves as a ratio of their deposits. But, unfortunately, we didn't actually have a specific ratio in the UK before the crash. And in any case, as we've discovered, the point about the Bank of England, really, at the end of last resort, is it will always supply whatever central bank reserves are needed into the system to keep it stable. So, does this really constrain banks? Not really sure? Probably not. Capital ratios, well, this is the whole solution, isn't it? Basal, we've got more yet more basal rules which are going to require banks to have a little bit more capital. Does that constrain their ability to create credit? Well, not if they're all creating credit in step, and not if they're making lots of money on that credit, because that adds to their capital. So, it's not running something that can really constrain a build-up or a boom. Interest rates, well, that's, I suppose, the main thing that's supposed to regulate this system. But, well, we're going to talk about that later on in monetary policy, but it's just worth noting that interest rates are not set in order to hit a certain quantity of credit and certainly nothing to do with any kind of allocation of credit. I mean, the interest rates are really manipulated in order to hit a certain inflation target. And so, what it boils down to is the primary constraint on the amount of new money created and where it goes is how confident banks feel about who to lend to. So, I'm going to speed up a little bit. I'm going to, this is the positive feedback loop. This is from Turner, but all it basically says is, you know, house prices start to rise. Everybody thinks, I want to buy a house because the price is going to go up. So, they ask for more mortgages. And that means that banks say, oh, look, house prices are going up so we're now happy to lend so they will offer more mortgages. And the combination of those two things increases the price. Everybody then thinks, oh, I really do need to buy a house now because they're going up really quickly. And the banks say, oh, look, we've got to go into this market and lend even more mortgages because it's going up really quickly and it's a positive feedback loop that ends in a bust, as all bubbles do. So, this is the point about allocation, you know, very, very quickly. This is GDP indexed from 1970 and the red line is the total amount of the money supply. Now, there's no reason why those two things should be exactly in line, but I think it's a reasonable indication that the creation of money has had not a lot to do with tracking the provision of medium of exchange for the economy, for the real economy, if you like. It's all gone into other things. And here's the clue as to where a lot of it's gone. I'm only going to highlight two bits in here. The bottom one, this is from 97 onwards, that blue one is the total stock of credit outstanding to the productive sector, retailing, manufacturing, house construction. That's really not gone anywhere, particularly hasn't gone up much and yet the overall quantity is almost trebled in that period up to the peak. The big movers, commercial property speculation, financial lending between the financial sector. And what that's led to, of course, is that we've got an enormously higher stock of debt, total debt. It's not government debt that necessarily needs to worry. In fact, many would argue it's not a worry at all at current levels. But however, private debt, which is the households here and firms there as a ratio to GDP has built up to really quite high levels by historic standards. The blue is interbank lending, which has also grown. I'm not going to read that out, but that's Richard Cewan economist explaining how balance sheet recessions... Sorry? Oh, that's better. Yes, thank you. This point about when you have a balance sheet recession and banks and indeed firms are all trying to reduce their debt, particularly with banks, that means that they are reducing their creation of new money. But they do need to repair their balance sheets. Doesn't that mean that you can try and re-stimulate that through more private debt? So, the answer we've got now is to try and re-stimulate the economy through getting people to borrow more again, particularly in mortgages. So, what you'll hear later on are at least one proposal that says, well, we don't have that, can't work, but actually there is another way of stimulating money supply without creating more debt. That's what I'm saying, more private debt is not the answer. So, to finish off, hopefully just within the time, the section on monetary policy here. So, what that one says, this is in the Bank of England website actually, what is monetary policy for? It's to deliver price stability, low inflation, and subject to that to support the government's economic objectives, including those for growth and employment. So, what's the context of monetary policy? We're going to talk about monetary policy in just five minutes. Now, just in case you get all excited by today's figures on the economy, that growth is projected to now be 2.8% next year, according to the Bank of England, and then employment is going to fall faster than usual. Just look at that massive output gap that is a result of the recession following the financial crisis. So, anemic GDP growth here is hardly anything to shout about when you consider how much production was lost. The same story with unemployment. Let's just remember where we've come from. We've come from here up to here, and it's undoubtedly good news that we're going to creep back down to 7%, a bit quicker than everybody thought, maybe sometimes towards the end of the next year. But nevertheless, we are still an economy that has enormous unused resources, particularly in the form of people, and untapped spare capacity. So, that is not a success story. So, what can fiscal policy be doing about it? Here's government income. Drew's excellent slides, can't claim credit for them, very nice. So, the government income and expenditure, or fiscal policy as it's known, as you can see that here's the surplices run by the last Labour government, and the deficits, the difference between income here and expenditure there, is pretty moderate by historical standards up to the crash when, of course, the deficit explodes as a result of the financial crisis. And so, rightly or wrongly, you can debate the need for a fiscal stimulus, but we are in a period where both or all the main parties are agreed that there is no room, or they wish to not use fiscal stimulus. They want to narrow that gap, they're not into the idea of borrowing more to invest, and so that leaves fiscal policy out of the picture. So, monetary policy really is the only tool we've got left. So, monetary policy is the current monetary policy. Is this going to get us out of this fix? Well, it's doubtful that it can, because one of the core purpose that we're talking about here is just to have stable consumer prices. Just consumer prices, and this is part of the problem. So, in other words, you can have asset price inflation, all you like, and the bank won't necessarily act on it. At least it won't change interest rates. And equally, monetary policy has got nothing to do with trying to encourage a more productive allocation of credit in the economy, whereas the two proposals you're going to hear in a moment both are very much concerned with quality as well as quantity. And here's another issue is that we mustn't forget that monetary policy pretends to be a neutral sort of technocratic thing almost outside the democratic decision-making process, but it has significant distributional impact. So, if you favour low inflation, that is favouring creditors over debtors. And having no attempt to control asset prices will tend to favour owners of assets. Equally, these are the tools that we use, and I've put in brackets neoliberal era just to indicate that monetary policy looked very different prior to, say, the 1970s. But this is what it's been like for 30 years odd. You just basically have a bank-based rate. Actually, I'm ignoring the monetary-based era there. Maybe it's, say, last 20 years. So, you use the bank-based rate, and you simply manipulate that to try and alter the amount of economic activity, the amount of borrowing as well. And that, of course, hit the rocks when it went down to half percent. You couldn't lower it any more, and yet the economy still needed to be stimulated. So, this is why we entered the era of so-called unconventional monetary policy. It's questionable whether it's actually unconventional, but, nevertheless, it is what we've got into. The quantitative easing and funding for lending Josh is going to talk a lot more about later on. And we've got sort of things that maybe look a bit like fiscal policy that are being used from the Treasury to directly try and actually guide credit into particular sectors. Some into small businesses, but most into mortgages. It might be questionable whether those are the right sectors for it to be guiding credit into. But, nevertheless, that's the set of tools that we have at the moment. And we would argue that between the lot of them, they haven't managed to do anything for really balancing the economy. They are, in fact, rather powerless to ensure a steady flow of new investment into those parts of the economy that would be environmentally beneficial or socially beneficial. And many would argue because it doesn't see itself as its job to do that. But if monetary policy is the only game left in town, then we need a different kind of monetary policy that maybe can do all those things. And so the final word for our finish is just a thought on the split between fiscal and monetary policy. These are very, very separate things. Fiscal policy is done by elected governments because it has distributional consequences and we have to sort of tax and spend people. And monetary policy is just a sort of technocratic thing. Leave that to independent central bankers and they will just make sure that we don't have high inflation. However, you know, we would say that actually there never has been that clear separation, really. And because actually monetary policy is just delegated under authority from democratic governments. It's a bit of a sleight of hand. I'm not saying that I don't think it's quite good to have independent Bank of England, but nevertheless. All the current things we've got going on in some sense blur the boundaries between fiscal and monetary policy. Funding for lending, help to buy. These are all things that are monetary, well, in two cases explicitly monetary policy QE, but they have, they stray into fiscal policy territory because the government actually guarantees potential losses on QE. So we've already got into this space of admitting that fiscal monetary policy often are complementary or indeed the same thing. Now could they actually be the same thing? I'll leave you with those final thoughts because it's a particularly nice picture. So this is what Adair Turner said about the idea that actually if you think about it fiscal monetary policy could in fact be exactly the same thing because if governments create money and they no longer need to rely on financial markets then their fiscal policy and their monetary policy look to be pretty well the same thing. And Martin Wolff in fact said only on Monday that the monetary and financial system is a complex private public partnership which I thought was a very nice way of saying listen, you know, money creation and it is not a separate thing that is done by the private sector. It is already very much guaranteed by the government, by all of us so should we not have more control over how it is used and what it does. So that's the end. That's the three points that you have to remember again and thank you very much.