The Economy Is Broken - but Two Small Changes Can Fix It Forever

I’ll start by pre-empting the two questions that might be at the forefront of your mind right now: why is an estate agent – and not even a ‘proper’ estate agent, but an online agent - writing about the economy, and why should I spend precious minutes of my life reading what he’s written?

Well, us estate agents might be very far down the chain of knowledge when compared to university professors, paid analysts and government advisors, but we operate on the front line of something only slightly less fundamental to everybody’s lives than oxygen, food and water, and so it’s a fair bet that we’re among the first to be exposed to a lot of useful information – if we notice it, that is. Also working for an online agency that covers the whole of the UK as opposed to being focussed on one small locality I get to interact with a wider variety of people in a wider variety of economic circumstances than the average agent does.

The impetus for writing this piece comes from the fact that I’ve noticed a marked - and very worrying - change in the last few years: anger, frustration, despair and desperation over the cost of housing has become a common conversation point, whereas as little as a decade ago I can’t recall it coming up at all. There’s real trouble brewing, but those in charge who can do something about it seem not to be aware of it.

Consider this: in 1997 the average house price was around four times the average income. In 2021 the ratio topped nine times! That is, frankly, nuts. And totally unsustainable. If you’re trying to push people over the edge, letting this situation continue would seem to be a good way to go about it. And that’s not even mentioning the soaring prices of daily essentials, the choice of jobs in many areas being so narrow that people have to up and leave their family and friends and move somewhere else in order do have a chance of a satisfying career, entire areas run down from lack of investment with businesses closing to be replaced by pound shops and charity shops, etc., etc., etc. The economy is clearly not serving the majority as well as it could, to put it mildly.

Maybe you are aware of these issues, and are not at all happy about them, but believe that these problems can’t be fixed or prevented, because if they could then they would have been by now.

However, that’s not true: these problems can be fixed, or at least markedly reduced. The fix is also easy to implement. And best of all it doesn’t require any crazy stuff to happen: No blood-soaked revolution. No massive societal dislocation or upheaval. No replacing the free exchange of goods and services between consenting adults with some nightmare totalitarian alternative. Things don’t even need to get worse before they get better. If two small changes are made to the banking system then within a generation we can have a thriving economy, free from recession and inflation. An economy that serves the vast majority of people much better than the current one does, offering a wider range of job opportunities spread more evenly around the country, one that strengthens rather than fragments communities, and one that makes a place to live a lot more affordable.

I mentioned above that achieving these obviously very desirable goals will require just two small changes. Before we look at what those changes are and why they would work, we have to understand a little about the economy – and the money that drives it along. Because money – and what people do with it - is what the fix is all about.


How money is created.

In modern economies the vast majority of money is not created by the government or the central bank. It’s actually commercial banks (that is the Barclays, Lloyds and NatWests of the world) that create nearly all of it and, what’s more, they create it out of nothing.

They do it with an accounting sleight of hand that would surely land you or me in jail if we tried it. The trick is both very simple, and very clever. It’s to do with bank loans. You might have been under the impression that, when making a loan, banks took some of the money that savers have put into their accounts and then lent it out to borrowers. That’s not true. What banks really do is just change the numbers on a computer to increase the amount of money showing in the borrower’s account. No money is moved from anywhere else. New money just pops into existence and is spent into the economy by the borrower.  

As far as I can see this is a grey area under the law, but it has been going on for such a long time and benefits so many people that it’s become de facto legal, at least if you are in the rather enviable position of having a banking licence! Usefully (at least for them) banks are also exempt from the client money regulations that apply to everyone else, meaning that they don’t have to keep depositors’ funds in segregated accounts and instead can just mingle them in with their own money, muddying the waters somewhat.


Is this actually a problem?

In and of itself, I don’t think it is. Ignoring the moral considerations of whether this kind of money creation is right or wrong, it’s a fantastically powerful tool that can either be used well or used badly. It’s helped people achieve some truly wonderful things, but its misuse is the cause of an awful lot of misery.


How uncontrolled money creation distorts the economy.

As you might imagine, there is no shortage of people wanting money. Almost everybody would like more to use for something or other. And as I pointed out above, money is ridiculously easy to create. Crucially it’s much, much easier to create than the assets, products, or services that it’s used to purchase.

I’ve never seen this claim made anywhere else, but I think it’s a reasonable assertion to make that two of the most important factors shaping an economy are who gets newly created money first and what they use it for. Both factors are under control of commercial banks. This makes bank lending decisions the most important driver of the economy. Stop and ponder that last sentence for a moment, as it’s mind-blowing, or at least it was for me. To realise that the government – other than when it’s doing something really bold or really crazy – is pretty much a bit part player in deciding the success or failure of the economy was a shocking notion to accept for me, and I’m sure it will be for many others too.

The reality of this statement makes some kind of control of bank lending vital to shaping the economic future of us all: If you want an economy without inflation that supports production and innovation and offers affordable homes and a wide range of job opportunities wither lower overall economic inequality, you can have one. However, if you want an economy that suffers from repeated boom/bust cycles, bouts of inflation, rewards financial speculation, causes massive asset bubbles and huge inequality, you can have that too. You can choose!

The bottom line is that banks need to be made to up their game. This seems a reasonable request in light of the incredible power that they have. If they don’t do so, then things will continue as they are.

To get a handle on what I mean by ‘up their game’, consider the following scenario: Two different people go to their bank wanting a loan. One of the applicants wants to borrow £100,000 to expand a toaster manufacturing business and the other applicant wants to borrow £100,000 to buy a house.

For the bank staff to be able to decide whether to agree the business loan to the toaster maker they are required to have a knowledge of – or to carry out diligent research on - the state of the economy, the field of business the applicant is in, the viability of the applicant’s business plan, and the applicant’s character. Alternatively, to agree the mortgage loan is a lot less risky and a lot, lot less work: the bankers know already that the property can be repossessed should the applicant not keep up with repayments and therefore just need to ensure that there is sufficient equity in the property to cover the bank’s costs in the event of a default.

So, which of the two applicants is more likely to get their loan application approved? Do I even need to answer?

You can’t really blame the bankers for this – I’d guess that most people would choose a low risk, low effort option to make money when compared to a higher risk, higher effort one. That’s why the rules need changing. There’s just no incentive for banks to take the hard road when they can take the easy one.

‘So what!’, you might say. ‘One financial transaction is as good as another.’ But that’s just not true.  If the loan to the toaster maker had been approved then new goods and new jobs (more toasters made by new machine operators, on new machines, supplied and maintained via new contracts from the machine-maker etc.) would enter the economy, neutralising the inflationary effect of the new money that the bank created to make the loan.  More money AND more goods/services/jobs = no inflation. However, if the mortgage got approved instead then no new goods or services will be created, and the new money will simply bid up the price of an existing asset. More money WITHOUT more goods/services/jobs = inflation. Over time and large numbers of transactions you can see where this problem leads.

A speeded-up version of this effect was seen during the Covid crisis where the government, by various means, injected roughly £400 billion of new money into the economy quite quickly without a corresponding increase in new goods and services.

The result was that, somewhat unsurprisingly, once the initial Covid shock was over – and despite the economy stumbling under Covid-related restrictions – the prices of all sorts of already existing assets from property to fine wine, to gold and classic cars went up, and then later (as the money worked its way through the economy) general price inflation occurred, with no corresponding increase in the majority of incomes.

Now people can do just perfectly well without fine wine and classic cars, but they can’t do without homes. There are other factors driving home prices up, of course, such as the increasing population size and an increasing numbers of split families living in separate households, but if we can’t easily do anything about those factors, we definitely can do something to increase production and wages. And that something is to make two small changes to the banking system.


What are these two small changes?

1.    Credit guidance.

This is where commercial banks are told, by the central bank, the amount of funds they must allocate to certain types of lending.

2.  The creation of a network of not-for-profit local community banks.

These are banks incorporated for the specific purpose of serving limited geographic areas. They will lend money for the creation and expansion of businesses in their area, and their profits will not be doled out to shareholders but instead will be reinvested in their locality.


How will these two small changes fix the economy?

Credit guidance:

The goal of credit guidance is to ensure a sustainable balance between financial activities that raise GDP and those that do not. It achieves this by directing some bank lending away from the purchase of existing assets, financial speculation, and other non-GDP increasing activities, and towards GDP increasing activities such as the expansion of small and medium-sized businesses. Big businesses generally have no problem borrowing money, so nothing is needed to help them in this regard.

You might ask why, if banks can create money at will, there is any need to suppress lending for non-GDP increasing activities? Why not just leave this kind of lending alone, and lend more for GDP increasing activities as well? The reason is that it’s the excess of money for non-productive activities that causes asset bubbles, which are a major part of the boom/bust cycle. It is important to prevent these from occurring.  Boosting productive sectors of the economy is part of the solution, but so is reducing the amount of money created for the purchase of existing assets. What this means in practice will of course be up to policymakers, but it’s likely that you’ll still just as easily be able to borrow money to buy a home or a used car, but it will become more difficult at certain times to, for example, borrow money to fund the takeover of a company or to invest in the financial markets.

The creation of a network of not-for-profit community banks:

By creating banks to serve only their local area, which are forbidden from sending depositor’s money away from their locality, and which are mandated to lend money for productive purposes, you can achieve the following:

Reduce regional inequalities in the availability and variety of jobs and increase the quality of life. Supporting the creation and expansion of small businesses will open up a wider choice of satisfying job opportunities for everyone. Successful local business supports the creation, expansion and success of other local businesses: e.g. more staff require more food, more premises require more fabricators to kit them out, more cleaners and maintenance people, and so on. It spirals upwards, with the net effect of people having a better chance of being able to find satisfying careers in their local areas rather than having to move away.

All of these factors help to ensure better future prospects for all. The IFC estimates that, worldwide, small and medium-sized businesses have an unmet financing need of $5 trillion per year. Just think of what those businesses could achieve if they could get that money.

Fund local community improvement. ‘Not for profit’ does not mean that these banks won’t make a profit. Banking is obviously a very profitable activity. What it means is that the profits won’t go into the pockets of shareholders, but will be used to benefit the local community in various ways.

These banks will become deeply embedded in local life in their area, and staff will acquire a level of knowledge of the local economy – and be able to offer a level of flexibility - that’s not possible to achieve from a remote central office belonging to a huge mega-bank. They will therefore be able to make better-informed lending decisions.

As and when they become successful these small banks will become targets for acquisition by larger banks. This must be prevented, or we will end up right back where we started. Accordingly, these new banks will require ownership structures that prevent them from being taken over.



Historical examples of success.

That implementing these two changes will massively help the economy is not just idle speculation on my part. Both credit guidance and small local banks have a past track record in aiding economic success. Notably Japan used credit guidance to channel bank lending towards export-focussed industries and take itself from a bombed-out wreck of a country in 1945 to the world’s second largest economy by 1968, and Deng Xiaoping’s radical reforms of the Chinese economy used both credit guidance and the establishment of a network of local banks to help lift hundreds of millions of people out of poverty in just over 40 years. The USA – the world’s largest economy - has a highly diversified banking system with over 4000 different banks. Compare that to the UK where there are around 130 native banks (not including branches of foreign banks operating here) and where just four banks hold over 50% of all customer deposits and carry out the vast majority of daily transactions. Hopefully you will agree that having such power concentrated in the hands of huge, unresponsive, impersonal entities is not likely to give the best service at the local level. It also should be intuitively obvious that if one of these big four runs into problems, the economy could be devastated, whereas if banking activity were spread evenly across hundreds of banks then the failure of any individual bank would be a lot less harmful to the economy as a whole.



What do I want to achieve?

My initial goal is to try and put these ideas – which aren’t even on the table of mainstream economic discussion as far as I can tell - in front of as many people as possible, my hope being that many will grasp their game-changing potential. The first step is to encourage people to share and reshare this article. If that is not sufficient to reach enough people, then I want to make ads for popular platforms like YouTube and TikTok. For this I will need the help of creative types, so if that sounds like you – and you’re sufficiently interested to offer some time and energy – then please get in touch, just in case.

If I can reach a sufficient level of engagement to ensure a reasonable chance of success, I want to petition parliament to establish a select committee to examine these ideas fully.

Ultimately, I want them to be thoroughly scrutinised, criticised and finally accepted as policy. Or rejected, even, as long as it’s done so on their merits rather than because they would change the status quo that serves many powerful people very well indeed.

I believe strongly that the current and future suffering and stress of millions of our fellow citizens because of avoidable economic distortions is both evil and unnecessary. Hopefully enough of you will agree with me on this point that we can start a movement big enough to stop it. Especially as we can do this with no hardship or sacrifice and using the democratic framework already available to us. This is the opening gambit.




I am indebted to Karim Ayoubi for originally bringing these ideas to my attention and to Professor Richard Werner for doing the long, hard work to establish these facts in the first instance.



Further reading:

Where Does Money Come From? A guide to the UK monetary and banking system

Ryan-Collins, Greenham, et al.


Princes of the Yen - Japan’s central bankers and the transformation of the economy




Something to watch:

For those of you too short on time (or not yet sufficiently interested) to buy and read long books, then you can do worse than to search for two videos on YouTube:


Princes of the Yen Documentary Film


How Do Banks Create Money? A Walk-Through of Richard Werner’s Papers




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