Jeremy Corbyn would clear the deficit – but not by hitting the poor

Ignore the hysteria. Our plans to tax the very rich and reshape the economy are sound common sense

As people wake up to the prospect of Jeremy Corbyn actually being able to win the Labour leadership, the reaction has become increasingly hysterical, especially from elements of the Labour establishment.

The near panic is especially evident in its response to the strategy outlined by Corbyn’s team of economic advisers.

A small band of shadow cabinet members have lined up to refuse to serve in posts they haven’t even been offered, on the basis of objection to economic policies they clearly haven’t read. Rebukes to Labour supporters to end their summer of “craziness” also not only insult the intelligence, idealism and judgment of our party members but have simply made them more determined to challenge this heavy-handed, domineering establishment attitude.

Some commentators have also prophesied economic and electoral doom if Corbyn is elected. Let’s see if, at least on economic policy, we can return to some level of rational debate. Let’s start by tracing out where there is absolute agreement.

First, it is unarguable that no modern party leader can win an election if behind in the polls on economic competence. Ed Miliband, sadly, was proof of this truism. Second, deficit denial is a non-starter for anyone to have any economic credibility with the electorate. This was a key finding of the poll recently published by Jon Cruddas, examining why Labour lost the election.

So let me make it absolutely clear that Labour under Jeremy Corbyn is committed to eliminating the deficit and creating an economy in which we live within our means.

Where the Corbyn campaign parts company with the dominant economic thinking of both the Conservative government and the other Labour leadership candidates is that we don’t believe that the vast majority of middle- and low-income earners who didn’t cause the economic crisis should have to pay for it through cuts in tax credits, pay freezes, and cuts in essential services. Instead we believe we can tackle the deficit by halting the tax cuts to the very rich and to corporations, by making sure they pay their taxes, and by investing in the housing and infrastructure a modern country needs to get people back to work in good jobs.

We accept that cuts in public spending will help eliminate the deficit, but our cuts won’t be to the middle-and low-income earners and certainly not to the poor. Our cuts will be to the subsidies paid to landlords milking the housing benefit system, to the £93bn in subsidies to corporations, and to employers exploiting workers with low wages and leaving the rest of us to pick up the tab.

Where we also part company with the economic orthodoxy of the Conservative and Labour establishments is that alongside tackling the deficit we also believe that we need an economic strategy to tackle the underlying flawed fundamentals of our economic system.

While our opponents wrongfully describe anyone who disagrees with their austerity programmes as deficit deniers, they themselves seem to be crisis deniers. They fail to understand that the unregulated, law-of-the-jungle market system they advocate is inherently crisis-ridden. Unless we act on these fundamental flaws we really do doom the next and future generations to further inevitable crises.

In fact all the factors that caused the 2007-8 crisis are currently reappearing on the scene – frozen or low incomes, low productivity, asset inflation especially in housing, a hands-off government turning a blind eye to loose credit expansion and City speculation, and a growing debt bubble.

Just like 2007 all it needs is a spark like Northern Rock to set things off again. The rehypothecation taking place in the bond markets could be the trigger this time, when the US starts unwinding its quantitative easing programme.

So alongside deficit elimination, the Corbyn campaign is advocating a fundamental reform of our economic system. This will include the introduction of an effective regulatory regime for our banks and financial sector; a full-blown Glass-Steagall system to separate day-to-day and investment banking; legislation to replace short-term shareholder value with long-term sustainable economic and social responsibilities as the prime objective of companies; radical reform of the failed auditing regime; the extension of a wider range of forms of company and enterprise ownership and control including public, co-operative and stakeholder ownership; and the introduction of a financial transactions tax to fund the rebalancing of our economy towards production and manufacturing.

Public ownership does have an important role to play, but this will be through smart forms of 21st-century common ownership and control. For example, rail will be renationalised, but with a form of joint management involving workers and passenger representatives. Energy would be socialised from below by the massive expansion of renewable energy production and supply by local communities, local authorities and co-ops on the successful German model, removing the monopoly of the big six energy companies.

Conservatives claim they are “one nation” Tories when they have actually been a government for the 1% who have undermined our economic interests through their greed.

Politicians have patronised and talked down to us all when it comes to our economy, but ordinary working people have to manage on incomes significantly lower than the likes of George Osborne and his friends in the City. They could teach the bankers and many commentators a thing or two about managing a budget responsibly. Given the opportunity, we will use the sound common sense of our people.

Tuesday 11 August 2015 16.25 BST

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  • commented 2015-10-14 22:33:07 +0100
    Yes we should be deficit deniers!
    “McDonnell should be educating the public to understand that fiscal deficits will be the inevitable outcome of the nation achieving important goals such as social inclusion and full employment. A nation that can sustain those things should celebrate and realise that the fiscal deficit is the reason they can enjoy such success.”
    http://bilbo.economicoutlook.net/blog/?p=32076
  • commented 2015-10-09 22:37:52 +0100
    John, have you considered an alternative way to frame the progressive economic agenda? http://youtu.be/4OVAROe3gW4
  • commented 2015-10-02 14:34:11 +0100
    Thanks Bill and David for your comments. Bill, thanks for that link. I’ll take a look at some point. I’m no monetary expert but I’d like to ask though how would a gold-backed currency present a constraint? Is not quantatative easing a completely fake economy? I just wonder if anyone knows exactly what has actually happened to UK’s gold. Is it not a better store of the value of your labour than is fiat money which only works because of the political stability of the countries in which it is used? Is that political stability not propped up through economic dominance in the form of unfair global trade rules and imperial ‘wars’? Can fiat currency not be devalued overnight?

    David, I have very little understanding of cryptocurrency so I can’t really comment. All I will say is that it is electronic currency and I’m just not sure how secure that would be in the longer term. I’m not sure the gold analogy works. Is it not just a piece of sophistry on the part of the inventors to liken it to gold?
  • commented 2015-10-01 12:41:48 +0100
    Just as an aside and at the risk of going seriously off topic, the modern equivalent of gold is Bitcoin. It has to be ‘mined’, gets progressively more expensive to recover as more of it gets recovered, and is totally outside anyone’s control. A libertarian’s dream, but no use if you want to have some control over your economy.

    Apologies for being irrelevant, but I just thought the parallel was too interesting not to mention!
  • commented 2015-10-01 12:20:51 +0100
    Joseph why sign up to a constraint that affects the gov’t ability to intervene with the appropriate level and type of stimulus when it is required? I found the following very helpful in understanding how the macroeconomy really works.
    http://bilbo.economicoutlook.net/blog/?p=14153
  • commented 2015-10-01 10:44:19 +0100
    Does anybody know what happened to UK’s gold? Why can there not be a gold-backed currency instead of the fiat monetary system we have now? Would that be too outlandish a prospect?
  • commented 2015-10-01 10:44:18 +0100
    Does anybody know what happened to UK’s gold? Why can there not be a gold-backed currency instead of the fiat monetary system we have now? Would that be too outlandish a prospect?
  • commented 2015-10-01 10:44:17 +0100
    Does anybody know what happened to UK’s gold? Why can there not be a gold-backed currency instead of the fiat monetary system we have now? Would that be too outlandish a prospect?
  • commented 2015-09-29 13:12:20 +0100
    A nice explanation of how the economy really works: http://youtu.be/GkAKG6nkFM4
  • commented 2015-09-29 09:53:55 +0100
    Stiglitz…….Really?Isn’t it a bit like Harold Wilson hiring Balogh and Kaldor?And we all know how well that turned out.You already have the answers John.They just need to be implemented.
  • commented 2015-09-28 23:19:10 +0100
    Good to hear McDonnell say he will call upon Stiglitz and other economic advisors. I hope he might also include Sander’s advisor Stephanie Kelton, a leading MMT proponent and economic historian who is impressively articulate in outlining a holistic program of economic regeneration that includes a job guarantee and payroll tax holidays in times such as these when private debt is the true ticking time bomb.
  • commented 2015-09-28 12:32:35 +0100
    Two points to Angela Sullivan’s excellent comment. Firstly, running a budget surplus transfers wealth out of the real economy. It doesn’t just ‘remove money’. Secondly, if challenging the Tory narrative why just ‘abstain’ from Tory proposals rather than vote against?
  • commented 2015-09-26 13:16:45 +0100
    Absolutely!
  • commented 2015-09-26 10:41:52 +0100
    Spot on, Angela Sullivan.
  • commented 2015-09-26 10:37:06 +0100
    I am dismayed by, “So let me make it absolutely clear that Labour under Jeremy Corbyn is committed to eliminating the deficit and creating an economy in which we live within our means.”

    I thought anti-austerity was all about CHALLENGING the Tory narrative. We should not be supporting the belief (widely prevalent) that the government can only spend money if it first either raises it in taxes or borrows it (from a bank?). We need to have the guts to explain that when we have a fiat currency we can print as much money as we need, the limit being the necessity to keep the currency stable. We have to explain that running a surplus does not give the government more to spend on hospitals. The effect is simply to remove money from the real economy. This is the right thing to do if you are trying to reduce inflation, but a terrible idea if you are trying to stimulate growth and investment.

    We should not be voting in favour of Tory proposals to run a budget surplus in 2019-20, We should abstain. The idea that surpluses are always desirable is wrong, and needs to be be challenged, not supported.

    I understand the reasons why many in the Labour party want to agree with voters, in order to get them to trust us, but we cannot do this. It leaves us in a completely untenable position saying things about the economy which are not only unclear but completely contradictory. Of course the press will howl if John McDonnell does not commit to running a surplus in 2019, but when he commits to it he is confirming to Tory voters that Conservative policies are the right (and only) way to go, and to Greens and non-voters that Labour is the same as the Tories.
  • commented 2015-09-25 09:52:33 +0100
    You’re right David that we now have a good chance of a Chancellor who will try to run the economy for the good of the people not big business. Whilst I agree that having the discussion regarding the merits of MMT v PM on this blog may be a little strange I hope it will encourage readers to look closer at the alternatives to the present system. Whilst there may not be a perfect solution, as Mervyn King said, if you could choose any financial system you wanted the present system would be the last that you would choose.
  • commented 2015-09-24 19:36:04 +0100
    It’s good to see some debate between PM and MMT supporters, though perhaps having it on someone else’s blog is a bit counter-productive? Still I’m sure we can agree that the important thing is that we should have a shadow chancellor who at least tries to get it right, unlike the present incumbent who merely has to get it Right.

    Chris, if I’m understanding you, I think you’ve got one crucial point wrong. You seem to be assuming that banks lend from reserves, or at least that that’s what they should do. The MMT analysis (which is supported by the BoE in this respect, though I can’t cite the reference off-hand) is that banks do not lend from reserves — indeed that reserves are technically only necessary for settlements between banks. Not only that, but since in lending they are creating new money, banks are performing a function that is essential to the economy. PM, if I’m not mistaken, half takes that point — i.e. it accepts that banks create money but holds that they cannot be trusted to do so responsibly and the function would be better performed by a new institution set up for the purpose.

    I find the MMT view more compelling. Lending, if it is to be commercially appropriate probably needs to be decided on a commercial basis — i.e. on the strength of the rate of return it can be expected to generate. Certainly a lot of regulation is needed to keep them on the straight and narrow, but in principle there doesn’t seem to be a lot wrong with letting the banks get on with it

    That leaves the question of spending ‘for the public good’, whether this is directed towards stimulating the economy or for ensuring adequate public services. This is properly (in my opinion) a government, not a banking role, and what always gets in the way is the basic misconception that it has to be paid for out of taxes and ‘borrowing’ — that the books must be balanced. I doubt if even Conservative chancellors really believe this, but it’s a convenient mythology that can be used to justify transferring services from the accountable government sector to the unaccountable private sector. At least PM and MMT agree on that, but can I urge PM supporters to look seriously at the question of where money really comes from and then to consider whether they really want its creation to be the job of bureaucrats?
  • commented 2015-09-24 18:35:47 +0100
    Steven Hall

    It seems strange that you are so derogatory in your remarks about Positive Money and that you assume from my short message that my knowledge is based solely on Positive Money teachings.i wonder where you got your information regarding PM as most of your statements are in total agreement with their teachings.
    You state that the Money Multiplier Theory taught at Uni is a lie-Positive Money agree
    you state that full reserve banking would not stop bank lending. Pm do not suggest otherwise, in fact they categorically state that they would expect banks to continue lending using Invested money (Deposit accounts), shareholders equity and profits. They would not, however be able to use sight deposits (current accounts).
    You say that banks lend first and create deposits, exactly what Positive Money say and what they want to stop.
    Much of what you say parallels Pm theory , however the big difference is how you treat demand deposits and time deposits. Demand deposits would be held by the Bank of England as transactions accounts with the banks acting as agents to facilitate transactions. These accounts would then be off balance items and the basks would not be able to use them as offsets for their lending. Time deposits would remain with the banks as investment accounts alongside equity and profits. The Banks would have to offer various choices of investment accounts in order to attract funds for lending and would be truly competitive. Banks would then be subject to the same governance as other business’ ie.greater investor scrutiny by the account holders and failure if bad practice leads to insolvency. Banks currently create over 95% of the money in circulation and they create or remove it from the economy for their own profit and not for the good of the economy. They lend in the good times thereby heating up an already hot economy and they slow or stop lending when money is needed to rebuild the economy. PM proposals would restore money supply to the Bank of England in a controlled manner (overseen by a Bank of England committee such as the MPC). I am not saying that these proposals are perfect, fine tuning would be required, but contrary to your assertions they have the support of many eminent economists and financiers. It is a viable replacement for a system that is in meltdown with the next financial crisis just around the corner. It just needs a trigger to and Warren Buffet suggests that it might be a derivatives crisis. With the incalculable and unknown amount of debt that this would release I dread to think of the consequences. But then again, perhaps we should stick with the status quo and just wait for the tsunami to hit!!
  • commented 2015-09-24 12:30:43 +0100
    Chris Heywood:

    Please don’t fall for the ‘Positive Money’ nonsense. It is based on a now completely discredited (even among most mainstream economists) description of money and banking remains in all the widely used mainstream first year macroeconomics books. It is called the ‘banking multiplier’ or ‘money multiplier theory’. It implies that banks need to receive cash deposits before they can create loans, but that they are able to create loans to some multiple of the cash deposits they can attract. A lot of PM people complain that the absence of high required cash ratios allows for a large banking multiplier, massive credit creation, and therefore the creation of ‘debt money’ by the banks.

    This is no only incorrect, but is childishly incorrect. Nobody with senior banking or central banking experience believes this, or has believed it for many years. Ulrich Bindseil of the ECB knows it doesn’t work this way. Charles Goodhart, formerly of the Bank of England and then of LSE, also knows this. Well, everyone who knows anything about money and banking knows it.

    Why does the nonsense get taught? It is because it is left in these books. Why? Most economists, and some text book authors, have no interest in money and finance. Even authors who know how the system works, leave the wrong story in their books, because Uni lecturers like to teach what they know. It is very rare to get a first year macro course taught by someone who actually understands banking systems. Strange, but true.

    In practice, banks are limited in the risks they are allowed to take by the extent to which they are financed by shareholders and retained profits. There are limits on their leverage.

    They are not EVER limited in their lending by the amount of deposits they attract. A bank does not have to attract a cash deposit before it can lend. The ‘reserve ratio’ requirement, where it exists, is irrelevant to credit creation. So a ‘100% reserve requirement’ (as in PM/debt free money/fair money/ etc stories) is irrelevant.

    In what sense is this true?

    Banks lend first, and create deposits as they lend, and look for liquidity afterwards. They look to raise cash on the money market. If there is a shortage of cash on the money market, the central bank has to supply the cash, to retain control over interest rates. Banks which are solvent can always raise cash. Where reserve requirements exist, they are normally based on deposit liabilities from weeks before. So a bank will engage in profitable lending now, and get the cash to meet its reserve requirement later. Since bank reserves at central banks pay below market interest rates, this just acts as a tax on the banking system. It does not limit the ability of a bank to lend.

    Even if you forced the banks to get the cash reserves before lending and credit creation, it would make no difference. The central bank would still have to supply those reserves on demand to the banks, in order to keep control of the cash rate/federal funds rate. This is not a choice central banks are free to make – they are forced to behave in this way, to stabilise interest rates, and avoid an almost immediate financial crisis.

    So……the banking multiplier if a fiction.

    And….banks don’t need cash deposits before they lend

    Although…this doesn’t mean there are no restrictions on them

    But….it does mean reserve ratio requirements are irrelevant to credit creation

    So…..100% reserve requirements would be no real change at all

    If…..the central bank chooses to supply liquidity, to avoid volatile interest rates and a financial crisis

    Which…..isn’t really a choice it is free to make

    So……100% reserve requirements, as advocated in almost all ‘Positive Money’ proposals, is utterly irrelevant

    Worse still….it completely misses the point

    Which….is to regulate banks properly, tighten up on capital requirements (a different issue), make them focus on commercial banking and avoid dangerous non-banking bets

    And perhaps even to retain state owned banks.

    ‘Positive Money’ completely misses the point.
  • commented 2015-09-24 12:23:30 +0100
    The sooner we legislate for full reserve banking and develop an economy based on a Sovereign Money system, the quicker we will rid the country of the neo-liberal elite who are straggling the world economies. Until this happens we will move inexorably to there ultimate goal of world financial domination by the few and economic slavery for the rest.
  • commented 2015-09-20 11:38:42 +0100
    Bill Krause is correct about need for education to destroy ‘deficit spending bogey man’, beloved of neo-libs. Challenge for a truly radical government is to explain how taxation, indeed, does not fund anything other than interest payments to the super- rentier class hence the need for continued deficit spending to provide the infrastructure/ services for the working classes to create the surplus for business/corporations etc., which is then distributed to the rentier class in form of dividends etc., etc. The remainder ( the crumbs) treated as a cost- paid as wages, is then taxed regressively to provide the interest payments to the rentier class who used previously appropriated surplus to provide the funds to subscribe to rounds of debt financing.
    Given Government is in the service of rentier class/ corporations, it will take something truly radical to break this mould, especially as much of the Ponzi derivatives market is held up with margin financing, i.e. leverage. Who will pay when this explodes?? and the majority class, the working class, does not identify itself as such?? Good luck John McDonnell
  • commented 2015-09-20 10:56:41 +0100
    There is much to commend Robert Searle/p2pFoundation/Transfinancial Economics(TFE).However, it does seem to predicate that there are rational solutions to irrational behaviour. If so, there is the clear and present danger of creating a new elite corps of ‘house servants’ to Capital, the Maths/Physics wunderkinds who make the best Artificial Intelligence (AI) programmers. The core of AI whether in the service of Capital; the Government or surveillance agencies (all on same side) is to learn, predict, adapt. The very essence of money markets are their irrationality and exploitation of human emotions (fear and greed). The AI algorithms used by Banks etc., have stop/loss volatility indicators built into them; this on a market level reinforces the volatility- see ‘flash crash’ of May 6 2010 and subsequent in August 2010. Ordinary investors saw their retirement funds wiped out and then reinstated (albeit 7% lower) the following day through no fault of their own. With Exchanges as profit-makers, beyond meaningful regulation, and over 40% of trades occurring in ’dark pools ’(no info. posted about the trade) , I respectfully suggest something much more aggressive than Transfinancial economics is needed. It is difficult to regulate that which cannot be seen. Goldman Sachs, JP Morgan control Governments and are beyond the scope of mere regulation.
  • commented 2015-09-18 21:36:39 +0100
    Why pay lip service to the false premise that fiscal deficits are necessarily bad things? Surely the only way forward must be to educate the public as to the true mechanics of modern money creation to destroy the neo-liberal deficit bogey man? Dr Mitchell, a leading proponent of MMT, explains: http://bilbo.economicoutlook.net/blog/?p=31908
  • commented 2015-09-18 19:02:38 +0100
    Labour will not win power unless it can reframe the economic argument in favour of progressive politics.Whilst there is much in the above, especially about the banks, if you attempt to make a case using a neo liberal economic frame of reference you will be hammered by the opposition. Those interested in a different paradigm should look at
    https://mail.google.com/mail/u/0/#inbox/14fdfb273bc6d488
  • commented 2015-09-18 15:41:59 +0100
    Amy Gdala takes an interesting perspective. I agree that global capital has used debt to disempower the left; indeed it has used debt to disempower the vast majority of people. Heavily indebted workers have no choice but to accept the conditions that employers present them with, whether it be payday loans, credit cards or mortgages. Debt is a huge problem! It is a global problem, but it is particularly severe in the UK where the total debt (which includes the debts of the government, households, corporations and the financial sector) is around 5 times GDP. Unfortunately, politicians and the media focus on just one part of that overall debt – the government debt, which is less than a fifth of the total, and (in the UK) is the least problematic. It was private sector debt that led to the 2008 crash, and it is private sector debt that will do so again, probably with even bigger fall-out next time, if it is allowed escalate.

    It’s important to realise that trying to tackle public debt when the private sector is so heavily indebted risks making the overall debt position worse. Reducing deficits, whether through cuts in public expenditure or increases in taxes, leaves individuals and companies with less money to spend. Thus, they either have to borrow more, or, they spend and invest less. If they borrow more they get still deeper into debt, putting themselves even more at the mercy of international capital than they were previously, and making another major financial crisis even more likely. If, on the other hand, they spend and invest less, the economy contracts, unemployment rises, incomes fall, and the debts of both the private sector and the government become even harder to repay. In this scenario, the government debt position is now worse than it would have been without attempts to reduce the deficit, because tax revenues have fallen and welfare expenditures have gone up. This is when global capital can really call the shots, because, with government finances in ruins and unemployment high, the government is in no position to bargain on behalf of its citizens. This is what happened all over the developing world from the late eighties onwards (as described by John Perkins in “Confessions of an Economic Hitman”) as governments were required to massively shrink the size of the state in exchange for loans. Of course, this also what has happened in Greece, and made worse there by being shackled to the Euro.

    One way in which government deficit reduction might avoid the scenarios described above (ie economic contraction or increasing private sector indebtedness), would be if deficit reduction helped encourage large amounts foreign direct investment (FDI). I’m sure that is what George Osborne is hoping for, especially as FDI would help finance another deficit that nobody ever seems to talk about, namely the UK’s enormous trade deficit. It seems to me that under current UK conditions deficit reduction can only work with substantial FDI. However, reliance on FDI plays right into the hands of those who support TTIP as means of encouraging foreign corporate investment – ie through further weakening of regulations designed to protect workers and the environment against the impact of unfettered capital.

    I agree that debt is a huge problem for the UK economy and puts us at the mercy of global capital. It is difficult to see how reducing government deficits will solve that problem. Indeed it is likely to make it worse. It’s a pity that public sector debt or government debt is often called ‘national debt’. It diverts attention away from where most of a nation’s debts actually lie.

    Having said all of the above, the only scenario that I can imagine in which deficit reduction might possibly make sense from a leftist perspective is where excessive private sector debt creates another major financial crash, forcing the government to nationalise the banks and introduce a debt jubilee. The crisis caused by excessive private sector debt then becomes a tool for radical redistribution and reshaping. However, that crisis is probably going to happen anyway, so I’m not sure there is any need to support policies that will contribute to it. Let the Tories take the blame for those policies.
  • commented 2015-09-18 11:50:21 +0100
    First a million thanks to John for tremendous work first with his Rad Lab site, then inviting private emails and then actually doing it. All my mates and I are rejoining the party.

    MIchael Stockbridge seems ignorant of the fact that John ran the exchequer for London in the “good old days” and knows exactly what he is talking about. Balancing the books and not getting in debt is NOT a Tory-type mistake at all. Poor people know well that debt is slavery on the micro and the macro level. This is where I disagree so strongly with the New Economics Foundation whose neo-Keynsian paradigm has infected many concerned about the environment and is orthodoxy in the green party. If you read Naomi Klein’s Shock Doctrine or the astonishing Confessions of an Economic Hitman (sorry I’ve lent it and forgotten the author’s name) you understand how global capital uses debt to completely disempower the left. Look at what happened in South Africa when the ANC concentrated on the constitution and took their eyes off the economic ball. Look what the IMF has done all over the world. Look at TTIP. Look at Greece!

    All power to John’s elbow – and his very able brain!
  • commented 2015-09-16 14:53:11 +0100
    RE: CYBERNETIC ECONOMICS GROUP

    This is probably the most important project that a possible future Corbyn government could ever undertake. A Group could be set up with the best experts in Information Technology, and related subjects. If it is ultimately doable it would have colossal implications for society, and the world. It could also be based in full, or in part on the New Paradigm of Transfinancial Economics.

    http://www.p2pfoundation.net/Transfinancial_Economics
  • commented 2015-09-16 10:55:40 +0100
    Many congratulations on your appointment and the fact that you have a calm nature when responding to the occasional polemical hysteria of Osborne, I hope that a National Infrastructure Bank(NIB) becomes a policy tool. It is practically certain that many Pension Funds(PFs), sovereign wealth funds, certain hedge funds interested in infrastructure assets will be very supportive of this. Currently, too many infrastructure funds are chasing too few opportunities in the UK. Witness the queue to buy Moto service stations. These funds want good cash flow and some capital growth or protection.This is not happening with gov./ corporate bonds( falling total returns). Investing in NIB bonds represents a slightly diluted risk for them compared to investing directly in the assets themselves-creditors rather than owners.
    You will be already aware that the vast majority of UK infrastructure whilst not only privatised is in the hands of foreign funds eg Ontario Teachers PF, Singapore’s sov. wealth fund, Cheung Kong etc. etc.
    NIB could also assist in renationalisation of UK transport infrastructure by a debt for equity swap ahead of a ‘big stick’ threat, which admittedly would not go down well.
    NIB could also help with rejuvenating the Social Housing market following firstly Shapps slashing of £400m from the NHF grant; secondly, Right to Buy privilege for Housing Association tenants, with75% proceeds (after debt outstanding) going to Treasury, thus severely choking off investment in future projects. Dagenham/ Redbridge did a scheme with a hedge fund where the hedge fund provide finance for 280+ dwellings over 40 yr period;ownership of property then reverts to Dag/ Redbridge. Maintenance etc, responsibility of Dag. /Redbridge and included in rent setting.
    Good cash flow is what its all about in infrastructure investment; this way PFI can be killed off.
    Finally, one very telling statistic of Coalition management is in the Whole Government Accounts for 2014. It shows over the 5 yr period, net liabilities increased by 51% despite rising government income.
    Best wishes,

    Dennis Exton FRSA
  • commented 2015-09-15 14:21:25 +0100
    For anyone wondering “what is rehypothecation” it’s a specialist term for the re-use of pledged collateral. As in, in order to get a loan from a broker/bank, you have to pledge collateral, in the form of “safe” bonds, you also have to agree that the broker/bank, can then pledge the collateral you gave them for their own purposes.

    So this: “Just like 2007 all it needs is a spark like Northern Rock to set things off again. The rehypothecation taking place in the bond markets could be the trigger this time, when the US starts unwinding its quantitative easing programme.”

    Is an allusion to the bank run on Northern Rock, applied to current holders of pledged bonds. Which was in essence what caused the wider financial crisis. In that there was a scramble for bonds, and thus a drying up of counterparty loans, due to the unavailability of collateral. This was the wider “silent run” on the whole of the Western banking system. Since banks would not lend to each other. This is why LIBOR is important, as it was the rate that banks supposedly loaned money to each other, fixed each day from trades, but at that point no trades were taking place, etc.

    The issue with QE, is that you had to pledge bonds to get it, something known as “Reverse Repo” wherein you trade your bonds for cash, but must repossesses (Repo) them later. If the Fed ends QE, then it means that interest rates go up, and bonds are interest rate sensitive. Which would mean there would be a glut of bonds available, and they would be worth less than before, so there may be “margin calls” where you are asked to put up more capital. But this would happen throughout the system due to the rehypothecation of pledged collateral. It would be another silent run.