What´s wrong with the current financial system – The Washington Consensus vs. Economic Development – with Richard Werner

Aug 16, 2017 by

by Anke Kläver and Sylvia Ambrusova

Just before the weekend, we heard the lecture from Mr. Richard Werner, who is a professor at the Southampton Business School. In the first part, he introduced the main points of the Washington Consensus of 1944 and identified the so-called 6 central claims of the Washington centred financial order.

In the next part, Mr. Werner presented the results of his empirical study. It was examined whether in the process of making money available to the borrower, the bank transfers funds from other accounts. It was found that in this process, the bank did not transfer the money away from other internal or external accounts, but it newly ‘invented’ the funds by crediting the borrower’s account with a deposit, although no such deposit had taken place. This resulted in a rejection of the fractional reserve and financial intermediation theory. However, it was in line with the credit creation theory. Based on this, the conclusion followed that banks are not financial intermediaries but rather they are the creators of the money supply.

Finally, the lecturer identified the concentration of power in the hands of a few as the main problem in the current financial sector. He is very critical about Central banks because of their lack of accountability and the fact that they constitute an almost absolute power which (may) corrupt. The solution is seen in the decentralisation of this concentrated power and the establishment of a network of many small community based banks. In Germany, a country which is perceived as a positive example for this, there is a certain amount of small local banks that are lending money for productive purposes and return all gains to the community. Secondly, it was pointed out that banks should also be banned to create bank credit for transactions which do not contribute to GDP.

Sylvia’s perspectives

The lecture of Mr. Werner encourages to a more critical way of thinking about the banking sector. It was shown how the banking terminology is often created in order to mislead clients and how the powerful ones can profit from the misperception of reality in society. The class vote on the question “Who owns the money which we put into a bank?” was a genuine example for this, since the class did not reach a unanimous decision here. The lecturer demonstrated how unknown and how distant a legal interpretation can be from the opinion of society. Because it was said that the real truth about the credit creation theory is actually known, but cannot be officially expressed, we should call for more transparency in the banking sector.

Anke’s perspectives

As mentioned above, Richard Werner visualized and explained that the 6 beliefs system of the Washington Consensus, which our financial system is based on, are not true. Not least after the experience of the Japanese economic crisis, Werner calls for more decentralization of the banking power. More specifically, he suggests detracting the power of central banks and to foster community banks. The reason for this is that a top down approach, convincing central banks to support this system, did not work. Can a single bottom up approach be sufficient to reform the financial system? And in particular considering the limited time we have left and the huge power central banks have already gained over the last years? In my eyes, at least the facilitation of community banks and the limitation of central banks power needs to be achieved through a top down approach, for example through an higher institution, in order to agree to Werner`s reform plans.