Economics as Superstructure

By Norbert Häring
http://www.worldeconomicsassociation.org/newsletterarticles/economics-as-superstructure/

[Address presented at the seminar “Economics and Power” on 23 March 2015, House of Lords, London]
Ladies and Gentlemen, To pay tribute to the Marxist jargon, in which Lord Skidelsky has phrased the title of my subject, I would like to start with a quote from Karl Marx: “The ideas of the ruling class are in every epoch the ruling ideas. … The ruling ideas are nothing more than the ideal expression of the dominant material relationships, … the relationships which make the one class the ruling one, therefore, the ideas of its dominance.” In my own words, that says that not all economic ideas are created equal. Some ideas make it into the leading academic journals, others can hardly be published. Some ideas make those who develop them successful in academics or even famous and influential. Other ideas sentence those who develop them to a life at the margin at best.
Ideally, this would all be a function of how convincing the idea is and how good the academic is at developing the idea, writing it down and marketing it. But we all know, that excellence by itself does not get you very far. Another important ingredient for a successful career is how convenient your subject of study and your results are for powerful interests in society.
Economics, like all social sciences, is a product of the prevailing economic and political conditions and has a role to fulfil. If the interests of the powerful change, so does economics.
I want to give you some examples of how the mainstream conception of economics conforms to the interests of the powerful groups in society and how it changes with these interests.
Pulling up the Ladder: From Mercantilism to the Free-Trade-Doctrine
My first example is the switch from mercantilism to the free-trade doctrine of David Hume, Adam Smith and David Ricardo that happened in the 18th century.
Before British economists discovered free trade, the nation had been following a protectionist industrialization policy. Starting with Henry VII in 1485, this strategy turned Britain from a poor exporter of raw materials to a leading exporter of cloth. Henry levied export taxes on wool and gave privileges to wool manufacturers.  As British capacity to manufacture wool increased, he and his successors raised export duties on wool. Finally, Queen Elizabeth banned wool exports altogether.
This is how Britain became the leading producer and exporter of manufactured goods. Only after Britain’s predominance was firmly established, did British economists start preaching free trade to the world. Many fell for it, but others, like Friedrich List in Germany or Alexander Hamilton in the US took this new Gospel as what it was: as an attempt to pull up the ladder on which the British manufacturing industry had climbed up to world leadership.
The same would happen again in the US. Starting with Alexander Hamilton, the country pursued a protectionist industrialization strategy and was very successful with it. Only after the US had had become the industrial leader, did its economists start to preach the gospel of unconditional free trade.
Neoclassical Labor Market Theory as an Antidote to Marxism
As a second example, I would like to point you to the emergence of the neoclassical doctrine around the middle of the 19. Century. This was the time then Karl Marx told workers, that they were being exploited and the threat of revolution was rife everywhere.
Classical economics was not a good antidote to Marxism. Adam Smith would not have disagreed too much with Marx on exploitation, as you can gather from the following (slightly abbreviated) quote:

What are the common wages of labour depends everywhere upon the contract usually made between those two parties… It is not difficult to foresee which of the two parties must have the advantage in the dispute, and force the other into a compliance with their terms. The masters can hold out much longer… Though they did not employ a single workman, (they) could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week.

This was not an admissible attitude for an economist any more, once workmen were threatening to use force to end exploitation. Economists who wanted to preserve capitalism needed to overcome the classical economists’ analysis of wages that are a product of negotiating power.
The following is how neoclassical pioneer John Bates Clark formulated the challenge:

Workmen, it is said, are regularly robbed of what they produce. This is done by the natural working of competition. If this charge were proved, every right-minded man should become a socialist.

With the marginal productivity theory that Clark and others developed he rose to the challenge of disproving the charge of exploitation. His theory claimed that at the margin, every factor of production, including labor, was remunerated exactly with what it contributed to the final product.
I would like to emphasize however, that the early neoclassical economists were quite open to redistribution. Since they saw marginal utility decline with income, they considered redistribution from rich to poor to be a welfare-increasing policy. At that particular time, this attitude was not against the interest of enlightened rulers. This was the time when Bismarck introduced social security in Germany to appease workers and fend off the threat of revolution. The rich needed to be convinced, with the help of a convenient economic theory, that some limited redistribution of income was to their own advantage, since it helped preserve the status quo.
Defining away distributional concerns to discredit redistribution
This takes us to the third change in doctrine which I would like to highlight: By the 1930s, the main threat for the wealthy had shifted from revolution to redistribution enforced by the democratic majority. This was also a time of preparation for war. Thus, priorities of the rich and the rulers had shifted to discrediting redistribution and towards making the best use of national resources.
As a first step, Lionel Robbins and others banned interpersonal utility comparisons.  Robbins redefined economics to be, “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”
This dogmatic change had the effect of pushing distributional concerns outside the realm of economic reason. Economic efficiency became the sole target. As, on efficiency grounds, it could be argued that redistribution was bad, economic reason became associated with as little redistribution as possible.
Cold-War-Economics: Anti-collectivist and Efficiency-oriented
The fourth example of a shift in economic doctrine suiting the interests of the powerful is a continuation of the third. It is the emergence and eventual predominance of methodological individualism and of the anti-collectivist schools of thought, called rational choice and public choice.
It was the time of the cold war, economists were enlisted in the ideological battle to win the minds and hearts of the people for capitalism. The aim was to focus attention on the strong point of capitalism – efficiency of allocation –  and to discredit what socialism claimed as its strong points –  planning, collaboration and fairness of distribution.
Ken Arrow ostensibly proved that it was impossible to come to rational collective decisions. Anthony Downs, Mancur Olson and James Buchanan built on this and portrayed the government and trade unions as the enemies of liberty. The more government did, the bigger was the threat to liberty.
The Taboos
There are some ideas, which the powerful do not like to be discussed at all.
Power is one such thing.
The powerful have a need to legitimize their power. If that is not viable, they like their power to be downplayed as much as possible to the point of becoming invisible. This is what mainstream economics is doing. Look in the index of a random economics textbook for  “power” and chances are that the entry will not be where.
Power is tantamount to the absence of competition. The opposite is also true: perfect competition, the darling of mainstream economics, is tantamount to the absence of power. This is why treating the economy as if something close to perfect competition was the rule has a very important political implication. It negates the presence and importance of power.
If you pretend that workers routinely have a next-best alternative to their current job, which is only marginally less attractive, there is no power of the employer. There is no justification for unions, for layoff-protection or for unemployment benefits. If you pretend that market-power is the exception, instead of the rule, you cannot tax companies without doing a lot of harm. You cannot ask for higher wages, without losing employment. If you pretend that there is a well-functioning market for top managers, CEOs will have no real power and will need to be rewarded very handsomely for any value that they help to create.
Such assumptions which define power away almost always yield results which are very much in the interest of the powerful.
Money is Power
Money is Power, goes the saying.  Thus, another subject that the powerful, don’t like to be discussed is money. And mainstream economists are abiding. Banks putting out profit targets of 25 percent and achieving these were not considered excessively powerful by economists. They were declared efficient and successful.  Financial institutions which individually control the flow of billions of dollars do not have any power that is worth analyzing for mainstream economics.
Even money itself has been deemphasized to the point of disappearing. Some of the most famous economists have declared that money is just a veil over what is going on in the real economy. JP Morgan and Goldman Sachs are utterly powerless in such a setting. The leading macroeconomic models– even thosae used by central banks – do not have a meaningful role for money.
The following is what Claudio Borio of the Bank of International Settlements says about the importance of money:
“Modeling the financial cycle correctly requires recognizing the fundamental monetary nature of our economies: the financial system does not just allocate, but also generates, purchasing power, and has very much a life of its own.”
A financial system that creates purchasing power is very powerful.
But this is not an admissible conclusion. The power to create money is not to be seriously discussed. Therefore, almost all major economics textbooks are telling students the lie that banks are mere interamediaries, who are just channeling the money from savers to investors. The fact that banks produce the money which they lend out, is hidden behind a nonsensical money multiplier mechanism. The way this mechanism is presented, it works exclusively with cash that is being deposited, lent out and redesposited multiple times. In this mechanism, it is not visible how individual banks create purchasing power. It just happens by some magic of the system.
There is a good reason for this obfuscation. Many people still feel like President Andrew Jackson did about money creation by private businesses. They would consider it an aberration, an abuse of power. If you tell these people, how banks really create legal tender, they will either call you a conspiracy theorist, or, if they believe you, they will be outraged.
It is this popular attitude that makes it so important for banks to have economists camouflage the process of money creation.
The consequence of the taboo to treat money and debt seriously is occasional policy failure. As long as economists observe the taboo, they will remain unable to understand a monetary economy. They will be unable to learn from past mistakes and avoid them in the future.
Thank you.

From: pp.3-5 of World Economics Association Newsletter 5(2), April 2015
http://www.worldeconomicsassociation.org/files/Issue5-2.pdf

James Robertson: PS to Newsletter No. 50

James Robertson
PS to Newsletter No. 50 - April 2015

This text can also be viewed at
www.jamesrobertson.com/news-apr15.htm

The last item in Newsletter No 50 (March) was on "One Glimpse of the Coming UK Election". Now there is something else to say.

(1) "The Public Money Supply should be for People, not for Banks – an Election issue for Britain?". See www.thomasattwood.wordpress.com/2015/04/23/a-message-from-dora-meade-positive-moneys-network-coordinator

You should act on it if you agree it's important.

There have also been some other interesting developments.

(2) With good sense the Iceland government is now seriously considering whether to deprive commercial banks of the privilege of creating the national money supply as debt to themselves. See www.thomasattwood.wordpress.com/2015/04/04/frosti-sigurjonssons-sovereign-money-proposal-icelands-central-bank-would-become-the-only-creator-of-money

(3) A petition is being put to President Zuma of South Africa asking him to "Create a People's Bank in South Africa - and to do this by re-purposing the CENTRAL BANK (South African Reserve Bank) to make it a PEOPLE'S BANK that creates sovereign money as value rather than interest bearing debt". See https://secure.avaaz.org/en/petition/President_Zuma_STOP_the_BANKS_from_CREATING_MONEY_as_INTEREST _BEARING_DEBT/?pv=97

(4) Euro or restored Drachma for the Greeks? If the Greeks have to go back to the drachma, they would be sensible to follow Iceland's example at (2) above. See www.wolfstreet.com/2015/04/03/greece-threatens-with-drachma-plans-exit-euro

These examples and others suggest that, sooner than we think, the world may accept the proposal to transfer the function of creating the whole of their national money supplies debt-free to public agencies serving the public interest.

That would remove the present privilege given to commercial banks to create over 95% of national money supplies as profitable debt for themselves.

Public policy would then not only remove the compulsory debt now imposed on all citizens for using the public money supply. Public policy would become freer than now to encourage the use of democratically controlled local and other complementary currencies; and it would also be freer than now to reduce today's systemic pressure to widen the growing financial gap between the majority of people and the comparatively few people able to share the unearned profits of the banks.

There are well-meaning people who believe that reforming the money system at national level will conflict with developing its growth at local level. But I think they are wrong. It's fairly obvious that reforming the money system at national level is a necessary step toward a more decentralised money system as a whole.

James Robertson

28 April 2015

www.jamesrobertson.com

Canada Committee on Monetary and Economic Reform

The trick and the fix for mega banks balances

A graph exposing the bank accounting problem

Italy party gets 100K signatures for euroexit

Italy party gets 100K signatures for eurozone exit vote

http://www.presstv.ir/Detail/2015/04/11/405699/100K-Italians-sign-appeal-for-eurozone-exit

Sat Apr 11, 2015 7:24AM

This file photo shows logo of the European currency Euro in front of the European Central Bank (ECB) in Germany. (©AFP)

An Italian political party has reportedly collected over 100,000 signatures on a petition demanding a legal bill that would provide for the holding of a referendum on Italy’s withdrawal from the eurozone.
An Italian lawmaker affiliated with the country’s Five Star Movement (M5S) Party, Carlo Sibila, said although the petition has already exceeded the required number of signatures needed for the legislative initiative, he expects his party to gather 50,000 more signatures by early May in a bid to highlight the issue, RT reported.
The Italian MP further stated that he expects a referendum on the move will take place by early next year.
“Who wants to stay in euro? This is the main question,” said Sibila as quoted in the report. “But we don’t want to get out just like this - we want a program and a discussion, and then let the citizens decide.”


According to the legislator, Italy’s debt climbed dramatically following the introduction of the euro. Sibila further noted that Italy’s unemployment rate hovers around 12.7 percent, the sixth highest in the EU.
“It’s really necessary today as the situation in Italy is going from bad to worse where (as far as) jobs and economy are concerned,” he added.
However, according to the report, the Italian constitution does not allow the cancellation of international accords signed before the referendum.
“We can’t have our own fiscal policy, but without the euro it is possible in Italy,” Sibila emphasized, underlining, however, that his M5S Party is not after pulling out of the European Union, but merely seeks to leave the currency union.
“Italian citizens need to have the right to decide if they want to stay inside or outside the monetary union,” Sibila said. “We are not questioning the European Union, it is only the monetary union.”
Established in 2009 by Italian comedian and activist Beppe Grillo, the M5S Party finished second in the 2014 European Parliament election with 21 percent of the vote.
According to the report, Italy joined the Eurozone in 1999, and the currency was introduced into circulation three years later.
MFB/NN/HRB

Lord Turner on SOVEREIGN ECB MONEY

Banking

ECB could solve eurozone crisis, leading economist says

http://www.dw.de/ecb-could-solve-eurozone-crisis-leading-economist-says/a-18374668

Adair Turner, former chief of the UK Financial Services Authority, is the new chairman of the Institute for New Economic Thinking. He tells DW calibrated use of the ECB's balance sheet could end the eurozone crisis.

INET is a network of top-flight economists founded in the wake of the 2007-8 global financial crisis, generously funded by several intellectually ambitious billionaire philanthropists. Its mission: To reinvent economic theory and reconnect it with the real world. Adair Turner took over INET's reins on the occasion of the network's sixth annual conference in Paris.
DW: Lord Turner, you've been giving talks about how to deal with the consequences of huge debts left hanging over an economy after asset price bubbles burst - like the real estate bubbles in Spain and Ireland. How does your approach differ from that of German economic policymakers?
Adair Turner: The Bundesbank was ahead of many other central banks in that it was skeptical of pure inflation targeting. It had a policy of managing monetary aggregates, too. But the Bundesbank's idea was that if the money supply is growing too fast, that's a forward indicator of inflation. Actually it's not. It's a forward indicator of an asset price bubble. When the bubble eventually pops, the result is deflation, not inflation. The reason is that when people try to "deleverage," or pay down debts on a net basis, that causes the money supply to shrink - and aggregate demand to shrink with it.
Why does the money supply shrink when bank debts are repaid?
Banks create the circulating money supply when they grant credit to borrowers. Bank debt and bank credit - the latter is what we commonly call "money"– are two sides of the same coin, mirror images on banks' balance sheets. When bank debts are paid off, both the debt and the money used to pay it off disappear.
If more bank debt is repaid than is created in a given time period, the result is a reduction in the circulating money supply, and that means a reduction in purchasing power. The result is a recession, or even a depression. The economist Irving Fisher described the basic process in the 1930s in his theory of "debt deflation."
Germans don't like being in debt and don't like their governments endlessly piling up debt, either. Isn't there some other way of dealing with the aftermath of a bubble?
Yes, there is. But you need an additional tool to prevent deflation in the face of general deleveraging. You have to allow the central bank to give carefully calibrated amounts of debt-free money to governments to spend into circulation.

Lord Turner suggests using an available medicine, but in the right doses

But then eurozone rules prohibit central bank funding of governments.
Yes. The prohibition was put in place at the Bundesbank's insistence, because of a fear that if any monetary financing of deficits were allowed, governments would get carried away, print far too much money and create hyperinflation.
Now, a medicine can be a cure in small doses, yet be a dangerous poison in high doses. But does it therefore make sense to forbid that medicine from being used at all? No. What you need is sensible rules about dosages and procedures for carefully monitoring how the patient responds to them - and a qualified doctor who administers and adjusts dosages based on the observed results.
The ECB's balance sheet could be used to end the eurozone crisis. The way forward is to set clear rules in advance, defining under what conditions, how and to what extent financing of eurozone government deficits with sovereign ECB money would be allowed.
The rules should leave decisions about how much monetary stimulus the ECB provides entirely up to the ECB. The central bank would retain its policy independence. We'd merely be giving it a new tool to improve its ability to manage monetary aggregates and prevent depressions.
... and provide it with an instrument to get rid of too much money ...
You'd also give it tools for removing money from the system again when it deems it appropriate. For example, we could set up an adjustable financial transaction tax that flows money to the ECB. Whenever it thinks the economy is at risk of overheating, the ECB could stop passing the tax revenue along to governments for spending. It could put the money on ice or destroy it. Alternatively, the central bank could increase the reserve ratios it imposes on banks, to reduce their ability to make new loans.
There's a variety of possible calibration mechanisms - ways to either increase or draw back money from circulation as needed - depending on the state of the economy. As long as the rules are clear and well designed, there's no risk that monetary financing of government deficits would get used to excess.
Ironically, we currently have a rule against using the medicine that could cure the eurozone. At this point, it may be the only plausible remedy.
Lord Turner became head of the UK's FSA on September 20, 2008 - a week after Lehman Brothers went under - and steered the UK's main financial regulator through the ensuing five years of crisis and post-crisis management. Previously, he'd been a director, vice-chairman or chairman of a redoubtable list of private and public sector institutions and regulatory committees.

Iceland’s grand monetary experiment

Iceland’s grand monetary experiment ?

Matthew C Klein | Apr 08 16:07

http://ftalphaville.ft.com/2015/04/08/2125780/icelands-grand-monetary-experiment/

Part of the Death of Banks series

 

 

One of the oddest things about the aftermath of the financial crisis is the extent to which things haven’t changed.
Yes, there are plenty of new rules, and stress tests, and of course there are more fines for wrongdoing, but the basic structure of the financial system doesn’t look much different from before it blew up. There is still plenty of money to be made (and lost) issuing short-term “safe” debt to buy long-term, illiquid, risky assets. Lenders still exacerbate the cycle by increasing their leverage when asset prices rise only to cut back on lending when the economy sours. And everyone knows that taxpayers are still on the hook when things go bad, which acts as a massive subsidy for the financial industry.
As if all that weren’t bad enough, the current system makes it far too hard for central bankers to accomplish their mission of stabilising the economy. Right now, changes in nominal spending power are largely due to decisions made at banks and other financial firms. The level of short-term interest rates affects their behaviour, as do asset purchases, but monetary policy is only one force among many that determines total nominal spending. Modestly raising the cost of short-term funds isn’t enough to stop excessive credit growth, just as aggressive bond-buying has proven insufficient to restore the pre-crisis trend of nominal spending.
The continuity can’t be explained by the lack of better ideas. In fact, the basic alternative to the status quo — moving the power to create money from private financial firms to the state — was suggested in detail in the 1930s by a group of economists led by Irving Fisher. Subsequent proponents have included Milton Friedman, James Tobin, researchers at the International Monetary Fund, John Cochrane, and Martin Wolf. (And me.)
Whether it was a fear of change or simply the power of vested interests, the reformers never made much headway. Despite the general willingness of the US government to experiment with all sorts of genuinely bad economic ideas in the 1930s, the 1933 “Chicago Plan” failed to gain traction. Then came World War II. Yawning budget deficits accommodated by the Federal Reserve’s interest rate caps caused nominal spending to soar by about 122 per cent between 1940 and 1945. Private debts, as a share of national income, fell by about 100 percentage points during the war. That laid the groundwork for the subsequent boom and, understandably, dulled the appetite for significant reforms of the financial system.
The more recent crisis could have been another golden opportunity. In February, 2009, Alan Greenspan — Alan Greenspan! — was telling the Financial Times that “it may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring”. However, the success of countercyclical policy (relative to the 1930s, anyway) seems to have had a comparable impact on the public debate as the WWII reflation.
But now it looks as if tiny Iceland, a country one one-thousandth the size of the US that nevertheless endured the third-biggest financial failure in history, is exploring more radical options. Frosti Sigurjonsson, the chairman of the Icelandic parliament’s Economic Affairs Committee, recently published a report, commissioned by Iceland’s prime minister, that argues for the establishment of what he calls a “Sovereign Money System”.
The essential proposal will sound familiar: separate money — the stuff we use for emergency savings and transactions — from credit, which is inherently risky but promises the possibility of higher returns. The Central Bank of Iceland would become the sole provider of “money” (analogous to today’s bank reserves, except available to everyone) and safeguard it in “risk-free, electronic safe deposit boxes”.
Commercial banks would manage these “Transaction Accounts” in exchange for fees, but they wouldn’t themselves issue anything resembling demand deposits. Meanwhile, banks would only make loans to borrowers after first raising the money from savers, rather than by simply creating new money. (Read this Bank of England primer for more details on how the current system works.)
In theory, these changes should make the economy more stable by eliminating the risk of bank runs, while also removing the hidden subsidies the financial sector currently enjoys thanks to its ability to ransom the people’s savings for government handouts. Oh, and it also ought to make it easier for monetary policymakers to prevent nominal spending from growing too quickly (or too slowly).
Economists at RBS seem to agree. From a recent note on Iceland’s proposal:

The key idea is a new Sovereign Monetary System, where only the central bank is responsible for money creation. The idea makes sense…Separating the creation of money and allocation of money powers could safeguard against excessive credit creation, and reduce incentives for commercial banks to create more credit to make private gains…Iceland’s proposal is worth exploring.

A few of the details, however, give us some pause.
Start with the conduct of monetary policy.
According to Sigurjonsson, the CBI’s new “Monetary Creation Committee” would decide each how many kronur the economy needed to grow, and then deposit that amount in the government’s transaction account. Then it would be the responsibility of the politicians to determine what happens to this extra money. The fiscal authorities would then get to decide whether to spend this new money on higher salaries for public workers, make benefit schemes marginally more generous, cut taxes, repay the national debt, give everyone a “citizen’s bonus”, or lend to financial firms on the condition that they pass the new funds on to businesses.
This strikes us as overly complex and liable to create needless confusion. Sigurjonsson’s report makes a convincing case that private lenders aren’t the best judges of how much money the economy needs to sustainably grow. Why should central bankers and politicians be any better? Monetary policy rules have failed in the past because they have been unable to adapt to structural changes in the financial system. If Iceland were successful in centralizing the control of nominal purchasing power, the appeal of policymaker discretion should vanish and a simple money-growth target would suffice.
Those are minor criticisms. We’re more concerned by Sigurjonson’s treatment of what he calls “Investment Accounts.” These “will earn interest for customers in proportion to the account’s risk and duration” and take the form of bank debt. After an Icelandic saver moves money from her transaction account into a bank’s investment account, the bank then decides how to invest that money to generate the promised yield. Unlike the money in transaction accounts, nothing in an investment account is guaranteed by the state. And these investment accounts can’t be redeemed for risk-free money on demand.
While we wholeheartedly agree that savers ought to be able to take risks in exchange for the possibility of higher returns, this proposal leaves too much of the existing system’s dangerous features in place. Most obviously, there is still a fundamental mismatch between bank assets and bank liabilities. From the report (emphasis ours):

The funding of long-term loans with short-term investments is called maturity transformation. A bank can perform a maturity transformation in the Sovereign Money System, as it can in the present system. In both cases the bank matches the demand of long-term borrowers with supply of several successive short-term investors. Maturity transformation carries risk in the present system and will continue to do so in the Sovereign Money System. A bank that is unable to find new investors to replace the investors that choose to end their investment, may run into liquidity problems.
It is not the purpose of the Sovereign Money System to eliminate this risk, but rather to reduce the danger of losses being passed on to the state, by protecting the payments system and the funds of those who did not wish to take any risk. Furthermore this risk will decrease significantly under the Sovereign Money System, as short term funding in the form of deposits will not be part of commercial bank’s balance sheets.

On the bright side, the payments system would be protected in the event of large losses. Plus, banks would be constrained in their ability to create credit beyond what the economy can support. Since basically all of the growth in private debt as a share of GDP since the late 1970s came from mortgages, rather than investment in productive capacity, both developments would be big improvements.
On the downside, banks would be almost exactly as vulnerable to runs as they are in today’s system.
It’s worth recalling that, for the most part, the bank runs that were so damaging during the 2007-2009 crisis weren’t the fault of household depositors queuing outside their local branches. Rather, they were caused by nonfinancial corporations, insurers, pension plans, hedge funds, and other banks that were pulling their savings out of money-market mutual funds (the big buyers of commercial paper issued by banks) and the repo markets. These are, presumably, the same sorts of institutions that would be keen on buying relatively short-term investment accounts under the new system — which would be almost as vulnerable to runs.
Suppose that a bunch of investment account holders decided that, at maturity, they wanted to redeem their accounts for risk-free money, rather than roll over their risky assets into a new investment account. (Maybe they saw other investment account holders take losses and got nervous.) The bank could have a tough time getting the cash needed to repay these quasi-depositors without dumping a ton of assets, which could cause problems elsewhere, or the bank might simply go bust.
Either way, you could expect a sudden spike in the cost of borrowing, assuming credit were even available, as other holders of maturing investment accounts rushed to redeem for cash. It’s the familiar story of something previously believed to be relatively safe suddenly looking far too risky. A whole cascade of failures could ripple through the system.
The central bank could prevent the extreme bad outcome if it printed new money that would be used to fill the hole in bank investment accounts created by fleeing savers, but that wouldn’t be much different from the existing system in terms of its impact and perceived unfairness. (While the obvious parallel would be to QE, it’s worth remembering that the Fed experimented with fixed targets for reserve creation in the 1980s, but was forced to abandon them because they didn’t want to blow up any banks that needed a little extra liquidity.)
The government could accomplish something similar by paying people to roll over their existing investment accounts, but again, this would be fiscal transfer by other means. It would also look a lot like the deposit insurance schemes that Iceland wants to dismantle.
Even if the maturities of the investment accounts perfectly matched the maturities of the banks’ assets, there is still a danger that lenders might be unwilling to roll over their maturing loans when borrowers want to roll over their maturing debts. Hyun Song Shin has argued that this is already something to worry about within the context of bond funds that invest in emerging market fixed income, and that monetary policymakers should be aware that sudden changes in the portfolio preferences of unlevered investors can create conditions somewhat similar to traditional bank runs.
Sigurjonsson’s plan for Iceland is an intriguing beginning that hopefully will lead to more debate about the future of the financial system. If implemented, it would dramatically improve the ability of central bankers to stabilise nominal spending without distorting the composition of economic activity.
However, the current proposal leaves open a large loophole in the way that banks can fund themselves, to say nothing of bank-like financial firms. Closing this loophole would require more radical measures, such as a requirement that all investments are funded by equity, or by venture capital-style lockups.

Related reading:
How to regulate banks: crazy like a fox — FT Alphaville
What will P2P lending look like 5 years from now? — FT Alphaville
Recent economic and financial developments in Iceland — Már Guðmundsson
“People want money” — FT Alphaville
Inflation and disinflation in Iceland — Palle S. Andersen and Már Guðmundsson

Death of Banks series

An occasional series dedicated to tracking the death of banks

1. Death of Banks Watch
2. DBW: ECB negative deposit rate edition
3. Goldman Sachs on coping with negative rates
4. The cronut-ification of banking
5. The Fed as universal banker
6. Banking will never know a more disruptive force than Excel, say bankers
7. The real disruption at the heart of banking
8. Why banking got out of control in the digital age
9. NIM decay *alert*
10. Negative rates as global cash burn
11. What will P2P lending look like 5 years from now?
12. How to eat a banker's lunch
13. Iceland's grand monetary experiment?
14. The financial sector's diamond age

This entry was posted by Matthew C Klein on Wednesday April 8th, 2015 16:07. Tagged with Death of Banks, iceland.

Iceland Sets Precedent: Jails Four Top Bankers

Iceland Sets Precedent: Jails Four Top Bankers for Fraud

April 8th, 2015 | by EV

http://anonhq.com/iceland-sets-precedent-jails-four-top-bankers-fraud/

Economy

Reykjavik, Iceland – Four Kaupthing bank executives have been given the heaviest sentences in Iceland’s history for their role in the nation’s 2008 financial collapse. It is said that the prison sentences, which were upheld by Iceland’s Supreme Court, are setting a precedent for the rest of the world.

Hreidar Mar Sigurdsson, former CEO of Kaupthing, received 5 ½ years; Sigurdur Einarsson, former chairman of the board, received four years; Magnus Gudmundsson, director of Kaupthing Luxembourg, received 4 ½ years; and finally Ólafur Ólafsson, one of the banks biggest shareholders, received 4 ½ years.

The bankers were found guilty in December of 2013 by the Reykjavik District Court of hiding the fact that a Qatari investor bought a stake in the firm with money lent, illegally, by the bank itself. Kaupthing announced a few weeks before the collapse that “His Highness, Sheikh Mohammed Bin Khalifa Bin Hamad al-Thani” had bought a 5.1% stake during the financial crisis in 2008. Kaupthing collapsed under the massive debt.

According to the Associated Press:

“Kaupthing was one of Iceland’s big three banks that crashed in October 2008, along with Glitnir and Landsbanki, sending the isolated volcano-dotted nation of 325,000 into a dire financial crisis.”

As the value of currency plummeted, unemployment and inflation soared, forcing Iceland to seek bailouts from the International Monetary Fund and Europe. They’re still recovering from the damage.
The bankers had since appealed to the Supreme Court, but their appeals were rejected.



In a report from True Activist:

“The sentence given is the heaviest penalty in the country’s history, and Iceland’s special prosecutor said it was evidence that it is possible to crack down on financial fraud without any adverse effect to the economy. Iceland has a reputation for taking steps that other countries have until now refused to even consider, such as nationalizing their banks. This radical change has boosted the Icelandic economy and leaves other European countries trailing miserably behind.”

---

SOURCES:
BBC. Dec 12, 2013. (http://www.bbc.com/news/business-25349240)
Gottlieb, Jenna. Associated Press. Feb 13, 2015. (http://www.apnewsarchive.com/2015/Iceland-Fraud-Case-Former-Kaupthing-bankers-receive-prison-sentence-for-market-manipulation/id-9755f9285c9f4659a2b497f9c0b8a112)
McAdam, Sophie. True Activist. Mar 30, 2015. (http://www.trueactivist.com/iceland-jails-four-top-bankers-for-fraud-in-landmark-case/)

How America Became an Oligarchy

American democracy no longer exists. Instead, America's political system had transformed into an oligarchy, with the wealthy elite steering the direction of the country, regardless of the will of the majority of voters.

Published: April 8, 2015 | Authors: Ellen Brown | Ellen Brown | Op-Ed 

http://www.nationofchange.org/2015/04/08/how-america-became-an-oligarchy/

The politicians are put there to give you the idea that you have freedom of choice. You don’t. . . . You have owners.                                                                        — George Carlin, The American Dream

According to a new study from Princeton University, American democracy no longer exists. Using data from over 1,800 policy initiatives from 1981 to 2002, researchers Martin Gilens and Benjamin Page concluded that rich, well-connected individuals on the political scene now steer the direction of the country, regardless of – or even against – the will of the majority of voters. America’s political system has transformed from a democracy into an oligarchy, where power is wielded by wealthy elites.
“Making the world safe for democracy” was President Woodrow Wilson’s rationale for World War I, and it has been used to justify American military intervention ever since. Can we justify sending troops into other countries to spread a political system we cannot maintain at home?
The Magna Carta, considered the first Bill of Rights in the Western world, established the rights of nobles as against the king. But the doctrine that “all men are created equal” – that all people have “certain inalienable rights,” including “life, liberty and the pursuit of happiness” – is an American original. And those rights, supposedly insured by the Bill of Rights, have the right to vote at their core. We have the right to vote but the voters’ collective will no longer prevails.
In Greece, the left-wing populist Syriza Party came out of nowhere to take the presidential election by storm; and in Spain, the populist Podemos Party appears poised to do the same. But for over a century, no third-party candidate has had any chance of winning a US presidential election. We have a two-party winner-take-all system, in which our choice is between two candidates, both of whom necessarily cater to big money. It takes big money just to put on the mass media campaigns required to win an election involving 240 million people of voting age.
In state and local elections, third party candidates have sometimes won. In a modest-sized city, candidates can actually influence the vote by going door to door, passing out flyers and bumper stickers, giving local presentations, and getting on local radio and TV. But in a national election, those efforts are easily trumped by the mass media. And local governments too are beholden to big money.
When governments of any size need to borrow money, the megabanks in a position to supply it can generally dictate the terms. Even in Greece, where the populist Syriza Party managed to prevail in January, the anti-austerity platform of the new government is being throttled by the moneylenders who have the government in a chokehold.
How did we lose our democracy? Were the Founding Fathers remiss in leaving something out of the Constitution? Or have we simply gotten too big to be governed by majority vote?

Democracy’s Rise and Fall
The stages of the capture of democracy by big money are traced in a paper called “The Collapse of Democratic Nation States” by theologian and environmentalist Dr. John Cobb. Going back several centuries, he points to the rise of private banking, which usurped the power to create money from governments:

The influence of money was greatly enhanced by the emergence of private banking.  The banks are able to create money and so to lend amounts far in excess of their actual wealth.  This control of money-creation . . . has given banks overwhelming control over human affairs.  In the United States, Wall Street makes most of the truly important decisions that are directly attributed to Washington.

Today the vast majority of the money supply in Western countries is created by private bankers. That tradition goes back to the 17^th century, when the privately-owned Bank of England, the mother of all central banks, negotiated the right to print England’s money after Parliament stripped that power from the Crown. When King William needed money to fight a war, he had to borrow. The government as borrower then became servant of the lender.
In America, however, the colonists defied the Bank of England and issued their own paper scrip; and they thrived. When King George forbade that practice, the colonists rebelled.
They won the Revolution but lost the power to create their own money supply, when they opted for gold rather than paper money as their official means of exchange. Gold was in limited supply and was controlled by the bankers, who surreptitiously expanded the money supply by issuing multiple banknotes against a limited supply of gold.
This was the system euphemistically called “fractional reserve” banking, meaning only a fraction of the gold necessary to back the banks’ privately-issued notes was actually held in their vaults. These notes were lent at interest, putting citizens and the government in debt to bankers who created the notes with a printing press. It was something the government could have done itself debt-free, and the American colonies had done with great success until England went to war to stop them.
President Abraham Lincoln revived the colonists’ paper money system when he issued the Treasury notes called “Greenbacks” that helped the Union win the Civil War. But Lincoln was assassinated, and the Greenback issues were discontinued.
In every presidential election between 1872 and 1896, there was a third national party running on a platform of financial reform. Typically organized under the auspices of labor or farmer organizations, these were parties of the people rather than the banks. They included the Populist Party, the Greenback and Greenback Labor Parties, the Labor Reform Party, the Antimonopolist Party, and the Union Labor Party. They advocated expanding the national currency to meet the needs of trade, reform of the banking system, and democratic control of the financial system.
The Populist movement of the 1890s represented the last serious challenge to the bankers’ monopoly over the right to create the nation’s money.  According to monetary historian Murray Rothbard, politics after the turn of the century became a struggle between two competing banking giants, the Morgans and the Rockefellers.  The parties sometimes changed hands, but the puppeteers pulling the strings were always one of these two big-money players.
In All the Presidents’ Bankers, Nomi Prins names six banking giants and associated banking families that have dominated politics for over a century. No popular third party candidates have a real chance of prevailing, because they have to compete with two entrenched parties funded by these massively powerful Wall Street banks.

Democracy Succumbs to Globalization
In an earlier era, notes Dr. Cobb, wealthy landowners were able to control democracies by restricting government participation to the propertied class. When those restrictions were removed, big money controlled elections by other means:

First, running for office became expensive, so that those who seek office require wealthy sponsors to whom they are then beholden.  Second, the great majority of voters have little independent knowledge of those for whom they vote or of the issues to be dealt with.  Their judgments are, accordingly, dependent on what they learn from the mass media.  These media, in turn, are controlled by moneyed interests.

Control of the media and financial leverage over elected officials then enabled those other curbs on democracy we know today, including high barriers to ballot placement for third parties and their elimination from presidential debates, vote suppression, registration restrictions, identification laws, voter roll purges, gerrymandering, computer voting, and secrecy in government.
The final blow to democracy, says Dr. Cobb, was “globalization” – an expanding global market that overrides national interests:

[T]oday’s global economy is fully transnational.  The money power is not much interested in boundaries between states and generally works to reduce their influence on markets and investments. . . . Thus transnational corporations inherently work to undermine nation states, whether they are democratic or not.

The most glaring example today is the secret twelve-country trade agreement called the Trans-Pacific Partnership. If it goes through, the TPP will dramatically expand the power of multinational corporations to use closed-door tribunals to challenge and supersede domestic laws, including environmental, labor, health and other protections.

Looking at Alternatives
Some critics ask whether our system of making decisions by a mass popular vote easily manipulated by the paid-for media is the most effective way of governing on behalf of the people. In an interesting Ted Talk, political scientist Eric Li makes a compelling case for the system of “meritocracy” that has been quite successful in China.
In America Beyond Capitalism, Prof. Gar Alperovitz argues that the US is simply too big to operate as a democracy at the national level. Excluding Canada and Australia, which have large empty landmasses, the United States is larger geographically than all the other advanced industrial countries of the OECD (Organization for Economic Cooperation and Development) combined. He proposes what he calls “The Pluralist Commonwealth”: a system anchored in the reconstruction of communities and the democratization of wealth. It involves plural forms of cooperative and common ownership beginning with decentralization and moving to higher levels of regional and national coordination when necessary. He is co-chair along with James Gustav Speth of an initiative called The Next System Project, which seeks to help open a far-ranging discussion of how to move beyond the failing traditional political-economic systems of both left and Right..
Dr. Alperovitz quotes Prof. Donald Livingston, who asked in 2002:

What value is there in continuing to prop up a union of this monstrous size? . . . [T]here are ample resources in the American federal tradition to justify states’ and local communities’ recalling, out of their own sovereignty, powers they have allowed the central government to usurp.

Taking Back Our Power
If governments are recalling their sovereign powers, they might start with the power to create money, which was usurped by private interests while the people were asleep at the wheel. State and local governments are not allowed to print their own currencies; but they can own banks, and all depository banks create money when they make loans, as the Bank of England recently acknowledged.
The federal government could take back the power to create the national money supply by issuing its own Treasury notes as Abraham Lincoln did. Alternatively, it could issue some very large denomination coins as authorized in the Constitution; or it could nationalize the central bank and use quantitative easing to fund infrastructure, education, job creation, and social services, responding to the needs of the people rather than the banks.
The freedom to vote carries little weight without economic freedom – the freedom to work and to have food, shelter, education, medical care and a decent retirement. President Franklin Roosevelt maintained that we need an Economic Bill of Rights. If our elected representatives were not beholden to the moneylenders, they might be able both to pass such a bill and to come up with the money to fund it.

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Authors

Ellen Brown

Bio: Ellen is an attorney, author, and president of the Public Banking Institute. In Web of Debt, her latest of eleven books, she shows how the power to create money has been usurped from the people, and how we can get it back. Her websites are http://webofdebt.com and http://ellenbrown.com.

 

Tags democracy, monetary reform, oligarchy, public banking

The Federal Reserve is enriching oligarcs

Peter Thiel Blasts: The American Political System Is "Not A Democracy Or Constitutional Republic"

Submitted by Tyler Durden on 04/03/2015 22:00 -0400

• Elizabeth Warren
• Fail
• Federal Reserve
• None
• Too Big To Fail
• White House

inShare15

 

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

The obvious conclusion that the U.S. is neither a democracy nor a constitutional republic has been a key topic of conversation here at Liberty Blitzkrieg over the past several years. One of the most powerful representations of this unfortunate fact came from an academic study highlighted last year: New Report from Princeton and Northwestern Proves It: The U.S. is an Oligarchy.
A couple of days ago, Peter Thiel sat down with Tyler Cower at George Mason University’s Mercatus center for a chat about all sorts of interesting things. The Washington Post picked up on some of his thoughts regarding the American political system, which I think deserve some additional commentary.
On the one hand, he accurately identifies the U.S. as nothing resembling either a democracy or a constitutional republic. He then goes on to point out that the system we have is one in which the power is increasingly concentrated in undemocratic, “technocratic” agencies. Where I think he falls way short is with a failure to ask what interests are driving the decisions of these undemocratic entities. Any unbiased observer can clearly see that it is oligarchs driving the oligarchy, as opposed to independent thinking bureaucratic technocrats driving a technocracy. I have published countless articles proving this to be the case. Naturally, a billionaire might have a harder time recognizing this.
Fortunately, the writer of the Washington Post article picked up on his oversight. Here are some excerpts:

Democracy in America is dead, according to Silicon Valley investor Peter Thiel.

“It’s not clear we’re living in anything resembling a democracy,” he told a crowd Tuesday at George Mason University. “We’re living in a republic that’s modified by a judicial system, that’s been largely superseded by these agencies that drive the decision-making.”

“Calling our society a democracy is very misleading,” Thiel went on. “We’re not a republic; we’re not a constitutional republic. We live in a state that’s dominated by these technocratic agencies.”

Thiel says that organizations like the Federal Reserve have been allowed to roam too far. Calling government agencies “deeply sclerotic and deeply nonfunctioning,” Thiel pointed to the Energy Department’s failed investments in Solyndra as a case study in bureaucratic mismanagement and executive overreach.

The Federal Reserve is a great example. Is it really a public agency, or is it a banking cartel that has gone into partnership with the U.S. government? Who does the Federal Reserve really work for, financial oligarchs or the middle class? It seems to me, that the tremendous success of the Federal Reserve system in enriching financial oligarchs who extract far more from society than they give back, has been imitated throughout the economy until we got what we have today — a centralized crony capitalist corrupt mess.
Also, what about this: Four “Too Big to Fail/Jail” Banks Threaten to Hold Back Funds to Democrats Over Elizabeth Warren. Are we living in a bureaucratic technocracy, or an oligarchy run by and for the rich and powerful merely using powerful agencies as tools of control?

“You could use ninth grade geometry to show this was never going to be commercially viable,” he scoffed in reference to Solyndra’s round solar panels, which he argued weren’t as efficient as conventional solar collectors.

Investors such as Chamath Palihapitiya, a former Facebook vice president and one of the founders of lobbying group FWD.us, have said that it’s now “excruciatingly, obviously clear to everyone else that where value is created is no longer in New York, it’s no longer in Washington, it’s no longer in L.A. It’s in San Francisco and the Bay Area.”

For Thiel, this trend is tied to a much broader notion about globalization.

“I think with the benefit of hindsight, we will realize 2007 was the peak of globalization,” he said.

As a result, the venture investor isn’t all that confident about the future relevance of Washington and New York in world affairs, either. States like California and Texas — relatively “inward-looking” places, said Thiel — are stronger bets.

In Thiel’s worldview, it makes sense to want to short the nation’s capital. And his theory explains why Washington seems so deadlocked. It’s just the wrong tool for the job, and the government is adapting in the only way it knows how: by becoming more assertive.

Here’s where the Washington Post writer picks holes in some of what Thiel states.

But the idea that the entire dog of government (or the country, even) is being wagged by the tail of agencies is a little far-fetched when we know there are so many other factors that play a role in decision-making.

Take lobbying, for example. Some of the most powerful nongovernmental interests in the country are constantly seeking to shape how policy gets made in Washington. Lobbying doesn’t just happen in Congress; it happens at the White House and at federal agencies, too. Corporations, nonprofits, trade groups — you name it — they’re all pushing policymakers to take one course of action or another. You’ve heard of the military-industrial complex? Citizens United? If federal agencies were truly running the show, none of that would matter. But it does.

Even that glosses over another fundamental Washington dynamic you may be familiar with: The revolving door theory of politics, which describes what happens when a federal official leaves their job and becomes a lobbyist, or vice versa. OpenSecrets keeps a whole list of people who’ve done that. At the FCC, the agency I cover most closely, we’ve seen former commissioners become leading lobbyists for the cable industry and the wireless sector, and we’ve seen former industry lobbyists become full-fledged chairmen.

If Thiel is right and agencies are hijacking the country, then companies and business interests deserve part of the blame.

These are basic features of Washington that someone in Thiel’s position should grasp.

Check out the entire conversation here. Certainly plenty of interesting stuff to think about:

Iceland suggests removing the power of commercial banks

Iceland looks at ending boom and bust with radical money plan

Icelandic government suggests removing the power of commercial banks to create money and handing it to the central bank

http://www.telegraph.co.uk/finance/economics/11507810/Iceland-looks-at-ending-boom-and-bust-with-radical-money-plan.html

In Iceland, as in other modern market economies, the central bank controls the creation of banknotes and coins but not the creation of all money Photo: Getty Images

By AFP

8:18PM BST 31 Mar 2015

Iceland's government is considering a revolutionary monetary proposal - removing the power of commercial banks to create money and handing it to the central bank.

The proposal, which would be a turnaround in the history of modern finance, was part of a report written by a lawmaker from the ruling centrist Progress Party, Frosti Sigurjonsson, entitled "A better monetary system for Iceland".

"The findings will be an important contribution to the upcoming discussion, here and elsewhere, on money creation and monetary policy," Prime Minister Sigmundur David Gunnlaugsson said.

The report, commissioned by the premier, is aimed at putting an end to a monetary system in place through a slew of financial crises, including the latest one in 2008.

According to a study by four central bankers, the country has had "over 20 instances of financial crises of different types" since 1875, with "six serious multiple financial crisis episodes occurring every 15 years on average".

Mr Sigurjonsson said the problem each time arose from ballooning credit during a strong economic cycle.

Monetary Reform - A better monetary system for Iceland by marco saba

^{Frosti Sigurjonsson's report, entitled A Better Monetary System For Iceland}
 
He argued the central bank was unable to contain the credit boom, allowing inflation to rise and sparking exaggerated risk-taking and speculation, the threat of bank collapse and costly state interventions.
In Iceland, as in other modern market economies, the central bank controls the creation of banknotes and coins but not the creation of all money, which occurs as soon as a commercial bank offers a line of credit.
The central bank can only try to influence the money supply with its monetary policy tools.
Under the so-called Sovereign Money proposal, the country's central bank would become the only creator of money.
"Crucially, the power to create money is kept separate from the power to decide how that new money is used," Mr Sigurjonsson wrote in the proposal.
"As with the state budget, the parliament will debate the government's proposal for allocation of new money," he wrote.

^{Iceland's three largest banks collapsed}
Banks would continue to manage accounts and payments, and would serve as intermediaries between savers and lenders.
Mr Sigurjonsson, a businessman and economist, was one of the masterminds behind Iceland's household debt relief programme launched in May 2014 and aimed at helping the many Icelanders whose finances were strangled by inflation-indexed mortgages signed before the 2008 financial crisis.
The small Nordic country was hit hard as the crash of US investment bank Lehman Brothers caused the collapse of its three largest banks.
Iceland then became the first western European nation in 25 years to appeal to the International Monetary Fund to save its battered economy.
Its GDP fell by 5.1pc in 2009 and 3.1pc in 2010 before it started rising again.
 

Aristocrats 'feel entitled to abuse people'

Aristocrats 'feel entitled to abuse people' says son of the 10th Earl of Sandwich who was raped by his father as a child 

• Robert Montagu made remarks while discussing book telling of his abuse
• Said 'noteworthy families' are often given more opportunities to abuse
• He was groomed and attacked by his own father from age seven to 11
• Confessed abuse to his mother and family doctor but nothing was done 

By Chris Pleasance for MailOnline

Published: 19:04 GMT, 28 March 2015 | Updated: 21:18 GMT, 28 March 2015

Read more: http://www.dailymail.co.uk/news/article-3016137/Aristocrats-feel-entitled-abuse-people-says-son-10th-Earl-Sandwich-raped-father-child.html#ixzz3WJs2N0cr
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Those from noteworthy families often feel entitled to abuse young people according to Robert Montagu, the son of the 10th Earl of Sandwich who was abused by his own father as a boy.

He made the comments at the Oxford Literary Festival while discussing his book, A Humour Of Love, in which he reveals years of abuse, including a single rape, carried out by father Victor.

Mr Montagu said that, during his years at Eton, rape was common, adding that people with 'entitled backgrounds' were given 'more opportunities' to be abusive towards children.

Robert Montagu, son of the 10th Earl of Sandwich, suffered years of abuse by his father. Speaking at a Literary festival in Oxford, he said 'noteworthy families' often feel entitled to abuse people

In a report for The Times, he said: 'People from noteworthy families do feel a sense of entitlement.

'It is true that people from an entitled background have more opportunities, maybe circumstances have made it more likely that they will abuse.

'We used to have this ethos that you just kept quiet about things in your life. At school you were taught the stiff upper lip. Thank goodness we got rid of that lip.'

Mr Montagu was abused by his father (pictured) from the age of seven to 11, including a single instance of rape

Mr Montagu has talked in the past about how a loving relationship with his father turned to abuse when he was aged seven.

It began after his mother, Rosemary Peto, goddaughter of Queen Maud of Norway, left the family home, and he believes his father used it as a way to cope with the loss.

He wrote about being groomed by his father, as hugs and tickles gave way to kisses, which in turn gave way to serial and serious abuse.

In a previous interview, he said: ‘It was what we did every day. It was accepted that I would always go to his room at half past seven in the morning until quarter to nine.

‘I felt I was fulfilling a function of my mother who was missing. It was my duty, to some extent, to be in the position I was in and that is the reason I did not resist. 

'That feeling was hinted at by my father, by sometimes making comments comparing me to my mother. 

'He never said it in outright terms – we never discussed what he was doing in any terms whatsoever – but it was implicit that I was helping him emotionally.'

At the time of the book's publication, in September last year, he said it would likely sour relations between himself and his elder brother John, the 11th earl, who is also a peer in the House of Lords.

Speaking now, he says his family are 'cross and unhappy' with his book, and that he is given dark looks at family events, and hug which are then turned into pushes.

However, he has repeatedly stated that he felt the story needed to be told, after he revealed the abuse to his mother and family doctor as a young boy, only for it to be swept under the rug.

Mr Montagu has previously told how, every morning, he would be called to his father's room at the family home at Mapperton, in Dorset (pictured), and would stay there from 7.30 until 8.45am

He said that following his confession he expected his father to be taken to jail, but nothing was done, and Mr Montagu was even returned to his care, though the abuse stopped.

Mr Montagu says there were other victims, beside himself, and that he has personally spoken to ten of them - though believes there could be another ten he has yet to identify.

Asked why there was such a reluctance for her father's story to be told, his daughter Fiamma said: 'In our case it has been because of the Establishment. Everybody has a vested interest in getting him to shut up. 

Read more:

• Why aristocrats ‘feel entitled to be abusive’ | The Times

Read more: http://www.dailymail.co.uk/news/article-3016137/Aristocrats-feel-entitled-abuse-people-says-son-10th-Earl-Sandwich-raped-father-child.html#ixzz3WJrgxxa7
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