Autor: Steve Keen

University of Western Sydney

We already are in another Great Depression

I have just been sent a transcript of my interview on HARDtalk, done by Jane Ross, who (to quote her blog) is “a freelance editor specializing in personal story”. Jane has posted the transcript to her blog (“Steve Keen on the New Great Depression“), and she has given me permission to repost it here.

Jane also kindly edited it for printing–something for which I am very grateful. Often language will slip in a live interview, and you can say the opposite of what you intended. This tends not to be noticed by listeners (they appear to substitute what you meant to say), but when it’s printed it can look stupid.

(Transcription and editing by M. Jane Ross)

Sarah Montague of the BBC’s HardTalk (HT): Another Great Depression is all but inevitable. That’s the view of my guest today. No wonder he’s been called the merchant of gloom. But then Steve Keen is one of the few economists to have predicted the global financial crisis. And while he used to be a lone voice challenging the economic consensus, more and more people are now listening to him. His way of avoiding Depression: bankrupt the banks, nationalize the financial system and start all over again.

HT: Steve Keen, welcome to HardTalk.

Steve Keen (SK): Delighted to be here.

Do you really think we’re headed for another Great Depression?

We’re already in one. And the same thing applied back in the last Great Depression that people didn’t call it one until it was over. Because in an experience like this you’re always hoping there’s change just around the corner, the system will turn around. It’s only after you’ve been through it people look back and see that it’s been going for some years. So the Great Depression wasn’t called the Great Depression until sometime in the late 1930s.

For those people who are watching listening to this thinking okay I can cope with things as they are now, they should relax because it’s just a few more years of the same?

I wouldn’t call it relaxing but certainly the situation now which economists in particular are hoping is transient is going to be a drawn out experience. The best we can hope for is something like what Japan has been through. Japan still talked about having a lost decade since 1990 but it’s really been a lost two decades.

The best we can hope for is a lost two decades?

If we leave it to the basic mechanism by which capitalism eliminates excessive debt which is bankruptcy and a slow grinding process of paying the debt down. Once we get back down to the level of debt that the system actually needs which is far lower than the level of private debt we have now then the process will be over. But that could take something like 20 years.

You’ve also suggested that it could take a rising level of violence.

The trouble is when you have a growing population and an economy that is used to growth and people expecting to get employed when they leave school and they find that in fact there are not enough new jobs coming on to handle the new entrants into the labor market, even if you grow slightly less than the rate of population change, that means that [you have] a population which you’re saying in the recent media is a lost generation. Well, that lost generation only has one outlet and that is frustration and violence. It is not the way to manage an effective society to be caught in a trap like this.

And of course what we know from the last Great Depression was that it had a profound effect on politics and not least led to the rise of for example Hitler.

Absolutely. Hitler got there because he was the person who reversed the conventional economic behavior of his time and turned Germany around from unemployment of 25% and more down to full employment and of course building a huge war machine in the process. [He was] regarded as a god by his people for doing it and then we had the catastrophe of the second world war. But he would never have risen to prominence had it not been the total despair of people in the middle of the last Great Depression. So you can have very very bad social outcomes out of a process like this. Even if people get enlightened about what caused it and after the event have more wisdom about the amount of debt they will take on, the transition can be dreadful.

What we have seen so far have been movements like Occupy Wall Street in capital cities around the world. I know you’ve spoken to those protestors in Sydney. When you think about their anger — it’s neither left nor right — but it’s certainly not right-wing.

That’s right. That’s one of the positives to me. The Tea Party was a predecessor in that sense in terms of a visceral reaction to what they thought was going wrong with the economy and that has certainly had a right wing flavor to it. This Occupy Wall Street really is progressive and generally you’d typecast them as Left and I’ve certainly seen quite a few politicians saying it’s the “usual suspects” in the protest movement doing it.

But in fact it has been very broadly based. Very much youth based, but also particularly in America large numbers of people who are laid off industrial workers, some laid off financial workers. People who wouldn’t normally be expecting to be sitting in a tent at the bottom of Wall Street.

So why do you think that’s heartening?

A major part about their attitude is that they feel they’ve had their trust in society betrayed. They want to bring about a harmonious society. They’re not socialists in the old-fashioned overthrow-capitalism style of a lot of previous protests. They are emphasizing they believe society should be something we can actually trust in and that’s been destroyed by what’s happened with the financial sector. They’re trying to rebuild that trust. They’re not quite certain how, it’s a very vague movement, but that is not your man-the-ramparts, burn-everything-down socialism.

Some of them are of course opposed to capitalism which you are not. It’s just the form that this capitalism is taking.

I’m opposed to capitalism parasiting itself which happens when we let the financial sector take over and generate far more debt than we need.

Before we get into that, as far as these protestors are concerned, you’ve told them that actually they should be going further. In a sense you’ve seen it as a call to arms. You’ve said, “You should be occupying the economics departments of universities.”

Yes. Because you don’t get into as disastrous a situation as we are in now without extraordinarily bad thinking. And economics departments were the source of that bad thinking.

How far do you think they should go, though? Would you be saying to everybody get out in the streets? Is that the way you feel about it?

I think we have to change the political power balance right now. Fundamentally the financial sector, effectively the creditors of the world, were dominant politically and have certainly set the political agenda for the last 20 or 30 years. The debtors have been down at the bottom of the pile. Now we need to reverse that and turn the power back towards the debtors rather than the creditors.

Your argument is that politicians won’t listen until there is something to make them listen.

Absolutely. Politicians are reactive individuals. They’re not leaders most of them. The vast majority of them. They’ve been going along with the general trend of believing that a larger financial sector, more deregulation, is a good thing. And their campaign donations come from there as well as the overall milieu in which they think. To get them to change around from that they really have to see that as being a dead end. Not a way to reelection but a way of losing elections.

Your solution is remarkably radical. We should write the debt off, bankrupt the banks, nationalize the financial system and start all over again.

That’s if it was easy to do. It’s not. If we had the situation of the 1930s where the banks owned all the debt — the banks had extended the loans and therefore if you wrote the loans off, the banks were the only sector that would directly suffer — it would be easy. The trouble is the banks haven’t simply created far more loans to the debtors. They’ve also then bundled those as securities and sold them to pension funds and individuals.

So it’s too interconnected to do it.

It’s far too interconnected to do it in the old-fashioned way of a jubilee. You could not do it without causing as much destruction as you’re trying to prevent.

Now you’ve used the phrase “the old-fashioned way of a jubilee.” That’s because it is something that has happened historically which is a writing of debts.

If you’ve ever been to the forum in Italy and taken a look at the friezes that are cut into the stone there, one of them is of the burning of the books of debt, which is a regular activity in pre-capitalist societies of actually writing off the debt completely and liberating people who had been put into debt slavery beforehand. If you hadn’t had that escape valve none of those societies would have lasted.

Tell us how it could work as you are proposing it. Whose debts are you are writing off?

Well, you have to see where the debt is a good or bad thing. And debt in some senses is definitely a good thing. Because rising debt is what actually fundamentally finances investment. Increases in productivity, new technologies, the iPads of the world and so on — fundamentally they’re financed by rising debt levels. That’s the good aspect of debt. The negative side is when we borrow the money to gamble on rising asset prices. And that’s what we’ve been doing globally, encouraged by the banks to gamble on rising share prices, rising house prices.

So I want to borrow a million pounds because I’ve got this fabulous idea that is going to be a new technology, a new innovation and society will benefit from it — good. I want to borrow a million pounds because I want to gamble on financial instruments — bad!

That’s right. If you look at the form of the good bit in America’s economy for example, that seems to be something which is sustainable at the debt level of something like about 50 or 70% of one year’s GDP. Whereas the current level of debt in America peaked at 300% of GDP. It’s about 4 to 5 times the level of government debt.

But that’s not all bad debt. An awful lot of that for example in the US as we know is people wanting to own a house and in order to do so taking out a mortgage.

Yes. What they’ve been caught up in, that has caused a bubble in house prices. There’s no denying now that there’s been a house price bubble. And the cause of it was actually borrowing money in the first place. Without the house price bubble they could be back with 75% level of debt.

Where we are now, are you saying we write off the mortgages, the debts of people like you and me?


Even people who can afford to pay?

We have to look at the situation that we’re in and say, What do we face if we continue trying to honor debts that we now know should never have been extended in the first place? What do we face? The best example of that is Japan and Japan is a far more cohesive society than anywhere else on the planet really. They have been in a 20 year slump where the rate of [economic] growth has been lower than their population growth, and they’re having rising unemployment even with a falling population.

Now if we look at that in OECD nations, we face two decades of that. So what I’m talking about, yes, of course this is an extreme change but it is basically admitting something which should be obvious to everybody by now: the credit system has failed.

Okay, but in terms of what the solution is, and we can get into the details of why you think the economic one has all been wrong, but you’re saying: Write off the debts of anyone who owes a mortgage?

No. There’s a certain level of debt which is necessary for such things as obviously business investment but also there’s a proportion of people who wish to own their own homes. If we go back historically and see what level of debt did that involve in terms of the ratio to the GDP, then in my own country of Australia for example, that level of debt was about 10% of GDP. Now it’s since risen to 100% of GDP. Now, most of that extra 90% simply financed the rise in house prices itself. It’s a bubble.

Somebody, under your solution, is coming in and saying that’s a good debt, that’s a bad debt?

No. If we try to do it on an individual basis, we’ll be here forever and we’ll feed lawyers more than ….

Who’s making the decision about the broad sweep?

That’s why it has to be an intelligent modern jubilee. We can’t say: Worthy borrower, unworthy borrower. We have to have a systemic approach because fundamentally households did not make the bad decisions. The bad decisions were made by the banks to lend in the first place.

Accepting what you identify as the problem and trying to understand what the solution is, in this new system that we’re replacing the current bad one with, who’s deciding who gets the debt write-off and who doesn’t?

I wouldn’t say it was a case of making a choice between one individual and another. It has to be a systemic process by which we reduce the level of debt-finance money in the economy and increase the amount of government-created money. Because we have two sources of money in a capitalist economy. The banks can create money by extending loans. The government creates money by running a deficit. Now back in the early 60s the ratio of government created money to the overall money supply was 15%. It’s fallen so far that we’ve got an entirely debt-based system which has driven speculation. We need to create the government money to balance out the credit. So I’d actually have a government creation of money system approach to try to rebalance the system and reduce the private debt.

The government, the central bank, prints money to pay off people’s debts? What I’m wondering is, you say, “Write off debts.” And it’s basically private debt that you want written off. Mortgages, companies’ debt. How is that working?

We’d have to give the money to the debtors rather than to the creditors. If you look at what’s been happening in the last three or four years, all the rescues Bernanke has done, the banks around the world have done, have been to give money, to create money and give it to the banking sector in the belief the banking sector will lend to get the economy starting again. Now that is bizarre because we know one reason they won’t lend is they’ve lent too much already. So all that money has been ineffective.

So who are you giving the money to?

[This is] a working model. But the idea would be, you would give the money to the public and if the person who received it was in debt, the first thing they would have to do is pay their debt level down. They could not spend.

So basically a government would say, Look, we’re not giving this extra money to the banks. We might even take back money that we put into the banks. We’re going to give all effectively per capita. If you have any debts it has to go to that.

That’s right, it pays the debt down first of all. The reason we have to do something like this rather than simply writing the debt off is…

It’s a tax cut?

No. It’s very different to cutting a tax. If you give the money to everybody and then require those who are in debt to reduce their debt then they’re better off obviously. But the complaint people make about a jubilee or a debt write-off is, What about me? I’ve saved money. I’ve bought bonds. I’m going to lose.

Exactly, it’s the moral hazard argument. It’s basically, you’re rewarding failure.

Yes, but the system has failed not the individuals in it. And if we don’t admit that we’re going to spend another 20 years in this grinding process.

But you will have people running businesses who hear this and say, Well, hold on a second….

But they’ll be getting the money as well.

But they’ve been managing themselves well. Their rival who was a badly run business and should have gone out in the process. A recession should have weeded them out. They’re getting a boost too.

Everybody gets a boost because we’re not trying to boost individuals we’re trying to eliminate a mistake of the financial sector that’s been going on for 40 years.

The scale of what I’m talking about sounds extreme in contrast to normal policy. But normal policy has allowed a 40-year buildup of the level of debt to simply unsustainable scales. One of my colleagues Michael Hudson puts it beautifully. “Debts that can’t be repaid won’t be repaid.” You simply have to work out how you don’t repay them. We have to have a sophisticated approach to eliminating a systemic level of debt that should never have been built up in the first place.

You give all this money to individuals or companies. There’s that [question] of how you give to companies. They pay back to the banks. You said, “If we keep the parasitic banking sector alive, the economy dies.” Under your model, these parasitic banks as you call them would die?

No. If you did a normal debt write-off, yes the banks would have to be bankrupted, reorganized, nationalized and sold again later back into private ownership. I’m not arguing for nationalization of banks permanently. But if you did this they wouldn’t need to be because what they’d lose in loans they’d gain in loan repayment. Their assets wouldn’t change.

But what would happen of course is, [currently] they actually make money out of [making] the loans so their cash-flow would decline radically so you’d probably still have organizations which would be financially challenged by that. Their cash-flows would drop drastically. So the banks would still have difficulty. We still need to manage them in some fashion. But it wouldn’t be a case of having to shut them all down. Because fundamentally they’re not just illiquid, most of them on current conditions are insolvent.

If you are effectively ensuring their survival this way, what do you mean when you say we need to kill off these parasites?

Banking behavior can be positive when it provides investment funds for corporations and working capital and a small amount of money for consumption. That’s the positive role of banking. Its become a negative role because fundamentally they’re financing Ponzi schemes. They’re giving us money to gamble on asset prices but the money they’re giving us to gamble with is actually what is causing asset prices to rise. And this behavior has taken over the financial sector in the last 30 or 40 years. That is the parasitic behavior.

And this parasitic behavior goes to the heart of your argument and your thesis of what has been wrong with the model of economics for decades. You talk about the instability there. Your argument is that actually instability can be a good thing.

This is the classic argument the non-orthodox economists have been making ever since Joseph Schumpeter. Instability in capitalism is part of why it’s creative. The instability that means you can see a potential opening for a solid-state recording device over those cludgy old Walkmans gets us to iPods and all the technological developments we’ve seen that are actually part of Occupy Wall Street on a grand scale. That’s a creative instability. Now that also has, over the top of it, the possibility of financial instability which is the dangerous one. I’m trying to promote what I see as the creative instabilities and reduce the destructive instabilities of capitalism.

Your argument about the way capitalism has worked is that it unchained Frankenstein’s monsters, which is this financial instability.

If you look at Robert Harris’s [novel] The Fear Index, he starts with a quote from Frankenstein. The danger in the system is that banks make money by creating debt. They always want to create debt. Most of us will decline the opportunity to take that debt on because debt’s not a good thing. Having debt is an obligation. For example, mortgage. The meaning of mortgage is death contract, in Latin. Not a charming thing to be in.

The only reason we take on more debt than we need is because we get persuaded that we can make a gain out of it by leveraged speculation. That lets banks persuade us to take on far more debt than we should which they have very successfully done in the last 40 years largely under the cover of my discipline.

You talk about banks persuade us to take on more debt. It sounds as though your model, which is that people’s debts could be written off, would persuade them to do it all again.

You have to prevent the possibility of asset bubbles being financed by leverage again.

So you’re saying wipe the slate clean. The example is Greece. The EC task force that’s going in to try to sort it out looked at the figures and their quarterly [report] said there’s 60 billion euros of unpaid outstanding taxes. Now that’s effectively private debt that’s owed to the government. Now if it’s wiped off….

We’re getting confused between private debt and sovereign debt. And also the very peculiar nature of the Greek taxation and financial system.

But the Greeks wouldn’t have the sovereign debt problem if people paid their taxes.

But you’ve got the sovereign debt problem everywhere else as well. I mean America’s got rising levels of sovereign debt. Why does it have rising levels of sovereign debt? Because the private sector is reducing its debt having caused far too much to begin with. All this emanates, across most of the globe, [from] a private debt bubble.

Greece is rather an anomaly. If we actually focus upon the anomalies and analyze what to do in their cases, we’re going to mislead ourselves with the rest of the system.

You had a Eureka moment — a light-bulb moment — at 1 a.m. on a December morning back in 2005 when you looked at the private debt figures for Australia growing exponentially. You wrote and then you actually checked.

I’d written “debt has risen exponentially compared to incomes” in an expert-witness case. This was a draft. And I thought, I can’t really get away with that as the expert. I’m not the barrister, I can’t use hyperbole. So I dived in to check the data and thought it won’t be quite exponential so I’ll need to modify but it’s certainly been rising. That was in the back of my mind. I plotted the data and [found] the perfect exponential curve from 1964 through to 2005.

I thought, this process has to change. When it changes and debt starts to reduce again we’re going to have an enormous financial crisis. Somebody has to raise the alarm and I’m probably that somebody.

You were called a tall poppy for doing so because you were going against the grain.

Oh, yeah.

Because people weren’t taking account of private debt. They didn’t think that it was necessarily important. They worried about government debt but not what rational individuals were taking on.

That’s because economists have a mythical view of how money is created that basically sees banking as being an intermediary between people who are patient and therefore save money and people who are impatient and therefore want to spend money and all you’re doing is transferring spending power from the patient to the impatient. So you can forget about the aggregate level of debt. So it’s a blind spot.

You alone are clever enough to see this?

No, no, no. I’m standing on the shoulders of a true giant, Hyman Minsky. And there’s many other non-orthodox economists around the world who have also been influenced by Minsky and are not being listened to. I’ve just got the loudest mouth but certainly I’m not the only one.

You’ve referred to: Progress happens one funeral at a time, when you’re talking about economists.

I was actually using an analogy from Max Planck talking about physicists and explaining why he failed to convince his Maxwellian colleagues of quantum mechanics and finally abandoned the possibility of ever doing it and thought he would just wait until each of them die off and the young kids come through who can cope with something as bizarre as quantum mechanics to understand the world properly. A similar thing applies in all sciences but economics is actually probably worse on that front.

They are so wrong and you are so right?

They are so wrong and they should know they’re so wrong but they don’t know their own literature well enough to realize that they are wrong.

But you do?

I do and so does a large number of non-orthodox economists. I’d say probably about 10% of academic economists would fall into the non-neo-classical camp. They would be call themselves either post-Keynsians or Austrians. There’d be some Marxists, evolutionary economists and so on. We’ve been watching this deluded majority and being excluded and derided ourselves by that majority knowing they’re following a totally foolish vision of how capitalism functions. And ultimately the only way we can convince the world that they’re wrong is after they have caused a spectacular economic crisis which they’ve done. So now we’re coming out of the woodwork. We’ve been there for 40 or 50 years.

In your view of how things are happening, can you see a politician bold enough to do what you think is necessary?

Not yet. If Obama had been elected in 2012 rather than 2008 it might have been possible. Somebody with his charisma could have seen that. But unfortunately I can’t see anyone on the horizon right now.

Steve Keen thank you very much for coming on HardTalk.

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