Niall Ferguson has just made the first call for widespread debt rescheduling that I have seen published in a major newspaper–today’s Australian, and I am sure it is reproduced in many newspapers around the world (if your local paper is owned by News Limited, there’s a good chance that you will find it there).
The article is linked here–The great repression–and some excerpts are shown below. Read it and refer your friends to it. Finally the call has gone out that what is needed to get out of this crisis is not more debt, but less.
“There is something desperate about the way people on both sides of the Atlantic are clinging to their dog-eared copies of Keynes’s General Theory. Uneasily aware that their discipline almost entirely failed to anticipate the crisis, economists seem to be regressing to macro-economic childhood, clutching the multiplier like an old teddy bear.
The harsh reality that is being repressed is this: the Western world is suffering a crisis of excessive indebtedness…”
“The idea of modifying mortgages appalls legal purists as a violation of the sanctity of contract. But, as with the principle of eminent domain, there are times when the public interest requires us to honour the rule of law in the breach. Repeatedly in the course of the 19th century, governments changed the terms of bonds that they issued through a process known as conversion. A bond with a 5 per cent coupon would simply be exchanged for one with a 3 per cent coupon, to take account of falling market rates and prices. Such procedures were seldom stigmatised as default. Today, in the same way, we need an orderly conversion of adjustable rate mortgages to take account of the fundamentally altered financial environment.
No doubt those who lose by such measures will not suffer in silence. But the benefits of macro-economic stabilisation will surely outweigh the costs to bank shareholders, bank bondholders and the owners of mortgage-backed securities.
Americans, Churchill once remarked, will always do the right thing – after they have exhausted all the other alternatives. But if we are still waiting for Keynes to save us when Davos comes around next year, it may well be too late. Only a Great Restructuring can end the Great Repression. It needs to happen soon.”
February 28th, 2009 at 3:04 pm
Hi Steve
If this way forward is to proceed wouldn’t we end up with a situation where many people gear themselves up in the short term in anticipation of a forced write down of their debts in the near future.
In other words from a purely selfish perspective wouldn’t it be best for me to go out and buy a house with a big mortgage – leaving aside a years payment in case I lose my income – and gambling on having the debt written down? I am not advocating this course of action but nature abhors a vacuum and where people can sniff out a new way of speculating they will.
Or have I missed something in the way the debt would be written down that would compensate for this possibilty?
Lastly, please fogive me if I have missed your coverage of this question in a previous post.
February 28th, 2009 at 3:12 pm
By the time this solution becomes politically palatable jc1, lenders won’t be giving money even to their own children, let alone to would be house purchasers or share market speculators.
February 28th, 2009 at 3:27 pm
jc1,
You have just highlighted why debt forgiveness/writing down is so inherantly unfair when practiced with Govt intervention. It penalizes the responsible borrowers and rewards the speculators (at taxpayer expense!!). The moral hazard INCREASES as people do exactly what you have hypothesized and INCREASES leverage on expectations of taxpayer funded bailouts.Speculation would tend to get worse, especially in housing.
There is only one morally responsible way of managing debt. If one is caught with too much they should liquidate or default but must always remain bound by contract. If contract is not honoured, who pray tell will loan in future? And if they do, do you expect they would do so accepting a similar or higher risk premium, thereby making all new borrowers pay the price of the write down?
Ferguson wants a bailout for speculative borrowers who made poor bets on their hyped up McMansions. Let them (NOT THE TAXPAYING PUBLIC) suffer the consequences of their errors so that they, their children and childrens children don’t make those same mistakes.
It’s called triage, and we better learn it’s benefit very quickly lest we all follow Iceland down the worm hole.
February 28th, 2009 at 5:05 pm
This article and the solution proposed is focused on America and American banks. How does this solution apply to Australia and Australian banks given that apparently we have excessive debt but the banks are not in trouble?
Also news released last night US GDP down six percent for the Dec quarter (not annualised, quarterly drop!). Early indicators (CAPEX, Retail Trade) in Australia point to a slightly positive GDP result.
February 28th, 2009 at 5:18 pm
Comments by GSM above regarding the tendency of these kinds of measures to reward the imprudent and wild speculators have some merit. Would it not be the case that such a measure would only apply to people who have been in their homes for a certain length of time, and would only apply to mortgages on owner-occupied homes? What other mechanisms would you suggest to minimize ’scamming’ these kinds of measures?
February 28th, 2009 at 5:35 pm
Are we in the ‘calm before the storm’ or perhaps ‘the eye of the storm’?
I’ve just returned from getting my papers and the obligatory lottery ticket. I happen to live not far from one of those shopping strips that real estate agents describe ‘trendy such and such a street’ when they describe a property for sale as being ‘a short stroll from trendy such and such a street’.
It’s business as usual down there! The shopping strip has lots of expensive clothes shops and lots of restaurants, and I noticed yet another expensive clothes shop has just opened and a new sushi bar is about to open.
Lots of people sitting around with their purchases from the expensive clothes shops (sorry that probably should be boutiques) having lunch and/or a latte.
Is this the same with anybody else in their local area?
February 28th, 2009 at 6:11 pm
Given the post is about Niall Ferguson, it seems appropriate to repost the link to the Thursday 18 minute Lateline interview with him here:
http://www.abc.net.au/lateline/includes/lateline_20090202.htm
February 28th, 2009 at 6:12 pm
Jc1,
I think Niall Ferguson meets your objections in the article. Sometimes moral hazard must be tolerated. Worries about moral hazard caused Lehman to go down. That didn’t help at all.
February 28th, 2009 at 6:19 pm
I can see where the “unfairness” arguement comes from regarding the mooted debt restructuring, but propose the following as a counter point:
I suggest nearly *everybody* has enjoyed the benefits of the giant ponzi scheme in some way or another: whether that be directly by being able to borrow more than they realistically should; or indirectly as a consequence of the [debt fuelled] rises in prices for goods and services (and ensuing period in the ultimately doomed economic utopia).
Consequently, shouldn’t pain from the from the failure of the ponzi scheme be shared amongst us all as well?
February 28th, 2009 at 6:22 pm
The problem with letting all of the speculators ’suffer the consequences’ is that we have ALL borrowed too much in the last few decades.
If all of the insurance companies (AIG, Lloyds, etc) simply become bankrupt, you may find that you have no house, car, fire, flood, or life insurance. There simply aren’t any insurance companies that can stand if the major reinsurers fail.
Likewise, if all bad debtors are punished, Australia is stuffed. We are one of the biggest debtor nations in the world after the US http://itulip.com/forums/showthread.php?t=8278
Our only real hope is a winding back of all debt in an orderly fashion. This will probably take about 10 – 15 years.
February 28th, 2009 at 6:27 pm
TITINT,
Australia is 6mths to a year behind the US in it’s participation to the GFC. At present our banks are not in trouble and this may remain so if unemployment remains within manageable levels.
However, should unemployment here reach 10%+ , watch how fast the Australian banks will fold under the weight of unperforming loans and written down assets. You will then see them doing the same as US banks , sticking their hands out for Federal bailout cash – taxpayer dollars. Would KRudd deny them? “Risk” the Australian banking system? Very doubtful given he has already labelled this an issue of “national security”.
Whilst we are not there yet, we could well be headed for such a situation, especially if the Australian economy is to be as hard hit as Prof Keen is portraying.
February 28th, 2009 at 6:27 pm
Effit: The appropriate Australian analogy is the beach. All of the water has suddenly disappeared – but look, there are loads of fish flopping around – all you have to do is walk down and pick them up.
February 28th, 2009 at 6:36 pm
Effit, re shopping. I think it depends on the particular day of week you observe (and hence who it is that is shopping). Near where I live North Shore, mid-week (retirees and mums) seems much quieter a noticeable pullback, Sat morning however (for the time poor), no problem lots of busyness.
An anecdote, my mother-in-law reported that she seemed to make a shop assistant’s day (mid-week) at DJs recently when as the only customer visible in the store she bought two items.
…calm before the storm.
February 28th, 2009 at 6:51 pm
To continue our cargo drops from accross the water, so that we can live in a manner to which we have become acustomed. Australia needs to borrow (to increase our debt) by $1,000,000,000 per week! The banks have been doing this for us so what happens when they collapse, as collapse they must.
The goverment is now primed to take on the continuing borrowing needs by their bill to issue $200,000,000,000 in treasury notes, or pehaps they intend to rescue the banks at our expense. That is until the government defaults.
But the government just signed a “free trade” agreement with Indonesia (what the), which, apart from ensuring more job losses will (if this crisis is just a “blip”) require more foreign borrowing. The Pacific Brands layoffs were possibly in anticipation of this agreement. More sucked in first home buyers will be needed (to pay this interest bill) than we have people.
The government and for that matter the parliament seem to be oblivious of the consequences of the comming depression. Do they think that Australia is a country on Mars if not what planet?
When we do default we may have a food supply problem just like Ireland in the 1840’s. Check out you local supermarket not much “produce of Australia” on sale there. Get the vegie patches going and the chooks laying.
February 28th, 2009 at 6:53 pm
GSM,
Big difference between Australian banks and American banks.
The American banks are what is referred to as investment banks. Australian banks are very much conservative retail banks. Australia’s big investment bank is in fact in trouble at the moment, with a slightly smaller Australian investment bank B&B on the verges of bankruptcy (I’m not up to date with what is happening to B&B). But the core of Australian banking is retail.
There is a big difference between those two types of banks with respect to the current situation. The investment bank model is to take investors funds and reinvest them at a profit. Retail banks are more like money shops, largely funded by retail deposits, which have been growing lately as people are looking for safer places to put their money.
This takes us to the root cause of why the banks are in trouble, and that is liquidity. An investment bank needs investor funding for its capital, in a way this is a highly leveraged model and when investor funding disappears, and assets lose value, this model quickly turns unviable.
I’ve stated before that banks will always get capital depending on the price. At the moment banks are paying about 2% credit premium above the historical norm, at the height of the liquidity crisis, just after Lehman collapsed, some banks, out of desperation were issuing at 3-4% above norm. Can you see how the investment banking model is extremely sensitive to such differences in capital funding costs? Australian banks are not only not that sensitive to the wholesale market because of it’s large retail base, but also don’t actually hold any sub-prime assets or anything even closely equivalent and remember there are many more assets linked to sub-prime loans than there arer sub-prime loans.
It is not a matter of some arbitrary time lag, the financial situation here is very different.
Let’s identify the experiment, the hypothesis is that current debt levels are unsustainable to the extent that they will cause a collapse of the financial system. This is already happened in the US, but not Australia with comparable debt levels. Now if the hypothesis fails, and it may or may not we don’t know yet
(and I think that anyone that says that they know with any certainty does not understand the uncertainty of the system), we need to consider an alternate hypothesis.
February 28th, 2009 at 6:57 pm
Niall Ferguson’s article refers to a “restructuring” of the insolvent banks as part of the answer, but doesn’t address the question of how such a restructuring would remove the bad debt from the system.
Thus, this doesn’t really seem like a “solution” to me – either the government itself has to pay back the bad loans (with potentially far reaching consequences for sovereign risk), or the bad debt has to be crystallised (with consequences a la Lehman Brothers).
Am I missing something here? Or is even this article still trying to make things appear to be better than they really are.
In this respect, I also note that his article doesn’t refer to cancellation of mortgage debt, merely to resetting loans to lower interest rates and longer maturities. So, a long slow decline rather than a sharp and quick decline, but a very substantial decline nevertheless.
February 28th, 2009 at 7:12 pm
Re: Shopping
I went to a Harvey Norman during a weekday and walked thru the furniture section and into the bed area – almost no one in there – maybe 3 punters?
There were quite a few people in the TV and electronics area.
Real Estate
Talked to a guy at work – he has 2 investment properties – he is convinced there will be no downturn in housing as Australia has a huge shortfall of homes…….
i suggested it was affordable homes not simply homes that Australia was short of…..
but he won’t have a bar of it…
according to him there is a shortfall of housing and that is why many people in their 30’s are living with their parents……i suggested that maybe these people have no choice due to being priced out…..
nahh he says – mate housing always goes up……..
ok.
February 28th, 2009 at 7:16 pm
Well, well.
From comments above , it certainly looks like we are all Socialists now. Especially when it comes to begging for taxpayer funded bailouts from debt laden falling asset prices.
No Suitablyironicmoniker and ickers you are wrong, not ALL Australian’s have borrowed irresponsibly. Far from it. Last I looked, only some 30-40% of total Australian households hold mortgages for example. There are many households (over 50%) who have managed credit card debt responsibly. Where were the same calls for the sharing of profits when asset prices were soaring? Silence. This is hyprocracy pure and simple.
Socializing the losses of households and keeping zombie banks alive with taxpayer treasure is exactly where Japan went after 1990 and it has been a rolling Depression since.
It is a recipe for disaster.
February 28th, 2009 at 7:36 pm
Even if you don’t have a mortgage, you participated in the debt bubble of the last 15 years. Your super was invested in ABC learning, Aristocrat, ANZ, Babcock & Brown, Mac Bank, Rio…
All of these (and many more) pursued aggressive policies of ‘wealth accumulation’ fueled by borrowing at low interest rates. SO we all participated in a giant Ponzi scheme, and we are all going to have to find a way out. Housing is only the trigger that starts the meltdown.
Residential mortgages are not the cause of the asset bubble, only a (major) symptom.
February 28th, 2009 at 8:14 pm
TruthIsThereIsNoTruth
Two points the US banks have less total exposure to foreign debt because the US government has not had a fetish about fiscal surpluses and has taken on a larger proportion of the foreign debt.
Also the certaintly in the current system comes with the exponential function, and exponentially rising debt.
SuitablyIronicMoniker
We also benefitted from the huge cargo drops of cheap everything. Now we pay!
February 28th, 2009 at 8:37 pm
SuitablyIronicMoniker,
Please don’t presume to know anything at all about my financial situation.
Just because someone has been suckered by imploding Ponzi property prices does not give that someone the right to expect public funds to bail them out when their speculations go pear shape. Or should we simply take the Communist view and declare all property as public owned, where we ALL prosper from it’s appreciation?
That attitude is how this country has bred a parasite lifestyle for those in our society that make a living from Govt handouts, rather than their own honest labour and productivity. But I accept that is a political arguement, not one for this blog.
If you have been reading here regularly, you will have noted Professor Keen’s many posts concerning Australian’s long love affair with debt. It has grown now to unmanageable proportions and must correct.Many Australians (certainly not ALL with mortgages) have been borrowing way beyond their means because they were speculating that house prices rise forever. In those cases GREED and PRICE SPECULATION was at the heart of it. Here on the Gold Coast and in other cities evidence of this is revealed daily.
I most certainly do not agree to Govt squandering my taxes to make whole anyone who has financially sufferred because of their poor judgement or greed.
February 28th, 2009 at 8:47 pm
BrightSpark1
The capital markets which the banks use for their wholesale funding are global markets, investors mainly come from US, Japan, Europe and UAE. It’s irrelavant whether the debt is foreign in terms of liquidity, except you have to convert to your home currency. The market for bank issued paper is not the same as the market for government issued paper. However there is an obstacle coming up in that Australian banks are currently issuing government guarantee and the government has some big capital requirements of it’s own coming up, which will test the appetite of the market to buy AAA rated debt.
“Also the certaintly in the current system comes with the exponential function, and exponentially rising debt.” – goodness me.
February 28th, 2009 at 8:49 pm
GSM,
I have not heard of the Australian government bailing out Australian mortgagees the way it is happening in the US. Am I missing something or are we just speculating on this in the forum?
February 28th, 2009 at 9:21 pm
I take it as given that there is no way out without reducing debt levels, and no “fair” way to do that. Debt must be defaulted, written off or inflated away, which means that the holders of financial assets must lose all or part of the value of what they hold. This is inescapable.
To mangle Marx: from each according to his ability to bear the loss, to each who can help build the future. We can safely leave moral hazard and fairness until we can afford them.
February 28th, 2009 at 9:27 pm
GSM, I would much appreciate it if you did not misrepresent my comments. I never said ALL had borrowed. Instead I stated that many have benefited from the debt bubble, and I include in that non-borrowers.
I put forward a postulate that every taxpayer has been a beneficiary of the debt bubble. Put simply, to be a taxpayer you have to have made an income. This income will have been in some way partially (though maybe not directly) financed by the debt bubble.
If this postulate holds true, it is then “hyprocracy” NOT to spread the effects of the debt bubble bursting across taxpayers too.
February 28th, 2009 at 9:30 pm
TruthIsThereIsNoTruth
There has been some talk of the RBA repo financing mortgages for banks.
Another obstacle is that the bank’s debt incurred by their currency conversion function is accrued in foreign currency and must be paid with the interest in foreign currency. This country has not earned an excess of this for more that 33 years.
The end of the exponential “hockey stick” is (goodness me) now very close.
February 28th, 2009 at 9:50 pm
BrightSpark1
The FX and foreign interest rate risk is dealt with seperately, the capital liabilities risk is alligned with the asset risk, I’m not 100% but I believe this is an APRA requirement. I’m also pretty sure that the risk is managed (swapped) by a third party. Your statement on this is simply false.
Ahh, ofcourse the all telling hockey stick, why didn’t those idiots at the RBA think of that one!
February 28th, 2009 at 9:55 pm
I agree that we have all benefited from The Great Ponzi Scheme. GDP growth has been artificially inflated for 15 years by new borrowings. It’s hard to avoid benefiting from that unless you where eating roots and living in a cave.
February 28th, 2009 at 9:59 pm
don’t you think to some extent we’ve also benefited from the commodity boom?
February 28th, 2009 at 10:10 pm
TruthIsThereIsNoTruth
The foreign exchange risk and foreign liabilities are in and must eventually be honoured in foreign currency.
We have not earned an excess of this for 33 years.
Which of these statements are false?
Capital liabilities risk is alligned with the asset risk but the assets were Ponzi financed and over valued.
The RBA idiots are blinkered by their neo classical economic dogma. They know nothing of the exponential function.
Even in this resource boom we were still running a current account defecit of $80,000,000,000 per year. Not enough benefit by far.
February 28th, 2009 at 10:26 pm
“The foreign exchange risk and foreign liabilities are in and must eventually be honoured in foreign currency.” – yes as required by APRA this must be repaid by a third party who manages this risk, this is done via a cashflow swap, so the debtor bank pays all it’s cashflows in its own currency, this is established at the beginning of the transaction.
I think the RBA needs BrightSparks like you to who can clearly identify exponential hockey sticks when they see one. Your country needs you!
February 28th, 2009 at 11:13 pm
I have tried to make sense of Australia’s debt problem is round numbers. Let’s say there’s 700b in foreign debt and that yearly interest on that is 5%. This amounts to 35b a year in interest or approximately 3b a month. Gross National Income (GNI) was around 250b headed to probably 150b. At 150b this means that Australia is spending about 23% of its GNI servicing its foreign debt. Thus on the surface it seems Ok.
However this type of simple interest rate scenario is not applicable in many instances as Oz banks borrowed short from overseas lenders and lent long locally. Note that Kevin Rudd stated that Australia may have to roll over 75b within the next two years. At present Libor in stable but an inverted Libor yield curve could spell disaster for Australia as these overseas loans won’t be able to be rolled over except at a loss. I have read in our news papers that the gov is already rolling over some loans for some of our businesses and thus tax payers are on the hook.
I think it’s fair to say that Australia is at the mercy of the ability of foreign entities to lend it money. An unforgiveable situation thrust onto the nation by banks and gov incompetence.
As for debt forgiveness! I really can’t see how it can work. In a debt based monetary system someone’s debt is another person’s income. Thus if investors of MBS are to take a haircut then all of the pension funds and the like that bought MBS will lose income – it’s that simple. Not to mention that economists fail to write down an equation describing the damage done by moral hazard. As to inflation being good; this is more moral hazard and it could well lead to revolution – Zimbarbwie anyone.
February 28th, 2009 at 11:37 pm
TITINT,
No, as yet there is no US style bailout. But we certainly are getting there. Already KRudd is backstopping Commercial Real Estate, much to the glee of the Banks and big property. under consideration is a deal to bail out homebuilders;
http://www.abc.net.au/news/stories/2009/02/02/2480476.htm
“Housing industry calls for $2b bailout”
Have no fear, it’s already on the drawing books.
ickers,
you posted;
“I suggest nearly *everybody* has enjoyed …”
Hardly a misrepresentation… unless you care to clarify what “nearly everybody” means.
The bubble in house prices was a well known established ponzi scheme participated in by many. Many benefitted. Clearly, many speculators won’t. For those that lose you postulate all taxpayers should now share in their loss?
Let’s hope and pray Australia never has to suffer such an openly Socialist and economically doomed agenda.
February 28th, 2009 at 11:42 pm
aac
I think the cost of funds is looked at the margin, so it is not assumed that existing funding will be replaced with equivalent rates. Rollover is not really a rollover as such, because there is no direct rolling over of facilities (except in rollover facilities
). It’s more of a case of replacing expiring deals. The risk there is mainly in credit spreads widening, not really libor risk. The funding is always swapped to aussie rates so there is some basis risk there, which I don’t understand as you have to work directly in this field to fully appreciate. I do know however that at the moment the danger is the credit spread, which exploded after Lehman’s but don’t forget banks are issuing government guaranteed at the moment.
One indicator of how the marginal cost of funds is looking for the bank is the pass through of interest rate cuts, which recently has been very good. Notice at the start of the crisis the pass through was not 100% and that’s because credit spreads were blowing out, but have been stable recently as far as I know. The funny thing at the moment is that AAA rated government guaranteed bank issues still have a significant credit spread.
February 28th, 2009 at 11:47 pm
gsm
I read that article as a bailout of the construction industry, not mortgagees. However there is support for mortgagees through rate cuts and hand outs as well as indirectly through the government guarantee. Thanks to which banks have been able to get cheaper funding and therefore pass on interest rate cuts to customers. BTW government guarantee earns the government 0.7% for every dollar issued.
February 28th, 2009 at 11:58 pm
TITINT,
Like I said,
“No, as yet there is no US style bailout. But we certainly are getting there.”
March 1st, 2009 at 12:01 am
We won’t need a US style bailout – there are no subprime loans in Australia
March 1st, 2009 at 12:29 am
TITINT;
Right .Just like “sub-prime is contained”- Paulsen.
Up until about mid 2008 most US commentators also were spruicking “there will be no US bank bailout”. Today, the US openly contemplates bank nationalization.
The point being- sh*t happens and things change.
Let’s hope we don’t need a bank bailout here of any style. But, despite your assurance, I won’t be counting on it
March 1st, 2009 at 12:35 am
TruthIsThereIsNoTruth
You seem to take an optimistic view which is contrarian and good to see especially as you seem to know what you are talking about. I would like to agree but I see it quite differently thanks to people like Steve Keen.
>It’s more of a case of replacing expiring deals.
Yes, not being able to borrow short leads to the Oz gov taking on the loan that was previously a foreign loan. Approximately 220b per quarter is rolled over and Rudd has stated that the gov needs to take on 75b of loans over the next two years. Of course gov numbers are so elastic and is often based on the best case scenario. I am still of the opinion that we are at the mercy of foreign lenders being able to lend to us.
The gov guarantee for banks has simply moved risk from individual banks to the gov – a truly diabolical move as bad banks get to shelter under the tax payer umbrella. The risk is seen in the rise in the cost of insuring sovereign debt – ie. Credit Default Swap prices for sovereign debt. I won’t post a link as I have read that links are sometimes blocked; CDS prices can be seen at the Bespoke Investment web site.
Banks matching official interest rates is a reflection of low credit demand as business and consumers tighten their belts. Only time will tell as to whether loan loss provisions negate this. In the end interest rates are driven by the cost of gov debt. Attempts to credit inflate by the gov risks higher interest rates and maybe even a collapse of our bond market and or the Au dollar. In both cases it would be a disaster for Oz. All states in Oz are currently in a massive capital spending mode in an attempt to create/preserve jobs. This is dangerous in the present climate; if the Au dollar tanks (and I mean really tank) then the gov must increase interest rates to prevent capital flight and of course to maintain its buying power. In the end a country such as Australia must defend its currency as it imports just about everything outside of mining and agriculture.
And BTW, some mistakenly believe that the Oz gov can ‘print’ money, ie. issue long term debt with the RBA buying it, without severe consequences. We are not the US and even the US will find it difficult to go down the quantitative easing path as it would destroy the only real asset it has and that is the integrity of the US dollar. The Fed has not yet printed and I think they will in the end do the right thing – mind you the politican on Capital Hill just dont impire confidence.
I also can’t understand why many in Oz seem to think that we are decoupled from the rest of world. Our income is getting cut in half; China will probably be hibernating for the next decade or two due to massive over production (ie. half of its office space is empty) and the US, UK and Europe is toast. Thus how is it that we are fine – I don’t understand.
March 1st, 2009 at 12:35 am
I still think there’s no viable solution to this financial crisis. Credit will just end up tightly controlled for decades, banks will go back in time, financial instituions will be tightly regulated. Eventually people will come to realise that the only way out is new tech, alternative energy, and in other words doing more with what we’ve got.
March 1st, 2009 at 3:14 am
Steve is right on about understanding that the “global crisis” is one of exponential debt. He is also right that the only way through this crisis is through universal “debt repudiation”.
So many “Republicans” and “Free Marketers” in the United States really do not understand the depression years and what eventually led to our recovery. They say that “World War 2″ bailed out the economy, and they are partially correct….What else had occurred that would eventually lead to a recovery?
According to them, the economy should NEVER have recovered…I mean think about it, the “Government” was enormous, consuming unimaginable percentages of the gnp…the tax rates on the “rich” were extortionary…reaching 90+%…who would have invested in such an environment??…and yet 10 years later, the economy was humming along quite nicely.
What they do not understand…is basic economics…..unfortunately.
What led to the eventual recovery was…surprise surprise…massive debt repudiation that was going on since 1929, and the “redistribution” of wealth through high taxes on the “rich” and massive wage increasing “work programs” for the poor.
My goodness….when poor people have money to spend…and they start to spend…even though tax rates are at 90+% on the top brackets…somehow the investments start to flow again…I just can’t figure it out…consumers without debt and money to spend….hmmmm
I wouldn’t feel too sorry for those high income “earners” paying 90+% of their “income” to the people…I mean “government”. I mean think about it…most high income people make their wealth through CAPITAL GAINS. That is…for all you financially illiterate “Republicans” “Free Marketers” and “Libertarians” is how most of the “high end” “earners” make their “income”, and I’m sure they really sweat every day to do that huh……rrrriiiiiiigggghhhhhttt.
The people with this kind of wealth…trust me people…will once again “invest” when they see the “economy” in recovery.
Once the gini coeficient returns to more “normal” levels, these poor rich people will once again jump at the opportunity to pay 90+% of their “hard earned wealth” to the people…I mean “Government”
History shows this to be the case.
March 1st, 2009 at 4:22 am
Here is just some food for thought:
Source:
http://www.lcurve.org/
Is the vertical spike just Bill Gates? NO. In 1997 over 144,000 tax returns were filed with adjusted gross incomes of $1 million or more [up to 240,00 in 2004]. As the vertical spike rises it thins down to a few individuals, but there is a growing class of billionaires that collectively holds a substantial fraction of the wealth of the country. [In March 2006 Forbes reported 793 billionaires in the US with combined net worth of $2.6 trillion. In March 2007 Forbes reported 946 billionaires in the US with combined net worth of $3.5 trillion. That is a 1-year increase of 19% in the number of billionaires and an increase of $35% in their net worth during a time of increasing poverty. Severe poverty is at its highest point in three decades.]
March 1st, 2009 at 4:39 am
You know I was having a conversation with my wife about this kind of thing last night. She grew up under communism here, whereas I grew up in the UK.
When I first came here (the Czech Republic) in the mid 90’s, quite a few Czech colleagues asked me “why do you want to come here? Isn’t life in the UK much better. This is still just a communist country.” This was only a few years after the revolution and of course not everyone had disappeared to a Western nation after the travel restrictions had come down.
Truth is I was having the time of my life in the CZ. There was much more of an emphasis on the outdoor life and simple pleasures. On the weekends everyone was out walking, skiing, swimming, or off to their country homes to lead a weekend of rustic existence (under communism here everyone had a flat in the city and most had a second recreational home with basic facilities like outdoor toilets and well-water).
In contrast with the UK, where people lead a bored existence in overpopulated areas and do nothing more than drink, talk about football and complain about work, I was in heaven. All I really remember about the UK was a stressful childhood where my parents worked in stupid jobs and were constantly worried about how they’d scrape the pennies together to pay the mortgage.
In the CZ, we actually didn’t even have mortgages until about 5 or 6 years ago.
I remember telling those first colleagues that in my opinion people had a much higher quality of life in Prague than in the UK. I said people were much freer in the CZ (this is post revolution mind). I said in the UK they don’t have central authority, they have decentralised tight social control, and to wait until it comes here. Everyone has everything – cars, phones, homes – on debt, and all they do is slave and complain to pay the debt.
The Czechs were kind of surprised to hear this, after years of propaganda painting a picture of freedom and luxurious bliss. I had to disillusion them.
Anyway, talking to my wife. Now we are in the situation where we have a mortgage, the crisis is making everyone uncertain, we aren’t sure about the job, the kids, etc. For her this Capitalism and Freedom that was sold to her isn’t all it was cracked up to be. I remember thinking about how I expected this to come as soon as debt came – the Western form of social control. I said “You know, you go to the bank and ask for a home. They insert a number into a database logging the value of the home (creating money) and expect you to work for about 30 years or they’ll send the police in take all your possessions. Under communism, you went to the local council, you asked for a home, they gave it to you, and you had to work or they’d come and seize all your possessions. What’s the difference?”
She did actually say that there are more choices and less restrictions. So I suppose that’s a plus.
March 1st, 2009 at 5:19 am
…oh and I forgot the main point. The point being that today we have bankers and similar folk, whereas yesterday we had the Communist Party. Same basic role in society and same effect on people. Bankers should be advised that it wasn’t that long ago that members of the Communist Party were found hanging from lampposts.
March 1st, 2009 at 8:47 am
i suppose this would be a case of ‘enemy of my enemy is my friend’? because niall ferguson doesn’t seem at all like he’d share any ideas on economics with you besides the debt part (fellow at the Hoover Institute, wrote that the “great contraction” of credit and economic activity … was the prime mover of the Depression.”
March 1st, 2009 at 9:21 am
What we need is a system that increases the *price* of those things that push *absolute costs* (time, energy, resources) down.
March 1st, 2009 at 9:38 am
Hi Guys
First time on Steve Keen site.
Recommend to watch this
http://www.chrismartenson.com/crashcourse
After much reading reading and research in the last 18 months about the economy and how money works and its history i can’t believe our Governments and banks have repeated similar problems of the past. (a naive comment i agree).
It almost makes you wonder, are we in this position by design, according to G Edward Griffin author of The Creature from Jeckyll Island, bailouts like today are in the bankers handbook. Who picks up the interest for all this money being made? and wouldn’t a central bank be ideal in today’s position? from a bankers viewpoint that is.
If the consequences of too much debt/credit that we are experiencing today lead to depressions around the globe doesn’t this then lead into a bigger issue of a currency crisis?
After all isn’t the real issue, as history seems to indicate, being money or fiat currency having less and less value the more its expanded or printed?
Isn’t this the reason why gold was used as a regulator of currency supply as Gold is considered real money of intrinsic value.
So therefore can anyone explain why the next global issue wouldn’t be a currency crisis.
With the US having exported so much money, and countries adopting a competitive policy to their own currencies, which is decreasing their value, hence that’s why it appears gold is going up, but its actually the value of their currency(fiat currency)falling.
As quoted by Chris Martenson ‘currencies today are like skydivers all falling at varying speeds’.
I’ve noticed countries starting to default Iceland, Latvia with Ireland, Greece and Austria on the edge with excessive loans to Eastern Europe countries who now can’t pay back because the EE currencies nave dropped significantly against Austria.
I assume the same basic principals apply to a country as they do a company. Once again too much debt, added with the changes in exchange rates and BIS currency policies.
If this is true, why wouldn’t the Yuan or other commodity based (oil, gold) based currencies be the new reserve with the US loosing its status and inherited priviledges.
Surely if this was 1944 at Bretton Woods today, the Chinese would be the new reserve currency.
I understand the Chinese have their gold mills runnig overtime to produce as much gold as possible.
Of the track from the subject a little, but it is all linked.
I understand (or don’t yet)only a small amount of how the whole system works and it is totally absorbing.
i stumbled across this website
http://www.chrismartenson.com/crashcourse
which is a brilliant presentation explaining money, debts and credit and its exponential limits.
I will donate to Steve Keen to make a similar presentation on the Australian system to be distributed to the people of this country.
It should be nice and simple so most can understand.
…remember watch this, must see. http://www.chrismartenson.com/crashcourse
All the best
March 1st, 2009 at 10:03 am
I think we are in so much trouble now our imaginations can’t really comprehend it. Let’s look at the strikes against us.
1. General Environmental degradation.
2. Global warming (requires special mention).
3. Global mass extinction event as large as any in earth’s history and happening much more rapidly.
4. Resource exhaustion.
5. Global financial Crisis leading to a Great Depression.
6. Global glut of armaments.
7. Humankind’s propensity to war rather than cooperate in desperate situations.
March 1st, 2009 at 10:15 am
Robbo said
‘So therefore can anyone explain why the next global issue wouldn’t be a currency crisis’.
I believe it will be a currency crisis and the fact that the US is the world’s reserve will make it all the worse.
Btw – i have seen
http://www.chrismartenson.com/crashcourse
it is excellent..
March 1st, 2009 at 10:28 am
Frank,
I hear you, I grew up in communism as well, where kids played together in communities. I knew every kid in the neighbourhood. Now parents are afraid to let their kids out because of a few cases of child sex trafficking, which is one of the many bad things that have emerged as a result of less control. The countries are run by criminal gangs.
Anyway, everyone did have their own little flat, which was owned by the government but you passed on the right to that flat to your kids. You know who owns the flats now? – the banks and common people have to pay a significant portion of their income to banks for most of their working lives.
Through mortgages the banks have a claim to your income, just like serfs had to give a proportion of their income to the lords in return for their right to exist. As banks lend out higher and higher proportions of the property value the key for banks is to find the sustainable sweet spot.
Don’t get me wrong, this isn’t a conspiracy plot by the banks, it is a system where the fundamental driving force is making money and companies, including banks will simply keep adjusting their strategies to optimise the way they make money, which over the years has been to give more and more money to home buyers, which of course has an effect on the price. I often wonder what homes would be worth if there were no home loans.