ABC Rear Vision: The US Economy post the 2008 Crash

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The ABC Radio National program Rear Vision is a current affairs program that presents "contemporary events and people in their historical context".

I was recently interviewed by Rear Vision for a retrospective on the crisis, entitled "Here we go again: A look at the US econ­omy post the 2008 GFC crash” which debated why the cri­sis is still with us today.

Other speak­ers were Ed Har­ri­son from Credit Write­downs, with whom I’m very much in agree­ment, eco­nomic his­to­rian Richard Sylla from New York Uni­ver­sity, and Steve Hanke from John Hop­kins with whom I almost com­pletely dis­agree. Hanke doesn’t even dis­cuss the level of pri­vate debt, puts the stan­dard neo­clas­si­cal argu­ment that gov­ern­ment debt is the prob­lem, that a stim­u­lus is con­trac­tionary (the so-called “reverse Ricar­dian Equiv­a­lence” argu­ment) and so on, ideas which I regard as total nonsense.

Fol­low the link above to hear the pro­gram via the ABC web­site, or click below to lis­ten to it here. I’ve also repro­duced the tran­script below, and cor­rected a few errors in the ABC original.

Steve Keen’s Debt­watch Podcast


The Tran­script

Jour­nal­ist [archival]: One of the top three credit rat­ing agen­cies, Stan­dard & Poor’s, has down­graded its rat­ing of US debt from AAA to AA+. It’s the first time the US has been down­graded since it first received a Triple-A rat­ing from Moody’s in 1917.

Jour­nal­ist [archival]: John Cham­bers said S&P’s deci­sion to reduce US cred­it­wor­thi­ness was because for too long it’s been spend­ing when it should have been saving.

John Cham­bers [archival]: Instead of stor­ing our nuts for the win­ter, we ate out nuts and now we’re in a posi­tion where we have very lit­tle fis­cal room to manoeu­vre with an econ­omy that’s tak­ing a sec­ond leg down.

Annabelle Quince: Just over a week ago, Stan­dard & Poor’s down­graded the United States credit rat­ing from AAA to AA+. The down­grade sent shock­waves through stock mar­kets across the world and raised the spec­tre of a double-dip recession.

Hello, I’m Annabelle Quince and this is Rear Vision on ABC Radio National, Radio Aus­tralia, and via the net. Today, we’re going to try to piece together how and why it is that the United States of Amer­ica, the largest econ­omy in the world, has ended up in such a mess.

While there’s a debate about how to fix America’s eco­nomic woes, most econ­o­mists and com­men­ta­tors agree that the main cause of the cri­sis is debt-both pri­vate and gov­ern­ment debt.

Accord­ing to Steve Keen, asso­ciate pro­fes­sor in eco­nom­ics and finance at the Uni­ver­sity of West­ern Syd­ney, debt in the United States has been accu­mu­lat­ing for decades.

Steven Keen: You need pri­vate debt to finance proper invest­ment, but what the banks make money out of is financ­ing Ponzi schemes. Right from the get-go in Amer­ica and from about the mid-60s in Aus­tralia, pri­vate debt to income has been ris­ing. And America’s gone from 45 per cent of GDP in 1945 to 300 per cent of GDP by 2009; that’s when it peaked out.

Now, all that’s been financ­ing spec­u­la­tion, and when you finance spec­u­la­tion what you’re really doing is gam­bling on ris­ing asset prices. The gam­ble itself dri­ves the asset prices up and then at some point, of course, it has to fall over, because when you’re bor­row­ing money to gam­ble on ris­ing asset prices, you’re not actu­ally increas­ing the num­ber or the pro­duc­tiv­ity of those assets. So you’re increas­ing the debt bur­den on soci­ety with­out actu­ally increas­ing society’s capac­ity to pay.

As soon as peo­ple start to try to reduce their debt, you go from ris­ing debt boost­ing the econ­omy to it slash­ing demand. Go back to 2008: the GDP in Amer­ica was roughly $14 tril­lion but the increase in debt that year was roughly $4 tril­lion. So that means total spend­ing in the econ­omy was about $18 tril­lion. Sim­ply slow­ing down the rate of growth of debt; that means you went from hav­ing an $18 tril­lion econ­omy to a $12.5 tril­lion econ­omy in two years. That’s what caused the crisis.

Jour­nal­ist [archival]: A year ago, those who pre­dicted that giant invest­ment banks would fail were dis­missed as mad­men. Today, in the early hours of the morn­ing in New York, the ven­er­a­ble firm Lehman Broth­ers announced that it would file for bankruptcy.

Steve Hanke: Towards the end of 2002, one of gov­er­nors of the Fed­eral Reserve Bank gave an impor­tant speech in November-now Chair­man Bernanke, he was a gov­er­nor at the time, but he’s now the chair­man of the Cen­tral Bank.

Annabelle Quince: Steve Hanke, pro­fes­sor of applied eco­nom­ics at John Hop­kins University.

Steve Hanke: He said the main dan­ger we faced in the United States is defla­tion and he con­vinced the then chair­man of the Fed­eral Reserve, Alan Greenspan, that he was right and Greenspan con­cluded that defla­tion was the num­ber one prob­lem fac­ing the United States.

They started press­ing on the money sup­ply accel­er­a­tor as fast as they could at the cen­tral bank and they reduced inter­est rates down to one per cent by June of 2003. Now, at the time that was a record low and this started and enabled all the bub­bles to be created-the hous­ing bub­ble and com­mod­ity price boom was asso­ci­ated with this. Loads of liq­uid­ity all over the world and a falling dol­lar, and the falling dol­lar was the cause for roughly, in my esti­ma­tion, between about 55 and 65 per cent of all the com­mod­ity price increases. All these things were started with the Fed. So that’s how we got all these bub­bles that started expand­ing and even­tu­ally popped.

Jour­nal­ist [archival]: And so what is the feel­ing? Is the feel­ing that bank­ruptcy is inevitable now, is that the concern?

Inter­vie­wee [archival]: Yeah, I think so and there’ll be more, there’ll be more.

Jour­nal­ist [archival]: Hours ago Mer­rill Lynch also con­firmed it has fallen vic­tim to the bear market.

Steve Hanke: They saw noth­ing com­ing. The Fed and all the estab­lish­ments all over the world, the estab­lish­ment politi­cians, they saw none of this com­ing. The Inter­na­tional Mon­e­tary Fund, they had not a clue that any­thing was amiss. It did of course really hit the fan in Sep­tem­ber of 2008 when Lehman Broth­ers col­lapsed and then the US offi­cials in par­tic­u­lar went into kind of a panic mode, indi­cat­ing that if there wasn’t an enor­mous bailout pro­vided that the whole finan­cial sys­tem would collapse.

Jour­nal­ist [archival]: The US gov­ern­ment has launched a takeover of the nation’s two biggest mort­gage companies.

Henry Paul­son [archival]: Fan­nie Mae and Fred­die Mac are so large and so inter­wo­ven in our finan­cial sys­tem that a fail­ure of either of them would cause great tur­moil in the finan­cial mar­kets here at home and around the globe.

Steve Hanke: And the sec­re­tary of trea­sury, Paul­son at the time, had sent a three-page let­ter up to the con­gress request­ing hun­dreds of mil­lions of dol­lars in bailout money-$700 mil­lion in bailout money-you know, close to a tril­lion dol­lars. And just in a three-page let­ter with no back­ground or any­thing. And of course they turned him down and no one paid any atten­tion to it. And he said, ‘Well, if you don’t give me the money everything’s going to collapse.’

Henry Paul­son [archival]: This tur­moil would directly and neg­a­tively impact house­hold wealth from fam­ily bud­gets to home val­ues to sav­ings for col­lege and retirement.

And Paul­son, the sec­re­tary of trea­sury, pan­icked. He was a for­mer head of Gold­man Sachs and had a fine record as an invest­ment banker but no qual­i­fi­ca­tions what­so­ever for oper­at­ing in the pub­lic sphere and as a sec­re­tary of treasury.

And he pan­icked, he totally pan­icked. That’s the gen­eral prob­lem. You had per­son­al­i­ties in there that were ama­teurs who had no idea of what they were doing and no idea that they were cre­at­ing pub­lic panic. It wasn’t the reces­sion or depres­sion of 2009; it was the panic of 2009 that we’re talk­ing about here.

Steve Keen: The rea­son we’re in this crisis-many, many rea­sons, but one essen­tial rea­son is extremely bad think­ing. Bernanke was pub­lish­ing papers with titles such as ‘The Great Mod­er­a­tion’, talk­ing about how won­der­fully the econ­omy was going and con­grat­u­lat­ing him­self for his good mon­e­tary man­age­ment, right up until 2006–2007. So they just basi­cally saw sta­bil­ity. They were com­pletely ignor­ing the level of debt.

So the cri­sis took them com­pletely by sur­prise, they had no idea it was com­ing, and because it was so dev­as­tat­ing they went into total panic mode. Now if you read Hank Paulson’s account, On the Brink, at one point he’s explain­ing that $700 bil­lion injec­tion he got the con­gress to give, which he actu­ally gave to the banks. And explain­ing what was going on he said, ‘I didn’t dare men­tion a tril­lion dol­lars, that would cause sheer panic, but I had to men­tion a large num­ber and I said $700 bil­lion,’ and then he said, ‘I was then asked, “What would hap­pen if you didn’t sign it all over?“‘ His answer was, ‘May God help us all.’

Jour­nal­ist [archival]: ‘Des­per­ate’ is a word being used a lot in the United States at the moment, and ‘cri­sis’. Both are apt descrip­tions of what’s going on. The Amer­i­can Con­gress failed to pass the bailout bill and the col­lapse of the finan­cial res­cue plan has sparked a huge sell-off on Wall Street.

Jour­nal­ist [archival]: Well, there’s dis­be­lief at this death blow for the bailout bid. After all, let’s not for­get Pres­i­dent George W. Bush was pre­dict­ing a deep and painful reces­sion for the US if it’s not passed.

George W. Bush [archival]: I was dis­ap­pointed in the vote with the United States Con­gress on the eco­nomic res­cue plan. We put forth a plan that was big because we’ve got a big problem.

Annabelle Quince: The Emer­gency Eco­nomic Sta­bi­liza­tion Act, or Bank Bailout Bill, did even­tu­ally pass, in Octo­ber 2008. The aim of the bill was to shore up the fail­ing banks by pump­ing $700 bil­lion into the system.

Edward Har­ri­son is an eco­nomic ana­lyst and the founder of eco­nomic web­site Credit Writedowns.

Edward Har­ri­son: Basi­cally what they were try­ing to do was put a floor under­neath the sys­tem, because all hell had bro­ken loose and there was utter panic. And all of the other insti­tu­tions were imper­illed at that time: Gold­man Sachs, Mor­gan Stan­ley, those were the two remain­ing insti­tu­tions that were invest­ment banks and they were both in jeop­ardy of going bank­rupt. AIG had to be res­cued. We also saw a very large bank, Wash­ing­ton Mutual, which went out of busi­ness and was bought out by JPMorgan.

So really what they wanted to do, they wanted to put a floor under all of that. And what they had orig­i­nally planned to do was to buy up a lot of these assets-these dodgy assets-which had been caus­ing these banks to fail and had been caus­ing the panic. But as time went along they realised it would be bet­ter for them to inject cap­i­tal into these insti­tu­tions to shore up their bal­ance sheets, as opposed to buy­ing the cap­i­tal, and so that’s what they ended up doing. And that’s what the bailouts were all about in the United States. So all of the largest insti­tu­tions received cap­i­tal from the US government.

George W. Bush [archival]: I believe in the long run this econ­omy is going to be just fine.

Jour­nal­ist [archival]: US Pres­i­dent George Bush-‘Everything’s just fine.’ It’s been a few days since the con­gress passed that mas­sive bailout pack­age for the Amer­i­can finan­cial sys­tem. How soon is it going to be up and running?

Inter­vie­wee [archival]: Well, the Bush admin­is­tra­tion has selected a for­mer Gold­man Sachs exec­u­tive, 35-year-old Neel Kashkari, to be the interim head of this mas­sive res­cue effort.

Annabelle Quince: What was the kind of polit­i­cal think­ing? Because clearly there was a lot of sup­port, espe­cially from the US pub­lic, to actu­ally let some of these banks go under, and yet the polit­i­cal will didn’t seem to be there.

Steven Keen: Who are you try­ing to get to say “let the banks fail”? The peo­ple who actu­ally run the Amer­i­can polit­i­cal sys­tem are the financiers. The same thing hap­pened back in the 1930s, when you had this incred­i­ble growth in the power of the finan­cial sec­tor over the 1920s in par­tic­u­lar, the JPMor­gan firms of the world and so on, and then Roo­sevelt came along and his inau­gu­ra­tion speech–which I rec­om­mend you reading-said that we’ve handed over con­trol to the money lenders, prob­lem caused by debt, their only solu­tion is to say yet more debt. And he then led to the shut­ting down the banks, the bank hol­i­day, reor­gan­is­ing them all and then destroy­ing the polit­i­cal power of the banks.

So when the Sec­ond World War ended, the size of the finan­cial sec­tor, or called the ‘non-bank finan­cial sec­tor’, their debt level was about two per cent of Amer­i­can GDP. It since rose to 120 per cent. Now, iron­i­cally, when you bor­row that much money you have that much polit­i­cal power. So you’re try­ing to tell peo­ple that they should com­mit harakiri for the bet­ter of the system-well they’re not going to do it.

Annabelle Quince: Not every­one agree that the bank bailouts were wrong. Richard Sylla, pro­fes­sor of the his­tory of eco­nom­ics at New York Uni­ver­sity, argues that with­out the bank bailouts the United States might have fallen into another depression.

Richard Sylla: Ben Bernanke, who’s the chair­man of the fed­eral reserve sys­tem, was a great scholar. He was a Prince­ton Uni­ver­sity pro­fes­sor, stud­ied the Great Depres­sion a lot in his aca­d­e­mic work, and he had writ­ten arti­cles and books on that the Great Depres­sion got to be as bad as it was because they allowed the many banks to fail, which caused a defla­tion­ary spi­ral, which caused even more bank fail­ures in a weaker econ­omy. So his stance was he wasn’t going to allow that to hap­pen again, and so he would cre­ate a mass amount of liq­uid­ity, which was not done in the Great Depres­sion of the 1930s.

Ben Bernanke [archival]: Credit is the lifeblood of the econ­omy. If the credit sys­tem isn’t work­ing, then firms can­not finance them­selves, peo­ple can­not bor­row to buy a car, to send a stu­dent to col­lege, to buy a house. That’s not just an incon­ve­nience, because if that is true gen­er­ally, it’s going to cause the econ­omy to slow markedly.

Richard Sylla: Of course I think that staved off another Great Depres­sion, but it pro­duced what’s called a ‘great reces­sion’ now and a lot of peo­ple are not used to that and so they’re very crit­i­cal of both Fed­eral Reserve pol­icy in bail­ing out banks, which I think was prob­a­bly a good thing, and they’re not quite under­stand­ing what Bernanke did. But I think when this is all over and things get to be more nor­mal again, we’ll look back on it and say, ‘Well, Bernanke didn’t turn things around right away, but he pre­vented some­thing much worse from happening.’

Steve Hanke: The money ulti­mately comes from the taxpayers-I mean, it was financed by debt, of course, because the deficit went up and the amount of debt issued by the US Gov­ern­ment went up, so the imme­di­ate source of the money was debt.

We went into the cri­sis by being over-indebted with no cush­ion and then we decided to ramp up the debt and even go into fur­ther debt to bail some of these insti­tu­tions out. The ulti­mate result has been a very bad result in terms of the struc­ture of the finan­cial institutions.

Annabelle Quince: So you think with­out the bailouts that actu­ally the finan­cial insti­tu­tions that were able to sur­vive would have come through stronger and fitter?

Steve Hanke: Yes, because they would have them­selves gone on to mend them­selves, shall we say. It would have been like Bear Stearns. Bear Stearns, it was vol­un­tar­ily gob­bled up by other finan­cial insti­tu­tions and they hardly missed a beat, shall we say. And that would have occurred with other finan­cial insti­tu­tions if, if-there’s a big if, here-if there hadn’t been a panic, Annabelle. Once you get into a panic, then the ball­game starts chang­ing on you.

Annabelle Quince: Since the cri­sis hit in 2008 there has been a num­ber of inves­ti­ga­tions into the prac­tices and reward sys­tems of the invest­ment banks in the United States.

US Con­gress­man Henry Wax­man [archival]: You have been able to pocket close to half a bil­lion dol­lars and my ques­tion to you is, a lot of peo­ple ask is that fair for the CEO of a com­pany that’s now bank­rupt to have made that kind of money? It’s just unimag­in­able to so many people.

You have a $14 mil­lion ocean-front home in Florida, you have a sum­mer vaca­tion home in Sun Val­ley, Idaho, you and your wife have an art col­lec­tion filled with mil­lion dol­lar paint­ings, your for­mer pres­i­dent Joe Gre­gory used to travel to work in his own pri­vate helicopter-I guess peo­ple wonder…

Annabelle Quince: Has there been any sig­nif­i­cant change in the way those banks work today?

Steven Keen: No, they’re still doing the same stuff. They still basi­cally finance merg­ers and acqui­si­tions and share mar­ket spec­u­la­tion. And they’re not doing as much hous­ing spec­u­la­tion any­more, for obvi­ous reasons-that bubble’s over-but fun­da­men­tally they look for bub­bles to finance.

Edward Har­ri­son: We’re back to square one. The banks are… they’re pretty much oper­at­ing as they did before. The big dif­fer­ence, how­ever, is that it’s likely the banks will need to have more cap­i­tal in order to func­tion; that is, that the cap­i­tal buffer will have to be larger; and that’s going to make them less prof­itable going forward.

I think you may have seen that HSBC, a British bank, just today, in fact, said that they were going to lay off 30,000 employ­ees out of their nearly 300,000. And the rea­son they’re doing this is basi­cally even though they earned $11 mil­lion in the first half of the year, given their enor­mous cap­i­tal base that wasn’t a very good return on cap­i­tal. And they know that they’re going to have to increase their cap­i­tal, and so what they want to do is cut their costs so that they can have a higher return on capital.

So really, nothing’s really been done except for the cap­i­tal, and per­versely the increase in cap­i­tal over the short-term may have the effect of caus­ing these banks to try to cut costs in order to make a return on cap­i­tal that their investors are look­ing for.

Annabelle Quince: You’re with Rear Vision on ABC Radio National, Radio Aus­tralia, via your MP3 player or the inter­net. I’m Annabelle Quince and today we’re piec­ing together how and why it is that the US econ­omy is in such a mess.

The cri­sis in the finan­cial mar­ket led to an eco­nomic recession-house prices fell, the num­ber of unem­ployed rose, and US con­sumers stopped spend­ing. Barack Obama won the US pres­i­den­tial race in Novem­ber 2008 and in at the begin­ning of 2009, he intro­duced a huge stim­u­lus pack­age in an attempt to kick start the economy.

Jour­nal­ist [archival]: The US pres­i­dent, Barack Obama, has signed his mas­sive eco­nomic stim­u­lus pack­age into law. Mr Obama hopes the $1.2 trillion-worth of new spend­ing and tax cuts will help steer the US econ­omy out of recession.

Barack Obama [archival]: I don’t want to pre­tend that today marks the end of our eco­nomic prob­lems. Nor does it con­sti­tute all of what we’re going to have to do to turn our econ­omy around. But today does mark the begin­ning of the end, the begin­ning of what we need to do to cre­ate jobs for Amer­i­cans scram­bling in the wake of layoffs.

Richard Sylla: I think Obama didn’t quite realise the extent of the prob­lem as much as Roo­sevelt did in the 1930s, but of course the prob­lem was much big­ger for Roo­sevelt, so maybe it was eas­ier for him to under­stand it. Now, Obama pushed through a stim­u­lus pack­age and it turned out to be, what, seven or eight hun­dred bil­lion dol­lars, which is quite a bit and added a lot to the gov­ern­ment deficit. That was prob­a­bly the right thing to do, but maybe there wasn’t enough of it.

Prob­a­bly half of the United States-you know we are a fed­eral sys­tem, I think Aus­tralians prob­a­bly under­stand that-a lot of the spend­ing of the fed­eral gov­ern­ment was off­set by reduc­tions in spend­ing by state and local gov­ern­ments. So the net effect of Obama’s stim­u­lus was zero. But of course things would have been much worse had he not had that stim­u­lus pack­age. It just turns out that what we’ve done here in the United States for the last cou­ple of years, in terms of gov­ern­ment spend­ing to alle­vi­ate the down­turn in the econ­omy, what was done at the fed­eral level was off­set by cuts in state and local spend­ing. So the net effect of all gov­ern­ment spend­ing in the United States has been effec­tively no stimulus.

Annabelle Quince: Pro­fes­sor Steve Hanke argues that the stim­u­lus pack­age rather than kick start­ing the econ­omy has actu­ally pre­vented its recovery.

Steve Hanke: A lot of the stim­u­lus pack­age was spent bail­ing out these finan­cial insti­tu­tions and some of it did seep in in shovel-ready pub­lic works projects and gov­ern­ment projects of one sort or another. That didn’t really amount to too much in my opin­ion and it cer­tainly didn’t stim­u­late any­thing because, para­dox­i­cally, it slowed the whole econ­omy down. Because when you run a great big deficit, peo­ple get very anx­ious about it and it puts the brakes on things because peo­ple are afraid. They know even­tu­ally they’re going to have to pay more taxes, or there’ll be more inflation-one way or another, some­thing has to be done with the debt that they’re run­ning up.

And you have just the oppo­site of what, you know, many peo­ple are taught in eco­nom­ics textbooks-that if you have a big­ger gov­ern­ment deficit, you have a so-called Key­ne­sian fis­cal stim­u­lus, you stim­u­late the econ­omy. No. You con­tract the econ­omy. It’s a con­trac­tionary pol­icy. So the stim­u­lus pack­age actu­ally is one rea­son that the econ­omy has been so retarded.

Edward Har­ri­son: It was some­what effec­tive in terms of get­ting the econ­omy back by… Basi­cally when Lehman Broth­ers went down, that was at the end of the third quar­ter of 2008. By the mid­dle of 2009, the econ­omy was back into a tech­ni­cal recov­ery. And so basi­cally, in con­junc­tion with the stim­u­lus, the econ­omy moved into a tech­ni­cal recov­ery and it stayed there ever since.

So in a real sense it did pro­vide the nec­es­sary kick to get us through at least a year or so, but already by 2010 you could see that the effects of the stim­u­lus had started to fade and the econ­omy had sort of been in this low-growth phase for about a year now.

US Con­gress [archival]: The yeas and nays are ordered and the clerk will call the role. [Woman starts call­ing role of names]

Jour­nal­ist [archival]: After so many months and so much doubt, finally a vote.

US Con­gress [archival]: If not on that ques­tion, the ayes are 74 and the nays are 26…

Jour­nal­ist [archival]: And with that, the US stepped back from the brink. It ended what many regarded as an unprece­dented polit­i­cal strug­gle. The vote in con­gress gives the US Trea­sury imme­di­ate access to $400 bil­lion in new bor­row­ing and cuts the deficit by a lit­tle over $2 tril­lion over ten years. And it’s not over. The hard choices about addi­tional sav­ings have now been put to a spe­cial com­mit­tee, which must report back by November.

Sen­ate Minor­ity Leader Mitch McConnell [archival]: We need to quit doing what we’ve been doing. Quit bor­row­ing, quit spend­ing, quit try­ing to raise taxes, quit over-regulating, and let the pri­vate sec­tor flourish.

Steve Hanke: It will start bring­ing the gov­ern­ment spend­ing as a pro­por­tion of the total economy-this so-called GDP measure-it’ll bring that down from around 25 per cent to 23 per cent, or some­thing like that. But I do not think what they have done today, as we speak, in Wash­ing­ton DC, is going to change the over­all mood and the over­all level of con­fi­dence in the econ­omy and con­fi­dence in eco­nomic pol­icy or vision.

Richard Sylla: The United States of Amer­ica is a coun­try that has always been bailed out by eco­nomic growth. I mean, it’s been a coun­try that’s been grow­ing since the begin­ning, since the 1790s. Gen­er­ally, when the coun­try has prob­lems they aren’t always solved right away, but higher eco­nomic growth gen­er­ates more gov­ern­ment rev­enue and the prob­lems seem mag­i­cally to go away as the econ­omy becomes big­ger. I sus­pect that’s what will hap­pen this time, or at least that’s what we can hope will hap­pen based on past experience.

Steve Hanke: The name of the game is, restore con­fi­dence you’ve got to shrink the size of the fed­eral gov­ern­ment dra­mat­i­cally and talk about things like hav­ing a sta­ble dol­lar is impor­tant, hav­ing less reg­u­la­tion. You’ve really got to go back and repro­duce some­body like Rea­gan or-in your context-like Lee Kuan Yew in Sin­ga­pore. Go back to 1965, when Lee Kuan Yew came in, and Sin­ga­pore was a com­plete bas­ket case after lit­er­ally being thrown out of Malaysia. And you came in with a leader who had a vision and he said, ‘Look, we’re not going to waste our time pass­ing the beg­ging bowl, we’re going to have a com­pet­i­tive free mar­ket econ­omy and have civil ser­vants that are first class and pay them first class wages.’ And you know the rest of the story. It worked.

Edward Har­ri­son: Really you need to put every­one back to work. You need to take the max­i­mum pro­duc­tiv­ity that you can out of your econ­omy. And so instead of con­cen­trat­ing on cut­ting gov­ern­ment spend­ing, really the United States should be con­cen­trated on real­lo­cat­ing resources to areas of the econ­omy that have prospects for growth going for­ward. And that would auto­mat­i­cally cut the deficit.

To the degree that the deficit’s a prob­lem going for­ward, it’s largely a ques­tion of mil­i­tary spend­ing in the United States, which is much larger than the rest of the world, and also the enti­tle­ment spend­ings; that is, pen­sions for retirees-state pensions-and health­care for retirees. Those are the only real ques­tions in terms of the deficit over the long term. All the other stuff is insignif­i­cant by comparison.

So basi­cally what we’re doing now is only going to cre­ate prob­lems that will make the deficit worse over the short to medium term.

Annabelle Quince: So how do you see the next cou­ple of years for the US and the US economy?

Steve Hanke: Well, two years is quite a long period of time for an econ­o­mist to be giv­ing a fore­cast, Annabelle, but I would say for the next year I’m very com­fort­able with the tack I’ve been on and been writ­ing about. Ever since this fiasco of 2009 occurred, I have said that at best we can expect what’s called a growth reces­sion, and that is we’re growing-there’s pos­i­tive growth-but the growth is actu­ally at a lower rate than the over­all long-run trend rate of growth of 3.1 per cent that we’ve realised in the United States over a long period of time.

So very slug­gish growth and a very bad state of affairs, eco­nom­i­cally. I just don’t see a lot of light at the end of the tun­nel right now in the United States-and Europe is even worse.

Edward Har­ri­son: What I think is likely to hap­pen is that we’re going to have some cuts-they’re not going to be enor­mous cuts, but they’re going to be large enough. The United States is at stall speed right now. Man­u­fac­tur­ing is near as a con­trac­tion point. We also have mon­e­tary pol­icy which has become less accom­moda­tive in the US and we are start­ing to see a lot more job cuts.

So what that means is any sort of shock that we get to the econ­omy will cause the United States to tip into recession.

So I would say that at this point we’re look­ing at, say, a 30 per cent like­li­hood of reces­sion. It could be higher going for­ward, depend­ing on how things progress. And this is exactly the same sort of thing that we saw in Greece when they went to aus­ter­ity; we saw the exact same thing in Ire­land when they went to aus­ter­ity; that aus­ter­ity that tipped the econ­omy into reces­sion increases the deficit as opposed to decreases the deficit. And so the United States would be in a worse sit­u­a­tion as a result. This is exactly what hap­pened in Japan in 1997 and also what hap­pened in the US in 1937.

Annabelle Quince: Today’s guests were Edward Har­ri­son, eco­nomic ana­lyst and the founder of web site Credit Write­downs; pro­fes­sor of applied eco­nom­ics at Johns Hop­kins Uni­ver­sity, Steve Hanke; Pro­fes­sor Richard Sylla, eco­nomic his­to­rian at New York Uni­ver­sity; and Steven Keen, asso­ciate pro­fes­sor in eco­nom­ics at the Uni­ver­sity of West­ern Sydney.

Announcer [archival]: Chief Jus­tice Hughes will admin­is­ter the oath to Franklin Delano Roosevelt.

Franklin Delano Roo­sevelt [archival]: This great Nation will endure, as it has endured, will revive and will pros­per. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.

Annabelle Quince: And if you’re inter­ested in eco­nomic his­tory, check out the web­site for a pro­gram that traces the events that led to the Great Depres­sion and the his­tor­i­cal argu­ments sur­round­ing Roosevelt’s New Deal.

Judy Rap­ley is Rear Vision’s sound engi­neer and I’m Annabelle Quince. Thanks as always for join­ing us.


Steven Keen
Asso­ciate Pro­fes­sor in eco­nom­ics and finance at the Uni­ver­sity of West­ern Syd­ney and author of Debunk­ing Eco­nom­ics: the naked emperor of the social sciences.

Steve Hanke

Pro­fes­sor of Applied Eco­nom­ics at Johns Hop­kins University

Edward Har­ri­son

Eco­nomic analy­sis and the founder of eco­nomic web site — Credit Writedowns.

Richard Sylla

Pro­fes­sor of The His­tory of Finan­cial Insti­tu­tions and Mar­kets and Eco­nom­ics, at New York University.


Title: Debunk­ing Eco­nom­ics: the naked emperor of the social sci­ences
Author: Steve Keen
Pub­lisher: Pluto Press & Zed Books, Syd­ney & Lon­don 2001


Annabelle Quince


Annabelle Quince

Radio National often pro­vides links to exter­nal web­sites to com­ple­ment pro­gram infor­ma­tion. While pro­duc­ers have taken care with all selec­tions, we can nei­ther endorse nor take final respon­si­bil­ity for the con­tent of those sites.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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141 Responses to ABC Rear Vision: The US Economy post the 2008 Crash

  1. elliottwave says:

    My oh my what is going on here?

    Look at this chart below and thank the great EW for his bril­liance and knowledge.

    Look at the gold price in $AU and you will see that the great EW needs an apol­ogy from the doubters.

    If any­one would like the great ones new pre­dic­tions please ask and you shall receive.

  2. ken says:

    It just takes a quick cal­cu­la­tion to show what is wrong. Pri­vate debt 300% GDP, pub­lic debt about 100% GDP. Total debt 400% GDP. Now most of that debt is longer term bonds which have inter­est rates over­all of at least 5% (lower for gov­ern­ment, higher for pri­vate) and you have at least 20% of GDP going to inter­est pay­ments. Fine when new debt is 30% GDP but in any real­is­tic econ­omy its not going to last, and it didn’t. So basi­cally the US econ­omy is spin­ning its wheels and going nowhere.

  3. TruthIsThereIsNoTruth says:

    It is cer­tainly a his­tor­i­cal day, US yields are at his­tor­i­cal lows. Iron­i­cally one of the most bank­rupt coun­tries’ in the world bonds are con­sid­ered a safe haven assets. Every­one knows the US econ­omy is screwed, but every­one knows they will never default on their debt oblig­a­tions, funny sort of world. There is a cyclone ram­pag­ing the mar­kets, wher­ever the mar­kets and the econ­omy end up from here ain’t going to be Kansas.

  4. sj says:

    Mr Keen
    Where are some of the old time blog­gers with a sense of humour?
    Good to hear from Home for Aussies,Barney Is Right,Bullturnbear,Noah cross,Ak
    TruthIs ThereIs No Truth good to see you are still here.
    Elliot­wave even if we dis­agree on gold I will say you have been upfront from day one all blog­gers knew you own gold and you don’t see gold as some sort of extreme right wing reli­gion to be worshipped.

  5. ak says:


    There is noth­ing his­toric I am afraid. It will be a his­toric day when all the delu­sions about the mar­kets and the econ­omy are purged and the com­mon sense is restored.

    Steve’s expla­na­tion of the root causes of the cri­sis is cor­rect — debtors are pay­ing back debts while savers are try­ing to save even more.

    August 12, 2011
    Selected Assets and Lia­bil­i­ties of Com­mer­cial Banks in the United States 1
    Per­cent change at break adjusted, sea­son­ally adjusted, annual rate

    Bank credit (2006–1010) 8.4 9.4 1.7 –6.0 –2.8
    Real estate loans (2006–1010) 10.4 6.7 –0.6 –5.1 –5.6
    Deposits (2006–1010) 7.4 9.1 5.7 5.2 2.6

    but the only way for­ward is to use func­tional finance to fix the real pro­duc­tive econ­omy by restor­ing the con­sump­tion and invest­ment flows so that the sav­ing desires of the pri­vate sec­tor are not frus­trated by low­er­ing the GDP.

    But how to achieve that if these few peo­ple who under­stand func­tional finance can’t even see the essence of the prob­lem with the pro­duc­tive econ­omy man­i­fest­ing itself with the reduc­tion of pro­duc­tive capac­i­ties caused by neg­a­tive trade bal­ance (los­ing the com­pe­ti­tion)? It is not a mat­ter of just print­ing more money as the sys­tem will not fix itself aus­ter­ity or no austerity.

    Please look at the com­po­si­tion of the trade deficit of the US:

    YTD June 2011 Sea­son­ally Adjusted mln USD

    Exhibit 16. Exports, Imports, and Bal­ance of Advanced Tech­nol­ogy Prod­ucts
    Bal­ance YTD June 2011 mln USD

    Exhibit 16a. Exports, Imports, and Bal­ance of Advanced Tech­nol­ogy Prod­ucts by Tech­nol­ogy Group and
    Selected Coun­tries and Areas

    Bal­ance YTD June 2011 mln USD

    Infor­ma­tion and Com­mu­ni­ca­tions
    Bal­ance YTD June 2011 mln USD

    China (total Advanced Tech­nol­ogy Prod­ucts)
    Bal­ance YTD June 2011 mln USD

    There is only a sur­plus in “Aerospace”

  6. ak says:


    Don’t worry if more aus­ter­ity is imple­mented we may soon have a chance to join the sec­ond Kosciuszko walk.

  7. TruthIsThereIsNoTruth says:

    Some­one has to keep the bears hon­est SJ.

  8. elliottwave says:


    You are right, where has some of the fun ban­ter between myself and bull­turned­bear and all the other guys that frowned upon my comments.

    Peo­ple know that i am being very over the top with my com­ments but at least i hope that i am bright­en­ing up the place.

    By the way look at the chart below and thank me for my great calls.


  9. elliottwave says:


    I would like to tell you that these peo­ple did see the cri­sis com­ing and they played the con­gress, the amer­i­can pub­lic and the world for the fools that we are for let­ting them get away with the biggest bank rob­bery in the his­tory of the world.

    Bernanke and Co. are some of the smartest peo­ple on earth, but also the most morally cor­rupted human beings to ever walk the earth.

    Deriv­a­tives is what caused the mas­sive esca­la­tion in the prob­lems that we have and when these greedy guys started los­ing con­trol of this they trig­gered the Lehmann col­lapse so as they could get paid on their bets 100 cents in the dol­lar and whis­tle dixie all the way home.

    The $700 mil­lion in toi­let paper that they got paid in from the front door and quickly exited the back door is fully pro­tected from what­ever the world will see, that is still to be deliv­ered to the world, it has not arrived yet but it will.

    This was pure and sim­ple loot­ing of the US treasury.

    Yet when you see what hap­pened in Lon­don, the pub­lic was dis­gusted and out­raged that this could happen.What Wall St has done is not evened men­tioned any­more and they are still pro­duc­ing these deriv­a­tives as if noth­ing had happened.

    Any­one who does not own any gold by now is really really dis­ap­point­ing as it will be the only cur­rency that will be accepted as real.


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  11. Steve Keen says:

    Then you haven’t read their aca­d­e­mic writ­ings, Elliottwave–nor have you lived 40 years amongst aca­d­e­mic econ­o­mists. Bernanke didn’t have a clue that this cri­sis was com­ing, and his so-called exper­tise on the Great Depres­sion was exper­tise in try­ing to find an expla­na­tion for the GD that was con­sis­tent with neo­clas­si­cal the­ory. The only expla­na­tion that fits is “some­body else did it”, that some­body else being the Fed­eral Reserve. I now regard it as a deli­cious irony that he is now in charge of that same body.

    There were plenty of morally bank­rupt peo­ple who made a for­tune off the naivety of econ­o­mists like Bernanke–and oth­ers like Hank Paul­son who were as naive and still made a fortune–but Bernanke and his aca­d­e­mic ilk were clueless.

    I agree entirely with you on Wall Street, and (almost all of) the deriv­a­tive trade. But I never expected them to go down straight away–as they should–because they still hold the reins of power in America.

  12. RickW says:

    Appar­ently Venezuela is get­ting ner­vous about sta­bil­ity of cer­tain coun­tries’ economies:
    Con­se­quence is that they want their gold back from the Bank of Eng­land and other locations.

    There is some con­cern that a lot of gold being held is only paper. Could be a fac­tor in recent price hike. Or maybe just another fac­tor as it is clear the US is in deep poo and sink­ing fur­ther. This mea­sure is accel­er­at­ing again:
    This mea­sure is on the decline again:
    Nei­ther good news.

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  14. mahaish says:

    inter­est­ing isnt it ak,

    the high water mark for the US trade bal­ance was 2006,

    at 753 billion,

    and by 2009 it had fallen off a cliff down to 381 billion.

    a sim­i­lar phe­nom­e­non or cycle before the 91 downturn,

    a high water mark of 151 bil­lion in 87, and by 91 , fallen off the cliff to 31billion,

    2001 , no such effect, and the trade bal­lance kept get­ting wider, going from 361 bil­lion to 490 bil­lion in a space of 3 years

    so we are told, a shrink­ing trade deficit is sup­posed to be good for us, isnt it

    well it may be a por­tent of trou­ble ahead perhaps

    shrink­ing trade bal­ance means shrink­ing for­eign hold­ings of domes­tic cur­rency bal­ances in the bank­ing system,

    short to medium term stress on the cap­i­tal base of the domes­tic bank­ing sys­tem perhaps.

    and the fed has to step in eventually

  15. Lyonwiss says:

    Steve Keen August 19, 2011 at 2:04 pm

    If an eco­nomic the­ory assumes that there is no credit default (most the­o­ries ignore defaults), then the level of debt is incon­se­quen­tial, because as Bernanke and main­stream econ­o­mists say “one man’s debt is another man’s asset”: every­thing can­cels out in over­all wealth terms.

    Dur­ing the Great Mod­er­a­tion, credit defaults were so low that neo­clas­si­cal econ­o­mists (eg Greenspan) inter­preted that as a new sta­ble global eco­nomic equi­lib­rium aris­ing from advances in risk man­age­ment and glob­al­ized risk shar­ing. Deriv­a­tives were con­sid­ered the main finan­cial inno­va­tions, which elim­i­nated risk.

    The evi­dence mostly appeared to sup­port this, except for few well-known scan­dals and crises, which were ignored. Reg­u­la­tion of deriv­a­tives was def­i­nitely rejected in the US. But deriv­a­tives are lever­aged finan­cial instru­ments, which is a new form of debt, which is not even men­tioned in any of the com­ments on debt in the bank­ing sys­tem. As a sim­plest exam­ple, when I buy one ASX200 futures con­tract on the SFE, I am effec­tively buy­ing 4100X$25=$102,500 worth of a port­fo­lio of 200 stocks. But my ini­tial mar­gin is cur­rently only $7,000, impy­ing a bor­row­ing of $95,500.

    The anal­ogy with buy­ing a $102,500 house with a mort­gage of $95,500 is clear. A 10 per­cent fall in asset price in either case would lead to neg­a­tive equity and poten­tial credit default.

    In the case of the above deriv­a­tive, the face-value or notional-value is $102,500, which does not by itself indi­cate the lever­age involved or hence the implicit debt. But in gen­eral, the nature and ratio­nale of deriv­a­tives, sug­gests that the implicit debt is a sig­nif­i­cant pro­por­tion of the notional-value.

    BIS data show the global notional-value of out­stand­ing deriv­a­tives is about US$600 tril­lion. You can guess how much effec­tively unreg­u­lated debt there is, out­side the for­mal bank­ing system.

    The risk of default and poten­tial dis­rup­tion to the finan­cial sys­tem is enor­mous. Many of the deriv­a­tives based on sub­prime mort­gages may not have been marked down. If Mad­off could hide a $50 bil­lion black-hole, oth­ers can do the same.

    Mon­e­tary the­o­ries in eco­nom­ics, includ­ing nei­ther credit default nor deriv­a­tives, com­pletely miss the ele­phant in the room.

  16. TruthIsThereIsNoTruth says:

    The impli­ca­tion of my state­ment AK was that I have a view that yields can’t go much lower and if they don’t 18 Aug marks a his­tor­i­cal low in yields.

    Both sides of the debate are ignor­ing the price of debt and liq­uid­ity. There seems to be this implicit assump­tion that the gov­ern­ment can just print money with no mar­ket effect, the twisted sit­u­a­tion at the moment is that the US gov­ern­ment can get away with it because it’s bonds are seen as safe haven assets. It is a good time to bor­row for the US, the prob­lem is they can’t seem to be able to spend this bor­row­ing pro­duc­tively, res­cu­ing cor­rupted banks, although prob­a­bly the lesser of two evils isn’t exactly pro­duc­tive. They need to heav­ily sub­sidise their pro­duc­tive busi­nesses to even out the play­ing field. They’ve been get­ting screwed by the cur­rency peg and they bend over and take it so they could get wid­gets with bor­rowed money.

    btw this doco on debt was made in 2006, pretty interesting.

  17. alainton says:

    Let­ter from Richard Koo to Econ­o­mist on econ­o­mists not hav­ing a clue

  18. elliottwave says:

    For my deflationistas,

    Please see attached chart and see what i said would hap­pen to $au gold prices when the haters were pound­ing me about the $A gold under performance.

    You can see that i was cor­rect as always and have given you a road map into the future for gold priced in Aus­tralian dollars.

    If you would have lis­tened to me 2 years ago you would now be retired like me.

    Buy Gold.

  19. Philip says:

    On the mat­ter of debt, I was think­ing about how the gov­ern­ment warns away con­sumers from tobacco with pic­tures of can­cer and dis­eased corpses.

    Maybe the gov­ern­ment should force banks to show pic­tures of peo­ple putting plas­tic bags over their heads, hang­ing them­selves or blow­ing out their brains with a gun — images that are placed upon every bank loan application!

    This could make peo­ple think twice about tak­ing upon debt.

  20. alainton says:

    Its inter­est­ing that yes­ter­day Haldene was argu­ing were up s%%% creek because of a bank­ing aver­sion to risk whilst today Jür­gen Stark has bizarrely told Ger­man news­pa­per Han­dels­blatt:

    (Euro-bonds) are a false solu­tion, which … pro­vides com­pletely wrong incen­tives.” When asked whether the use of loose mon­e­tary pol­icy by cen­tral banks is speed­ing up the cri­sis, he says: “Keep­ing inter­est rates too low for too long car­ries risks. Such a pol­icy con­tributes to exces­sive risk-taking and wrong invest­ments and there­fore under­mines an economy’s growth potential.”

    And dis­sent­ing fed mem­ber last week said the prob­lem was the old canard ‘pol­icy uncer­tainty’ pre­vent­ing entre­pre­neurs tak­ing risks.

    Its easy to take the p out of cen­tral strike W strike Bankers but its shows how econ­o­mists, like mar­kets, are all at sea at under­stand­ing and pric­ing risks.

    Exces­sive risk tak­ing on debt fuelled asset bub­bles, squeez­ing cap­i­tal for insuf­fi­cient risk tak­ing in the real economy.

  21. Linus Huber says:

    I am no econ­o­mist. Around 2001 I lost like about 100k with bonds of the for­mer air­line Swis­sair (today Swiss). In Switzer­land, that air­line was called the fly­ing bank because it was tops in so many ways, well, until some peo­ple thought that they have to expand and felt they were greater than sim­ply man­ag­ing Swis­sair. Any­how, from that day on I decided to not trust any­one but to have to inform myself on how to man­age my wealth.

    In this con­text I really appre­ci­ate these very valu­able insights I gain from Steve Keen and like to express my grat­i­tude. I tried to fol­low the online lessons but some­how lost a bit inter­est when con­fronted with all those for­mu­las that are prob­a­bly very com­mon to a trained econ­o­mist. I will check them out again when I feel very keen and alert.

    Com­ing back to the Swis­sair story, I got like 7 cents on the dol­lar on my bonds when they went bank­rupt and it really makes me fed up when I see how bond­hold­ers get that much con­sid­er­a­tion today at the expense of tax pay­ers. I accepted those losses grudg­ingly and went on with life but today (maybe it is the banks and not pri­vate per­sons that would lose) every­body plus his pet is being bailed out. E.g. Greece can­not pay and the banks did were not dili­gent enough when extend­ing credit to that coun­try; a hair­cut in the range of 50–80% is only a ques­tion of time. The delay allows the banks to trans­fer the losses again to the cit­i­zens of the EU due to the mar­ket inter­fer­ence by the ECB.

    So my ques­tion, if I may, Steve:

    Do you, based on your eval­u­a­tion of the cur­rent sit­u­a­tion, fore­see that soon these bail out activ­i­ties in what­ever obscure form and under what­ever newly found head­ing, will halt or will it require a polit­i­cal shift at the bal­lot box before real change comes?

    Thanks again for all your great work.

  22. mahaish says:

    see where you are com­ing from titint,

    but i think the issue is why issue any debt at all. if the yanks are so wor­ried about the debt ceil­ing, well get rid of the trea­sury over­draft rules and dont issue any debt.

    they have rate tar­get­ing by decree at this stage, and fur­ther more they are run­ning at near zero fed fund rate anyway.

    so liq­uid­ity man­age­ment isnt an issue,

    the right would argue , what about inflation,

    well what about it, where are we going to get infla­tion with unem­ploy­ment rates at between 9 and 17%.

    and besides is a bond issue by the gov­ern­ment to cover every dol­lar of spend­ing any less infla­tion­ary than no bond issue. i would argue the dif­fer­ence is per­func­tory. cash or gov­ern­ment bond they are both very liquid .

    i cer­tainly think we can challemge eco­nomic ortho­doxy on this point

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  25. economicminor says:

    As said, espe­cially with fiat money, all debt is some one else’s asset. Worse than that in today’s over indebted sit­u­a­tion, almost all assets are some one else’s debt.

    What wor­ries me and should be wor­ry­ing every­one else is what hap­pens when so much debt has to be deleveraged?

    The world as we know it is going to change dra­mat­i­cally. Those with great pen­sions will be with­out most of or all the income they have grown accus­tomed lead­ing to even more delever­ag­ing. The cycle of defla­tion and dis­rupted lives is going to be unthink­ably bad. No one really want to think about the prob­a­ble consequences.

    I don’t care much about the deriv­a­tives as there aren’t enough real assets in the world to pay them off and by then fiat money will be toi­let paper. The delever­ag­ing of debt and deriv­a­tives will take down much of the pow­er­ful elite of today as their assets are mainly debt and require lots of income to sus­tain. Their reign will be his­tory as there is no pos­si­ble way to pre­vent the delever­ag­ing of this much debt, no mat­ter what kind of insur­ance they have bought. Their assets will be ren­dered worthless.

    Gold may be a good asset to hold pre­tend­ing that there is a rea­son­able out­come to all this messy promis­ing what we can’t deliver. But in the world of Mad Max or the Blade Run­ner, I just don’t know where it gets you unless you are ruth­less enough to pro­tect it.

    My best guess is that liv­ing rurally with water, soil and decent cli­mate will be the best chance of decently sur­viv­ing the great depres­sion yet to play out.

    Good luck to all of us.

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