My HARDtalk inter­view tran­scribed

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

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

My most recent instance of this was in a live dis­cus­sion of pop­u­la­tion growth, when I was talk­ing about the extinc­tion of Australia’s megafauna; appar­ently I said “megaflora” instead. Jane has edited out such slips in the tran­script below.

Sev­eral peo­ple have also posted record­ings of the talk to Youtube. HARDtalk asked me not to post it myself–so I took down a record­ing I had put up–but it seems impos­si­ble to stop these things “going viral” today, so here is one of those record­ings as well.

Economist Steve Keen, interviewed on the BBC’s HardTalk, November 24, 2011

(Tran­scrip­tion and edit­ing by M. Jane Ross)

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

HT: Steve Keen, wel­come to HardTalk.

Steve Keen (SK): Delighted to be here.

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

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

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

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

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

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

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

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

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

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

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

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

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

HT: So why do you think that’s heart­en­ing?

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

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

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

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

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

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

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

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

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

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

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

HT: So it’s too inter­con­nected to do it.

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

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

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

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

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

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

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

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

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

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

SK: Yes.

HT: Even peo­ple who can afford to pay?

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

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

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

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

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

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

HT: Who’s mak­ing the deci­sion about the broad sweep?

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

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

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

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

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

HT: So who are you giv­ing the money to?

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

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

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

HT: It’s a tax cut?

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

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

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

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

SK: But they’ll be get­ting the money as well.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SK: Oh, yeah.

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

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

HT: You alone are clever enough to see this?

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

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

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

HT: They are so wrong and you are so right?

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

HT: But you do?

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

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

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

HT: Steve Keen thank you very much for com­ing on HardTalk.

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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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  • Dan­ny­b2b


    How would this dif­fer to the Govt reduc­ing tax, or increas­ing pen­sion etc. Except that the expense of the RBA open­ing and admin­is­ter­ing an account for every Aussie would be removed”

    Increas­ing cit­i­zens accounts would be an increase in pur­chas­ing power or an increase in the money sup­ply. Adjust­ing gov­ern­ment spend­ing would be the fis­cal pol­icy side while mon­e­tary pol­icy would be con­ducted through cit­i­zens accounts instead of with banks. Its much more sim­pler to admin­is­ter accounts with the pub­lic were the funds are not cre­ated t=hrough debt and there­fore inter­est doesnt need to be cal­cu­lated. No adjust­ment of rates, or mul­ti­ple mar­ket oper­a­tions in order to repay debts. Just sim­ple one off pay­ments at fixed time inter­vals.

    And money can not be cre­ated debt free. It’s impos­si­ble. Money is a finan­cial asset that must be sup­ported by a finan­cial debt lia­bil­ity. As are all finan­cial assets.
    A house is built and is sup­ported by the real phys­i­cal asset. As is gold and sil­ver etc
    Money is cre­ated by jour­nal entries. It only has value if sup­ported by debt. Either Govt debt (Govt bonds, indi­rectly by cen­tral bank reserves or notes and coins) or non Govt debt (bank loans or over­drafts).”

    Money doesnt need to be sup­ported by debt at all. It just needs to be accepted as a medium of exchange by the pub­lic as it is now. Peo­ple that use the Aussie dol­lar dont con­sider whether it was debt cre­ated they just know every­one accepts the notes for what­ever trans­ac­tion they need so they trust it.

  • End­less

    Slight off topic, but it is inter­est­ing to see that Gold is behav­ing like a risk asset at the moment. When there is a flight to safety Gold drops, which is of course not the tra­di­tional view of gold as a safe haven. US dol­lar is the prefer­able safe haven. While EU teeters on the brink, and there is a sniff of good news out of the US (unem­ploy­ment drop­ping) rel­a­tively the USD looks good.

    Be very inter­est­ing to see at what point Gold starts to look more attrac­tive again.


  • mahaish

    -Govt BONDS pur­chased by non banks also destroy money”

    not strickly speak­ing rj,

    trea­sury cre­ates the reserve add, and the cen­tral bank under­takes a liq­uid­ity swap.

    so the finan­cial assett posi­tion is not changed, and the liq­uid­ity of trea­sury secu­ri­ties are only mar­gin­ally less than cash, and they can be cola­toralised.

  • mahaish

    If fiat money is used with­out bonds. Mon­e­tary infla­tion could result
    –why use fiat money rather than cen­tral bank reserves”

    by fiat money , i assume you are talk­ing about trea­sury deposits as well rj,

    i think the pro­pos­tion that a fis­cal deficit wthout bond issuance is more infla­tion­ary than a fis­cal deficit with bond issuance is highly ques­tion­able,

    this is the stan­dard nEo con , igbc line, and it has cre­ated the sov­er­eign debt fiasco’s in both europe and poten­tially in the US.

    made even more ludi­crous given that we have inter­est rate tar­get­ing by decree in most mon­e­tary regimes, which means the cen­tral bank can set rates inde­pen­dent of the bank­ing sys­tems reserve posi­tion, so no need for bond issuance under such a regime

    when we talk about bond issuance , we a talk­ing about the cen­tral bank re dis­trib­ut­ing the fis­cal deficit as either deposits/reserves or trea­suries at vary­ing matu­ri­ties

    its not necesser­ally the com­po­si­tion of the defict thats infla­tion­ary , but the total level of the deficit thats poten­tially infla­tion­ary,

    as for bond issuance suck­ing up liqiuid­ity, well that assumes a loan­able fund, which again i think is highly debat­able.

  • RJ

    -Govt BONDS pur­chased by non banks also destroy money”

    not strickly speak­ing rj,”

    I’m refer­ing to our money not the banks and trea­suries money (cen­tral bank reserves) when a non bank buys Govt bonds.

    –Our money (bank deposits) decrease. It is replaced by Govt bonds. So say a pen­sion fund now hold a Govt bond not money at the bank.

    The com­mer­cial banks hold­ing of cen­tral bank reserves also decreases. It is trans­ferred to the trea­sury. So the com­mer­cial bank has a reduced bal­ance at the cen­tral bank and the trea­sury a higher one

  • RJ

    as for bond issuance suck­ing up liqiuid­ity, well that assumes a loan­able fund, which again i think is highly debat­able.”

    Our money is reduced if we (a non bank) buy Govt bonds

    If a Aust Govt bond is pur­chased by a bank. Then the bank just swaps cen­tral bank reserves for a Govt bond. It has no impact on cus­tomer deposit bal­ances

  • mahaish

    i think the point is rj,

    that eco­nomic the­o­ries that cre­ate a dis­tinc­tion between trea­sury secu­ri­ties and deposit bal­ances , are cre­at­ing a false dichotomy within a sov­er­eign cur­rency regime.

    and i think it con­tra­dicts endoge­nous money, where the cen­tral bank has to acco­mo­date the bank­ing sys­tems reserve requirments , and the only thing it can con­trol directly is the price or rate of return on reserves.

    i think its the net assett posi­tion that is impor­tant as oppossed to the liq­uid­ity posi­tion, in this age of finan­cial engi­neer­ing

  • RJ

    It will surely make a dif­fer­ence.

    If 100 bil­lion is avail­able as money to invest in total assets.

    Then the Govt issues 20 bil­lion of bond. so now 80 bil­lion is avail­able to invest in the same assets. Surely this will have an impact

  • mahaish

    bonds can be liq­ui­dated, col­la­toralised and lever­aged rj

  • RJ

    So explain how this impacts on the money sup­ply

    Both com­mer­cial bank money (our money) and cen­tral bank reserves (the banks money) are both cre­ated and destroyed by mil­lions of sim­ple jour­nal entries. (there is no other way to do this in the real world)

    So what are the jour­nal entries when bonds are liq­ui­dated etc. Give me the jour­nal entries and show me how this impact on our money or bank reserves

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  • Steve, I’m here to help:

    Not that I don’t have my hands full with other press­ing mat­ters, but we should talk about all this. I’ve been pon­der­ing the idea that we could have a gold stan­dard AND a cen­tral bank.

  • You should look at this one too:

    I know you don’t like the gold stan­dard. I don’t think there’s any way around it, though. At least we agree on bank deposits, post jubilee. 

    You and I could come up with a good plan, work­ing together. Hud­son, too. 

    I would love to get into this fight, but I need an entre.

  • And so say all of us John–to hav­ing our hands full! But yes, we should talk. I’ll drop you an email off-line to start the con­ver­sa­tion.

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