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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  • sj

    Well Mr Keen you are lead­ing the charge in nihilists indi­vid­ual debt jubilee.
    Please see the doc­u­men­tary SBS “Deca­dence” west has peaked.
    After see­ing this doc­u­men­tary you may change your mind on your nihilists agenda.
    Mr Keen with respect you are being dog­matic and giv­ing too much credit to Michael Hud­son.
    We all know enough about his­tory to know debt jubilee in ancient times work because it was real HONEST assets with real good returns.

    His­tory has never seen such low returns in yeilds and high debt lev­els with cor­rupt ques­tion­able asset val­ues.

    Did ancient his­tory have CDO’s asset swaps and option trad­ing gear at 100 times equity, of course not !

  • mahaish

    The Jubilee pro­posal is effec­tively a large injec­tion of fiat money to replace debt-cre­ate money, and in that sense it is con­sis­tent with MMT think­ing, not in con­tra­dic­tion to it. I am sim­ply going one step fur­ther by say­ing the first use of that injec­tion should be to reduce pri­vate debt directly.’


    directly effect the net assett posi­tion of say the house­hold sec­tor by cre­at­ing spe­cial pur­pose grants/deposits to pay down debt,

    its just one of many ways the gov­ern­ment through either trea­sury or cen­tral bank action has to improve the bal­ance sheet posi­tion of debtors 

    the prob­lem is the banks arent just inter­ested in lever­ag­ing there own bal­ance sheet, they also want to lever­age up the bal­ance sheet of there cus­tomers to max­i­mum car­ry­ing capac­ity.

    the gov­ern­ment might pour out some water in the debt bot­tle, but the banks will just turn on the credit tap to fill it up again , as long as the gov­ern­ment sup­ports increases in the income stream of debtors.

    if we have a gov­ern­ment com­mit­ted to full employ­ment and ris­ing nom­i­nal incomes, think the credit engine will nat­u­rally tend towards max­i­mum debt car­ry­ing capac­ity,

    with­out mas­sive re reg­u­la­tion of credit under­writ­ting stan­dards

  • Bhaskara II

    We may have liked to think that cap­i­tal­ist soci­ety was clev­erer, but I think the GFC has proven we just had a bet­ter class of delu­sion. ”

    Of course many pre­vi­ous soci­eties more clever. They didn’t have TV and spend hours a day, every day not think­ing.

  • mahaish

    and i was going to add,

    the gov­ern­ment fis­cal inter­ven­tion in this way , can be achieved by not incur­ring any extra gov­ern­ment sov­er­eign debt, if we make the sup­port rate for bank reserves equal to the inter bank lend­ing rate.

    that way a gov­ern­ment can incurre any level of deficit it likes inde­pen­dent of the the bank­ing sys­tems reserve posi­tion.

    unfor­tu­nately the pre­v­e­lance of igbc(inter tem­po­ral gov­ern­ment bud­getary con­straint) the­ory in gov­ern­ment pol­icy mak­ing makes this a dif­fi­cult task,

    and the cri­sis in europe is a tes­ta­ment to the fail­ings of igbc think­ing.

  • mahaish

    No one brave enough to do some­thing as dras­tic as you sug­gest?
    what about Ron Paul, he is pro Aus­trian Eco­nom­ics and wants to change the mon­e­tary sys­tem. i.e get­ting rid of cen­tral bank­ing, thats pretty dras­tic.”

    there is a dif­fer­ence between brav­ery and stu­pid­ity , dat

    the bank­ing sys­tem is unable to deter­mine its own reserve dif­fi­ciency posi­tion, should there be one,

    thats why we have a cen­tral bank, to gau­ran­tee the deposit base and the pay­ment sys­tem

    if you want to gau­ran­tee a mas­sive defla­tion­ary and pay­ments cri­sis, get rid of the cen­tral bank,

    the less we lis­ten to ron paul the bet­ter

  • sj

    Hi Mahaish
    Many times in his­tory great coun­tries have done very well with­out cen­tral banks.
    Even today we have some great exam­ples Hong Kong is done quite well with­out a moral haz­ard free pass call the cen­tral bank.

    Cen­tral banks cause a gam­bling cor­rupt cul­ture we want banks that give pro­duc­tive loans to use­ful suc­cess­ful busi­nesses.

    How do you do that? 

    let the free mar­ket decide inter­est rates, no way super low inter­est rates would hap­pen under a free mar­ket.

    Cen­tral banks are large cen­tral plan­ners with the low­est com­mon denom­i­na­tor (high debt undis­ci­pline greedy indi­vid­u­als) being the most impor­tant agenda.

  • steve allder

    Steve, tran­script read very well. Very authen­tic answers under pres­sure.

    Have you seen krugman’s blog 3rd Decem­ber, refers to Irv­ing fish­ers paper enti­tled debt defla­tion!

  • steve allder

    Ps very inter­est­ing entry on wikipedia re Ice­land finan­cial cri­sis 2008–2011, in par­tic­u­lar ref­er­ence 188, ‘by mid 2010 the econ­omy appears to be return­ing to growth!’

  • RJ

    What you and the MMT crowd fail to acknowl­edge RJ (though there has been some recent move­ment in this direc­tion by some MMT advo­cates),

    is that too much money was cre­ated by too much issuance of pri­vate debt that financed Ponzi Schemes in prop­erty and shares.”

    Not me. And I have not read this on a MMT web site


    –Bank loans cre­ate new money (by a com­mer­cial bank jour­nal entry)
    –Govt spend­ing also cre­ates new money (by a series of jour­nal entries included the cen­tral bank, com­mer­cial bank and trea­sury. The bank holds inter­est free cen­tral bank reserves as an asset to sup­port the cus­tomer deposit)

    –Repay­ment of loans destroys money (bank deposits)
    –Tax destroys money
    –Govt BONDS pur­chased by non banks also destroy money

    So the Govt could have eas­ily stopped the boom in shares and prop­erty by either

    Reduced Govt spend­ing
    Issu­ing bonds at the appro­pri­ate inter­est rate
    More tax
    Reg­u­lat­ing banks was also an option

    The Govts world­wide choose not to. So blame the Govts not the banks. Banks responded to cus­tomer demand for money and share­holder demand for prof­its. Govts could have stopped the boom but decided not to.

  • RJ

    The Jubilee pro­posal is effec­tively a large injec­tion of fiat money to replace debt-cre­ate money, and in that sense it is con­sis­tent with MMT think­ing, not in con­tra­dic­tion to it. I am sim­ply going one step fur­ther by say­ing the first use of that injec­tion should be to reduce pri­vate debt directly.’

    Agree in part.

    And if you are sim­ple sug­gest­ing Govts run larger deficits I agree. This is essen­tial to solve the cur­rent prob­lems.

    But fiat money? (do you mean notes and coins)

    Remem­ber Govt bonds are issued to stop mon­e­tary infla­tion

    Govt deficits with­out Govt bonds increase money $1 for $1

    The com­mer­cial banks jour­nal entry when Govt spend is

    DEBIT Cen­tral bank reserves (com­mer­cial banks asset/central banks lia­bil­ity)
    CREDIT Cus­tomer deposit (banks liability/our money asset)

    When the non bank sec­tor buys bonds. The buyer of these bonds use money and the banks set­tle with trea­sury using cen­tral bank reserves

    So bonds decrease reserves held by the com­mer­cial bank. And also money if the non bank sec­tor buys the bonds. The com­mer­cial banks jour­nal entry if we (non bank) buy bonds is 

    CREDIT Cen­tral bank reserves (com­mer­cial banks asset/central banks lia­bil­ity both decrease)
    DEBIT Cus­tomer deposit (banks liability/our money asset both decrease)

    It exactly reverses the entry when Govts spend.

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

    MMT under­stand how this all fits together. Very few econ­o­mists do. Most are com­pletely lost in con­fus­ing mod­els. And have for­got­ten how sim­ple the bank­ing and money sys­tem really is when the indi­vid­ual jour­nal entries are fol­lowed.

  • Matthew K

    Hon­estly RJ i keep see­ing your com­ments but still don’t know what you’re talk­ing about. 

    Loan exten­sion = new money, CB loan exten­sion = new fiat or cb reserves.
    Pri­vate bank loan cre­ation = new credit money.

    A gov­ern­ment bond cre­ates new credit/fiat/reserves depend­ing on which bank buys it. 

    Repay­ment of same reduces those bal­ances. cb reserves and fiat money can form cap­i­tal base for credit money.

    What is the MMT dif­fer­ence?? please explain.

  • Matthew K

    Addi­tion­ally — a gov­ern­ment deficit above tax­a­tion founded through pri­vate sec­tor bond pur­chases doesn’t cre­ate new money but moves pri­vate sec­tor money to the pub­lic sec­tor to use. tax­a­tion itself moves funds from the pri­vate sec­tor to the pub­lic sec­tor.


  • RJ

    Hon­estly RJ i keep see­ing your com­ments but still don’t know what you’re talk­ing about. ”

    That’s because you do not under­stand sim­ple dou­ble entry book­keep­ing. And con­se­quently end up mak­ing mis­takes like this

    A gov­ern­ment bond cre­ates new credit/fiat/reserves depend­ing on which bank buys it. ”

    Its the oppo­site as shown above

    The rest of you posts is con­fus­ing

  • Yes, but it was only a para­graph, at least when I checked it out. But I will hold my breath on how he inter­prets him.

  • alain­ton

    A very sim­ple demon­stra­tion of why debt jubilee is non infla­tion­ary with hor­i­zon­tal money cre­ation in the short term — the long term is an inter­est­ing puz­zle.

    First take Gechert’s for­mula link­ing the credit impulse (accel­er­a­tor in steve’s term) to the propen­sity to pay off debt

    The share of the impulse that is not used for net debt set­tle­ment induces aggre­gate demand, ?Ct + ?It
    , which equals the addi­tional income (?Yt) gen­er­ated in that period. From this fol­lows the inte­grated mul­ti­plier for­mula:
    ?Yt = Vt(1 ? ?t)?Mt’

    propen­sity to set­tle debt (?t)

    So if mon­e­tary expan­sion­ary is solely used to pay down debt in the short term there is no expan­sion­ary effect as the expan­sion in money sup­ply cre­ates an exactly bal­anc­ing mul­ti­plier effect through an increase in the veloc­ity of money.

    In the medium term although the stock of money has increased — but this is bal­anced by the increased propen­sity to con­sume caused by the fall in the stock of pri­vate debt. This is where it gets more com­pli­cated and inter­est­ing, these effects need not bal­ance, as the effect on prices depends on both the stock of debt and the inter­est rate. Sug­ges­tive of a need to bal­ance fis­cal expan­sion with debt fore­beare­ance in a coor­di­nated way. 

    BTW unsure if Gechert is com­pletely there as changes to the propen­sity to pay debt will have impacts on the price of debt assets held by banks A reduced propen­sity to set­tle debt is defer­ring appre­ci­a­tion of these assets to the future, and vice versa. Or put in another way, you cant solely look at changes in flow vari­ables with­out look­ing at long term changes in cap­i­tal (stock) struc­ture.

  • alain­ton

    sorry for­mu­las got scram­bled ? = delta above — or see the link

  • Dan­ny­b2b

    I think the best solu­tion to stim­u­late demand and reduce the value of out­stand­ing debts is to change how mon­e­tary pol­icy is con­ducted. Instead of the cen­tral bank adjust­ing the inter­est rate on lend­ing to com­mer­cial banks we should have a sys­tem were the CB deals directly with the pub­lic instead. This is bet­ter than using banks as an inter­me­di­ary chan­nel.

    Each adult cit­i­zen could have an account with the RBA. In order to stim­u­late the CB would expand the money sup­ply by cre­at­ing new funds that are trans­fered to the cit­i­zens account. These funds are not debt, they do not need to be repaid. In times when stim­u­lus is required the cb could trans­fer 100 dol­lars a week to recip­i­ents for exam­ple. When the econ­omy is run­ning at poten­tial then the cb could con­duct neu­tral pol­icy and sim­ply leave the accounts unchanged.

  • RJ


    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

    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).

  • Matthew K

    RJ: ‘That’s because you do not under­stand sim­ple dou­ble entry book­keep­ing.’ Epi­cally wrong. 

    A jour­nal entry is a descrip­tor of an event, not an event in itself. A lot of back­ground can be hid­den behind sim­ple jour­nal entries- While account­ing can describe a pic­ture, it is never the pic­ture itself. Fol­low­ing a series of jour­nal entries can be a guide to a sys­tem or struc­ture (and get­ting them right cer­tainly helps!) but it won’t elu­ci­date the struc­ture itself. 

    My point is that if a series of sim­ple jour­nal entries are harm­less of them­selves doesn’t make the sys­tem the per­tain to sim­ple or harm­less. That money can be cre­ated as needed with­out ill effect because its just jour­nal entries that all bal­ance any­way is a grave mis­nomer that mis­takes the descrip­tor of an event for the event and then belies the events effects.

  • Matthew K

    RJ: 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).

    Gold is money and is not sup­ported by debt. Bit­coins are money and are not sup­ported by debt. Courie(?) shells are money and are not sup­ported by debt. cig­a­rettes are money and are not sup­ported by debt. sil­ver is money and is not sup­ported by debt.

  • Derek R

    @RJ, Money can be cre­ated debt-free. Con­sider these exam­ples.

    1) A state which does not impose taxes but does impose fines as penal­ties for crim­i­nal activ­ity. Every­thing from lit­ter­ing to speed­ing to mur­der. Non-pay­ment of the fines is pun­ish­able by death. The state prints and issues enough money per cit­i­zen per year to pay the aver­age fine rev­enue of the cit­i­zens.

    2) A state which does not impose taxes but owns all its land directly and rents it out to its cit­i­zens. The state prints and issues enough money per cit­i­zen per year to pay the aver­age rent of the cit­i­zens.

    3) A state which does not impose taxes but has a rank sys­tem. Rank has its priv­i­leges and the higher the rank the higher the priv­i­lege. There is a fee asso­ci­ated with each rank. Any cit­i­zen may fill any rank they wish if they can afford it. The state prints and issues enough money per cit­i­zen per year to pay the aver­age fee rev­enue of the cit­i­zens.

    In all three of these exam­ples, money achieves its value for rea­sons other than debt. In the first case, it buys life; in the sec­ond it buys a neces­sity of life; in the third it buys sta­tus. That is not to say that banks and debt would not arise in such states. It is merely to say that the base value of the money does not lie in its abil­ity to pay debts.

  • Matthew K

    Derek R — great Michael Hud­son link. Thanks for that, it reminds me of a recent FOFOA arti­cle which flows from the con­trol of lend­ing: easy money ver­sus hard money

    And RJ, this arti­cle might help you to see money as more than jour­nal entries

    The pure con­cept of money is our shared use of some thing as a ref­er­ence point for express­ing the rel­a­tive value of all other things. Money is the ref­er­enc­ing of the thing, not the thing itself. As FOA said, money is “a value stored in your head!” Money is not some­thing you save. “Money in its purest form is a men­tal asso­ci­a­tion of val­ues in trade; a con­cept in mem­ory not a real item… the value is in your asso­ci­a­tion abil­i­ties. This is the money con­cept, my friends.”

  • RJ

    Money is a finan­cial asset. 

    It has always for thou­sands of year been a finan­cial asset held by one party backed by another one. It is in effect an IOU owed(the debt) by one party to another one (called money).

    Today the debt lia­bil­ity and debt asset match­ing and account­ing is done by banks

    I’m unsure why some­thing so sim­ple causes so much con­fu­sion.

    –Gold is not money. If Gold is used for trade = barter
    –Debt free money is impos­si­ble.
    –Tally stick is a debt based money sys­tem
    –Frac­tional bank­ing is a debt based money sys­tem
    –The gold stan­dard was a debt based money sys­tem

  • Matthew K

    Money is a ref­er­ence point for exchange — that can be derived from debt, can be owed as a debt, but also can be as sim­ple as a tally — say a weight of gold. 

    Our cur­rent money is debt based though and also a finan­cial asset as per cur­rent finan­cial report­ing guide­lines — but that doesn’t mean that money inher­ently has to be a finan­cial asset. As a ref­er­ence point for exchange, money doesn’t have to also be a finan­cial object or a store of value (a true finan­cial asset) it just is right now.

  • Dat

    Hi Steve and every­one else,

    Could we solve the debt prob­lem by print­ing money and hand­ing it out to every sin­gle cit­i­zen, per­haps a por­tion equal the yearly income?