Photo by Maz Kessler

Joan Walsh of www.salon.com asked me some questions on Occupy Wall Street and wrote this article:

As the Occupy Wall Street movement spreads to dozens more cities and towns, it’s waking many Americans to the unrivaled control Wall Street exerts over American politics and the economy. It’s also shining a spotlight on the crushing amount of debt carried by Americans today – debt that’s at the core of our lingering economic troubles, which many experts believe can never realistically be repaid.

In 2007, American debt was 100 percent of GDP; today, after an austerity binge, it’s down to 90 percent, which is still a stunning imbalance. Almost a quarter of all home mortgages today are currently underwater, 2 million homes are in the foreclosure process – and at least 5 million homes have already lost to foreclosure since 2007. American student loan debt is over $1 trillion right now, higher than American credit card debt, with the average student leaving school with about $24,000 in loans.

The debt crisis that’s at the heart of the global economic crisis has sparked some fascinating debate about whether and how American banks should restructure and even write off some of that debt. Our own Alex Pareene proposed that writing off all consumer debt should be a demand of the so far demand-free Occupy Wall Street movement. In fact, even some mainstream economists back some form of debt write-off. Last week a Reuters special report found surprising  establishment support for some modern version of the biblical concept of “Jubilee,” a recurring period, every 50 years or so, during which debts were forgiven.

Reuters gets one thing wrong: It claims the notion of “Jubilee,” hilariously, came to public consciousness thanks to a 2009 “South Park” episode about it (in which Kyle used a credit card to pay off everyone’s debts, in order to stimulate the local economy). In fact, more than 15 years ago, an inspiring global movement coalesced around a demand for “Jubilee 2000,” to free developing nations from their crushing debt burdens to public and private lenders and the austerity imposed by the International Monetary Fund.

I turned to political economist Ann Pettifor, the director of Jubilee 2000 from 1994 to 2001, to get her thoughts about OWS. She is the director of Advocacy International as well as the macroeconomic think tank PRIME.  Pettifor is also the author of the prescient 2006 book “The Coming First World Debt Crisis” and, more recently, with Maz Kessler, of “Cutting the Diamond: How to Shape a Movement to Make Transformational Change Happen.”

Are you encouraged by the OWS movement in the U.S.?

I am cautiously trying to understand the OWS movement from a distance, but from the news and intelligence that I have gathered, I am hugely encouraged and inspired. It is a movement that has already, in just a few weeks, given voice to many thousands of impoverished and indebted Americans, and that alone is a significant achievement. Once people are given voice, and once they understand that they can act collectively, there is no knowing what transformative power they find within themselves.  So I watch with some anticipation as this movement changes the dynamic between people, the White House and Congress, and between people and Wall Street.

It strikes me that this American movement stands on the shoulders of the very first, the American Revolution. As Benjamin Franklin argued, the colonists were provoked into revolt by the greed of British bankers, who bribed Parliament to introduce a Currency Act, which made it illegal for the colonies to print their own money. This meant that all taxes to Britain had to be paid in silver or gold. Those without silver and gold had to borrow them at interest from the banks – causing debt, unemployment and poverty to escalate in the colonies.

Then there are the broad shoulders of the “Greenbackers,” who just over a hundred years ago invented the idea of the March on Washington, and argued for detaching the dollar from gold to allow government to spend freely on job-creation programs.

Yes, and all Americans learn about that, if they learn anything, is the out-of-context William Jennings Bryan quote about the “cross of gold” – and then that Bryan opposed Darwinism during the Scopes trial. He’s remembered as an eccentric, if he’s remembered at all.

Bryan was wrestling with a really difficult issue: the nature of credit and the power of the producers of credit vs. the power of the producers of food, goods and services.  And he and his followers didn’t get it right, and yes, he was wrong on some other big issues. But he and the Greenbackers resisted Organized Money, and so we should not be surprised that their resistance is deliberately forgotten. “The Wizard of Oz” is all that remains of their story, and the true meaning of that story is lost to today’s generations.

Then there are the shoulders of 1930s Americans, including American Democrats, who four years after the 1929 Crash resisted the predations of Wall Street, and elected a government that tamed the finance sector. So to watch a people’s movement rise up against finance again — on the shoulders of these great Americans — is indeed a privilege.

How important is the symbolic power of targeting Wall Street?

Targeting Wall Street is not symbolic. And Wall Street’s power is not symbolic either.  The 99 percent are right. Wall Street is where U.S. financial and political power lies. The United States is a bank-owned state that enslaves its people in debt; and Wall Street is home to the banks.  Congress is in debt to Wall Street. In other words, like many Americans, Congress is enslaved.

Although the movement has yet to coalesce around a set of demands (to the chagrin of more pragmatic, action-oriented activists) it’s clear that the issue of bank power and consumer debt is practically and symbolically resonating. Are there any parallels with the early development of the Jubilee 2000 movement? And will you briefly describe the movement.

Jubilee 2000 was a campaign that mobilized many millions of people in more than 60 countries behind an effort to “break the chains of debt” that effectively enslaved poor debtor countries to rich creditor countries.  Like the British 19th century anti-slavery campaign, Jubilee 2000 arose as a response to a movement – people in poor debtor countries demonstrating against and resisting decades of foreign debt repayments, and the associated International Monetary Fund “structural adjustment” programs.

The IMF was, and is, the agent of the finance sector, all global creditors, official and private. Riots and resistance in debtor nations were triggered by policies imposed by the IMF on behalf of bankers, and included hikes in food and gasoline prices, increases in unemployment, cuts in government programs – all designed to generate resources for the repayment of foreign debts.  Jubilee 2000 set out to place pressure on creditors, one of which was our own government, to cancel these debts, and thereby render the IMF and its policies redundant.

But let me make clear: Jubilee 2000 was not the anti-debt, anti-IMF, anti-globalization movement. It was a campaign that for a few years harnessed a part of the global anti-debt, anti-IMF movement behind a specific, achievable goal: to drop the debt [of the poorest countries] by the year 2000, under a fair and transparent process.

Movements are broad, collective mobilizations, often arising spontaneously in response to injustice.  They are vital in giving voice to the voiceless. Campaigns are organized, have institutional capacity and adopt specific goals and targets. If well-designed and thought through, campaigns can harness the energy and power of a movement to achieve specific goals. Examples of great campaigns that harnessed movements against injustice, and achieved transformative change, include the movements to abolish slavery, to win the vote for women, to expand civil and political rights to African-Americans, and in this case, to “Drop the Debt.”

All of these campaigns had a specific legislative goal that altered the balance of power: between slaves and their owners; between women and men; and between black people and white people.  Jubilee 2000 succeeded in one of its goals: getting about $100 billion of debt written off for 35 poor countries — a huge achievement.  But we failed to achieve structural legislative change.  We failed to alter the balance of power between international creditors and sovereign debtors.

Instead, under pressure from millions of campaigners, creditors caved in. They, not an independent tribunal, decided which debtor country would get relief, how much relief would be given, and the terms of the relief. If we had achieved structural change, the debt write-offs would have been much bigger, Greece would not be in turmoil, and the eurozone would not be in crisis.

I feel a little strange linking the American consumer debt crisis to the global crisis addressed by Jubilee 2000, which was an effort to help desperate impoverished nations get out from under their crushing debt to powerful nations, including the U.S. And yet, it seems as though we can link the forces pushing debt, with harsh conditions, on struggling countries, with the forces pushing debt on American workers, students and families. Can you help me tease that out a little?

There are strong parallels between the Wall Street resistance movement that is growing in the U.S. today, and the IMF resistance movements that mobilized people in poor, debtor nations from the 1970s onward. The most important is this: both sovereign debt – the debts of whole nations – and individual, household and corporate debt in the U.S. rose dramatically after the deregulation of the private finance sector in the 1970s.  Associated with this rise in debt, were policies that impoverished those without financial assets, and wildly enriched those who had gained financial assets – by fair means or foul.

These levels of debt did not exist in the immediate postwar period. There was not a single international financial crisis between 1945 and 1971 according to the great historian of the financial system, Barry Eichengreen. And similarly, Americans were not burdened by rising debts and falling incomes during that period. The unregulated, liberalized expansion of credit and debt began quietly after President Nixon unilaterally dismantled the Bretton Woods system in 1971. Liberalization was given further impetus by President Reagan and later President Clinton, and as a result the rise of ultimately unpayable debts accelerated in the ’80s, ’90s and ’00s.

Millions of Americans are today enslaved by what in biblical times was called “usury,” the exploitation of those without money by those with money.  Bankers and financiers whose place it is to act as “servant” to the real economy in which Americans work and live, have instead become “stupid masters” of a world crafted, designed, worked and built, not by financiers, but by ordinary hardworking Americans.

As Ramsay MacDonald, Britain’s first Labour prime minister, once argued, “No community can be free until it controls its financial organization….”

The Occupy Wall Street movement seems to understand this.

Not that you or I are in charge of crafting either demands or proposals for OWS, but what might be some ways to approach a call for debt forgiveness? Can you start with student loans? Mortgages?

I would not use the language of “debt forgiveness.” This phrase was strictly prohibited in Jubilee 2000, because it implied that the debtor was the “sinner” and needed “forgiveness.” Instead we argued that there is co-responsibility for the debt, and within that frame the more powerful creditor must take a greater share of responsibility for the losses associated with the debt. As things stand in the U.S., as far as I can see, Wall Street takes no responsibility for the vast debts it heaped on the shoulders of working Americans – debts vast as space.

Second, I would absolutely demand a “Debt Jubilee” – especially for students –  based on the biblical principle outlined in Leviticus 25. A very large proportion of the debts owed by the American people cannot and will not ever be repaid. And if this debt is to be deleveraged in a disorderly, unmanaged way, then America will have decades of economic failure and social unrest ahead. Unfortunately, Wall Street bribed and lobbied the second Bush administration to implement a much tighter bankruptcy law, which favors lenders and penalizes debtors.  This law will have to be modified, and a “debt Jubilee” introduced.

We must remember that Jubilee principle is not just a tradition of the Torah or Old Testament; it was fundamental to the American Revolution and subsequently to the fight against slavery. It is a powerful symbol of American independence, which is why the text from Leviticus 25 is engraved on the Liberty Bell in Philadelphia: “Sound the trumpet of Jubilee, and declare Liberty throughout the land.”

Are there lessons from other crises in other countries?

I think the lessons to be learned are American. There are the lessons from the Revolution; the failed “Greenbackers” movement, and their populist leader, William Jennings Bryan. Above all, there are the lessons taught by President Franklin D. Roosevelt. In the 1930s, under Roosevelt’s leadership, Wall Street was once again made servant to the people of the United States. The Pecora Hearings dragged bankers into Congress to explain their misdeeds.   Structural legislative change, in the form of the Glass-Steagall Act and the setting up of the FDIC, subordinated bankers to the interests of the economy as a whole.  In his famous Oct. 31, 1936, speech, Roosevelt describes the

… struggle with the old enemies of peace — business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me — and I welcome their hatred.

I’d rather look forward than backward, but did the Obama administration miss any key solutions as it dealt with the banking crisis and TARP in 2009?

Unlike President Roosevelt, President Obama and his advisors did not seem to welcome Wall Street’s hatred. Instead, in a fatal miscalculation, they bowed to “organized money.” Wall Street bankers were bailed out – unconditionally. Unlike the contracts that enslave millions of Americans, there were few “terms and conditions” for the bailout, and by the time the administration finally got around to discussing these in Dodd-Frank, Wall Street bankers had succeeded in turning Congress into a “mere appendage to their own affairs,” in Roosevelt’s words.

Occupy Wall Street is mobilizing a movement. We now need a second American revolution – a campaign that will structurally alter the balance of power between ordinary Americans and Wall Street.

Are there practical sorts of proposals, or next steps, you’d like to see this movement begin to coalesce around?

This one is tricky. I hear from friends that there is determined opposition to leadership, and therefore to organization. And I respect that approach by the movement, as well as their processes for communicating and mobilizing. There is profound disillusionment with both President Obama and political organizations, in particular the Democratic Party.

So it is not for me to suggest any practical steps. However, I do believe, as I am sure many of the 99 percent do, that just demonstrating is not enough. Specific campaigns and organization to achieve structural legislative change will be necessary.

But for now, let’s wait and see how this new movement spreads and grows. For the first time since the crash of 2007-09, I am optimistic!

Published in the Guardian Cif alongside responses from Jonathon Freedland and Sheila Lawlor:

Ed Balls said sorry for Labour’s record on ultra-light-touch financial regulation, and that must be acknowledged.

But apologies are just not enough. He and Ed Miliband must stop attacking his electoral base, “hardworking families”, many of whom are trades unionists.

As Balls recognises, unless urgent action is taken, this may be the gravest economic crisis in history – given the global integration of finance and the growth of world population.

So Balls must go further.

First, he must declare loudly and forcefully that Labour will never again be captive to neoliberal central bankers like Alan Greenspan; or private bankers like Sir Fred Goodwin of RSB.

Labour must never again be seen to be in the pockets of the finance sector.

Balls and Miliband must give the Labour party back to its electoral base, to its members.

They must both distance themselves from Labour leaders that profit from links to the global finance sector.

Second, Balls must stop talking about the deficit; about “tough decisions on tax and spending” – the last thing the economy needs. It is private debt – 469% of British GDP and six times the public debt – that is the real crisis facing Britons. It is debt-deflation, and debt-deleveraging, and collapsing private investment that pose the gravest threat to us all.

Given this, there is an urgent need for government spending on environmentally sound projects to generate economic activity – jobs, the income, the savings that will help protect us from Armageddon.

Until he does, his apologies will count for nothing but special pleading.

Read the original article on Cif here >

By Ann Pettifor. An edited version of this piece was published on Left Foot Forward, 14 September, 2011. This original, longer version posted 19 September, 2011. 

The game is up. The 2007-9 private banking crisis that started with the unpayable debts of the US sub-prime sector, was never over. The crisis has now moved on to include the unpayable debts of sovereigns owed to private European bankers. It is increasingly clear that there is declining political and institutional support for further private bank bailouts. The dramatic resignation on Friday 9th September of Jürgen Stark, architect of Europe’s equivalent of the Gold Standard – the Growth and Stability Pact – marks an important step in the resistance to bailouts by the ECB; in the inevitable collapse of the Maastricht Pact, and with it, the utopian vision of the neoliberal Euro.

And so the age of liberalised, de-regulated finance appears to be over – at least in Europe. That is the conclusion of investors in both Wall St and the City of London and explains the collapse of confidence in banks and the volatility of stock markets as investors rush for the exits, transferring speculative gains into the safety of government bonds.

The Growth and Stability Pact was, and is repeatedly flouted by Greece and other eurozone countries – even by Germany under Gerhard Schröder. The ECB, led by Jean Claude Trichet is also obliged to flout its terms, by effectively adopting a fiscal role – buying up the bonds of deficit countries – and thereby causing the resignation of not just Mr Stark, but also Germany’s Axel Weber.

This resistance represents a Polanyian counter-movement – however weak – which defies orthodox economists, central bankers and Haute Finance. Across the Eurozone, Europeans resist further private sector bailouts; and refuse to march like lemmings to their own destruction across cliffs of unemployment, deflation and social unrest.

The Eurozone and its economic framework was designed as a financial ‘straitjacket’; to undermine the sovereignty of Europe’s elected governments; to transfer power over financial and therefore economic policy to unaccountable central bankers; powers then enforced by ‘the invisible hand’ – ‘the markets’ – international speculators on foreign exchange and financial markets. It was also, its protagonists argued, designed to ensure peace across Europe.

But so utopian is the vision of liberalised, unaccountable finance, that it has achieved the very reverse: the divergence, not convergence of European economies; sovereign insolvency, bank failures, rising unemployment, the degradation of public services, and with it the intensification of tensions and conflict across Europe.

Regrettably we have been here before. The very same policies – and liberal finance model – were tried in the 1930s, under the Gold Standard. By 1933 their failure was complete, challenged effectively by both Karl Polanyi and John Maynard Keynes. The latter took on the responsibility of outlining and implementing a ‘Plan B’ – one which endured until overturned by neoliberals in the late 1960s and early 1970s.

So as we witness the death throes of this second experiment in liberal finance, what is today’s progressive alternative? What is the left’s Plan B?

The failure of the left to pose an alternative to liberal finance was striking both before, during and after the 2007-9 financial crisis. In the wake of the greatest financial catastrophe of our lifetimes, the loudest complaints were aimed at bankers’ bonuses, and at the failure of rich elites to pay taxes. Recently, the pro-austerity Institute for Fiscal Studies has tried to turn this into a debate about the mal-distribution of wealth.

But while these are important issues, they do not touch on the structural injustice of a liberalised financial system that is capable of wrecking the global economy; denies economic sovereignty to democratic states, and that stratifies the polarisation of wealth between rich and poor. Nor does the debate on bonuses or the addition of taxes structurally alter the role of Haute Finance as ‘stupid master’ (to quote Labour’s Employment manifesto of 1944) as opposed to ‘servant’ of the real economy.

So what should the left’s macro-economic Plan B look like? Clearly it will have to embrace both monetary and fiscal policy, with monetary policy more important in the long-run; but fiscal expansion needed immediately to deal with the collapse of employment and private sector activity.

The first element of any plan must be the careful and coordinated sequencing of both quantitative easing and fiscal expansion. This will involve the financing of a programme of public works expenditures designed not just for socially and ecologically essential projects, but also to stimulate private economic activity. Central banks are eager to supply liquidity to private bankers when they wreck both their own institutions and threaten the global economy; they should now act to supply liquidity to governments that need to stimulate economic recovery, and finance the transformation of the economy away from fossil fuels. (For more on this see ‘The Green New Deal’ co-authored by this blogger.)

Next, it will be essential to manage in an orderly fashion the massive write-off or ‘re-structuring’ of unpayable debts – to replace the current disorder of random de-leveraging by sovereigns, corporations, households and individuals. Many of these debts are phantom debts, and cannot ever be repaid. That reality must be faced. It is time for another debt Jubilee.

The third element should be the introduction by sovereign states of capital controls over the mobility of finance across borders, to strengthen democratic, accountable policy-making. In the words of Brazil’s President Rousseff, governments must protect their “internal markets.” The form these controls take will depend on local conditions and circumstances, and should be agreed by elected representatives of democratic states, with central bankers acting in the interests of domestic economies, not the proverbial ‘gnomes of Zurich’. Fourteen countries already impose capital controls, including China and Iceland; but each week new reports appear. The most recent is Indonesia which will require companies to repatriate about $33bn of foreign currency earned each year on exports (FT 9 September, 2011).

Fourth, central bankers, while regulating the creation of credit by private bankers to ensure loans are repayable, should also seek to bring down interest rates across the spectrum of lending: for safe and risky loans, short and long-term loans. Adam Posen’s recent proposal for a public bank that would make cheap loans available to SMEs should be given serious consideration. In other words, the rule should be ‘tight but cheap’ money.

Fifth, governments and central banks should be mandated to promote a) full employment and b) sustainable, localised economic activity, supporting the domestic economy – not a globalised financial elite. For just as employment makes things affordable for individuals and households so full employment will make things – including the transformation of the economy away from fossil fuels – affordable for government.

“Look after employment” as Keynes argued, “and the budget will look after itself.”

Add to the above, terms and conditions for banks bailed out by taxpayers; and a reformed taxation system and you have a coherent and plausible Plan B. Correct me if I am wrong, but so far it seems the most comprehensive one on the table.

End

http://www.abc.net.au/rn/breakfast/stories/2011/3310691.htm

For any of you in Sydney – come along to the Catalyst event: ‘Making the boom pay… if not now, when?‘. I will be speaking along with others, more details are here:

http://www.catalyst.org.au/catalyst/.

Wall Street plummeted as concerns over European debt and the US economic downturn spurred a broad sell-off. Photograph: Shen Hong/Xinhua Press/Corbis

Read my article from Guardian Cif, Friday 19th August:

As bank shares and stock markets plummet, and investors flock to the safety of government bonds; as obstinate EU leaders crucify their countries in a futile struggle to defend today’s equivalent of the gold standard; as British and American politicians adopt austerity policies and drive their economies closer to the cliffs of depression; and as most professional economists stand aloof from the escalating crisis – what lies ahead for ordinary punters like you and me?

First, let’s take look at the big political picture. This crisis is already sharpening the divide between left and right in both the EU and the United States. Studying a precedent – the implosion of the 1920s credit bubble in 1929 – we note that four years after that crisis erupted, the political divide sharpened decisively. The United States and Britain moved to the left. Germany chose a different path. After 1930, Germany’s Centre party under Chancellor Brüning adopted austerity policies that resulted in cuts in welfare benefits and wages, while credit was tightened. At the same time the German government engaged in wildly excessive borrowing from the liberalised international capital markets. The ground was laid for the rise of fascism.

Four years after the “debtonation” of August 2007, our political classes in both the EU and the US have consciously declined to restrain out-of-control finance sectors or to fix broken, effectively insolvent banks. Instead, central bankers deployed taxpayer-backed resources (quantitative easing) to finance, guarantee and bail out bankers who then went on a wild, speculative spending spree.

At the same time, politicians imposed austerity on the more socially useful and productive sectors of the economy, both public and private. In both the EU and US these economic strategies have angered the populace and emboldened the right; in particular the far right. Looking ahead through the political lenses of austerity, street rioting and Tea Party obstructionism, the signs are ominous.

And then there is the impact on our own living standards. For comparisons and precedent, we need only look at Japan. Our politicians and central bankers have not learned from Japan’s crisis, which preceded our own. We are, therefore, destined to follow Japan’s disastrous record of lost decades of economic activity. As in Japan, so here: a broken banking system, crushed by the weight of unpayable debts on its balance sheet, fails to lend to businesses at affordable rates. Pretty soon this constrains investment. First-time buyers can’t get affordable loans or overdrafts, placing downward pressure on property prices.

A fall in investment is compounded by government policies for austerity – rises in VAT, and cuts in public spending. These policies trigger a rise in unemployment. Rising unemployment causes people to snap their purses shut, placing even further downward pressure on prices, profits, wages and employment. The downward spiral is then hard to arrest.

Property prices across Japan have continued to slide uninterrupted for nearly two decades. Hard though it may be for us to accept, it is not impossible to imagine UK property prices falling for the next two decades.

Just as here, Japan’s politicians and central bankers exaggerated the risks of inflation, reflecting the concerns of bankers and creditors – who fear inflation will erode the value of their outstanding loans. And so they were slow to a) use monetary policy to help the broader economy recover, and b) to restructure banks. The primary Keynesian tools for reversing the Great Depression were an aggressive monetary policy combined with extensive restructuring of the banking system.

While Keynes is largely defined (by his enemies) as a fiscal activist, he was first and foremost a monetary economist. In other words, he believed that if governments and central bankers would only fix the money system – by lowering rates of interest for all borrowers (not just the banks); by injecting QE into productive, socially useful projects; and by restructuring the banking system – the rest of the economy could be helped to recover.

Because our politicians and central bankers have so firmly rejected these lessons, prospects don’t look good for us at all. Instead, we would do well to echo Frank Zappa’s realism: “I mean to say that every day/Is just another rotten mess/And when it’s gonna change, my friend/Is anybody’s guess.”

Tonight, Wednesday 3 August 2011 at 08.00pm BST (GMT +1), BBC Radio 4 will broadcast a debate which took place at the London School of Economics (LSE) on 26 July.  This broadcast will be repeated on Saturday, 6 August, at 10.15 p.m BST (GMT +1).

Along with my colleagues Prof. Victoria Chick and Douglas Coe at PRIME  we have written the following response to the debate:

Debaters considered whether Keynes or Hayek had the solution to the present financial crisis. The economist George Selgin and philosopher Jamie Whyte spoke for Hayek; Keynes’s biographer Robert Skidelsky and the economist Duncan Weldon spoke for Keynes.

On the one hand we are pleased that the BBC and the LSE now acknowledge rival positions to the present austerity policies of Western governments. On the other  we are concerned that the debate might have served mainly to reinforce existing prejudices, rather than to clarify the substance of the matters under discussion, matters which – there can be no doubt – are of the most profound importance.

Lord Skidelsky provocatively but justly reminded the audience that in the early 1930s, the same orthodoxy driving western austerity policies directed the actions of Germany’s 1931 Bruning government and paved the way for the rise of Nazism. These actions – vigorously opposed by Keynes – were the final straw for a Germany crushed by defeat and the disastrous boom-bust cycle that followed their return to the gold standard. Reparations were easily circumvented by wildly excessive borrowing from financial interests around the world, in a manner that even Keynes did not anticipate. It was these financial and fiscal policies that brought Hitler to power.

With financial interests still firmly in the ascendency and reactionary right-wing forces increasing their grip in the United States and much of the Western world, we must not forget these lessons from history, which formed the background to the original debate between Keynes and Hayek themselves. The stakes are high indeed.

Keynes shared with Hayek a preference for the economy to be primarily the province of the private sector. However, he recognised that ‘the market’ did not always best serve the common good and therefore that state intervention was necessary – and not just during a slump. In this he was diametrically opposed to Hayek.

For Keynes, the market’s major flaws were rooted in monetary arrangements that favoured speculation and excess consumption rather than productive activity. In addition, in a slump, the pessimistic outlook of producers and investors allowed the slump to persist and needed the stimulus of public works expenditure.

The LSE debate neglected the subtleties of the respective positions of Hayek and Keynes and reinforced many of the most common and most dangerous fallacies about Keynes’s contribution – and even established some new ones.  While both economists were misrepresented to some extent, our main concern must be to rectify distortions about Keynes. There are eight misrepresentations that we want to bring out.

1.   Hayek as “an opponent of financial excess”

From 1971 through the early 1980s, restraints on the financial sector were steadily unwound. These actions were prompted by Hayekian ideals of liberalism, as is well known.  The Hayek supporters at the LSE debate dissociated themselves from this liberalisation, the cause as we now know, of the rapid expansion of the money supply before the crash. Hayek might not have predicted this consequence of liberalisation, but its disastrous consequences are now plain to one and all. Perhaps this is why the debaters dissociated themselves from this aspect of Hayek’s position. Instead they castigated the conduct of the liberalisation policy rather than the policy itself. Indeed the ideal of liberalisation was scarcely mentioned, for to do so would be to acknowledge the existence of an alternative: Keynes’s managed financial system.

2.   Keynesian policy as “promoting the big state”

Keynes’s most substantial legacy was a financial system managed by the state.  This system prevailed from the end of the gold standard until the 1970s. This management ensured that on the one hand low long-term interest rates facilitated both private and public sector investment; on the other, restraints on

banks and capital mobility kept speculation and excessive consumption at bay. Keynes had devised and helped implement a financial system that was conducive to production and investment rather than speculation and consumption.  A larger state rightly prevailed than in the 1920s or 1930s, but ironically Keynes’s state was still smaller than the state that prevailed after the counter-revolution of financial liberalisation

The post-war world was one in which the state and the private sector operated powerfully in tandem, supported by a greatly revised monetary architecture.

As we have stressed, Keynes was concerned mainly with the effective operation of the private economy.

3.   The inflation of the 1970s as “the fault of Keynesian policies”

The inflation of the 1970s began just after the Keynesian post-war mechanisms for the regulation of finance started to be dismantled. In Britain, controls on banking and capital mobility were relaxed, and liberalised arrangements were restored, beginning with Competition and Credit Control (1971) (evaluated as “all competition, no control” by most economists). The root cause of the inflation of the 1970s was the massive expansion of the money supply that followed the deregulation of credit control, as both Friedman’s monetarism and Keynes’sGeneral Theory, Ch. 21, predict.

The inflation of the 1970s was not the consequence of Keynes’s policies but of the dismantling of his policies for restraining the finance sector. In the past, the inflationary 1970s would have been understood as a ‘bankers’ ramp’.

4.   Keynes as “advocate of deficit spending”

While the importance of Keynes’s monetary policies is scarcely recognised, even his fiscal policies are severely misrepresented. Most prominent and pernicious of all is the idea that he advocated deficit spending. From his earliest contributions to the debate on fiscal policy, Keynes was concerned to establish how public works expenditure would pay for itself and would constitute a relief rather than a burden to the public finances. As we have shown in ‘The economic consequences of Mr Osborne’,[i] the outcomes of public expenditure policies over the last century vindicate his analysis. It remains a puzzle why even Keynes’s most ardent champions neglect the evidence.

5.   Keynes as “a supporter of wasteful expenditures”

The austerity brigade is rattled. Young Daniel Knowles over at the Daily Telegraph is so worried, he has had to rise to the defence of the Treasury and Office for Budget Responsibility – and then resorts to proposing Greece’s economic strategy for the UK. Why? Because orthodox economic ideology has been challenged by none other than Daniel’s ‘hero’ that notorious womaniser, President Bill Clinton.

Bill gets it. On the deficit that is.  Thanks to Left Foot Forward and Mehdi Hasan we have all read Clinton’s  speech:

“(the) UK’s finding this out now. They adopted this big austerity budget. And there’s a good chance that economic activity will go down so much that tax revenues will be reduced even more than spending is cut and their deficit will increase.”

Daniel Knowles challenges his hero, on these grounds:

1. “The government cannot spend so much that net revenues actually increase. By Clinton’s logic we should increase spending until our deficit goes away. ”
2. “The Office of Budget Responsibility..using a Keynesian model, estimates that the fiscal multiplier is about .35”……that means that…overall the deficit is will be smaller than it would have been without cuts….. (Note: Knowles Update:  I actually made a mistake with that statistic – 0.35 is the estimate for the multiplier for VAT. Estimates of the fiscal multiplier overall, including those of the OBR, IMF and others, are closer to 0.)
3. Greece: spending cuts have reduced the deficit from 15.4% of GDP in 2009 to 9.5% now.

The first two points are rightly, morphed together in Knowles’s argument. The first is to do with the impact of government spending. In a slump – which we are living through now – it is vital for the government to spend to fill the investment vacuum created by an over-indebted and extremely nervous private sector, desperately trying to de-leverage its debt. Right now the UK private sector is busily hoarding cash, because they are – rightly – worried about their levels of debt; and because they fear – rightly – that if they do invest, customers (both private and corporate) will not walk through the door – because customers too, are heavily indebted and worried about the threat of unemployment and falling house prices.

So given these circumstances of widespread fear and paralysis in the economy – what the ONS calls ‘flat-lining’ –  say the government invests £1 billion in libraries. What would happen next?

The Office for Budget Responsibility has adopted a model of the economy with a ‘multiplier’ – which is supposed to tell us how much the government would get in return for that investment. The OBR, according to Knowles, reckons the return would be a measly 0.35 on VAT, 0.0 on government spending overall. This model implies that an investment of £1billion in an investment in e.g.  libraries, would return nil to the Treasury. In other words, the multiplier delivers a negative return: a lot less than the £1 billion invested.

The OBR model, Daniel Knowles, is most definitely not Keynesian. In fact it is an insult to the work of Keynes and Richard Kahn – who developed the multiplier - to describe it as such. It is the very reverse of what Keynes and Richard Khan argued (for more see appendix 1 of ‘The Cuts Won’t Work‘)

For Keynes, the multiplier at the very least must be 1. That is, it must return, at the very least, £1 billion to the Treasury. This will happen because, for example,  private contractors will be hired to build the library. They will buy bricks from a supplier, who will pay taxes to the Treasury on the profits he makes from selling bricks. The construction company will pay taxes on the profits they make from building the library. And their employees will pay taxes on their income – generated by working on the library build. Then the employees may e.g. walk into  a home insulation company, and buy home insulation – to ensure greater energy efficiency at a time when gas prices are rising. The home insulation company will pay taxes on that – and employ more people to insulate homes – all of whom will be on PAYE (unless evading tax). They too, will use their income to walk through the doors of heavily indebted companies….and so on.

At the same time, the Treasury will stop doling out dole money to unemployed construction and home insulation workers.

So for Keynes and Kahn the multiplier could be at 2. In other words, with public works expenditures the Treasury could expect to get £2 billion back (in tax revenues and reduced unemployment benefit payments) for their investment. This explains why government spending, unlike the spending of an individual or company, could pay down the government’s monthly ‘overdraft’, the deficit, and in time pay down the government’s ‘mortgage’ – the public debt. Our paper, cited above, provides evidence from records of the national accounts that this is precisely what has happened in the past.

Now I don’t understand why the OBR has set the multiplier at 0.0 – and indeed will write to Robert Chote, head of the OBR to seek clarification. But anyone can see how helpful such a low multiplier is to the argument about austerity. An investment of £1billion that generates a negative return – i.e. costs the Treasury without any hope whatsoever of a return – explains precisely why the government can’t be bothered to invest in  libraries, or energy efficiency or de-carbonisation of the economy.  All of these investment could revive the economy….but why should the government bother to try and revive the economy, and with it the private sector – at a negative of return for government expenditure on public works? A return which does not even pay for the investment – and indeed is modelled not to pay for a return on the investment.

That’s not to deny that there are circumstances in which the multiplier may not work. If government spending goes into tax cuts – and if consumers choose not to spend those tax cuts – then returns to government may well be negative.  And if government spending – is invested in say, Siemens, Germany – it will leak out of the country, and returns on British public investment will go to the German government, not the UK government. That is a risk, and may explain why the OBR’s multiplier is negative. They don’t expect government to invest in Britain.

But if the investment goes into public works here in the UK – productive expenditure that improves our quality of life, employs people, generates income both for the private sector, the employed, but also for government – AND reduces the deficit – why on earth should it not do that?

Finally the unlikely point made by Knowles that thanks to cuts in government spending,  the deficit is falling in Greece.

Frankly, I can’t get my head around Greece’s numbers for its deficit – which are continuing to be revised up by actors such as the EU.. First of all, as is well-documented, with the help of Goldman Sachs and with officials at the EU and the ECB turning a blind eye, the previous Greek government ‘cooked the books’. They lied about their deficit – and hid parts of it in complex products invented for them by the bankers at Goldman Sachs. So before 2009 they claimed that the deficit was 5% of GDP. When finally EUROSTAT/ the EU/IMF got their act together and looked at the books, they estimated the deficit at 15%. Since then it has apparently come down to 10%. I find this all very dodgy.

Second: remember the government deficit can be compared to an overdraft. The public debt can be compared to a mortgage. (Although please: there is no way that government spending can be compared to individual or even corporate spending; that we can draw macroeconomic conclusions from microeconomic reasoning!)

But just for illumination: Greece’s ‘overdraft’ or deficit will, of course, be volatile. Large sums of money are being transferred by the ECB and other institutions into the government’s bank account to help with the crisis. At that point in time the ‘overdraft’ will look good. But it’s the ‘mortgage’ that we should worry about, and whether or not the ‘mortgage’ is being paid down or rising.

It’s the economy stupid.  The deficit will only recover, when the Greek economy recovers. And not before. If the ‘overdraft’ or deficit gets a boost from a one-off deposit – is that helping the Greek economy recover, so that government can collect tax revenues from an active private sector and pay down both the deficit and the debt?

Right now, I am not in a position to tell why the Greek deficit has apparently fallen. But to be honest, my major concern is whether the economic recovery in Greece is in place, and is sustainable over the long term.

And I suspect that even Daniel Knowles can see what I can see: Greece is going downhill….Is that really the model Britain should follow?

This article was simultaneously posted on LeftFootForward and PRIME >

Bernard Madoff’s 90ft yacht ‘Bull’ is offered for sale in Monaco for €3m this week. Image source: associated press.

I learnt to my cost that the role of Cassandra is no fun.  Why “Apollo’s cursed gift is a source of endless pain and frustration.”

While it is possible to note that the ‘tectonic plates’ of the financial system are shifting and that those shifts presage a ‘financial earthquake’…unless one can get the timing of these things right – one’s insights are, rightly, scorned and ridiculed.

But I am now more attuned to the signs.

In the run-up to the 2007-9 crisis advertisements for yachts started appearing in the FT’s ‘How to Spend It’ magazine. First, there were one or two. Then more. Then they expanded and became double-page spreads. The vast backgrounds of sea and sky, set against the shiny white of the boats were blinding to the casual, disinterested reader. But as the credit-fuelled asset bubble expanded, text on these glossy ads disappeared. There was just the sea, the sky, the vast burnished white boat and some numbers: $7 million.

And then crash! bang! wallop! For almost a year or so, very few ads for yachts appeared. Simultaneously the property section of the paper was wiped out. We were back to fancy watches, gadgets and clothes.

Last weekend the FT devoted the WHOLE of the magazine to – you guessed it -yachts! And today the paper reports, hedge-funders are in Monte Carlo to buy up Bernard Madoff’s old yacht….

Could this be the sign? Or just BULL?

It goes without saying, I hope, that of course I support ‘clamping down on tax avoidance and evasion’ – but do not support ‘raising taxes’. I had asked the originators of the letter if we could debate this point, and later the words “those best able to pay” was added, without informing me. Even then, I may not have signed it. The fact is that with the UK’s rate of unemployment; with businesses facing a very hard time because of the rise in VAT and the cuts in government spending, and with banks effectively refusing to lend to SMEs and others (except at very high rates of interest)….this would not be the moment to raise taxes.

But I want to make a bigger point. By calling for taxes to be raised, the letter implicitly suggests that the deficit can be financed through increased taxation. In this sense, it echoes the orthodox line: that government expenditure is like a personal or corporate budget and that ‘savings’ (i.e.cuts or increased taxes on e.g. VAT) have to be found to finance it. That ‘we cannot afford to spend’. That the ‘money has run out’ and we need to find more – from somewhere, preferably taxation.

I strongly disagree. First, to reiterate: the government’s budget is not at all like individual, household or corporate budgets. Individuals cannot engage in ‘quantitative easing’. The Bank of England, on behalf of government, can, and indeed has done so, in order to support the financing of the UK government’s deficit. Individuals and corporates do not necessarily generate income from spending. The government can generate income from investment in public works. It’s a form of income called tax revenues. Third, individuals and corporates can go bankrupt. The government cannot – not even Zimbabwe.

Given these facts, the best way to finance the govermemt’s budget is by increasing, not cutting, the government’s  income – from increased economic activity. In this sense we can make a comparison between governments and individuals: as Prof Chick and I note in our latest update of “The economic consequences of Mr O” -

“Just as work makes things affordable for an individual, so too for society. A nation’s prosperity follows from its employment, not the other way around.”

What the VAT rise and cuts in government spending  do, is to cut economic activity – and therefore employment – and with it income from economic activity for the government.

And this, I fear,  is what raising taxes would do too. And I do not want to be party to that.

It really is very good.

“The official narrative today is that the plan of recovery is working. The narrative focuses on the rise of the stock markets to almost pre-crash heights. The failure of housing or commercial property markets to recover and the fact that unemployment is hideously high is simply no longer part of the recovery narrative. These things have been dropped. What has been added has been the ‘shocking’ level of public, national debt. In the new narrative the cause of the ballooning of public debt has been steered away from facts about the cost of the bail outs or how the disintegration of the speculative bubble caused a subsequent collapse of real economic activity. The new story is that the debts we have now are nothing to do with the banks and their temporary difficulties. They are due to a deeper incontinence in public spending.

“The narrative is being re-written so that the ‘debt crisis’ is seen as something that is under control and being solved, whereas the present and pressing problem in need of controlling is the cost of public services and the unreasonable expectations that underlie them. Public expectation of a free lunch for their children at school or a pension for their life’s work or a health service paid for through taxes – these socialist weapons of fiscal destruction are to blame for the vast public debt. That is the narrative we are being fed. The bankers are being air brushed out of the story and certainly any mention of blame being attached to them is being described as backward looking if not downright suspect and dangerous. Not far, I suspect, from being vaguely alluded to as financial terrorism or a ‘financial hate crime’.

“What we are left with in the official narrative is that our betters have one crisis under control – the cash flow/liquidity crisis and are now taking equally heroic steps to deal with the recently uncovered, deeper, systemic crisis – the ‘true’ crisis – of out-of-control public spending which is responsible for sovereign debt levels that are injurious to the efficient workings of the markets. Markets whose fearless leaders are trying, despite pubic profligacy and obstinate stupidity, to help us out of debt and back on to the true path of prosperity via necessary austerity and more ‘realisitic’ expectations of what we are worth and what we deserve.

“ The question for me is if the dissident narrative can hold its ground and find something more say. Or have we been been swept aside?

“Certainly we are outgunned and alone. The press are supine collaborators, the rule of law has been bought and whored, and academia is either captured by the dominant ideology and too dimwitted to escape or just too concerned with grovelling for tenure and a city sinecure.

“The dissident narrative I advance says that what we are told are temporary and extraordinary measures are nothing of the sort. The measures taken to ‘deal’ with the ‘crisis’ have in fact created, whether by accident design, a new and very much more reliable, system for ensuring that the super rich stay that way. The new system horrifies me because it has put finance above democracy, markets over governments, and it appals free-marketeers because it sets up an untouchable aristocracy within the markets who are not allowed to lose and who can therefore take what they want, when they want, from whomever they want and the law will not touch them. Neither the law of the land nor the law of the markets. Free marketeers and those on the left like me find ourselves in the unlikely position of sharing an abhorrence for what the super elite are doing.

“What we have in place now is a system of permanent and institutionalized acceptance that the largest accumulations of wealth and those who own, manage and serve them can never be imperilled or threatened either by democratic rule of law nor even the workings of the markets themselves. Both perils have been removed for the super rich and their banks because it is now established that the purpose of government is to make sure the system and the hierarchy of wealth and power at its peak, remains untouchable and unchangeable.

“With this accepted, the rules of sovereign democratic government and global finance have mutated beyond recognition. Today when banks need more of their assets purchased by the public purse in order to relieve them of possible losses, the public purse is opened without discussion. What this means is that you and I are NO LONGER simply buying up, as a temporary, emergency measure, mistakes made in the bubble of three years ago. We are there to buy up the results of any greedy speculations made in the last two years. Government purchases and the QE which fund them are no longer part of dealing with any ‘crisis’ at all. They are now part of how the banks do business. They are the new normal.

“This isn’t a crisis. This is the new business of profit without risk. It isn’t even really a ‘bail out’. The new normal is a no risk machine for expropriating public wealth. The banks can now buy what ever they want, the higher the risk the better, because the new system guarantees that there is no risk for them. The banks can speculate on sovereign debt, currencies and commodities knowing that if they are in the elite, they will be bailed out. Not in the spectacularly embarrassing fashion of 07-08 but in the low key ways dreamt up in the last two years. A plethora of ‘exceptional’ funding measures, bond purchases and abrogations of the rule of law in favour of bank profit, which are all, in fact, bank bail outs at public expense.

“Crisis? What crisis?

“The only crisis for the elite and their banks will be if the next round of QE in America and of ECB bail outs for German and French Banks via Greece, Portugal and Ireland somehow do not happen. If there is a minor miracle and our leaders remember we exist – THEN there will be a crisis for the banks and the financial elite and some small hope for us.”