This week I appeared on Newsnight with Gillian Tett of the FT and Louise Cooper of BGC Partners. We discussed our graphs of 2011 (see mine below) and wider questions around the global financial crisis this year – and how ecnomists and policy makers need to respond.

Watch the show on iPlayer for the next 5 days here. Our discussion begins at 33 mins.

'Standard & Poor’s is just following events, not shaping them.' Photograph: Stan Honda/AFP/Getty Images

Image: acknowledgements to the BBC.

The Autumn Statement reveals but one thing: the Chancellor and his advisers are both ill-advised and dangerously ill-prepared for the forthcoming prolonged Depression. (And if you think I exaggerate, let me remind you that 20 years after the Japanese debt bubble burst, Tokyo house prices are still falling, and the stock market is worth 60% less than 20 years ago. And the Japanese economy was in a healthier state then, than the UK is today, thanks to an export surplus.)

Today’s penalising of the innocent – public sector workers, pensioners and those hundreds of thousands of young people entering the labour market  - is a result of a deeply flawed economic analysis by the Chancellor of the causes of the global financial crisis.

No depression will be averted;  no government borrowing will be reduced; no economic recovery can be hoped for, until the cause of the crisis is correctly analysed and then addressed with appropriate policies.

For me an interesting angle on the day was the difference in emphasis between the official Treasury Autumn Statement, and the Chancellor’s speech. The latter was far more ideological of course; but the Treasury Statement does indicate some grasp of the scale of the crisis. The very first paragraph of the full Statement (on page 11) reads:

“The UK economy is recovering from the biggest financial crisis in generations. Prior to the crisis, underlying competitiveness fell and economic growth was driven by unsustainable levels of debt, with the UK seeing the greatest expansion in debt of all the world’s major economies over the last decade. As a result, the UK experienced the deepest recession of any major economy except Japan and the Government inherited a budget deficit forecast to be the largest in the G20.” (My emphasis.)

So the Treasury does get it. The country that enthusiastically hosts the biggest global banks in the world; that celebrates “London ..as the world’s pre-eminent financial centre” (to quote the Chancellor today) witnessed “the greatest expansion in debt of all the world’s major economies over the last decade” – and as a consequence, the public finances worsened.

From these simple facts much analysis flows.

The most important is this: Britain (and the Eurozone) are not facing a sovereign debt crisis. We are not facing a crisis of the public finances. Instead: we are facing the biggest ever crisis of the private financial system.

Why? Because the “greatest expansion in debt of all the world’s economies” is not going to be paid back.

“The greatest expansion of debt in all the world’s economies” must first be written off, ‘de-leveraged’ or paid down.

As this process grinds relentlessly forward, the banks that lent “the greatest expansion of debt in all the world’s economies” face bankruptcy – if not now, in the near future.

That is the crisis we all face. The bankruptcy of the global private banking system - based in our backyard.

The mobilising of finance for the Eurozone is to bail out private banks that engaged “in the greatest expansion of debt.”  Although you would not believe this from media reporting, its purpose is not to bail out sovereign governments. The stubborn refusal of German politicians (with whom I have some sympathy) to agree to further taxpayer-backed bailouts of the private finance sector means that private banks face imminent bankruptcy.

Which is the why the Polish Foreign Minister warns of an impending “crisis of apocalyptic proportions“.

Given this terrifying prospect, what do our Treasury mandarins and British Chancellor recommend?

First, that we make it easier for employers to sack people, and thereby increase unemployment and cut wages – making it harder for those employees to pay back debts.

Second that we cut public sector wages of those in employment – with which some of those private debts may have been paid back. Third, that we penalise future pensioners. For why? And fourth, that we try and rescue 200,000, but sacrifice hundreds of thousands more young people on the dustheap of unemployment. That policy alone will cut the nation’s income; income that could help the banks put balance sheets back in the black.

The Chancellor’s speech reminded me of the parent that knows his child is hiding behind the curtain, but instead looks under the sofa, inside the box, behind the dresser – everywhere except where the solution lies. A silly, but in his case, dangerous game.

The fact is that the solution does not lie with cuts in public spending; with austerity. We have had only eighteen months of synchronised austerity across Europe and already the British and world economy teeters on the brink.

The failure is not that austerity was not implemented; the failure is austerity.

Private money markets are not asking for deeper austerity. They are asking for a revival of economic activity. They are begging for governments to draw back from the policies that have caused output, investment and employment to fall off a cliff.

But that is hard for governments such as ours, gripped as they are by an antiquated and flawed economic orthodoxy. As David Graeber  explains so well in his book “Debt: the first five thousand years.” orthodox economists – believe it or not – do not understand the nature of money and credit. An unfortunate weakness for a profession majoring on the economy.

Nor can their jaundiced Scrooge-like minds accept that prosperity is caused by employment. Not by rich, ‘light-touch’ regulated bankers.

They find it hard to grasp that money/credit – that is not generated by savings, but begins life at the Bank of England – can provide a bridge to employment. But only if it is managed carefully, and not outsourced to the reckless greed, and fraudulent behaviour of bankers and their friends in government. (See today’s story about Hank Paulson’s “inside jobs” with Wall St.)

Orthodox economists like those in the Treasury and the Conservative party cannot grasp one simple but vital truth. Employment can generate the income needed to a) repay debt b) pay tax revenues to lower the budget deficit and c) restore both general prosperity and a sense of national well-being. All of which might be of some help to the private finance sector.

Instead our policy and decision-makers are playing petulant, disgracefully irresponsible games with all our futures. And missing the biggest crisis of all: the imminent bankruptcy of the private finance sector.

George Osborne was presumably aiming at himself and his friends, when he vowed “to speak truth to power and wealth” at the Tory party conference this week, but dare he speak economic truth to the rest of us? – simultaneously published on Left Foot Forward >

On the narrowest of bases, he might still claim he spoke “truth” to the weak and powerless when in the House of Commons debate on the economy on August 11th he made this challenge:

“Those who spent the whole of the past year telling us to follow the American example, with yet more fiscal stimulus, need to answer this simple question: why has the US economy grown more slowly than the UK economy so far this year?”

It was a ‘brave’ claim when he made it, and it’s looking even ‘braver’ – and more disingenuous – now.

Following very recent revisions to US and UK data on GDP for the first half of 2011, the position is as follows, broken down into different quarters:

UK growth:

Q1    +0.4%   (revised down from the previous +0.5)

Q2    +0.1%   (revised down from the previous +0.2)

Total: +0.5%

US growth:

Q1   +0.1%

Q2   +0.325% (revised up from 0.25%)

Total: +0.425%

So by the triumphant margin of 0.075%, taking the period in total isolation, Osborne just scrapes home. But this ignores the fact the UK quarter 1 figure of +0.4% followed the disastrous Q4 figure of -0.5%, compared to US Q4 growth of more than +0.5%.

Without this Q4 quirk, his tenuous case would collapse.

For when we compare the US and UK over the last three quarters (including Q4 2010), we find that the US grew by 1%, whilst the UK grew not at all. A difference of one per cent in favour of the US economy.

And over the 12 months to the end of June, i.e. the lifespan of the coalition government, the US rate of growth is likewise 1.0% greater than in the UK (US 1.6%, UK 0.6%).

Taking the last 18 months, we get the following medium-term picture:

US:

2010                        +3.0%

2011 first half         +0.4%

18 months               +3.4%

UK:

2010                        +1.4%

2011 first half         +0.5%

18 months               +1.9%

In other words, the US economy has grown by 1.0% more than the UK over the last 12 months, and 1.5% more over the last 18 months, to end June 2011.

The US has many problems, but it has applied some meaningful, if now fading, stimulus.

So if George Osborne really does wish to speak truth, to power and wealth, and to the rest of us, let him own up – it is simply not true the UK’s austerity-based economy has grown faster than the USA’s. On the contrary, coalition government policies have led us deeper and deeper into the mire of unemployment, bankruptcies and economic stagnation.

“I have just returned from a lecture tour of Australia where I came across the story of the Sydney Diocese and what the Aussies call the GFC – the Global Financial Crisis.

The Sydney Diocese, far from chasing the money-lenders from the temple that is their faith, invited them in, borrowed money against the diocese’s collateral, and used the borrowed money to invest – some would say gamble – on the stock market. When the financial crisis broke in 2008, stock market losses were amplified by the church’s huge borrowings. Archbishop Dr. Peter F. Jensen broke the bad news while addressing the church’s annual Synod in 2010, and according to ABC, said that the synod’s “losses total more than $100 million.”

The Archbishop counselled against recrimination, according to the Sydney Daily Herald (13 October, 2010). “He even took a little of the blame himself: “Looking back, I can now see many of the things I should have done, things I should not have done and even clear moments when I should have spoken up or insisted on different behaviour.”

The crisis of the Sydney Diocese alerts us to the way in which the finance sector has corrupted our most cherished institutions, including the temples of our faith, and how Christians too have fallen prey to their siren calls to borrow for speculation –.

It reminds us that we Christians and people of faith, in the period before the financial crisis “should have spoken up or insisted on different behaviour.”

For too long, we have failed in our duty to condemn the use of interest and money as ‘despotic power’ (to quote the Cambridge sociologist, Geoffrey Ingham) and to protect society from the exploitation of usurers.

Not only do we fail to condemn usury; many of us have forgotten its meaning.

I take it to mean the power of those with money, to exploit those without by charging high rates of interest on loaned money. And given that banks are in charge of the production of money; that banks can create credit or money out of thin air – this has indeed become an awesome and despotic power.

And now it is too late to condemn usurious practices. For today we face the potentially catastrophic consequences of the powers of ‘light touch’ de-regulated finance, used to blow up/inflate a credit bubble – and create vast private debts.

If voters don’t trust Labour with money – it may be because we have taken our eye off the ball – their private debts and the threats that austerity poses to their livelihoods and incomes – and their ability to repay these debts.

Thanks to de-regulation and ‘ulta-light-touch regulation’ by both Conservative and Labour governments, private bankers recklessly over-extended credit from the 70s through to the 00s, and now have vast, often unpayable debts on their balance sheets.

Central bankers and Chancellors stood passively by, as private bankers inflated this immense credit bubble. This was a form of inflation to which they turned a blind eye.

According to the McKinsey Global Institute, this credit bubble generated vast private, not public debts –which now amount to more than four times UK GDP – 469% of GDP.

This mountain of private debt eclipses public sector debt. It is about 6 times the level of public debt.  (See chart below.) And as a key part of this, between 1987 and 2010 the finance sector’s indebtedness has grown by over 400%, standing at over 200% of GDP.  

A large proportion of these private debts will never be repaid – because they exceed income by multiples. If some debts are to be repaid, that will only be out of income gained from employment and profits. But employment is falling, and unemployment rising.

It is this frightening prospect, coupled with rises in energy and commodity prices, that is inducing fear and insecurity in British voters.

And so they have begun deflating and de-leveraging  this vast pool of private debt – and dragging economic activity as they do so.

It is this deflation and de-leveraging which is spooking consumers, bankers and ‘the markets’.  Not the government deficit.

But Labour’s spokespersons appear blissfully unaware of this private debt crisis. Instead our leaders – like the Coalition leaders – focus endlessly on the far less significant public deficit, promising to ‘cut the deficit’ and “conceding there would be cuts” – i.e. more austerity – if a Labour government were to be elected.

Ed Balls’ speech yesterday began to move away from the Coalition’s agenda, with his very welcome proposal for investment in public infrastructure.

But the proposal to cut VAT won’t work, because it is based on the flawed notion that over-indebted consumers want to consume more.

They don’t and they can’t.

Even if consumers were persuaded to open their purses and ignore their debts – most of the gains from consumption would anyway leak away to China – as they did under the weak stimulus introduced by Chancellor Alastair Darling.

So while Ed’s speech was welcome, it sounded very much like a re-run of the timorous, and ecologically dubious Darling stimulus of VAT cuts and ‘cash for clunkers’.

So it is no wonder the electorate are anxious and insecure about Labour’s intentions and its economic credibility.

By insisting that a Labour government will cut spending, and cut the deficit – the party’s spin doctors worsen the anxieties of voters; continue to focus on just one sector, and not on the issues of greatest concern to voters: their debts and the threat of unemployment and loss of income.

Unfortunately this failure to see the bigger picture is mirrored in political debates on the global stage.

Let no one underestimate the economic threats facing Britain and the world today.

As Christine Lagarde of the IMF has tried to warn us, we are threatened with the gravest economic crisis since the great depression.

And as Ed Balls hinted yesterday, this may turn out to be the greatest economic crisis in our history – given the unprecedented global integration of finance, and today’s size of world population.

And don’t let’s underestimate the intelligence of ‘markets’.

The fear – real fear – and volatility in financial markets stem from a growing awareness of the true nature and extent, not of public deficits, but of private bank insolvency and of the utter wrongheadedness of the present policy stance.

By focusing on government deficits, politicians and central bankers are applying the wrong remedy – austerity and measured deficit reduction – to a different problem: the broken private banking system.

By applying policies that slash economic activity, raise unemployment and threaten more corporate bankruptcies; by cutting incomes, ‘austerity’ – as Ed said yesterday –  is adding more defaulters, and more unpayable debts to the already weakened balance sheets of over-extended British and European banks.

And ‘the markets’ can see this, even if politicians and policy-makers cannot.

As the crisis unfolds in horrifying slow-motion, governments on the global political stage are reacting with harsh right-wing policies that punish the innocent, cut the public sector and avoid the bankers.  In Britain, powerful elites are incorporated into ministerial decision-making.

There is more than a whiff of the corporate state.

And the scapegoat both here, and in the Eurozone?  As always: government finances.

But the real cause of this potentially catastrophic economic failure has little to do with government finances. They are merely symptoms of failure.

The real cause of this historically unprecedented crisis is the broken global banking system.

A system that is both morally and financially bankrupt – broken on the back of de-regulated finance.

As a member of the Labour Party since 1973 (one who resigned briefly over the Iraq war) I make this challenge to Ed Miliband and our Party leadership: affirm with clarity and conviction the principle that Labour will never again be captive to bankers, nor be seen to be in the pockets of bankers.

That we will never again be captive to neo-liberal central bankers like Alan Greenspan and private bankers like Fred Goodwin.

That Labour will instead finally begin to focus on the consequences of those neo-liberal policies: a vast mountain of private, individual, household and corporate debt – 469% of Britain’s GDP.

The Labour Party has given Britain some of the greatest governments in our history. But just as in the 1930s, Labour remains in danger of capture by the very technocrats that created and supported the reckless de-regulation of finance.

Senior Labour figures continue to dally with international banking elites; to use the power bestowed on them by Labour members, to leverage personal financial gains. To settle scores and to distort debates through the publication of their memoirs.

As a result Labour’s new leaders can make no effective challenge to the finance sector; have developed no substantial narrative or alternative, no comprehensive resolution to the crisis of private debt; only initiatives, political games and point scoring.

So it is urgent that just as it did in the 1930s, the Labour movement must once again wrest the party from the hands of those who supported and implemented the interests of the finance sector.

To regain credibility with the five million voters it has lost; to win back the commitment of the British people as a whole, Labour must chase the money-lenders from the temple that is our democracy.

And Labour must propose a Plan B. Let me sketch the elements of a Plan B.

First, to avoid plunging the British and global economy into a deeper great depression, there is an urgent necessity for both the orderly re-structuring of debts, and for fiscal stimulus.

Until large proportions of private personal, household and corporate debts are acknowledged as unpayable, and a percentage written down, or written off, in an orderly way – there can be no hope of economic recovery and financial stability.

Until Labour calls for a Jubilee of debt cancellation – recognising that debt cancellation is a form of regulation and discipline that is vital, because it disciplines both lenders and borrowers; and periodically restores balance to their unbalanced relationship – there is little hope of recovery.

Second, because the private sector is so over-indebted; and because the banking system is effectively insolvent, there can be no recovery until government takes the lead and kick-starts economic activity.

This must be done through a programme of sound investment in public works, financed in part by Bank of England operations, and subsequently by the tax multiplier.

The financing of a programme along the lines of the Green New Deal: not just for socially and ecologically essential projects, projects that will enable us to transform our economy away from a dependence on fossil fuels.

Such a programme is also necessary to stimulate private economic activity.

And note friends, that I use the term economic activity here, not growth. We cannot afford limitless, exponential growth – the ecosystem has physical limits, and it is time that Labour acknowledged this simple truth about nature’s boundaries – and abandoned the language of ‘growth’.

But we can afford full employment. After all, there is so much to be done. Birds, bees and an ecosystem to be conserved. So many to be cared for, educated; so much creative potential to be unleashed.

And let no one believe we cannot afford to care for our elderly and frail; that we cannot afford to transform our economy away from fossil fuels; that we cannot afford for our artists to give vent to their creativity; that we cannot afford to make music. That we cannot afford to be led out of ignorance; to be educated.

“We can afford what we can do” to quote John Maynard Keynes.

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, create jobs, and with it the income, savings and tax revenues that will help finance the transformation of the economy away from fossil fuels – and repay debts.

Because, friends, public investment will re-start and create economic activity and jobs, something the over-indebted and fragile private sector cannot do. This in turn will generate the income/savings/tax revenues with which individual, household and corporate debtors can repay debts.

Without sound, extensive government investment in that which is both socially and ecologically useful, there can be little hope of recovery.

Without investment in public works, the public deficit will continue to rise. As sure as night follows day.

Above all, without public investment there will be little hope for a return to solvency by Britain’s banks.

Because of their debts and liabilities, Britain’s bankers, like those in Europe, will soon be knocking at the doors of the Treasury and the Bank of England, demanding even more taxpayer-backed bailouts, quantitative easing and negative rates of interest.

Regrettably, the nationalisation of private losses by further taxpayer bailouts will be inevitable, if we are to avoid systemic failure.

But this time, unlike the Labour’s government’s bailout, there must be tough terms and conditions. Large scale monetary reform.

First: a Jubilee that will result in the cancellation or re-structuring of private debts deemed unpayable. These write-offs to be agreed within a fair and proper process – fair to both debtor and creditor.

Second: an end to speculation by bankers in domestic and global markets.

Third: a range of controls over capital mobility to limit speculation, and strengthen democratic, accountable policy-making and ensure the stability of the domestic economy. Such controls to include a ‘Robin Hood Tax’.

Fourth: the full separation of retail and investment banking as one part of large-scale reform of the domestic banking system.

Fifth, effective regulation of interest rates by the Bank of England. Such reforms to lead to the provision of low-cost loans by the banks to SMEs and other productive and socially useful enterprises at very low rates of interest – for loans across the spectrum, short and long, safe and risky.  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.

Sixth: the abolition of bankers’ bonuses.

Seventh: an end to the recognition of Britain’s ten tax havens, and an end to tax evasion and avoidance through the employment of thousands of more trained and motivated tax inspectors.

Labour will only regain economic credibility with Britain’s voters if Labour’s leaders act to displace bankers from their role as the ‘stupid masters of our economy’ (to quote Labour’s 1944 employment manifesto) and once again subordinate finance to the role of servant to the real economy: where jobs and entrepreneurs are created, where socially and ecologically useful and sound activity takes place; where incomes/savings and tax revenues are generated and financial solvency and stability ensured.

For this to happen, Christians in the Labour Party must reassert our core values of social justice, our abhorrence of usury; and challenge once again, the despotic power of finance.

We do that best by chasing the moneylenders from the institutions we cherish most.”

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 >

As mayhem breaks out on stock markets; as Eurozone banks freeze up; and as the global financial system approaches a frightening ‘danger zone,’ the champions of the globalised ‘free market’ and of the Euro are in search of a scapegoat.

Instead of accepting that it is the broken banking system; the de-regulated financial Eurozone, and the deflationary monetarist policies of the Maastricht Treaty that are the roots of the crisis, the Troika (the IMF/EU/ECB) want to identify a convenient whipping boy.

Instead of going after the real culprits — un-regulated bankers that lent recklessly, confident they would always be bailed out by taxpayers — the approach of the Troika is to scapegoat Greece. The implication is that the whole fabric of the Euro, and with it the global economy, is torn apart because one poor country, Greece, will not enforce ever-deeper austerity on her people.

Let’s get this straight. The Greek economy — and with it the Euro — is disintegrating because Greek politicians are implementing austerity, not because they are failing to.

As one of the poorest of the Eurozone economies, Greece was always the most vulnerable to the global financial crisis. The ‘Troika’ can build a credible case that Greece’s politicians should not have borrowed from the private bankers of Europe, and therefore Greeks share responsibility for the debt.

But Greece was only able to borrow because, with the help of Goldman Sachs, she was welcomed by Europe’s bankers and leaders into the pre-existing de-regulated, financial framework that is the Eurozone. A monetary union designed above all to promote, protect and subsidise the interests of money-lenders and speculators in the private bank-debt and sovereign debt markets.

Greece’s entry into the Eurozone was of course a mistake. But the idea that Greece has misbehaved to an extent that deems her responsible for destroying the European and global financial fabric is, frankly, absurd.

The fact is Greece and Greece’s debt is a symptom of the crisis, not the cause.

That is why the spectacle of the IMF’s representative Bob Traa hectoring Greeks this week was both hypocritical and spurious.

All unbiased persons of common sense recognise that more austerity — more unemployment, poverty, suicides, family breakdown, civil unrest — will crush Greece. It does not require a PhD from Harvard to work that out. Last year Greece’s GDP declined by 4.4%, according to the IMF. So far this year GDP has plunged by a further 7.3%, according to official statistics.

That is why the IMF’s call for “a reinvigoration of structural reforms” is so profoundly irrational and self-serving.

Who believes that declining economic activity in Greece can save both her economy, the bankrupt European banking system and the Euro?

No sane person can believe that sacking 100,000 civil servants in a single year, increasing taxes on fuel, lowering the tax threshold so that the poorest Greeks pay for this crisis, cutting back on wages and old peoples’ pensions — will a) repay debts b) re-capitalise banks and c) lead to economic recovery.

Instead, these policies will trigger wider social unrest and the inevitable default — sooner rather than later. And a Greek default, accompanied by social upheaval will be contagious, making things much, much worse for Europe as a whole.

So stop whipping Greece.

As we at PRIME have repeatedly pointed out, austerity policies pose a grave threat to a global financial system over-burdened by the debts generated by an out-of-control banking system.

The Troika seem unable to acknowledge that austerity is the wrong remedy for another crisis; the crisis of a bankrupt banking system broken on the back of de-regulated finance.

To address that crisis, the Troika must manage the write-down and write-off of unpayable private and sovereign debts in an orderly manner. This they refuse to do.

Instead their approach is that the private banking system must be protected from losses (and the discipline of the market) — at all costs.

By this approach they are failing the people of Europe, as well as Greece: throwing good money after bad.

It is the failure of the Troika to extend their focus beyond the narrow interests of the private, wealthy banking elite of Europe — and towards the interests of all Europeans — that is causing economic failure.

Above all it is the failure of the Troika to promote policies in Europe that would create and increase employment — in Greece and throughout the Eurozone.

For employment is the only way to raise the income (and tax revenues) needed to repay debts; and to restore the economy and the public finances (of Greece and other countries) to health.

Because the IMF, EU politicians and ECB bankers cannot accept or implement these self-evident remedies, the people of Greece are well advised to go it alone; to default and escape the clutches of politicians and officials determined to strangle all possibility of economic recovery.

Others have gone before — and recovered: Russia in 1998; Argentina in 2001 and Iceland in 2008 — after the biggest banking collapse in economic history.

Greece has only her austerity chains to lose.

While I was in Australia I recorded this interview with ABC’s daily show. This went out on 15th September. Watch it above or on ABC’s website here >

Read about my speaking tour of Australia below – from the SEARCH Foundation:

The SEARCH Foundation is currently touring eminent British economist and author Ann
Pettifor around Australia and she is visiting our shores with a warning; the GFC inducing credit
crunch is not over and Australia’s banking sector is vulnerable.

Ms Pettifor is visiting Adelaide, Sydney, Melbourne, Canberra and Brisbane for speaking
engagements over the next fortnight.

“Before the Credit Crunch of 2008-2009 Brits and Americans were convinced that the good
times could last forever. Our orthodox economists, central bankers and politicians encouraged
us in that delusion. Today millions of the unemployed, homeless and bankrupt are paying
a heavy price for the failure to understand the role of the private banking system in causing
systemic and widespread economic failure.” Ms Pettifor said.

“Australians would be well advised not to fall into the same trap.

“At the same time, the increased frequency of extreme weather events is challenging the
widespread delusion that there is no limit to the rate at which humanity can go on polluting the
atmosphere and looting the seas and wider ecosystem.

“Australians, who have suffered more from extreme weather events than we have in Britain
would do well to take the lead in warning the world of a widespread delusion: that there are no
limits to the rate at which we can consume and ‘grow’.

“Instead we all need to address the most urgent crises facing humanity: the continuing global
financial crisis (it never did end in 2008); the threat of peak oil; the threat of climate change;
and now the rising threat of food and water shortages. That is why we, at the New Economics
Foundation first proposed the Green New Deal in July, 2008.

“We argued then, and we argue now, that societies must first fix the out-of-control globalised
financial system. We must strip the Masters of the Universe of their mighty power – after all
they rely on the world’s taxpayers to guarantee their profits and bonuses, and to socialise their
losses.

“Only then can we put the domestic banking system to work to help finance the transformation
of the economy away from costly globalised finance on the one hand and dependence on
fossil fuels on the other. Instead, tight but low cost-finance, generated by our domestic banking
systems must be put at the service of the transformation of the economy.

“We need massive investment in sustainable, renewable sources of energy and in the
conservation of the ecosystem’s resources.

“The banking system must provide regulated, low-cost finance for that investment. Just as
the banking system of the late 1930s and 40s helped finance economic recovery from the ’29

Crash; and then the challenge societies faced in 1939: World War.

“Such a transformation – a Green New Deal – will require greater self-sufficiency, and the
localisation of economies as far as practicable. It will also require the training and recruitment
of a ‘carbon army’ of workers – skilled and unskilled – to turn every building into a power
station, and to make every building energy-efficient.

“But just as central bankers and politicians turned a blind eye to the looming credit-crunch of
2008, so now they are turning a blind eye to the financial and ecological threats facing society.

“For example, right now, Australia’s mining boom is masking the vulnerability of her banking
system – and the threats that both high levels of household debt, and instability in globalised
capital markets pose to Australian banks – and therefore to the economy.

“Despite Mr. Glenn Stevens’ sanguine approach to the stability of Australia’s banks in his
recent testimony to the Australian parliament, insurance against the risk of Australian banks
defaulting – credit default swaps – climbed nearly 50% over August. That means that investor
expectations of Australian banks’ defaulting are on the rise. In addition, the cost of raising
40% of Australian bank funding ($100 billion) in global capital markets has been rising as a
result of instability in the Eurozone and US.

“The rising cost of this integration of the Australian banking system in the globalised economy
invariably means that Australian banks – and the financing of the current account deficit – are
more vulnerable to the whims of global investors.

“And as a result of the falling confidence in global capital markets, interest rates on loans
to Australian businesses and households will rise too – at a time when their customers are
snapping purses shut; house prices are sliding as Australians slowly pay down very high levels
of debt; and mortgage costs have been ratcheted up by the RBA’s raising of base rates to the
highest in the developed world;

“No amount of iron ore is going to fix Australia’s financial system. Australia needs a Green
New Deal.”

For media interviews with Ann Pettifor whilst she is in Australia, please call Peter
Murphy on 0418 312 301.
’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Note to editors.
1. Ann Pettifor a fellow of the New Economics Foundation (nef) in London, UK, and director
of PRIME economics, is visiting Australia on a two-week tour, sponsored by the Search
Foundation.

Ms Pettifor first predicted a credit crunch in September, 2003 on launching a book she edited
and Palgrave Macmillan published: “The Real World Economic Outlook.” Later in October,
2006, Palgrave Macmillan published her book: “The Coming First World Debt Crisis”. Then in
a Times interview in 2009, she warned that “the worst of the slump is yet to come.”
2. In his recent evidence Mr Stevens of the Reserve Bank of Australia said: “Major Australian
banks report being offered substantial US dollar funding offshore on account of their relatively
high credit standing. In any event, their reliance on such wholesale funding is much reduced
from three years ago, with the large increase in deposit funding at home and slower balance
sheet growth.” And yet in May this year, Moody’s downgraded all four of Australia’s major
banks, as ABC reported at the time.

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.”