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.

Below is my slideshow from the talk:

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 >

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.”

The olive grove harvest. Image source: www.oxfam.org

As a follow-up to yesterday’s post on Greece: the Greeks are doing the one thing that hurts bankers most – they’re turning down invitations to their party.

In my book, ‘The coming first world debt crisis‘ I tried to spell out what actions individuals could take to defend themselves against the predations of voracious lenders.

“After all,” I wrote, “the finance sector depends on us, the world’s debtor-spenders, to come to the ball. We can turn down the invitation. We can decline the credit card, overdraft or loan. We can refuse to dance to Finance’s tune. We can live within our means.”

Well the Greeks have taken the advice, but gone further. They are taking their money out of banks.

According to the FT today, -

“Monthly bank withdrawals (from Greek banks) were running at €1.5bn-€2bn (£1.3bn-£1.8bn) in the first quarter. Last year, depositors withdrew €30bn, equivalent to 12.3 per cent of total savings, according to the central bank. Greek deposits worth an estimated €8bn were transferred to banks in Cyprus in 2010. But the flow has dried up this year amid fears that Cypriot banks could suffer contagion.”

They’re also learning that earning interest effortlessly on money, rather than investing it in productive activity – may not be that rewarding. The FT again:

“Sakis, a garage owner, said at an anti-austerity protest in Athens’ Syntagma square. “A bank collapse has got to be on the cards.” He added he had withdrawn his savings and placed them in a bank safe deposit box “for security. Who cares about interest right now?”

Angelos, a software specialist, bought a neighbour’s olive grove.

“I grabbed the opportunity,” he said. “A year ago I wouldn’t have considered making such an old-fashioned investment.”

Ah….yes, I remember them well: old-fashioned investments. That’s what is going to restore jobs and economic health to Greece.

Unemployment poster ‘jobless men keep going, we can’t take care of our own’, 1931.

We write to encourage you – to urge you on in your resistance.

In your defiance, you understand Greece is slave to the interests of private wealth.

You must understand too that it is private wealth that needs Greece. Greece does not need private wealth.

As is obvious to you – if not to EU finance ministers – Greek and other EU taxpayers are asked to shore up the immense wealth and reckless lending of private French, German, British and American banks.

Without your taxes, your sacrifices, the privatisation of your government’s assets, these bankers once again face Armageddon – as they did in autumn of 2008.

Just as then, so now they have rushed behind the ‘skirts’ of their defenders at the IMF and the EU. On their behalf, these unelected officials and some elected politicians demand that Greek and EU taxpayers shield private sector risk-takers from the consequences of their risks. The very antipathy of market principles.

In the process, the European Union is torn apart. Politicians, backed by officials, now defy the founding goals of the Community and, in the interests of private wealth, set the peoples of Europe against each other.

On 20 June, 2011 the acting Head of the IMF called for “immediate and far-reaching structural reforms, privatization, and the opening of markets to foreign ownership and competition.”

Which proves our point: private wealth needs Greece. Greece does not need private wealth.

Greece’s elected politicians have plunged the country into a spiral of decline, as austerity leads to greater economic crisis, more severe failure of public finances and social and economic hardship on a scale unknown since the inter-war years.

Is there anybody on earth who seriously believes that austerity will restore the prosperity of Greece? The idea is ludicrous.

But equally ludicrous is the idea that there is no alternative.

There is an alternative.

In reality, austerity marks the final failure of the existing arrangement between public interests and the interests of private wealth. Financial liberalisation has failed. The only way forward is a new arrangement, based on ones that have better served societies since the dawn of civilisation: since Aristotle identified the evils of usury and the barrenness of prosperity based on speculation.

The first step must be the abandoning of the Euro.

The Euro must be understood not as a currency of the peoples, but as an ideal of private wealth.

The Euro is a perversion of the greatest monies in history. These arose as a relation between people and the state. Through the institutional development of central banks, domestic banks, state borrowing, paper currency and double-entry book keeping, national monies have underpinned all of the greatest societies of the world.

Money has been aimed at the interests of society, of productive labour, and vibrant state and private activity alike.

But the Euro is a money aimed only at the interests of private wealth. It is divorced from individual nation states. Its statutes explicitly prohibit the support of state activity through money creation, while its foundation in monetarist doctrine inhibits private activity and has led to a world devoid of markets, at the mercy of large financial monopolies.

Greece must restore the Drachma

If Greece restores the Drachma, social, private and financial interests can be re-aligned; prosperity can be reignited. Issued through the central bank and domestic retail banks, the Drachma can underpin a programme of public works expenditures, and in parallel, through multiplier processes, the spending of newly earned income to revive private activity in Greece. Through the Drachma, jobs and prosperity can be restored. The expertise to facilitate such a transition exists, moreover the very nature of money guarantees precedent on which action can be based.

It has been done before – successfully

The last time the world threw off the chains of private wealth was in the 1930s. Then, Britain led the way. In September 1931, financial interests demanded high interest rates and austerity as the impact of the Great Depression hammered the people. At this point Britain, like Greece today, became defiant. The UK threw off its fetters and left the gold standard – the Euro of a century ago.

Under Keynes’s tutelage, Sterling was revived as a money managed by the Bank of England and protected from speculative and vested interest. Then in 1934, President Roosevelt freed the dollar, and with it, the people of the United States, who then embarked on the finest programme of public works expenditures known in modern history.

Great public buildings were erected, symphony orchestras established, writers were sponsored – not least John Steinbeck – fantastic murals created, swimming pools built. When, in 1935, a socialist government took power in France and freed the Franc from the fetters of the gold standard, only the fascist economies remained in thrall to private wealth.

Interrupted by war, and diluted at Bretton Woods in 1947, finance was still restrained as servant not master through the age of economic and social advance from 1945-1970.

Today, the likelihood of the UK or US once again taking this lead – and defending society from the predations of private wealth – is slim indeed. But there is no theoretical reason why the lead should not be taken by a smaller nation – like Greece.

The history of the world teaches us the ebb and flow of prosperity between nations. It would be fitting too if a new era was to arise from the cradle of western civilisation.

Certainly Greece would feel the full force of the anger of private wealth, through their allies in the media, academia and politics. But this will follow from fear – not reason.

Because Greece will show the world not only that there is an alternative, but that the alternative is very good.

Posted simultaneously on the Huffington Post >

With a backdrop of bankers looting the EU’s Treasuries (via a bailout that rivals George Bush’s TARP) let us consider one of the most significant Dem-Con appointments (and a non-appointment) to the British cabinet.

That of someone who until now was invisible: David Laws the new Chief Secretary to the Treasury.

His Wikipedia profile (updated on the day of his elevation, and before he had taken up his ministerial responsibilities) depicts him as the man that speaks for his party on matters relating to kiddie-winkies and families and, no doubt, motherhood and apple pie.  He is also commended for his conciliatory role in negotiating the Scottish Parliament coalition.

No mention here of his real background.

For, according to ePolitix, David Laws was once Vice President of JP Morgan and Co and based in the United States, before becoming Managing Director of Barclays de Zoete Wedd in 1992.

Now, in my book the most obvious candidate for the job of Chancellor, or Chief Secretary to the Treasury,  was surely Vince Cable, a man credited for his prescience in predicting the financial crisis, respected for his ongoing analysis of that crisis and regarded as a “scourge of City ‘fat cats’.”

Why was he shunted across to the toothless Department of Business, Innovation and Skills? And why was a man who until now has had absolutely no record of speaking out on the financial crisis, elevated to a powerful post at the Treasury?

Could it be that Vince Cable is unacceptable to the City? That he was likely to threaten the oligarchical role of the British banking community, and their grip on the UK Treasury?

Evidently so. What else can explain the Financial Times’s headline (under a picture of David Laws and the Old Etonian) “Coalition softens stance on banks” (FT 13 May 2010).  And the comment that “proposals for banking reform announced by the new coalition government appear to take a much more measured approach to the task of reshaping Britain’s bloated banking sector”.

So be afeared.

While most economists recognise (as does the FT’s Martin Wolf) that “the source of the government debt…. is the past profligacy of large segments of the private sector, and in particular the financial sector.” (FT 12 May 2010) yesterday’s Dem-Con coalition statement argued to the contrary. Government debt, according to our new political masters, is the result of “Labour’s financial crisis’ – with the City of London blanked out.

This framing of the debate is deliberate, and Labour was profoundly unwise, and irresponsible, for allowing it to pass unchallenged during the election campaign.

Because this devious framing of the causes of the financial crisis was at the heart of the Conservative election campaign strategy. And even while the Tories hid George Osborne away in a cupboard for the full duration of the election campaign, the framing of the issue remained central to their strategy. The role of the City of London was completely ignored, and the entire financial crisis laid at the door of the government, and the innocents dependent on, and working for, the public sector.

It was the most dishonourable and deceitful sleight of hand in modern British politics, I would contend.  And sadly, both Labour and too many of the British public bought into this framing of the debate.

So the ground is now laid. Bankers are preparing to move from looting Treasuries in the US and EU – to once again looting the British Treasury.  And as Michael Hudson argues, to shift the burden of taxation from property and finance – back on to Labour.

Less public money spent on welfare and jobs, means more money for bank bailouts.

Labour’s claims for jobs, for healthcare and pensions will be subordinated to claims by the banks “to get fully paid on hundreds of billions of dollars of recklessly bad loans… reduced to junk status.”

With a totally inexperienced and economically inept Old Etonian in charge: with David Laws playing the role of decoy in this proposed Great Bank Robbery, and aided and abetted  by subservient economists, the Treasury remains within the firm grip of Britain’s most powerful oligarchy.

What is at stake is not just ‘savage cuts’ inflicted on the innocent and the vulnerable, shocking though such an injustice will be.

What is at stake is nothing less than Britain’s democracy, and the peoples’ right to control over the nation’s finances.

My latest Huff Post blog

Britain’s political elites are doing deals this weekend, trying to form a government. Gingerly making their way across the shifting tectonic plates of public opinion; wary of being tripped up again by voters.

For, let’s face it, the British electorate are no fools.

As the governor of the Bank of England apparently warned last week, they are mad as hell. Austerity measures will not be tolerated, and will keep any governing party out of power for a generation .

So there is a lot to lose.

Voters listened carefully last autumn as David Cameron, the leader of the Conservative Party and his Finance Minister, George Osborne turned a blind eye to the reckless behaviour of the City of London. They ignored the extent to which taxpayers had bailed out private bankers, and taken the full burden of their losses on to the public sector balance sheet. Instead Osborne implied that responsibility for economic failure lay with millions of public sector workers, and the essential services they provide.

In a politically disastrous move, Osborne threatened to punish the innocents with a ‘new Age of Austerity’ , while promising to give an inheritance tax break to the 3,000 richest families in the country. He vowed “to freeze the pay of millions of public sector workers, cut benefits enjoyed by the middle classes and cap civil service pensions at £50,000 a year.”

As a result, and despite the fact that Conservatives were at that point 17 points ahead of Labour and headed for a landslide – their vote slumped.

Canny British voters refused to behave like turkeys voting for Christmas, and steadily withdrew support.

There then began a concerted effort to silence Osborne (it seems he was locked up in a cupboard for the duration of the election campaign). Nevertheless, the damage was done, and the Tories failed to muster a majority of seats in the House of Commons last Thursday.

Labour, under the leadership of Gordon Brown and to the surprise of many, managed to staunch the political wounds inflicted earlier on his party by his predecessor, Tony Blair. 13.5 million had voted for Labour in 1997 – in good faith. By 2005 and during ‘the good times’ when Britain was growing at 3% per annum – Labour’s vote had plummeted to 9.6 million – which is why Blair had to go. He had lost the Labour Party 3.9 million voters.

Then, just as Gordon Brown took over the premiership, ‘the world economy fell off a cliff’.

Economic failure, unemployment and the failure to rein in bankers cost Brown’s government about 900,000 votes last week – fully 3 million votes less than were lost under Tony Blair.

In other words, Labour’s lost voters were lost long before 6th May, 2010.

Sceptical of the Conservatives and fed up with Labour, voters turned their attention to the ‘new boy’ on the block – Nick Clegg, leader of the Liberal Democrats.

Excited by the media spotlight, the inexperienced Clegg blundered, fell victim to hubris, and asked incredulously how Mr Brown could “squat” in No 10 even if Labour came third in the popular vote.

In the event it was Mr Clegg’s Liberal Democrats that trailed in third place.

As quickly as they had risen, his party’s hopes were dashed – thwarted by shrewd voters.

Nevertheless, Cameron and Clegg have grabbed the post-election spotlight, and are doing deals behind closed doors to forge a coalition, and force out Brown.

Many expect the negotiations to fail, for want of common ground – on for example, the cancellation of the Trident nuclear submarine, and electoral reform. So power-sharing is doomed to fail, if not this week, then by this autumn.

In the meantime, the real deal-makers are to be found elsewhere.

Across the Irish Sea . In Belfast, Northern Ireland.

The fact is that none of the political parties can afford another election campaign for the next year or so, and the Lib Dems and Tories are too far apart for a sustainable power-sharing deal. Cameron knows this. So expect the Conservatives to put in calls to the 8 members of the Democratic Unionist Party, in the hope that their support will enable David Cameron to govern as a minority government.

This way they would keep both Labour and the Liberal Democrats at bay.

That is, if they are not dislodged by the tectonic plates of ‘austerity’ – that could keep Conservatives out of power for the next generation.

My conversation earlier this week with Elena Sisti – of Italy’s Altreconomia on macro-economics, reform of the finance sector, money, and yes, how we women have left the all-important matter of finance to the boys. Big mistake. It’s time to get in there, and exercise influence. Too much is at stake.

ELENA: In the build up to 2000 you were amongst the leaders of the Jubilee 2000 campaign that helped to cancel the debt to developed countries. Do you think that the fact you were a woman helped you bring a different perspective to the issue?

ANN: I am not sure that it would be right to say that it affected my perspective. But I do believe that as a woman it was easier to bring people together to develop a fresh, more radical perspective on the issue.

I was very struck by the fact that the most effective Jubilee 2000 campaign leaders were women – Laura Vargas in Peru, Yoko Kitazawa in Japan, Wangari Mathaai in Kenya, and Paola Biocca here in Italy. They were organisationally some of the best developed campaigns – more than 2 million petition signatures collected in the mountains and desert regions of Peru, for example, an extraordinary feat.

I think it is easier for women to bring people together, because while we are strong, stubborn and often difficult (I speak for myself in particular) – we are also less ambitious for personal gain, while being very ambitious for the achievements of our group. This may be a very unfair generalisation, as I know there are plenty of selfless men out there – but very few selfless men get to positions of leadership. Women in positions of leadership – in business, in politics or NGOs – have had experience of results achieved as a result of co-operating with others, and seeking out the support of others. With Jubilee 2000 I found, and there were exceptions of course, that one always had to muscle one’s way past a man’s ego, before one could get to the campaign…..if that makes sense.

Having said that, I will undermine all I have said by this: one of the best male campaigners was an Italian – Luca de Fraia, who helped lead Campagna Sdebitarsi, after the tragic death of Jubilee 2000’s founder in Italy: Paola Biocca who died in Kosovo on 12 November 1999 while coordinating the emergency humanitarian missions for the United Nations World Food Programme.

ELENA: You have always been convinced that the complication of finance could be explained to everyone and masses could be mobilised even for finance issues. Why have you always considered the finance sector as crucial for people?

ANN: Finance is not complicated really – especially not for women, most of whom have to manage budgets, small budgets. And managing a little bit of money, making it go far, requires far more skill and intelligence than managing huge sums of money.

The fact is we all need money to be economically active. The poor in particular need money. We are intellectually mesmerised by this thing we call money, partly as a result of our dependence on it, even though many have difficulty understanding it. The ones that have the most difficulty are economists. Very few economists understand or study the nature of money – in particular bank money. Having said that, some of the greatest economists and political leaders from President Abraham Lincoln, Adam Smith, John Maynard Keynes, President Roosevelt to JK Galbraith – understood the nature of money – and acted accordingly.

One of the reasons we have difficulty understanding in particular the nature of bank money, is that for most of us our first experience of money is when we leave school; we are penniless, work for a week or a month, and then find money deposited in our bank.  We think that the money arrives as a result of our economic activity.

In reality exactly the opposite is the case: money stimulates economic activity. Credit creates economic activitiy. Credit creates deposits.  Expenditure creates income. The money deposited in the young worker’s bank account existed prior to the economic activity of that young school-leaver, and made it possible for her to get paid work.

To put it slightly differently: it existed before that young person engaged in economic activity – it did not come into existence as a result of her activity.

People find it hard to get their heads around this concept, but we must…or else we will fail to understand the financial system.

Before western societies invented bank money and institutionalised banking systems – there were often shortages of money in the economy as a whole. This was because money was linked to a commodity – like gold – which was limited, and indeed was used as an anchor, precisely to limit the availability of money.

Then some geniuses (including one John Law) discovered that it was not necessary to have the same amount of ‘money’ or ‘credit’ in circulation, as there was gold in the bowels of the earth. One just needed to create enough money equal to the amount of economic activity in the economy.

If one created less money than the amount of economic activity, the result was depression and deflation. If one created more money than the amount of possible economic activity – the result was inflation…  So central bank governors were given the task of carefully measuring economic activity and then  supplying enough money to enable that activity to take place.
Money is not the thing for which we exchange goods and services.

Its the thing by which we exchange goods and services.

And bank money is not tangible. You cannot touch it or smell it. You cannot even see it – except perhaps as a statement on your monthly bank account. What you do touch and smell is cash – and these days only a tiny proportion of the money we use is issued as cash. The rest takes the form of cheques (declining in number now, and soon to be abolished in some stores in Britain); bank transfers; credit card and debit card payments. (Not so in many parts of Africa where they do not trust their banking system, where they may not have developed a system of bank money with credit and debit cards, and so, in some countries, carry cash around in large bags!)
Now intangible bank money is one of the most wonderful things humanity has ever invented. It enables us to engage in economic activity. That’s all. It’s effectively incidental to that activity – because without economic activity that money would be useless.

But it is potentially also one of the most dangerous of our inventions – which is why credit creation must be so carefully regulated.

Bank money comes into existence in the form of credit, issued by the central bank, and then distributed by the commercial banking system. Credit creates deposits, and in England it has done so since 1694 with the foundation of the Bank of England.

This is the very opposite of what most people think – that only once you have deposits can you obtain credit. No, credit creates deposits in the bank.

So when you are a youngster, fresh out of school, your employer has invariably obtained credit from the bank to finance her investment, and she uses part of that to pay you, and you promptly pay that into the bank as a deposit – using some of it as cash.

That credit has stimulated or generated the first month of your productive economic activity. The deposits that the young person places in her bank account are then exchanged and transferred as ‘bank money’ invisible and intangible – but very useful when she is shopping on Ebay, using her credit card, or paying by cheque.

Until recently, most people could not bring themselves to believe in something intangible and invisible called bank money. But now we have a new phenomenon to discuss over our dinner tables: quantitative easing, or ‘Queasing’ as we joke in English.

Last year on 13th March, 2009 the governor of the US Federal Reserve, Ben Bernanke gave an interview to CBS TV, in which he was asked: “where did you find $160 billion to bail out the insurance company AIG?  Was that taxpayers money that the fed was spending?”. “That was not tax money” replied the Governer. He elaborated: “the banks have accounts with the Fed, much the same way that you have an account with a commercial bank. So to lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed”. The Fed did what a commercial bank does when it provides you with a loan: they entered a number into a computer and charged it to AIG’s account.

Watch CBS News Videos Online

The fact is that the Federal Reserve did not even have to print 160 billion greenbacks – they simply entered a number into a computer.

And that is what the bank does when you apply for a mortgage, to buy a house for example. All the bank needs is a) your application for a loan b) the collateral of your property and c) your promise to repay at a certain rate of interest. Hey presto! The money is transferred – digitally – to your bank account and appears there as a deposit. You may spend 10% of that money on small purchases with cash (euros), but most of that will be paid by cheque or bank transfer.
Now the point of explaining this is as follows: the creation of credit is in fact an almost effortless activity. Different for example, from growing tomatoes. To grow tomatoes one has to depend on the weather, on the rain to fall; on the land and its fertility, and on labour, yours or that of another. All of these factors can disappoint or fail a farmer.

To create credit there is no need for our banking system to depend on the weather, on land, or even on labour. “Why then”, as John Maynard Keynes once argued in his ‘Treatise on Money’:
…if banks can create credit, should they refuse any reasonable request for it? And why should they charge a fee for what costs them little or nothing?
Keynes, 1930.

The ‘fee’ that Keynes is referring to here, is the rate of interest – the ‘price’ of a loan. And the point he is making is correct: the price of money should remain low – to enable people like entrepreneurs to borrow to invest; to enable governments to borrow to invest for example in de-carbonising the economy – something that requires major investment.

However, he also argued that while the rate of interest should be low – the creation of credit should be carefully regulated. In other words, bank money should be regulated so that it is lent to stimulate productive economic activity rather than speculative, inflationary activity.
We have just lived through three decades of financial de-regulation where economic policy makers have encouraged reckless, privatised credit creation. This in turn led to crazy speculation and gambling – in derivatives, collateralised debt obligations, and a range of other parcelled up, sliced-and-diced securities.

At the same time central bank governors and finance ministers succeeded very successfully in repressing the inflation of wages and prices – while allowing the prices of assets (property, race-horses, works of art, stocks and shares etc.) to rocket upward in an inflationary bubble.
However none of the economic gurus of the time – from US Federal Reserve Alan Greenspan, to European central bankers, to orthodox economists – while ferociously opposed to the inflation of prices and wages,  ever complained about the inflation of assets.

Why? It is my belief that this is because it is the rich, on the whole, that own assets. The rest of us live by our wages, or by the prices we can obtain as farmers or small business women… The rich live on rent from their assets – be it property, stocks and shares or an number of assets. And orthodox economists allowed bankers and the rich to inflate the value of their assets with easy  credit. This enabled the rich to enrich themselves over the period of financial liberalisation to an extent probably unknown in our history.

But invariably that asset-price inflation bubble had to burst. Because if more credit is created than there is economic activity – then the result is inflation. And if inflation grows into a vast asset price bubble as it did in the 90s and early noughties, then it will invariably burst – leaving the detritus of excessive debt to spread the destructive forces of deflation over both assets and other economic activity. One has only to look at Japan’s debt-deflationary spiral of the last two decades. Twenty years after Japan’s asset bubble burst, property prices are still falling!  Can you imagine what that would mean to us, if in 20 years time, the property that we thought would finance our old age – just keeps falling in value?

So today we are trying to clear up a mess, a mess made by the greedy and excessive explosion of unregulated credit-creation, which while the party was on, excessively enriched a few. This mess  was created by the ideology of “easy” but expensive credit (i.e. credit lent at high rates of interest).

(Many argue that low interest rates were the cause of the crisis. Not so. Interest rates were lowered after the bursting of the first of the asset bubbles – the dot.com bubble after 2000. In reaction to that first manifestation of the crisis – central banks lowered base rates. But that did not mean that, for example,  sub-prime borrowers, or companies wanting to undertake risky investments paid less…they paid usurious rates, because of course they were risky, but to the bankers, very profitable borrowers! )

The mess that we are living through is a debt-induced deflationary spiral. As borrowers de-leverage their debt and save more, as they are bankrupted by high, real rates of interest, so they reduce their economic activity.

This is so if they are businesswomen, or consumers.

As they reduce economic activity, so more companies go bust (especially if they have heavy debts), so more people have to be made unemployed. As more people lose their jobs and cut their economic activity – so prices fall more, and more jobs are lost. It is a wicked and vicious spiral. The perpetrators of this crisis – orthodox economists/central bank governors/regulators, politicians, reckless and irresponsible bankers and financiers – should be imprisoned and punished; but not a single one has even been indicted!

The real worry is this: in a deflationary environment the cost of debt (including interest rates) rises. While the price of e.g. tomatoes can fall below the cost of growing tomatoes – the ‘price’ of money – interest rates – can never fall below zero. So while prices and wages might turn negative (i.e. people lose their incomes) the price of money cannot turn negative…

Its a wicked old world. Which is why we women should make a strong effort to understand finance and economics – monetary policy as well as fiscal (taxation) policy – and not let the boys in pin stripe suits run the economy. They have amply demonstrated their incompetence.

There I go again! Another broad generalisation!  And apologies for the very long answer…

ELENA: The world collapsed exactly as you predicted in  “the real world economic outlook” (Palgrave, 2003), why do you think it happened?

ANN: It happened because the United States, under President Nixon, had unilaterally dismantled the Bretton Woods System in 1971. Under Bretton Woods governments had to maintain some balance in the national accounts. It was not possible to build up a massive trade or capital account deficit, or surplus. There were constraints in the Bretton Woods System which obliged governments to periodically re-balance their economies. It was a form of periodic structural adjustment.

After the Vietnam War, the US found that it was about to exhaust its gold reserves in the vaults of Fort Knox. Advisers approached Nixon, and warned him of this. President De Gaulle, for example, insisted on being paid in gold, and would not accept paper or bank money. President Nixon in 1971 effectively shrugged his shoulders and told De Gaulle to ‘eat cake’ – much as Queen Marie Antoinette suggested to the poor of Paris. If De Gaulle would not accept printed greenbacks, suggested President Nixon – then tough.

That was when the US defaulted on its obligations to repay its debts in gold – at that time (1971) the biggest default in history, although it is never described as such in the history books. It makes the Argentine default of 2001 appear a minor event.

After that the US instituted (informally and without proper consultation) a new international currency standard. Instead of the gold standard the world adopted the US debt standard, or the Treasury Bill standard. Instead of holding their trade surplus in the form of gold, central banks now held that surplus in the form of US Treasury Bills – IOUs signed by the governor of the US Federal Reserve, and lent to the US at very low rates of interest.

Today China has, reportedly (there is a great deal of secrecy surrounding China’s reserves) $2-3 trillion of reserves, held as loans to the USA – at low rates of interest.

This contrasts with the predicament of poor countries, who unlike the US , cannot borrow money in their own currency – and when they do borrow, borrow at much higher rates of interest.

Anyway, the post Bretton Woods System allowed the United States to behave as if she owned a credit card with no repayment date on it, and with no limit to her expenditures. Couple that with the de-regulation of credit at a domestic level – and the US was set for a prolonged and wonderful shopping spree.

This credit, which financed US expenditures ended up as income (or deposits) for China and the rest of the world. It was good while it lasted – but invariably the bubble burst. Sadly, China is now often blamed for holding a surplus – but under the post Bretton Woods international financial architecture, and under a system in which Americans became reluctant to make and grow their own goods and services, and instead depended on the cheap and hard labour of poor Chinese people for the provision of these goods and services, the government of China had little choice but to hold excessive American expenditures as a surplus.

After working within Jubilee 2000 to cancel about $100 billion of the debts of more than 40 of the poorest countries, I took time out at the New Economics Foundation to try and understand why poor countries had built up such large debts, and why the global economy had become so unbalanced. I poured my newfound understanding into the book I edited:  ‘the real world economic outlook’ (palgrave, 2003). It soon became clear to me that the crisis taking place on the periphery of the global economy, was a limited one. The real crisis was still to come – at the centre – the Anglo-American economies. We worried about the debts of the poor countries – but they were a drop in the ocean compared to the debts building up in economies that had adopted the neo-liberal and Anglo-American economic model.

ELENA: Are women underrepresented in the finance sector in the world?

Definitely. For too long, we have left these important matters to the boys. Big mistake. We have to get in there, and exercise influence. Too much is at stake.

ELENA: Women still face discrimination in the financial sector?

ANN: I don’t work in the banking sector, so cannot speak authoritatively, but every so often here in London the popular press explodes with a story of a rich woman banker suing her bosses for discrimination…and it never comes as a surprise to me.

ELENA: Why do you think that microfinance -  mainly concentrated on women – has been a huge success from the start?

ANN: I worry about the microfinance movement. On the one hand, it has done great good, because intelligently, it has targeted women borrowers. And bankers have found something that would not have surprised you or me: namely that women are skilful at managing money and budgets, and, on the whole,  rigorous about maintaining repayments.

The movement has been good in that respect: it has bypassed men, on the whole, and put funds directly into the hands of women, many of whom live in communities where they would have been stripped of their earnings or assets by male members of the family. So in that respect the movement has been successful.

But on my travels I have come across micro-finance institutions (in Orissa, India, but also in Pakistan) lending to women at very high, real rates of interest. Usurious rates of interest. To be honest, I am not an expert on microfinance, but it would astonish me if there were not default rates on these high interest rates…and if they did not in some way enslave women borrowers to their lenders. It would only take one failed harvest, or one extreme weather event for a woman to lose her crop, and her ability to repay, and then no doubt the lender would compound interest on the defaulted loan and bankrupt the borrower. As I explained earlier, credit creation is an effortless activity, by and large. For that reason it should be carefully regulated. In English we use the phrase ‘tight’ lending – i.e. lending only after careful scrutiny that the borrower will have the income stream to repay. But while lending should be ‘tight’ – it should also always be ‘cheap’ – i.e. at low rates of interest – to be sustainable – i.e repayable without great sacrifice.

Debt has an environmental impact too. If compound interest is allowed to ‘compound’ – then borrowers have to strip the land (the earth) of its assets to repay. The woman farmer has to double the productivity of her land – presumably with fertilisers and other chemicals. Or else she has to strip the forest of more trees; or the sea of more fish – to repay her ever-rising debts. Simultaneously, labour has to be exploited. People have to work twice as hard, and twice as long, perhaps, to repay rising debts. For that reason, debt should not be allowed to grow exponentially. If it does, it has environmental and human costs – as we have known since pre-biblical times. It is why all faiths have strong laws about debt. Islam expressly forbids interest, and in Christianity we abhor debt slavery and ask our God to forgive our debts, as we forgive the debts of others. We celebrate the Jubilee – a periodic (every 7 x 7 years in the 49th year) correction to imbalances that build up in the form of debt – by cancelling debts in the Jubilee (50th)  year. Just as every 7 days we honour the Sabbath, by resting the land, and by refraining from labour. These periodic corrections to imbalances are fundamental to western Christian civilisation – 2,000 years of a form of regulation that was banished over night e.g. when in Anglo-American economies the notion of 24/7 was introduced: 24 hour working or shopping for 7 days a week.

ELENA: Do you think it will be possible for macrofinance to feminise the way it operates?

ANN: No, that will not be possible. Women will have to feminise macrofinance – by taking economics courses; by challenging economic orthodoxy; by taking positions in banking and finance. Above all, by understanding the nature of credit and bank money. The boys have hidden these secrets from us all for too long.

ELENA: Which ones do you consider to be the main advantages of feminisation of finance?

ANN: I am getting into deep waters here – and by answering your question will fall once again into generalisations – but for me I hope it will be that women will bring a sense of responsibility to the finance sector. The realisation that self-interested greed does not result in care for others, in responsibility for others. It turns us into alienated monsters – which is why we need to assert or re-assert old values.

That love and companionship and altruism matter more than money.

That community is more important than individualism and acquisitiveness – the ability to consume and acquire more and more things.

That we live within a world of finite resources – we live within a world of limits. We must humbly accept those limits – not act like supermen busting out of the limits!

That when we find ourselves out of tune with nature, disrespecting nature and her constraints – we go a little mad. Crazy.

That sanity means accepting constraints with humility, and remembering that the economy is just a subsidiary of the natural system – not the other way around!

ELENA: Everyone is blaming the finance sector for what happened do you agree?

ANN: Yes, and no. The bankers lobbied politicians and pressured them to de-regulate credit creation – and to transfer the power to create and regulate credit, and to set rates of interest, from the state to the private, invisible, hand of the market.

But ultimately it was politicians that transformed our economy. It is they who succumbed to the lobbying of the bankers – they who weakened and de-regulated in face of that pressure. Many politicians of course profited from this lobbying. There was a great deal of corruption – let’s not beat about the bush.

So it is they, the politicians, who must take the full blame. The bankers only did what most would do if given the chance to make money effortlessly. After all that is what we all do when we go and buy lottery tickets – we believe that we will make money effortlessly. In that sense we are no different from those bankers. Which is why we need constraints and restraints – regulation, just as we need the regulation of traffic to prevent ourselves killing others, as well as ourselves, on the road.

Between 1945 and 1970 we lived through what economists commonly define as the ‘golden age’ – an age in which the financial regulation recommended by Keynes was the norm. It was not as he would have wanted – but it was a lot more stable than the chaos pre – 1929, and the destruction that prevailed prior to his influence over both the US and UK economies from 1933 onwards.

And then in the 1970s the politicians gradually de-regulated. Not all, of course. It is my understanding that Italians do not have the same levels of debt as we do in the Anglo-American economies – and for that the Italian state and Italian politicians must be congratulated – if I am right about that. The same is true in France where the credit card is not as ubiquitous as it is here in the UK, or as it was in Iceland and Ireland.

ELENA: What are the reforms that you would introduce for the international finance sector?

ANN: Now, I will hopefully be brief: capital mobility should be constrained. The Finance sector should be made accountable to democratic institutions – i.e. to the governments where they are based. Those governments should have the power to regulate flows of capital across borders – an essential power if central banks are for example, to be able to exercise control over interest rates – rates for short-term loans, long-term loans, safe loans and risky loans. Right now central banks only have control over the ‘bank rate’ the base rate, the rest are controlled by private sector bankers, and in particular the LIBOR rate is fixed by a secretive and quite unaccountable group of London-based bankers – the British Bankers Association.

The rate of interest is too important to be left in the hands of unaccountable individuals, keen only to turn a quick profit. The rate of interest is a ‘public good’ – and as such should be managed in the interests of society as a whole – industry, labour – and not just the finance sector.

By constraining capital mobility (and capital controls are not the same as exchange controls, which affect the currency individuals can take on holiday. Capital controls are taxes on the movement of capital across national borders) – by constraining capital mobility, we will restore to governments the power to regulate credit creation, and fix interest rates. In other words, the power to determine major aspects of economic policy.

And don’t let anyone tell you that in this digital age it is not possible to control the movement of capital. Iceland has had to introduce capital controls, and has done so successfully since  her crisis broke in the autumn of 2008.  When I met with officials in the Prime Minister’s office in Iceland, they assured me they had no difficulty making capital controls work, but it did require constant attention, as the owners of capital were always finding loopholes…By these means will we restore economic policy autonomy to democratic institutions.

That is how it should be. That’s what our grandmothers fought for, when they fought for democratic government.