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:

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.

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 >

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 >

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

End

Some of our friends were irked by my observation this week that Paul Krugman is:

“an extremely controversial figure for Keynes scholars. He champions a mainstream interpretation of Keynes’s work known as the neo-classical synthesis”

Many rightly applaud him for using his platform at the New York Times to defend further fiscal stimulus in the US – against a hostile political crowd, not to mention the downright opposition of neo-liberal economists – and we commend him for that.

However, because he has such an important platform, it matters more that he lacks a proper understanding of the nature of credit. Our beef with him – and the vast array of neo-liberal economists -  is well expressed, and evidenced by Steve Keen in his latest blog: “Dude! Where’s my recovery?” Namely that:

“Neoclassical economists ignore the level of private debt, on the basis of the a priori argument that “one man’s liability is another man’s asset”, so that the aggregate level of debt has no macroeconomic impact. They reason that the increase in the debtor’s spending power is offset by the fall in the lender’s spending power, and there is therefore no change to aggregate demand.

“They are profoundly wrong on this point because neoclassical economists do not understand how money is created by the private banking system—despite decades of empirical research to the contrary, they continue to cling to the textbook vision of banks as mere intermediaries between savers and borrowers.”

(The only point I would quibble with is Steve’s use of the word ‘decades’. We have known for centuries how money is created by the private banking system – in Britain at least since 1694 with the founding of the Bank of England.)

Steve then goes on to quote directly from Paul Krugman’s 2010 paper with Gauti B. Eggertson, in which they write:

“Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth — one person’s liability is another person’s asset.” (Paul Krugman and Gauti B. Eggertsson, 2010, pp. 2-3; emphasis added)

This was written at a time when economic recovery around the world was stalling – because individuals, households, corporations and banks are burdened by a vast bubble of debt, and are reluctant to undertake further investment or risk, until debts have been paid down or ‘de-leveraged’.

Neo-liberal dismissal of ‘the overall level of debt’ and their failure to accept that banks create credit in excess of savings, helps explain why central bankers at the Bank for International Settlements continue to argue for banks to hold and increase ‘capital cushions’ against the risk of losses. This is based on the nonsense of what some define as ‘fractional reserve banking’ – namely that there is a link between ‘capital’ in the bank, used as a basis for lending – and credit, and that only a fraction of capital is needed to facilitate lending. And that lending is constrained somehow, by the level of capital in the bank.

In fact, as we were made well aware by the vast bubble of credit/debt created by the private banks – there is no relation between ‘capital’ in the bank and lending. The money for a loan does not exist, until a borrower applies for it. And contrary to widespread belief – loans create deposits.

Steve quotes from the Senior Vice President, Federal Reserve Bank of New York, Alan Holmes who wrote four decades ago that monetarists suffered from “a naive assumption” that:

“the banking system only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt.” (Alan R. Holmes, 1969, p. 73; emphasis added)

Which is why Amar Bhidé, professor of economics at Tufts University, and previously at McKinsey, was so right in a recent interview (hat tip Yves Smith) in which he talked about today’s “rampant, extensive criminality” of banks as proof that reform had gone down the wrong path.  He argued that the Bank for International Settlements’ reforms based on ‘capital cushions’ are:

“irrelevant….a waste of time….a fake debate…Because nobody knows what the banks’ risk-weighted assets are……if you don’t know what these are, it is pointless to call for capital cushions…The way regulation (by the BIS) is done…completely misses the point.”

(For the benefit of those that do not follow these debates –‘risk-weighted assets’ represents the credit created by banks and lent on to borrowers, weighted by credit risk according to a formula set by central banks. It is well known that traders in various financial ‘products’ offered by banks as credit are a) ignorant of the risk b) fiddle the risk weightings, or c) pretend there are none. Second, that sleepy and passive regulators (indoctrinated by neo-liberal theory) are none the wiser; and third, that CEOs and other senior bankers have no idea of the level of risk posed by their banks’ activities. Hence the shock and astonishment as hundreds of small and large banks collapsed between 2007-09).

Keynes had no such delusions about the nature of credit, and the ability of banks to create credit. The full title of his great work, is, after all: The General Theory of Employment, Interest and Money.

Which is why we are right to get het up about the way in which economists, including Paul Krugman, continue to ignore or downplay Keynes’s contribution to our understanding of Interest and Money. With that understanding, which Keynes applied to the crisis of the 30s, regulators could begin to tackle bank regulation effectively; and by those means address the present crisis, and hopefully prevent another.

Without that understanding….further crises loom.

Simultaneously published on www.primeeconomics.org.

Like Catholics organising a conference on Protestantism and excluding Protestants, the Cambridge organisers of a conference to ‘celebrate the 75th anniversary of the publication of Keynes’s General Theory of Employment, Interest and Money’, have excluded Keynes scholars. By contrast, most of those who will address the conference subscribe to the ‘classical’ theory that Keynes thought he had defeated.

The one name on the list that is identified with Keynes, at least in the public eye, is Professor Paul Krugman of Princeton University, who will be giving the ‘Plenary Lecture’. However, in his opening remarks to the conference, Prof. Krugman poses the question: “What am I doing here?” and modestly suggests that:

I’m arguably not qualified to [give this talk]. I am, after all, not a Keynes scholar, nor any kind of serious intellectual historian. Nor have I spent most of my career doing macroeconomics. Until the late 1990s my contributions to that field were limited to international issues; although I kept up with macro research, I avoided getting into the frontline theoretical and empirical disputes.

Click here to download a PDF copy of Paul Krugman’s lecture >

Krugman is an extremely controversial figure for Keynes scholars. He champions a mainstream interpretation of Keynes’s work known as the neo-classical synthesis, and seems to have avoided any discussion with those actually working in the field. Many fear that his adherence to a rightly discredited version of Keynes’s theory serves Keynes very badly indeed.

Qualification for participation in this event hosted by the Cambridge Faculty of Economics and Cambridge Finance appears to be complete detachment from scholarly debates about the nature of Keynes’s work. Scholars were hard pushed to recall one contribution to the Keynes literature written by any on the list of participating economists. The UK Post-Keynesian Economics Study Group, a body dedicated to the serious pursuit of these matters since 1988, with an on-line community of over 300 academics, found out about the conference by accident. “Even by the standards of the economics profession, this is staggering”, one member observed.

One wonders why Lord Eatwell, who once wrote a Keynes-oriented textbook with Joan Robinson, one of Keynes’s close collaborators, has consented to be on the Organising Committee for such an event.

The impression created is of an economics profession actively seeking to exclude any Keynesian challenge to an orthodoxy that has so patently failed society. As we seek solutions to rising unemployment, bank and business failures, debt-deflation and sovereign debt crises, the determination of a group of economists at an elite University – Keynes’s University – further to close down debate on alternatives should be a matter of the greatest possible concern to the public at large.

Have just been told that my post on the Left Foot Forward on Ed Balls’s speech  crashed the site “under weight of people wanting to read it”…so here it is for those of you that may have missed it….

David Cameron was delighted when the formidable Ed Balls walked straight into his framing of the debate on the deficit – and was promptly trapped.

That framing goes as follows. We (the government) have spent beyond our means. And the way to pay for it, is by cutting (public sector) jobs, and raising taxation - like VAT.

Ed Balls’s speech concedes (as Labour has done since Alastair Darling’s time at the Treasury) the deficit-reduction-emphasis agenda set by his opponents. And by so doing – implicitly concedes the need to cut public sector jobs.

But I am being unfair.  Balls began his speech by mentioning Labour’s “emphasis on jobs and growth” But the speech immediately morphed into Labour’s concession to the Coalition: that what is needed is “a steady and balanced approach to halve the deficit in four years”. The implication being that cuts must be matched by ‘jobs and growth’.

But the highlight of the speech – the sound-byte that his spin doctors no doubt intended the media to emphasize-  is a call for a cut in VAT “to boost consumer confidence and jump-start the economy.”

Cameron flashed back his retort: ”slashing taxes” he argued, would only make the UK’s fiscal deficit worse.

And so Balls is trapped.

The debate now centres on whether the deficit can be financed by increasing or cutting taxes, in particular VAT. For most people, Cameron has the upper hand.  ’Of course the deficit can only be financed by increased taxes’ is the consensus. Because we have ‘spent beyond our means’ – we have to raise taxes, like VAT.   “Slashing” VAT – when it’s higher VAT returns that are paying down the deficit – is unacceptable to the Coalition, to the Treasury, to orthodox economists and to the bulk of the British public.

But that’s only because most have been drilled in the propaganda: “the deficit is like a credit card”. We need to pay it down. To do so, we have to mobilise/hoard ‘savings’ – i.e. higher taxes – to pay down the ‘credit card’.

But the government’s deficit is not like a credit card. And nor do we need ‘savings’ to pay it down.

The only surefire way of paying down the deficit is not by government cutting the deficit – which I and others have argued it cannot do -  but by employment.

Put 2.43 million people back to work, and hey presto! the deficit will vanish.

Get 2.43 million people – including thousands of skilled and unskilled workers, clever and talented student graduates –  to address Britain’s very real insecurities in energy, food and health – and hey presto, the deficit will be financed.

How? By the tax revenues that will pour into the Treasury’s coffers, either directly or indirectly – and by the savings that will be made on welfare benefits.

However, keep 2.43 million people unemployed, keep them feeling insecure, with their purses firmly shut, and you can guarantee an ever-rising government deficit (April’s deficit numbers were the highest on record for that month).

And 2.43 million unemployed is sure to make British ‘confidence’ fall and the recession deepen.

Ed Balls has to face this fact: cutting VAT on falling retail sales will do little to ‘restore confidence’. Confidence is evaporating, and retail sales are falling, not just because of VAT – but because of the fear of unemployment.

The only thing that will restore confidence will be: employment. And while it is encouraging that the private sector created 88,000 jobs between February and April, that still leaves 2.43 million people economically inactive, unemployed and lacking in confidence. Many millions more are worried about their job security, rising fuel and food prices.

So Ed Balls’ speech should have gone like this.

Jobs will cut the deficit.

Look after unemployment – and the budget will take care of itself.

And if the private sector can only create 88,000 jobs in 3 months - while 2.43 million people remain economically inactive, depriving the Treasury of tax revenues, costing the Treasury dear in welfare benefits – and causing the deficit to rise even higher – then government must step in and spend on public works, to create jobs.

Jobs will cut the deficit – and simultaneously create the ‘confidence’ the private sector needs to invest – to create more jobs.

That framing would have put David Cameron on the defensive – would have pleased Labour’s base, and would have encouraged insecure voters. It would have put Ed Balls and Ed Miliband in a ‘winning state of mind’.

Instead we are back on sterile, old territory: the centrality of the deficit to all of political debate, and economic policy-making, and the eclipse of the subject of unemployment.  Paying down the deficit as Labour’s leadership and its right-wing constantly concedes, is REALLY IMPORTANT. For the Coalition it is is far more important than creating jobs, and getting 2.43 million people back into meaningful work.

So let’s go on emphasizing the deficit, and ignoring the unemployed. But please, spare us the tears and anguish of politicians and economists when the deficit keeps rising!