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.

Debtonation Readers: This is the full version of my latest blog for Huffington Post:15th March, 2009

Once a-ponzi time, millions worshiped at the feet of the Wizards of Finance.  These Wizards preached an economic religion that promised security and an abundance of riches from the ‘Emerald City’ — Wall St.

Investors following this religion were led to believe that they could make capital gains effortlessly and endlessly.

To make these gains, it was argued, there was no need for protection from the authorities. 401(k) plans were safe in the hands of the Wizards. There was also no need for investors to engage in hard work: to invest in research; to engage more labor; to sweat at making goods or delivering services.

There would be no need to save.  Money would be made effortlessly.

Above all, argued the Wizards, there would be no need to consider limits — financial, environmental or human. There would be no limit to consumption. No limit to the amount of credit created by private bankers. No need to consider the limits imposed by the ecosystem, or limits to the exploitation of labor — whether in the US or China.

And so investors, armed with a firm belief in Wizards, unlimited credit, economic growth and exploitation, marched down the yellow brick road. They borrowed and invested. Then they went shopping.

Even though the average business enterprise makes returns of roughly 3-5% each year, Junior Wizard Madoff promised, and delivered to investors a 10% annual return on investments. Some like Eli Wiesel, invested $15 million with him and thought he “was God“.

Millions more gathered behind the TV tipster, Jim Cramer and hailed his idolatrous motto: “In Cramer we Trust”.

Some believers raised questions about how the Wizards made such extraordinary capital gains?  They were quickly silenced, and told by the Sorcerers at the Fed and in Congress not to worry their pretty heads about the complexities or duplicities of these capital gains.

Instead they were simply to have faith.

The Chief Wizard — Alan Greenspan — waved his magic financial markets wand, and with the help of politicians, effectively dispensed with government regulation of credit-creation. He and his friends in the ‘Emerald City’ then rustled up a gigantic credit bubble. This bubble financed the inflation of assets, and immeasurably increased the wealth of those who owned assets: e.g. property, stocks and shares and works of art.

Those without assets — the poor, and those known as ‘sub-primers’ — were forced to borrow at very high rates of interest. If they could not borrow or had to rely just on their wages, they were denied access to the ‘Emerald City’. They became poorer.

As the rich got richer, they fell worshipfully at the feet of Chief Wizard Greenspan, who promised each and all the equivalent of a pair of ‘ruby slippers’.

All they had to do was believe.  And so they did.

But then came the tornado. Investors were rudely awakened from their dream.

Now there is a dawning realization that while millions may have felt enriched, they were in fact, duped and robbed.

While they thought they had ‘gained the whole world’, in fact something much more valuable was lost.

Trust.

Now it seems, Americans are ditching the Greenspan belief system, and losing faith in the Wizards of Finance. It turns out they are mere gnomes, and have no supernatural powers at all.

This is disastrous. The loss of faith and trust in finance undermines not just the reputation of the Wizards, but the financial system, sound businesses, hard-working Americans — and the entire global economy.

To stabilize the financial system, and to right the global economy, we need to restore faith and trust in the way banks do business.

For that to happen, it is vital that the money-lenders and their lobbyists are chased from the temple, and the temple is restored ‘to the ancient truths’ to quote Roosevelt’s 1933 inaugural speech.  ‘The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.’

These values are common to all the Abrahamic faiths — Jewish, Christian and Muslim, and are well known to most Americans. These are some of them:

I am the Lord your God, who brought you out of the land of Egypt, out of the house of slavery;

Do not have any other gods before me.

You shall not make for yourself an idol.

You shall not bow down to them or worship them…

Remember the Sabbath day and keep it holy.

The seventh day is a Sabbath to the Lord your God; you shall not do any work — you, your son or your daughter, your male or female slave, your livestock, or the alien resident in your towns.

You shall not steal.

You shall not bear false witness against your neighbor.

You shall not covet your neighbor’s house… or anything that belongs to your neighbor.

The point about these ‘ancient truths’ is that they are rules. Regulations that underpinned the values of all civilizations. And to our great cost, we have ignored them. We have de-regulated.

The one most ignored by the Wizards was the rule of the Sabbath — a form of regulation that periodically corrects imbalances — every 7 days, every 7 years (think of sabbaticals) or every 7 x 7 years (think of Jubilee). A form of regulation that underpins the system defined by Ched Myers as Sabbath Economics.

Sabbath economics places limits on the exploitation of labor, of livestock and of the land, in the broadest sense. It is environmental law, and it’s labor law.

During the decades of de-regulation, the concept of 24/7 was introduced. Money markets whirred 24 hours a day, each working day. There was to be no limit to the exploitation of labor, or livestock or land; or to consumption. The ecosystem would expand, it was believed, just like the credit bubble — into eternity.

If we are to restore stability to the financial system, to tackle this spiritual crisis, and to restore faith, we will have to first revive the ancient truths and regulations. Including the truth about limits.

We will have to bring an end to the idolatry of these past few decades, and return to a system of regulation that periodically corrects imbalances — and reminds us of limits. A system of Sabbath economics.

Watching our British politicians squabble and spin this last week over the Pre Budget Report – while Rome burns –  was depressing. Why are our politicians so off-beam? Why does their response to this crisis seem so petty and botched?

The answer may lie in their ties to the finance sector. The fact is we are experiencing what will be a prolonged Bankers’ Depression – born in the City of London, not in the US sub-prime market. Neither of our major political parties is willing to admit that; to analyse the crisis in those terms and therefore to lay the blame on the finance sector and to rein it in. They are too compromised.

If Britain were facing the threat of a foreign invasion, would the Conservatives hesitate to spend on defence? Have any balanced budget Tories suggested dropping Trident to bring down public spending?  No of course not.

And if this crisis is likely to be prolonged and grave, why is Labour’s Alastair Darling so optimistic, airily assuring us that the economy will be so improved in thirteen months time, that he will raise taxes? Does he not appreciate the scale of this crisis, which thanks to globalisation is now borderless?

One need only think back to events on an oligarch’s yacht in Corfu in which both political parties were implicated. Or to JP Morgan’s recruitment at just £2 million a year of a man until recently Labour’s Prime Minister. Or to Gordon Brown’s decision to bestow a knighthood on the man that carries a great responsibility for this crisis – Alan Greenspan. On 4th August this year Greenspan, writing in the Financial Times, celebrated the role that “Adam Smith’s invisible hand” has played in “quietly displacing government control of economic affairs. Since early this decade” he wrote “central banks have had to cede control of long-term interest rates to global market forces”.

In this last week, just three months after this was written, governments on both sides of the Atlantic used taxpayer resources to take government control of two of the biggest banks in the world – Citigroup and the Royal Bank of Scotland (RBS) – to protect them from the savage discipline of global market forces.

Politicians (and we Green New Dealers) will not be able to deal with this, or the climate change crisis effectively until the finance sector and its ideology is subordinated to society’s interests – and we regain control over movements of capital, the regulation of credit and interest rates.

Politicians have in turn, to abandon the certainties of orthodox monetary theory. Namely that money is a commodity, and that its “price” – the rate of interest – must be set by the private sector alone – through supply and demand for money in private markets for capital – just as the price of oil is set by supply and demand for oil.

This is a nonsense. We do not dig capital out of the ground, nor does it grow on trees. Money is man-made. Interest rates are a social construct. And as such, unlike oil or soya beans “there are no intrinsic reasons for the scarcity of capital” as Keynes argued in the General Theory. Because there is no reason for the scarcity of capital, there is no reason for the price of capital to be high.

If we are to emerge from this grave financial  crisis; if we are to finance a Green New Deal, we need to get a grip on the finance sector, on the creation of credit, on the movement of capital, and on the setting of interest rates. Until we, as a society acknowledge that, and begin to disarm the financiers, there will be little hope of the recovery Alastair Darling boasted of this week – or indeed of a Green New Deal.

Interest is the ‘rent’ paid for money or capital – and right now, in a world in which millions have unpayable debts, unemployment is rising and incomes are shrinking as a share of the economy – the central banks of Britain, Europe and even the US are refusing to lower the ‘base rate’ or ‘policy rate’ which influences the remaining interest rates paid on capital. In Britain the rate has almost deliberately been kept at a level that will first bankrupt many individuals, small businesses and companies – and then bankrupt their bankers.

Only mainstream economists, dismissive of history, and who have therefore failed to learn the lessons of the 1930s and of Japan after 1990, could come up with such a ‘sound’ financial strategy.

Keynes wrote at the end of his great work ‘The General Theory of Employment, Interest and Money’ that ‘the owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital”.

On the same page, he wrote, somewhat over-optimistically it turns out, that his new framework for ensuring that capital is never scarce could ‘mean the euthenasia of the rentier and consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital”. For, he argued “interest today rewards no genuine sacrifice, any more than does the rent of land.”   (The General Theory. Macmillan, 1973. P. 376.)

Keynes defined the ‘rentier’ whose euthanasia he so ardently wished for as a ‘functioneless investor’.  I prefer the  more democratic Wiktionery definition: “an individual who does not work for a living, but instead receives an income, usually interest or rent, from their assets and investment.” Wall St. and the  City of London are awash with members of this rentier class.

Money, or capital is not a commodity – like land.  It is a social construct. It is, to put it crudely, a device that society has constructed to facilitate the exchange of goods.  It is the thing that oils the wheels of commerce.  However, unlike that viscous liquid, it is not dug up from the bowels of the earth. Its extraction is not likely to ‘peak’.   It does not grow on trees.  For, unlike trees, it is not dependent for its existence on the vagaries of the weather.  No society can ensure – or more specifically society’s civil servants at the Bank of England can ensure – that this valuable economic lubrication is never scarce.  The ‘guardian of the nation’s finances’ can undertake certain measures to ensure that the rent on this vital ‘ lubrication’ is not scarce and its rent not high for an economy like the UK’s, where many are drowning in debt.  Instead society (via its elected politicians) has chosen to allow the Bank of England to  hand control over this vital asset to a rentier class.

This happened when the  BoE, egged on by the finance sector, abrogated its powers (set up under Keynes) to end the scarcity of capital, and to keep the rent on capital low.  Instead it has authorised and overseen the building of a liberalised financial system (by the private sector) that has succeeded – against all the odds -  in making capital scarce.  Furthermore this private financial system, after blowing up a gigantic bubble of debt, has ratcheded up the rent on these debts, rendering debts unpayable.  This incompetence – for that is what it it is – has led to a global financial crisis, described  variously as the ‘armageddon’ the ‘credit crunch’ or a ‘financial train crash’ – that is destroying, yep, you’ve got it -  the private financial sector.  A form of painful self-harm by a rentier class reluctant to take up Keynes’s suggestion that they go all the way and commit euthenasia.

Instead, like Old Testament Methuselas they go on, and on, and on – extracting high rents from capital they have made scarce.  And the Prime Minister remains blissfuly ignorant, and the Old Lady of Threeadneedle St. stands by, twiddling her thumbs.

On one day, ‘debtonation day’, central bankers in Europe and the US pumped an eye-watering $150 billion into the financial system, to keep big banks afloat. According to Bloomberg, the US’s Federal reserve has ‘cycled $2.58 trillion through U.S. money markets since December’. (Bloomberg 8th August, 2008).

The UK Treasury and Bank of England found £55 billion of taxpayer-backed funding to bail out Northern Rock, and a similar amount (in the form of a ‘swap’) to bail out the Royal Bank of Scotland. The latter was a very generous helping hand for a bank whose chief executive had taken risks, and made massive gains, but who had also taken unwise risks, and now faces massive losses. Sir Fred Goodwin (knighted by Gordon Brown) was quick to take the gains, but declines to swallow the free market price of losses for unwise riks… So the Bank of England has bailed him, and his bank, out.

Is the central Bank as keen to help the ‘little people’? It seems not, if a report in the Times last week is to be believed. (The Times, August 14, 2008). Tensions, it appears, have arisen between the elected Chancellor of the British government, Alastair Darling, and the unelected, and unaccountable governor of the Bank of England, Mervyn King. (Mind you the fact that Mr King is unaccountable, is partly down to this government granting the Bank of England semi ‘independence’ from elected governments.)

The government is rightly worried that banks and building societies are witholding loans from potential borrowers, and thereby gumming up the housing market. The Treasury is therefore trying to find ways of ungumming the works. A young member of my family, desperate to find a home for a new baby, is trapped in this gummed-up market. Mr King, it appears, is not moved. He ‘poured scorn on a… measure whereby the Treasury would temporarily guarantee high-quality mortgage-backed bonds to help struggling lenders to boost the funds available for mortgage lending.’

The Treasury’s plan is, of course, just another way the taxpayer would be bailing out private lenders – but it is a measure that could conceivably help ungum the housing market and give relief to these same taxayers – many of them individuals and households struggling to find a roof to put over their heads, or small businesses trying to avoid bankruptcy. Mr. King is willing to help rich bankers, but not those looking for homes or managing businesses. So he is putting his foot down, and the Chancellor and government appear too weak to over-ride his opposition.

Of course the biggest help that could be given to the millions of Britons and Americans facing the threat of ‘negative equity’, ‘foreclosure’ and bankruptcy… would be lower rates of interest on their debts -mortgages, business loans, auto-loans, credit cards. This would have the supreme benefit of helping debtors while not exposing innocent taxpayers to more liabilities and risks.

With lower rates of interest, debts might then become repayable, This in turn would help salvage the banks and the finance sector. But our elected representatives – in Congress and the House of Commons – have given away powers to set the rate of interest – to unaccountable central banks and private bankers. Alastair Darling has no power over what is known as the ‘official policy rate’ – the Bank of England rate of interest – even though the Bank of England remains a nationalised bank. Nor can Mr. Paulson do much about the Fed Rate. Darling’s predecessor gave away this power in a grand political gesture at the beginning of Labour’s term in 1997. The rate is now determined by an unaccountable committee, chaired by Mr. King at the Bank of England and by Mr. Bernanke in the US.

The Bank of England committee is digging in its heels, and refusing to cut interest rates to help struggling consumers and small and large businesses facing bankruptcy. Indeed interest rates are being maintained at a very high level in real terms, and this is crucifying millions of borrowers. Of course, if they were to cut rates, that might affect the nation as a whole – as Britain (like the US) is living beyond its means, and relies on foreign lenders to pay the difference… If they decline to lend, because the rate of return on their loan (i.e. the interest rate) is too low… who then will finance the UK deficit? And what will become of sterling? So we may sympathise with this dilemma (a dilemma brought about by governments failing to regulate and maintain a balance in our trade accounts). At the same time as ordinary taxpayers, we should demand that the Bank of England and the Federal Reserve place our interests first, above those of the private finance sector.

But curmudgeonly though Mr King and the Bank of England may be, the problem is a bigger one. Central bank governors, encouraged by elected politicians in both the US and UK, have allowed a parallel private bankers committee to set interest rates – the so-called London Interbank Offer Rate – or LIBOR. Now you may think this has nothing to do with ‘the little people’ but LIBOR is the benchmark for 6 million U.S. mortgages and more than $350 trillion of derivatives and corporate bonds. (Bloomberg 29 May, 2008).

I repeat, $350 trillion. That’s a lot of potatoes – to quote Damon Runyon.

Right now, this rate of interest – LIBOR – is out of control. ( See Bloomberg: Money Market `Plagued’ by Libor That Fed Can’t Reduce (Update3)). Central bank governors stand idly by and watch it ratcheting upwards, tightening the rack of torture to which debtors are manacled. Yesterday, the ex-chief economist of the IMF, Ken Rogoff warned that a big bank was bound to fail (Guardian 20 August, 2008). You can be sure if he knows this, central bankers and politicians know this too – yet they refuse steadfastly to end the torture.

Instead the torturers (central bank governors and finance ministers) are about to gather for their annual meeting at a delightful venue in the US – Jackson Hole, Wyoming. (See Dean Baker on this gathering.)

Guantanomo might have been more appropriate.

Have been listening to debates about the conflict in Georgia over the week-end. There has been much wailing and gnashing of teeth about Putin’s disregard for democracy. In a similar vein, western commentary about President Hu Jintao’s Olympic Games is never complete without some tut-tutting about democracy and human rights in China.

Yet these leaders have in reality much in common with Alan Greenspan, former chairman of t he US Federal Reserve, who is held in the greatest esteem by western commentators. He came to London recently to promote his book, and I attended one of his sessions at Chatham House. The deference from the British political and media establishment was nauseating. The Prime Minister had already honoured him with a knighthood, so deferential is he. Yet this is Greenspan on democracy, as expounded in the columns of the Financial Times last week:

“It has become hard for democratic societies accustomed to prosperity to see it as anything other than the result of their deft political management. In reality, the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs. Since early this decade, central banks have had to cede control of long-term interest rates to global market forces”

So democratic societies, under Alan Greenspan’s watch, lost control, through their governments, over ‘economic affairs’. And central bank governors ‘have had to’, Greenspan insists (who forced them to?) raise their hands and surrender a key lever of control over the economy to ‘global market forces’. What are central bank governors for, then?

Greenspan is concerned that there is a “danger” and I quote that “some governments…..will endeavour to reassert their grip on economic affairs.”

Danger? Credit crunches/contracts or tightens – thanks to the reckless greed, deceit and fraudulent behaviour of global capital markets; banks (like Northern Rock, Fannie Mae and Freddie Mac) collapse, and innocent taxpayers, unaware of the sacrifice they are making, bail out their managements and shareholders. To the tune of hundreds of billions of dollars. (See the IMF’s ex chief economist, Ken Rogoff, on this subject, here). What use the invisible hand here?

Debts pile up, interest rates (no longer controlled by democratic governments) rise on these debts, they pretty soon become unpayable, and so thousands of families are evicted from their homes. Immense pain ensues. Families break up, people treat their pain with drugs and alcohol, women and children are abused, young men are knifed to death, old ladies are attacked….Society’s close-knit fabric of security is torn asunder. What help the invisible hand here?

Small businesses borrowed to invest, the interest on their loans ratchets upwards (thanks to Adam Smith’s ideas apparently) they go bankrupt, people are thrown out of jobs, which means they can’t pay their debts, which destorys banks. The financial sector plunges into meltdown.

But worry not, the invisible hand is nigh…and thank god, sighs Greenspan with relief – democratic governments are no longer in control of economic affairs.