Below is my slideshow from the talk:

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

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

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

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

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

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

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

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

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

1.   Hayek as “an opponent of financial excess”

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

2.   Keynesian policy as “promoting the big state”

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

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

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

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

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

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

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

4.   Keynes as “advocate of deficit spending”

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

5.   Keynes as “a supporter of wasteful expenditures”

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 >

http://www.guardian.co.uk/commentisfree/2009/jun/12/recession-economic-crisis

A banker, Alan Clarke of BNP Paribas, citing a NIESR report, confidently tells the Guardian that the recession is over. Should we take the word of any banker – especially one that claims to be an economist – seriously?

Given that the economics profession was blind-sided by the ‘debtonation’ of 9th August, 2007, I am deeply sceptical. Second, given that this is a banker-induced recession; that reckless and often fraudulent behaviour by bankers led to a loss of $60 trillion of yours and my wealth (in the form of pensions, equities, lost interest on savings, and lost income from job losses) last year, should we believe a banker’s particular spin on the crisis?

I say firmly, no, for a number of reasons, outlined below. But the most important reason for pessimism, in my view, is the hegemonic role played by fiscal conservatives. By raising fears over government deficits, and by refusing to acknowledge that government spending pays for itself, these conservatives have set the economic and political agenda in all the British the media, and in every British political party (with the Green Party the honourable exception). As a result, chancellor Darling seems hell-bent on committing electoral suicide, with shadow chancellor George Osborne actively encouraging him.

The private sector will not be able to rely on the public sector for the stimulus vital to recovery. As things stand, any fragile signs of economic recovery will quickly be crushed by the failure of government to intervene and spend at an appropriate level. Instead government cutbacks will impact with considerable force on the fragile economy, and will hurt the middle and working classes. As the year proceeds many will discover the true, and often pitiful value of their pensions; and will be hurt by cuts in services and job losses in the public sector. This will hamper recovery and deepen, if that is possible, the alienation of British voters from the Labour government.

Unfortunately, the hegemony of fiscal conservatives reaches far and wide, and includes Chancellor Angela Merkel of Germany, President Sarkozy of France and the US’s Federal Reserve Governor Ben Bernanke. So at a time of grave private economic failure, cuts in government spending in Europe and the US will arrest recovery. Furthermore, central bankers will have no room for manoeuvre to lower rates further – as they have done this year. Instead interest rates may well rise at a time when low rates are needed to reflate the deflating body of the global economy.

So, while it must be accepted that the economy seems to have slowed its freefall into the abyss; that there are now fewer jobs to lose and fewer businesses to go bust – there is no real cause for confidence in sustained, or even halting recovery. The real economic outlook remains grim.

All G-7 economies will report negative growth in 2009 for the first time in 100 years, according to the Economist Intelligence Unit’s Senior Vice-president, Dr. Daniel Thorniley in a report to the EIU’s corporate network. The British Prime Minister and Chancellor constantly assure us that the Bankers’ Recession was not made in Britain, but is a global phenomenon. By this reasoning negative growth in the G7 economies means little chance of recovery for the UK economy.

Foreign direct investment could fall globally by 45% this year, according to the same report, and corporate profits will decline by 20-25%. Global trade is down 25%, and the EIU predicts trade will be down by 10-15% by year end – the worst figure since 1945.

In April this year, consumer prices turned negative in the US, the UK, Germany and Japan. This may be good news for consumers, and may help lower food prices for the poor, but it is not good for the economy as a whole. Businesses cannot profit from negative prices, so they are bankrupted and lay off employees. The rocketing numbers of unemployed (whose plight is seldom taken seriously by orthodox economists) will cut back on borrowing and shopping and may even default on loans. This is not good news for the productive sector of the economy, and it’s very bad news for the banking sector. Banks have still not fully de-leveraged the debts on their balance sheets. Now, thanks to rising unemployment, non-performing loans are “set to rise sharply around the world over the next 12-18 months” according to the EIU. This is very scary, if one considers that there are still $600 trillion of liabilities in the form of derivatives on balance sheets out there – backed up by a mere $38 trillion of so-called credit default swaps (in reality a form of insurance on derivatives).

Finally, the rising price of oil seems set to exacerbate this dismal economic outlook. To everyone’s surprise, it has been rising lately and is now at $71. This is strange, because as Business Week’s Stanley Reed reports “stockpiles are so high that an ocean of oil is building up around the world in tankers or in depots.” Yet the price of US crude has almost doubled, to $71. While OPEC has cut back and maintained quotas of production, and contributed substantially to the price rise, it turns out that once again, the finance sector is playing fast and loose in oil markets. Göran Trapp, head of global oil trading at Morgan Stanley (MS) in London is quoted as saying: “Hedge funds and asset managers who have been sitting on cash now feel it’s time to buy [oil].” $3.8 billion has flowed into oil and gas exchange traded funds this year, vs. $1.4 billion in the first half of 2008.

Governments in Britain and the United States appear relaxed, even passive, about the impact of hedge fund speculation on the oil price and the global economy. Indeed they seem determined to maintain the dominant status of the finance sector within the economy. Banks that are ‘too big to fail’ are not just tolerated by both the US and UK governments, but encouraged in their morally hazardous behaviour. In Britain the Labour government has actively helped consolidate the banking sector, and shrink the competition, as the forced Lloyds/HBOS merger demonstrated. Hedge funds remain free to gamble in the casino that is the global economy.

Nothing has been done to re-structure the global economy and limit financial imbalances – including Anglo-American deficits and the Chinese surplus. Indeed these matters were not even discussed at the recent G20 Summit in London. Big, reckless money continues to be made from currency speculation, just when the global economy requires currency stability.

We – employees, consumers, investors and borrowers – have been misled and fooled by the economics profession and finance sector for years before this crisis. As a result of our gullibility, we lost $60 trillion of wealth between June, 2008 and 2009. We would be wise now to dismiss their vain efforts at confidence-boosting, and instead rest our judgements on the real world economic outlook.

First, the BoE is not independent. It is a nationalised central bank. It is owned by the government. By taxpayers. Second, the BoE’s governor, Mervyn King operates under a mandate from the Chancellor – a mandate to prioritise suppressing inflation – over all else.  In other words, at a time of crashing oil and commodity prices, at a time of global economic meltdown, he must care less about small businesses, households and individuals and instead go after a non-existent threat of inflation.

The governor does not have an independent mandate. If he is to do something about lowering interest rates, the government must change the mandate. The political mandate must be changed!

In May 1997, Gordon Brown wrote to the governor, and reaffirmed that the Bank is to remain in public ownership. He then charged the Bank with fixing rate of interest “to deliver price stability – as defined by the government’s inflation target.” (Bank of England’s site – monetary policy committee’s remit.)

This is not independence. Gordon Brown gave the mandate. He is a politician. He is elected by us to act as a guardian of our finances. He can take the mandate away.  Or he can amend it.

Alternatively he can allow borrowers – that owe money on billions of pounds – to continue being bankrupted by high, real rates of interests – crippling borrowing costs. Re-capitalising the banks; throwing money at the problem, as Hank Paulson has learnt to his cost in the United States, will not work. What matters now is that the cost of borrowing must be brought down, so that all those heavily indebted, banks, companies, households and individuals – can breathe, economically speaking.

Right now, their heads are being held below the water by very high rates of interest. Pouring more water down their throats – forgive the ghastly analogy – will not stop them drowning!

Their insolvency now threatens a global systemic financial crisis, and their taxpayer-funded bailout of shareholders, bondholders and an incompetent management exposes the hypocrisy of much neo-liberal cant.

As Professor Nouriel Roubini argues:” Fannie and Freddie are insolvent and the Treasury bailout plan (the mother of all moral hazard bailout) is socialism for the rich, the well connected and Wall Street; it is the continuation of a corrupt system where profits are privatized and losses are socialized. Instead of wiping out shareholders of the two GSEs, replacing corrupt and incompetent managers and forcing a haircut on the claims of the creditors/bondholders such a plan bails out shareholders, managers and creditors at a massive cost to U.S. taxpayers.”

We know, because of Brad Setser’s sustained and diligent research, that the central bankers of Russia and China have exposed their taxpayers to losses at Fannie and Fred to the extent of about 10% of their countries respective GDPs. Those are huge potential losses……

Roubini has many excellent points to make on this massive crisis of insolvency:

“these were effectively public institutions – not private ones – used by the government (especially this administration) to pursue public policy goals. The hawkish rhetoric about the “moral hazard” the from implicit guarantees that Greenspan, Bernanke, Paulson, Bush and the administration peddled for eight years was thrown out of the window the moment the housing and mortgage bust started. Instead, for the last few months the GSEs – that were already bleeding and becoming insolvent on their own portfolio – have been used by the government to back stop the mortgage markets: their portfolio limits were raised, their regulatory capital was reduced and the limits to what conforming mortgages (that the GSE can repackage/insure) are were raised from $420k to over $720k. So much for barking in public about “moral hazard” and then going ahead and using already distressed GSEs to bail out the mortgage market and make them even more insolvent. Now this “the emperor has no clothes” farce has been revealed to be what it always was: a high-flatulin “moral hazard” farcical rhetoric with zero substance and credibility.”

Could not have put it better myself.

In Ten tactics to brighten the gloom, the Guardian invited ten experts to give advice to the Chancellor and Prime Minister on how to lift the economic gloom – and to do it in just 100 words. Other contributors included Howard Davies, Robert Peston, Irwin Stelzer and Bill Emmot. Here is Ann Pettifor’s contribution:

Don’t crucify the economy on the cross of inflation. In the 1920s, central bankers crucified debt-laden economies on the cross of gold. In the 90s Japan’s finance ministry crucified that economy on the perceived threat of inflation. Ending the creditor-driven policy of inflation targeting frees up the Bank of England to cut interest rates and immediately helps debt-laden banks, companies and consumers. Inflation is feared most by creditors, grown rich on financial deregulation policies. The greater threat to the poor is a debt-deflationary spiral leading to high unemployment – made more certain by high real rates of interest.

This is a very important debate for all those that have debts – because while house prices are falling, the debts on those houses loom larger for owners. According to the Office for National Statistics in May, unemployment is rising, and unemployment makes it hard, if not impossible, to pay off any kind of mortgage. This is the context in which the BoE is preparing to raise interest rates above the current 5% and appearing relaxed about falling house prices.

A lot of innocent borrowers are affected by the BoE’s policies and actions, and by its mandate from the Labour government. According to the Dept. of Communities and Local Government 14.6 million people in England own their own homes and 8.3 million have mortgages. The craze for buy-to-let mortgages means that some have more than one. Given that the average UK household is made up of 2.36 people this means about 19 million people in England alone are affected by changes in the cost of mortgages, i.e. rises in the rate of interest.

The Bank of England is obliged by a law drafted by the then Labour government’s Chancellor, the Rt. Hon. Gordon Brown MP, to fix interest rates at a level which keeps inflation within the government’s 2% target. In other words, Gordon Brown insisted that it was more important to target inflation, than to keep interest rates low. Now, because inflation is rising the government mandate means that the BoE must now allow interest rates to rise, to curb inflation, even though all debtors are already under terrific pressure from falling house prices and rises in fuel and food costs.

Peter Spencer, an economist with the influential Ernst and Young Item Club, has warned that consumers (most of whom are debtors) will be ‘crucified’ if the government continues to insist that the Bank of England defend an inflation target of 2%. For this to happen, the ‘committee of men’ (see blog below) at the BoE that set the rate of interest, will have to keep interest rates at 5%, or even raise them further.

So debtors are in for a hard-time. And if debtors are in for a hard time, so are their creditors – the banks. Prof. Nouriel Roubini argues that “47% of the assets of all major banks” are related to property. In the US, he argues, 67% of all assets of smaller banks are related to real estate. In the UK, one bank, Northern Rock has already gone belly-up and efffectively had to be nationalised by the government because it was too exposed to a property market – the sub-prime market – where debtors were defaulting. If more debtors default on their mortgage payments, Prof. Roubini believes that “the chances of hundreds of banks going belly up – starting with one that has already gone bust – the US’s biggest mortgage lender, Countrywide “- could thus cause “a systemic banking crisis“ (my italics). Because banks operate internationally, such a crisis would not be confined to the US.

A systemic banking crisis will not be a pretty sight. And once again, it will be politicians and central bankers, ‘guardians of the nation’s finances’ – who will have helped precipitate that crisis, because of their determination to make controlling inflation a priority over lowering interest rates.