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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Aviva has brought together a collection of prominent thinkers to provoke renewed debate and fresh ideas about future prosperity and creating a culture of sustainable savings. The group, names the ‘Future Prosperity Panel‘, published their report ‘Big picture thinking – Towards sustainable savings’.

My article is called ‘Savings and the alchemy of credit’ and is published alongside valuable work from Alain De Botton, Simon Tay, Paweł Świeboda and Diane Coyle.

Read a summary of my essay on the Aviva site and watch a video interview with me here… >

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 >

Much of the news of the last few weeks -

• the financialised commodities mania;
• the disgraceful abuse by the banks of payment protection insurance;
• the mortgage fraud which led US banks to rush through foreclosures without proper process and evict people from their homes;and their  decision reported  in the WSJ to offer a miserly $5 billion to settle claims by federal and state officials of these  fraudulent mortgage-servicing practices;
• HSBC’s quarterly fall in profits,
• HSBC’s threat announced today to cut thousands of jobs

As I wrote in a blog for the Huffington Post in October last year – banking  has been turned on its head, and the system, bizarrely, has become a borrowing, not a lending machine. No-one, not politicians, not regulators, not central bankers, least of all bankers themselves – appears prepared, or has the political will and the guts –  to fix it.

Above all, the damage will not be fixed until governments implement policies that stimulate economic activity, so that companies can hire workers, and generate income for both themselves and their employees. This in turn,will generate income for banks.

Tin produced at a Glencore plant in Vinto, Bolivia

“Experience shows that when policies falter in managing capital flows, there is no limit to the damage that international finance can inflict on an economy.”

Yilmaz Akyüz, “Capital Flows to Developing Countries in a Historical Perspective: Will the current Boom End with a Bust?”

Today, as speculation and leverage in global, financialised commodity markets reach manic levels; as we witness an ‘epic rout’ (FT 5 May, 2011) in commodity prices, and as the boom in capital flows peaks, is another crash inevitable? And is it coming soon?

I know from experience that while it may be possible to analyse fundamentals, it is always difficult to predict precisely what dynamic will trigger the next crisis, and when it will happen. Back in 2003, together with colleagues at the new economics foundation in London, and with very little funding, I assembled and edited a series of essays on the ‘outlook’ for the global economy. We titled it: ‘Real world economic outlook’, and added a subtitle, ‘the legacy of globalization: debt and deflation’. We intended the report to be annual, and to act as a counter to the IMF’s annual World Economic Outlook, which in our view was irrationally optimistic about developments in the global economy.

We were pretty pessimistic about global imbalances, and predicted a crash. Sadly, our timing was way out: the crash was four years away. It does not always help to be right on the fundamentals. Given the inevitability of the then forthcoming crash, we argued that there was once more a need for a ‘great transformation’ of the global economy. The starting point we wrote ‘will be to reverse the most pernicious elements of the ‘globalization’ experiment’ by the ‘taming of financial markets through the re-introduction of capital controls; restraints in the growth of credit; the establishment of an International Clearing Agency; and a Tobin Tax’.

Back then it was hard to talk/write about these matters – and be heard. Our cheerfully-titled report and predictions did not hit the best-seller lists. Funding for the project was withdrawn, and the project wound down. It’s major flaw? We had breached areas of economic debate that at the time were carefully circumscribed. It took the financial crisis of 2007-9 to loosen the intellectual chains to which orthodox economics had so heavily tied economic debate.   Today the Tobin Tax, or Robin Hood Tax is a high-profile issue, with some signs that EU governments are considering implementation of such a tax. (See point 8 of Euro leaders’ statement, March 11, 2011). So that taboo has been broken.

Another taboo subject then – control over capital flows (now re-designated as ‘capital flows management’ by the IMF) is now, in contrast to 2003, actively discussed, even though debate is limited to controls on inward flows. Debate on controls over outward flows – illicit capital flight that makes it so easy for corporations and elites to export their gains– are still taboo.

The big change came in February, 2010, when to the surprise of many, IMF staff accepted that ‘capital controls are part of the policy mix’. And by April, 2011, the Fund had developed a ‘framework’ to help countries manage capital flows.

This framework was promptly rejected by the G24, led by India and Brazil, for several reasons. First because the IMF was dealing with symptoms, not causes – i.e. the easy money policies of the Federal Reserve.  Quantitative easing (QE) was and is, intended to pump liquidity into the US economy; to allow funds to cascade down through the banking system, for lending to companies that would, in turn, invest in infrastructure and the creation of jobs.  Because, as Prof. Chick has noted, there is neither economic debate about the money supply, nor overt management of the money supply, there is no control over how banks deploy low-interest rate funds generated by the Fed.  US and US-based foreign banks are free to ignore the Fed’s mandate or the US administration’s priorities. Like the public utilities they effectively are, banks instead are free to draw down from the Fed’s easy and cheap money-creation – QE – to speculate, and accrue private gains in mainly developing and emerging markets (DEEs).  The IMF shows little interest in the implications for the global money supply of credit-creation by central banks and, in the view of many, turns a blind eye to these de-stabilising activities. Instead fund staff lecture poor countries on the management of capital inflows.  The G24 will have none of this, and instead demands that a light be shone on the causes of the boom in speculative capital flows.

Second, as Lesetja Kganyago, chairman of the G-24 and director-general of South Africa’s National Treasury told the Wall St Journal: the group opposed the IMF framework because the fund proposed to integrate it into its surveillance program and policy recommendations. G24 leaders – especially those leading some of the world’s biggest democracies – rightly expect to enjoy the same policy autonomy privileges usually reserved for leaders of the G8.

All of this makes a recent paper on the current boom in capital flows by Yilmaz Akyüz of the South Centre so timely, comprehensive and insightful. Akyüz is chief economist at the South Centre, Geneva and former director of the Division on Globalization and Development Strategies at UNCTAD, where he edited a range of UNCTAD’s annual reports.

Akyüz begins by noting that there have been three generalised boom-bust cycles in private capital flows since the end of the Second World War: all with devastating impacts on developing and emerging markets. The first started in the late 1970s, and ended with the Latin American debt crisis in the early 1980s. The second started in the early 1990s and was followed by the East Asian financial crisis of 1997/8; and by defaults in Latin America and Russia. ‘The third cycle’ argues Akyüz ‘started in the early years of the new millennium and ended in the second half of 2008 with the subprime crisis. This was soon followed by a new boom, the fourth in the post-war era, which started in the first half of 2009 and is continuing with full force as of early 2011.’

Akyüz argues that this current cycle will most likely end with a reversal in the upswing in commodity prices, because commodity “markets have become more like financial markets…with several commodities treated as a distinct asset class, attracting growing amounts of money in search for profits from price movements…”

The commodity bubble began with a new financial instrument invented by Goldman Sachs – the Goldman Sachs’ Commodity Index (GSCI) – so argues Frederick Kaufman in the April, 2011 edition of Foreign Policy. Next, commodity price inflation received a boost in 1999, when the US Commodities Futures Trading Commission deregulated futures markets. “All of a sudden, bankers could take as large a position in grains as they liked, an opportunity that had, since the Great Depression, only been available to those who actually had something to do with the production of our food” writes Kaufman.   “Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds.  In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets.”

As has been well documented, rising commodity markets have enriched the few, but impoverished millions of people. Driven in part by higher fuel costs, global food prices are 36 percent above their levels a year ago and remain volatile, the World Bank argued in a recent report: “A further 10 percent increase in global prices could drive an additional 10 million people below the $1.25 extreme poverty line. A 30 percent price hike could lead to 34 million more poor. This is in addition to the 44 million people who have been driven into poverty since last June as a result of the spikes. The World Bank estimates there are about 1.2 billion people living below the poverty line of US$1.25 a day.”

Falling commodity prices, therefore, are central to any strategy for reducing global poverty.

Have they begun to fall? As I write this (6 May, 2011) global commodity markets have been subject to what the FT calls an ‘epic rout’ “…the worst sell-off for many commodities since the collapse of Lehman Brothers and, in dollar terms, the biggest-ever for Brent crude.”

While these markets may well stabilise, and be talked up (and down) again, it daily becomes clear to even the most orthodox economists that, in the real world, the global economic ‘recovery’ is very weak indeed. As that reality dawns on speculators (and long before it dawns on policy-makers) will there follow a collapse in index-traded commodity prices?

Furthermore, margin debt — the amount that speculators borrow for speculative purposes — is rising quickly, just as it did in advance of the 1929 stock market crash, the Nasdaq bubble and the subprime crash of 2006/7. Indeed, as the blogger, Cullen Roche of ‘Pragmatic Economist’ notes, margin debt is now at ‘manic levels’.   Debit balances at margin accounts skyrocketed to $20.7 billion in February.  ‘Only two other times historically have we seen leverage rise so much so fast and both times it was during a manic phase – during the tech bubble of the late 1990s and the credit bubble just a short four years ago.’

These debit balances, as an anonymous player at an investment boutique notes:

‘increase speculative volatility in things like oil, which goes from $40 to $150 to $50 to $130 over and over. Paper profits change accounts but the real economy is not theoretically affected, except that it is held hostage to this casino game of rapidly changing prices for basic materials and necessities that businesses and consumers use to make decisions. So the economy is in actuality disrupted by the casino, the casino creates no net wealth, and everyone is worse off as this charade continues.’

We’ve been here before. Akyüz argues that the post-2000 ‘swings in commodity markets show strong correlation with those in capital flows’ to developing and emerging markets (DEEs) and with it  ‘the exchange rate of the dollar’. After rising constantly, both commodity prices and flows declined in 2008, when falling prices triggered the exit of capital from commodity-rich economies.  Both recovered rapidly afterwards.

These factors are reinforcing with ‘greater force’ argues Akyüz, the ‘macroeconomic imbalances and financial fragility in several DEEs….Imbalances that started with the subprime bubble but were interrupted by the Lehman collapse.’

Akyüz cautions that the continued boom in commodity prices could eventually cause rampant inflation in China, which could lead to a sizeable slowdown. ‘This, together with the global oversupply built during the boom, would bring down commodity prices, and the downturn would be aggravated by an exit of large sums of money from commodity futures. This would make investment in commodity-rich countries unviable and loans non-performing, leading to risk aversion, flight to safety and a reversal of capital flows to DEEs.’ The most vulnerable of these are countries in Latin America and Africa that have enjoyed the twin benefits of global liquidity and the boom in commodity prices. They could be hit twice – by falling capital flows and commodity prices, he argues. South East Asian economies are less vulnerable, because they have built up substantial current account surpluses and large stocks of reserves.

Akyüz concludes correctly that these unstable capital flows and commodity price booms show that ‘the international monetary and financial system needs urgent reforms’. He quotes Ben Bernanke’s speech to the Banque de France in February, 2011:

“Looking back on the crisis, the US, like some emerging-market nations during the 1990s, has learned that the interaction of strong capital inflows and weaknesses in the domestic financial system can produce unintended and devastating results. The appropriate response is…to improve private sector financial practices and strengthen financial regulation, including macroprudential oversight. The ultimate objective should be to be able to manage even very large flows of domestic and international financial capital in ways that are both productive and conducive to financial stability.”

Fine words indeed. But words are not enough. Akyüz argues that ‘macroprudential regulations, as usually defined, would not be sufficient to contain the fragilities that capital flows can create’. Instead, controls over both inflows and outflows should be part of the arsenal of public policy, used as and when necessary and in areas and doses needed, rather than introduced as ad hoc, temporary measures.

And we do not have to re-invent the wheel. ‘The instruments are well known and many of them were widely used in the advanced economies during the 1960s and 1970s.’

While politicians, economists and regulators may be more alert than they were in advance of the 2007-9 slump, they remain submissive to a global banking lobby and passive at the wheel of the global economy. This leaves commodity speculators unfettered by regulation and free to steer the global economy towards another financial precipice. Only this time central bankers and governments will have fewer tools and resources (i.e. taxpayer largesse) available with which to rescue bankers and speculators from their reckless and worthless endeavours.

Nevertheless, soon after this coming crisis – which will again cause massive economic failure and dislocation, intense human suffering and pain – controls on capital flows will finally be applied. Be sure of that. But by then, it will be too late.

This article was simultaneously posted on PRIME (Policy Research in Macroeconomics).

I have a comment in todays Guardian on the new campaign on the Tobin Tax – the ‘Robin Hood Tax’. Click here to read the whole article:

Ann Pettifor:

“The proposed currency transaction tax (CTT) represents the tiniest grain of sand in the wheels of global, mobile capital, and places very little restraint on the movement of international capital. For that reason CTT will be welcomed, ultimately, by international financial institutions. The proposal lacks a framework of democratic, accountable governance for the disbursement of funds collected under a CTT scheme. NGOs and treasuries are debating whether funds should go, for example, to national treasuries; to the Global Fund to fight Aids, TB and Malaria, or to the UN for mitigation and adaption to climate change. Until disbursement and distribution of CTT revenues are accounted for in a democratic, fair, and transparent way, the CTT will be vulnerable to attack.”

7th January 2010,

Read Ann Pettifor and Jeremy Smith’s letter on why Iceland must NOT repay the debt in the FT today:

” Sir, The president of Iceland’s refusal to approve repayment to the British and Dutch governments should be welcomed (January 5). The pause gives the Anglo-Dutch governments an opportunity to withdraw their demand for full repayment from the government of Iceland, a country whose population at 317,000 is somewhat smaller than Leicester’s.

The UK and the Netherlands, with a combined population of 76m, should cease to use economic force majeure on a tiny country, and accept the principle of co-responsibility for the crisis. Repayment of the nationalised losses of a private bank amounts to €12,000 per Icelandic citizen, and will inevitably impact harshly on their lives and public services. By contrast the cost to Dutch and British taxpayers of the bail-out will be about €50 per capita.

We understand the strong desire of the present government of Iceland to restore the country’s tattered reputation.

But anyone reading the financial press in 2007 and 2008 (as opposed to the academic reports commissioned by Iceland’s chamber of commerce) would have known that Iceland’s banks were far from risk-free. That was why British and Dutch depositors enjoyed good rates of return on their deposits.

The British and Dutch governments have sound political reasons for protecting small savers lured into shark-infested financial waters. What is unjust is that the tiny population of Iceland should be forced to bear the full costs of the laxity of Icelandic, British and Dutch regulators and the reckless behaviour of private bankers and risk-takers. “

Read the letter on the FT website here.

Motley Fool blogger TMF Sinchiruna spotlights the Times interview, describing me as “once ridiculed, later vindicated…” TMF Sinchiruna goes on to say: “Peter Schiff, Jim Rogers, Niall Fergusson, Ann Pettifor … these are the voices that I believe investors need to hear. Turn off the tv and look deep into the events of last year and consider for yourselves whether anything more than a hail-mary reflationary maelstrom has been heaped upon the fire that started it all.”

Read the Motley Fool article >

Also just did an interview for You and Yours on Radio 4 which was broadcast Wednesday. You can listen to it here.

Article Published in the Times, September 1st 2009. Photo by Jon Enoch.

Ann Pettifor predicted a painful end to the good times. Now she says that only radical action can prevent further gloom

Phil Thornton

Ann Pettifor is a member of a select club — the seers who saw it all coming. Now the economist, who predicted the credit crunch as far back as 2003, believes that the worst is yet to come unless there is radical reform of the financial system.

Six years ago she parodied the International Monetary Fund’s annual economic forecast with her own — The Real World Economic Outlook. Then, in 2006, her book The Coming First World Debt Crisis, warned that rich countries were heading for a debt crisis that would overshadow anything seen in the developing world. Both were ridiculed.

With the British and world economies languishing in the worst recession since the Great Depression and with once-mighty banks reliant on government life support, she could be forgiven for being a little smug. Not a bit of it: “No, being Cassandra is not something I wish for. I hate this role of being a gloomer and doomer, as I’m an optimist by nature. But I am very pessimistic now.”

She is dismayed that politicians have failed to seize the opportunity that the crisis has given them to embark on tough reform of the banking system. Stock markets have rebounded and house prices have stopped falling, but Ms Pettifor fears that politicians and households have started to relax prematurely.

“The economy is no longer in freefall and, as a result, there’s an enormous amount of complacency from politicians, in particular, about what will happen next. I believe politicians have given away the opportunity to restructure the banks and reconfigure the system.”

She likens Alistair Darling, the Chancellor of the Exchequer, to a high-wire artist. “He thinks that if he can just keep his eyes closed he will get to the other side. Yet underneath him is this vast debt that has not been cleared off the banks’ balance sheets. Many of the banks are still insolvent and this has not been addressed.”

Ms Pettifor, executive director of Advocacy International, which advises countries on debt management, made her name spearheading the Jubilee 2000 campaign to cancel the debts owed by the poorest countries. She believes that there are only three solutions to Britain’s woes: write off these debts as unpayable; convert the debt into equity; or use the benefits system to raise people’s incomes so that they can meet their debts.

She is baffled that the Government has used billions of pounds of public money to rescue the banks without insisting on any change in behaviour.

She highlights an admission by the Treasury that one company in three is paying interest rates more than nine percentage points above the base rate and is furious that banks such as Barclays feel able to offer bonuses reminiscent of the pre-crash boom. If the banks do not change their ways, she says, the Government must simply withdraw the insurance guarantees that have kept them alive.

Instead, public money should be used to bail out households and businesses threatened by bankruptcy. “The banks are not using the money productively, yet what we need is for the Government to spend more productively,” she says. “But now there is a consensus that governments should not spend any more in this crisis. That will tip us into a big depression.”

Ms Pettifor, who is a fellow at the New Economics Foundation, a left-leaning think-tank, believes that it is not too late for politicians, regulators and even bankers themselves to embrace reforms that will prevent another cycle of boom and bust. She believes that a culture of easy but expensive credit, which she blames for the accumulation of unaffordable debts over the last two decades, should be replaced with a model of “tight but cheap credit”.

“Orthodox economists talk about cheap money being the cause of the crash. But it was not cheap — subprime homeowners were paying 19 per cent interest. It was easy money that was the cause.” This, in turn, led to the massive inflation in property prices — house prices trebled between 1997 and 2007. “We over-borrowed against these inflated prices. The rollicking times were rollicking and now we are getting a bollocking.”

She was baffled by a recent letter to the Queen — from other leading UK economists — after she reputedly asked why nobody had seen the crisis coming. With a voice bordering on incredulity, she reads out a passage where the letter-writers say “inflation remained low and created no warning sign of an economy that was overheating”.

“What about asset price inflation? We repressed prices and wages but turned a blind eye to assets,” she says, adding that central bankers must monitor asset prices in the same way that they track high street costs.

But how do we achieve cheap but tight credit? In terms of tighter lending standards, it means an enhanced role for bank managers. “When I and my partner took out a mortgage in 1970s we had to see the bank manager, who went through our finances with a fine-tooth comb,” she recalls. “That’s all you need — more bank managers making an assessment of risk.”

Since she believes that high interest rates were a key cause of the crash, she says that low interest rates for loans are essential.

Her prescription for achieving cheap credit is more radical — nationalise the setting of the London Interbank Offered Rate (Libor), which tracks the rates at which the largest banks are borrowing money from each other and is used to set mortgage and business loan rates.

She says that government intervention to keep real rates at a level at which businesses can make a profit would help to stem the rise in insolvencies that, in turn, leads to people losing their jobs and their homes.

This taps into Ms Pettifor’s long-standing worry over the “financialisation” of the economy that has allowed banks to become the “masters, not the servants” of industry at the expense of genuine entrepreneurial activity.

Future lending should be directed towards sustainable home ownership and business activity, rather than speculation.

At times her model comes close to a form of Sharia, the Muslim financial code that forbids the earning of interest. Indeed, in her 2006 book, Ms Pettifor urged society to return to the traditional religious approaches to usury as a way of curbing the excesses of capital market speculation.

The final element of her vision is a “green new deal” to create economic growth and the jobs needed to fill the “crater” of lost employment and output caused by the crash.

Ms Pettifor would take a leaf out of the Bank of England’s book on quantitative easing but would direct new money to the Government to support green projects.

Private banks could lend to the Government at low interest rates for the same effect. “The fact is that when the Government spends, the private sector is the biggest beneficiary. If the Government announces a home insulation programme, it will be the construction industry that will do it,” Ms Pettifor says.

Her forecasts of a crash have been proved right, but will her latest warnings receive a better hearing? She admits that none of the three main political parties is likely to adopt her policy prescriptions. “There is a weakness in being too far ahead of the game.”

Originally published in The Times, September 1st, 2009.