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

Wall Street plummeted as concerns over European debt and the US economic downturn spurred a broad sell-off. Photograph: Shen Hong/Xinhua Press/Corbis

Read my article from Guardian Cif, Friday 19th August:

As bank shares and stock markets plummet, and investors flock to the safety of government bonds; as obstinate EU leaders crucify their countries in a futile struggle to defend today’s equivalent of the gold standard; as British and American politicians adopt austerity policies and drive their economies closer to the cliffs of depression; and as most professional economists stand aloof from the escalating crisis – what lies ahead for ordinary punters like you and me?

First, let’s take look at the big political picture. This crisis is already sharpening the divide between left and right in both the EU and the United States. Studying a precedent – the implosion of the 1920s credit bubble in 1929 – we note that four years after that crisis erupted, the political divide sharpened decisively. The United States and Britain moved to the left. Germany chose a different path. After 1930, Germany’s Centre party under Chancellor Brüning adopted austerity policies that resulted in cuts in welfare benefits and wages, while credit was tightened. At the same time the German government engaged in wildly excessive borrowing from the liberalised international capital markets. The ground was laid for the rise of fascism.

Four years after the “debtonation” of August 2007, our political classes in both the EU and the US have consciously declined to restrain out-of-control finance sectors or to fix broken, effectively insolvent banks. Instead, central bankers deployed taxpayer-backed resources (quantitative easing) to finance, guarantee and bail out bankers who then went on a wild, speculative spending spree.

At the same time, politicians imposed austerity on the more socially useful and productive sectors of the economy, both public and private. In both the EU and US these economic strategies have angered the populace and emboldened the right; in particular the far right. Looking ahead through the political lenses of austerity, street rioting and Tea Party obstructionism, the signs are ominous.

And then there is the impact on our own living standards. For comparisons and precedent, we need only look at Japan. Our politicians and central bankers have not learned from Japan’s crisis, which preceded our own. We are, therefore, destined to follow Japan’s disastrous record of lost decades of economic activity. As in Japan, so here: a broken banking system, crushed by the weight of unpayable debts on its balance sheet, fails to lend to businesses at affordable rates. Pretty soon this constrains investment. First-time buyers can’t get affordable loans or overdrafts, placing downward pressure on property prices.

A fall in investment is compounded by government policies for austerity – rises in VAT, and cuts in public spending. These policies trigger a rise in unemployment. Rising unemployment causes people to snap their purses shut, placing even further downward pressure on prices, profits, wages and employment. The downward spiral is then hard to arrest.

Property prices across Japan have continued to slide uninterrupted for nearly two decades. Hard though it may be for us to accept, it is not impossible to imagine UK property prices falling for the next two decades.

Just as here, Japan’s politicians and central bankers exaggerated the risks of inflation, reflecting the concerns of bankers and creditors – who fear inflation will erode the value of their outstanding loans. And so they were slow to a) use monetary policy to help the broader economy recover, and b) to restructure banks. The primary Keynesian tools for reversing the Great Depression were an aggressive monetary policy combined with extensive restructuring of the banking system.

While Keynes is largely defined (by his enemies) as a fiscal activist, he was first and foremost a monetary economist. In other words, he believed that if governments and central bankers would only fix the money system – by lowering rates of interest for all borrowers (not just the banks); by injecting QE into productive, socially useful projects; and by restructuring the banking system – the rest of the economy could be helped to recover.

Because our politicians and central bankers have so firmly rejected these lessons, prospects don’t look good for us at all. Instead, we would do well to echo Frank Zappa’s realism: “I mean to say that every day/Is just another rotten mess/And when it’s gonna change, my friend/Is anybody’s guess.”

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”

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… >

The austerity brigade is rattled. Young Daniel Knowles over at the Daily Telegraph is so worried, he has had to rise to the defence of the Treasury and Office for Budget Responsibility – and then resorts to proposing Greece’s economic strategy for the UK. Why? Because orthodox economic ideology has been challenged by none other than Daniel’s ‘hero’ that notorious womaniser, President Bill Clinton.

Bill gets it. On the deficit that is.  Thanks to Left Foot Forward and Mehdi Hasan we have all read Clinton’s  speech:

“(the) UK’s finding this out now. They adopted this big austerity budget. And there’s a good chance that economic activity will go down so much that tax revenues will be reduced even more than spending is cut and their deficit will increase.”

Daniel Knowles challenges his hero, on these grounds:

1. “The government cannot spend so much that net revenues actually increase. By Clinton’s logic we should increase spending until our deficit goes away. ”
2. “The Office of Budget Responsibility..using a Keynesian model, estimates that the fiscal multiplier is about .35”……that means that…overall the deficit is will be smaller than it would have been without cuts….. (Note: Knowles Update:  I actually made a mistake with that statistic – 0.35 is the estimate for the multiplier for VAT. Estimates of the fiscal multiplier overall, including those of the OBR, IMF and others, are closer to 0.)
3. Greece: spending cuts have reduced the deficit from 15.4% of GDP in 2009 to 9.5% now.

The first two points are rightly, morphed together in Knowles’s argument. The first is to do with the impact of government spending. In a slump – which we are living through now – it is vital for the government to spend to fill the investment vacuum created by an over-indebted and extremely nervous private sector, desperately trying to de-leverage its debt. Right now the UK private sector is busily hoarding cash, because they are – rightly – worried about their levels of debt; and because they fear – rightly – that if they do invest, customers (both private and corporate) will not walk through the door – because customers too, are heavily indebted and worried about the threat of unemployment and falling house prices.

So given these circumstances of widespread fear and paralysis in the economy – what the ONS calls ‘flat-lining’ –  say the government invests £1 billion in libraries. What would happen next?

The Office for Budget Responsibility has adopted a model of the economy with a ‘multiplier’ – which is supposed to tell us how much the government would get in return for that investment. The OBR, according to Knowles, reckons the return would be a measly 0.35 on VAT, 0.0 on government spending overall. This model implies that an investment of £1billion in an investment in e.g.  libraries, would return nil to the Treasury. In other words, the multiplier delivers a negative return: a lot less than the £1 billion invested.

The OBR model, Daniel Knowles, is most definitely not Keynesian. In fact it is an insult to the work of Keynes and Richard Kahn – who developed the multiplier - to describe it as such. It is the very reverse of what Keynes and Richard Khan argued (for more see appendix 1 of ‘The Cuts Won’t Work‘)

For Keynes, the multiplier at the very least must be 1. That is, it must return, at the very least, £1 billion to the Treasury. This will happen because, for example,  private contractors will be hired to build the library. They will buy bricks from a supplier, who will pay taxes to the Treasury on the profits he makes from selling bricks. The construction company will pay taxes on the profits they make from building the library. And their employees will pay taxes on their income – generated by working on the library build. Then the employees may e.g. walk into  a home insulation company, and buy home insulation – to ensure greater energy efficiency at a time when gas prices are rising. The home insulation company will pay taxes on that – and employ more people to insulate homes – all of whom will be on PAYE (unless evading tax). They too, will use their income to walk through the doors of heavily indebted companies….and so on.

At the same time, the Treasury will stop doling out dole money to unemployed construction and home insulation workers.

So for Keynes and Kahn the multiplier could be at 2. In other words, with public works expenditures the Treasury could expect to get £2 billion back (in tax revenues and reduced unemployment benefit payments) for their investment. This explains why government spending, unlike the spending of an individual or company, could pay down the government’s monthly ‘overdraft’, the deficit, and in time pay down the government’s ‘mortgage’ – the public debt. Our paper, cited above, provides evidence from records of the national accounts that this is precisely what has happened in the past.

Now I don’t understand why the OBR has set the multiplier at 0.0 – and indeed will write to Robert Chote, head of the OBR to seek clarification. But anyone can see how helpful such a low multiplier is to the argument about austerity. An investment of £1billion that generates a negative return – i.e. costs the Treasury without any hope whatsoever of a return – explains precisely why the government can’t be bothered to invest in  libraries, or energy efficiency or de-carbonisation of the economy.  All of these investment could revive the economy….but why should the government bother to try and revive the economy, and with it the private sector – at a negative of return for government expenditure on public works? A return which does not even pay for the investment – and indeed is modelled not to pay for a return on the investment.

That’s not to deny that there are circumstances in which the multiplier may not work. If government spending goes into tax cuts – and if consumers choose not to spend those tax cuts – then returns to government may well be negative.  And if government spending – is invested in say, Siemens, Germany – it will leak out of the country, and returns on British public investment will go to the German government, not the UK government. That is a risk, and may explain why the OBR’s multiplier is negative. They don’t expect government to invest in Britain.

But if the investment goes into public works here in the UK – productive expenditure that improves our quality of life, employs people, generates income both for the private sector, the employed, but also for government – AND reduces the deficit – why on earth should it not do that?

Finally the unlikely point made by Knowles that thanks to cuts in government spending,  the deficit is falling in Greece.

Frankly, I can’t get my head around Greece’s numbers for its deficit – which are continuing to be revised up by actors such as the EU.. First of all, as is well-documented, with the help of Goldman Sachs and with officials at the EU and the ECB turning a blind eye, the previous Greek government ‘cooked the books’. They lied about their deficit – and hid parts of it in complex products invented for them by the bankers at Goldman Sachs. So before 2009 they claimed that the deficit was 5% of GDP. When finally EUROSTAT/ the EU/IMF got their act together and looked at the books, they estimated the deficit at 15%. Since then it has apparently come down to 10%. I find this all very dodgy.

Second: remember the government deficit can be compared to an overdraft. The public debt can be compared to a mortgage. (Although please: there is no way that government spending can be compared to individual or even corporate spending; that we can draw macroeconomic conclusions from microeconomic reasoning!)

But just for illumination: Greece’s ‘overdraft’ or deficit will, of course, be volatile. Large sums of money are being transferred by the ECB and other institutions into the government’s bank account to help with the crisis. At that point in time the ‘overdraft’ will look good. But it’s the ‘mortgage’ that we should worry about, and whether or not the ‘mortgage’ is being paid down or rising.

It’s the economy stupid.  The deficit will only recover, when the Greek economy recovers. And not before. If the ‘overdraft’ or deficit gets a boost from a one-off deposit – is that helping the Greek economy recover, so that government can collect tax revenues from an active private sector and pay down both the deficit and the debt?

Right now, I am not in a position to tell why the Greek deficit has apparently fallen. But to be honest, my major concern is whether the economic recovery in Greece is in place, and is sustainable over the long term.

And I suspect that even Daniel Knowles can see what I can see: Greece is going downhill….Is that really the model Britain should follow?

This article was simultaneously posted on LeftFootForward and PRIME >

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.

(Photo: REUTERS / Yiorgos Karahalis )
A Greek riot policeman stands in front of graffiti written on the wall of a bank during violent demonstrations over austerity measures in Athens, May 5, 2010. Greece faced a day of violent protests and a nationwide strike by civil servants outraged by the announcement of draconian austeristy measures.

Dear readers….Recovering from ‘flu and a trip down to Hay on Wye…Thought you might be interested in this piece I have written for Prime.

“We should note recent developments in political economy, that – while understated – are, we hope, of significance. Last week, the OECD published their latest World Economic Outlook, which features chapters on each developed economy as well as an assessment of the world economy as a whole.

The report is schizophrenic. It clumsily offers an outlook of excessive optimism; makes a selective assessment of ‘risks’; but continues adherence to an economic policy doctrine that is clearly making OECD economists very uncomfortable.

While the OECD report contains the expected justifications and support for the ‘austerity’ approach, nevertheless the organisation’s ‘cold feet’ are becoming apparent, even before the full extent of austerity programmes has begun to impact. There is no better example of this unease than their approach to the UK.

The report commends UK policymakers for their “current fiscal consolidation (which) strikes the right balance and should continue.”  At the same time, OECD economists hedge their bets by urging the UK government to embark on “higher infrastructure spending (that) would lower the short-term negative growth effects of consolidation without affecting its pace.”   At a press conference last week, the OECD chief economist warned that the UK should be prepared to cool austerity in the wake of weaker growth.

In parallel, President Obama was reported as disappointing the expectations of UK policymakers by failing to endorse the Government’s approach to economic policy. While Obama has not proved the champion of the better world that we had all hoped, – he is no FDR -  his stance is important and perhaps even brave.

In the second half of 2010 the world economy began to weaken, but this is greatly underplayed by OECD economists.  Instead they point to a perceived optimistic outlook ahead. But this outlook is thinly based. We are told that financial conditions are improving: but in the UK the latest assessments of project Merlin flatly contradict such a notion.

Source: www.telegraph.co.uk. Data: BBa / BIS / Bank of England

In the real economy, world trade has retreated substantially from the relatively rapid outturns at the start of 2010. The report recognises that this is a consequence of monetary policy tightening in emerging markets and the wearing off of stimulus packages in major economies. The retraction of earlier stimulus programmes by the US and EU is rather an understatement. Stimulus has not only been withdrawn, it has been replaced by austerity.

So what are the grounds for OECD optimism?   Especially given that their economists remain obsessed by inflation as the causa causans of all possible outcomes. Their overriding fear is that inflation will cause consumers to retrench. This threat is then used to justify tighter monetary policies – which would hurt over-indebted consumers, corporates and SMEs. But unemployment is a much more important driver of consumer behaviour. Wage earners snap their purses shut in the wake of what for many millions is the reality of, and for others the threat of, unemployment. Inflation is no doubt painful to the less well-off, but from a macroeconomic perspective ‘core inflation’ today is at low levels, no matter how much the OECD tries to play it up. Watch out as inflation falls rapidly over the next few months, in line with weakening economies.

The austerity and fierce monetary strategies embarked on by governments – already burdened by losses transmitted by the private banking crisis – have been directed by the civil servants of supra-national organisations: such as the OECD and IMF as well as the global central banking fraternity. These public employees enjoy immense influence, and as the the president of the European Central Bank, Jean-Claude Trichet indicated in a speech on 2 June, 2011 they wish to capture:

“a much deeper and authoritative say in the formation of the country’s economic policies….. A direct influence, well over and above the reinforced surveillance that is presently envisaged”

Given the ECB’s role in exacerbating the crisis in Greece (described by Nouriel Roubini as ‘throwing good money after bad – to bail out, rather than bailing in, reckless creditors….a giant Ponzi scheme”)  such “authoritative” advice  by supra-national organisations has crucified economies “in a struggle which is certain to prove futile” –  to quote Keynes.

But the OECD’s latest report hints that minds might be changing. It contains the beginnings of the admission that the world is being forced down a desperate path that has no justification in economic reason and the evidence of history. The experience of the great depression stands before us. It was only enlightened monetary policies and expansionary fiscal policy that restored the US and UK not only to health but to a position to resist reactionary forces and fascism.  The current strategy is likely to make us more vulnerable to reactionary political forces – in the EU and the US.

Some might like to celebrate the previous timid stimulus for e.g. car scrappage schemes etc, under both Alastair Darling and the Larry Summers White House.  But in the light of present events, it is clear that their approach was designed not to save society but to preserve a financial system that has palpably failed the vast majority of the citizens of the world.

We at PRIME economics have repeatedly called for something greater and more just. Perhaps the foot-shuffling of the OECD indicates recognition that imposing austerity policies at a time of global economic weakness is indeed a futile struggle – soon to be abandoned?”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Its the thing by which we exchange goods and services.

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

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

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

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

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

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

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

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

Watch CBS News Videos Online

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

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

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

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

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

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

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

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

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

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

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

This is so if they are businesswomen, or consumers.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ELENA: Women still face discrimination in the financial sector?

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

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

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

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

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

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

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

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

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

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

That love and companionship and altruism matter more than money.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I wrote a piece on Keynes and monetary policy for the Standard, which appeared on Thursday, 23rd October, 2008. You can read it below. Today a group of monetarist economists , supported by a range of bankers, have written to the Telegraph objecting to a public works programme to help economic recovery. They are right that excessive liabilities on the government’s balance sheet could cause interest rates to rise, but government spending has a multiplier effect, and very quickly pays for itself. They seem unaware of this economic fact. There is some overlap between our views on monetary policy as an effective tool, but I disagree with their view that UK government spending has been excessive.

Nor do I share their complacent view that: “Occasional slowdowns are natural and necessary features of a market economy”. First, this is not a slowdown. This is a hugely destructive and likely to be prolonged global economic failure, unprecedented in history. Second, there is nothing at all “natural” or God-given about this failure. It is man-made and these letter-writers are largely to blame for the economic policies of financial de-regulation that have led to the biggest financial meltdown “since the First World War” to quote Mervyn King of the Bank of England.

From the Evening Standard, by Ann Pettifor

“JohnMaynard Keynes suddenly finds himself in favour with all those enamoured of fiscal policy. These range from governments and central banks trapped in economic orthodoxy to free marketeers in the private banking sector benefiting from taxpayers’ largesse. However, bail-outs will not prevent individuals, households, small and big businesses going bust because of onerous borrowing costs.Keynes’ advice would first and foremost be to cut interest rates to the bone; that is all rates, short and long, real, safe and risky.

Keynes laid far greater store by monetary policy than fiscal policy.He believed it is both sustainable and cost-effective to manage financial crises by sharply lowering borrowing costs.This remedy involves neither tax payers’ funds nor burdening the balance sheets of central banks or governments.Today the governors of the Bank of England and the European Central Bank stand firmly in defiance of this key pillar of Keynesianism. Contrary to his advice they prefer to keep interest rates high and periodically lose control over the Libor rate set by the private banking sector.

Keynes did not believe that the burden of economic renewal should be carried overwhelmingly by the public sector.Indeed he was against excessive public spending primarily because it caused long-term interest rates to rise.Instead he wanted to diversify the process of economic renewal by ensuring the private sector played a full part.For the private sector to be able to do that, requires extremely low rates of interest.Only by easing monetary policies will Alistair Darling and Mervyn King be said to be reflecting Keynes’ true priorities.”

24th October, 2008

The NS has published a short piece this week: “Economists simply would not accept that their model could fail“.  An introductory sentence is not mine: “Who would have predicted..that prudent Gordon Brown (would)  breach the EU cap on government spending?” Am writing to the NS to ask for a correction to be published.