Photo by Maz Kessler

Joan Walsh of www.salon.com asked me some questions on Occupy Wall Street and wrote this article:

As the Occupy Wall Street movement spreads to dozens more cities and towns, it’s waking many Americans to the unrivaled control Wall Street exerts over American politics and the economy. It’s also shining a spotlight on the crushing amount of debt carried by Americans today – debt that’s at the core of our lingering economic troubles, which many experts believe can never realistically be repaid.

In 2007, American debt was 100 percent of GDP; today, after an austerity binge, it’s down to 90 percent, which is still a stunning imbalance. Almost a quarter of all home mortgages today are currently underwater, 2 million homes are in the foreclosure process – and at least 5 million homes have already lost to foreclosure since 2007. American student loan debt is over $1 trillion right now, higher than American credit card debt, with the average student leaving school with about $24,000 in loans.

The debt crisis that’s at the heart of the global economic crisis has sparked some fascinating debate about whether and how American banks should restructure and even write off some of that debt. Our own Alex Pareene proposed that writing off all consumer debt should be a demand of the so far demand-free Occupy Wall Street movement. In fact, even some mainstream economists back some form of debt write-off. Last week a Reuters special report found surprising  establishment support for some modern version of the biblical concept of “Jubilee,” a recurring period, every 50 years or so, during which debts were forgiven.

Reuters gets one thing wrong: It claims the notion of “Jubilee,” hilariously, came to public consciousness thanks to a 2009 “South Park” episode about it (in which Kyle used a credit card to pay off everyone’s debts, in order to stimulate the local economy). In fact, more than 15 years ago, an inspiring global movement coalesced around a demand for “Jubilee 2000,” to free developing nations from their crushing debt burdens to public and private lenders and the austerity imposed by the International Monetary Fund.

I turned to political economist Ann Pettifor, the director of Jubilee 2000 from 1994 to 2001, to get her thoughts about OWS. She is the director of Advocacy International as well as the macroeconomic think tank PRIME.  Pettifor is also the author of the prescient 2006 book “The Coming First World Debt Crisis” and, more recently, with Maz Kessler, of “Cutting the Diamond: How to Shape a Movement to Make Transformational Change Happen.”

Are you encouraged by the OWS movement in the U.S.?

I am cautiously trying to understand the OWS movement from a distance, but from the news and intelligence that I have gathered, I am hugely encouraged and inspired. It is a movement that has already, in just a few weeks, given voice to many thousands of impoverished and indebted Americans, and that alone is a significant achievement. Once people are given voice, and once they understand that they can act collectively, there is no knowing what transformative power they find within themselves.  So I watch with some anticipation as this movement changes the dynamic between people, the White House and Congress, and between people and Wall Street.

It strikes me that this American movement stands on the shoulders of the very first, the American Revolution. As Benjamin Franklin argued, the colonists were provoked into revolt by the greed of British bankers, who bribed Parliament to introduce a Currency Act, which made it illegal for the colonies to print their own money. This meant that all taxes to Britain had to be paid in silver or gold. Those without silver and gold had to borrow them at interest from the banks – causing debt, unemployment and poverty to escalate in the colonies.

Then there are the broad shoulders of the “Greenbackers,” who just over a hundred years ago invented the idea of the March on Washington, and argued for detaching the dollar from gold to allow government to spend freely on job-creation programs.

Yes, and all Americans learn about that, if they learn anything, is the out-of-context William Jennings Bryan quote about the “cross of gold” – and then that Bryan opposed Darwinism during the Scopes trial. He’s remembered as an eccentric, if he’s remembered at all.

Bryan was wrestling with a really difficult issue: the nature of credit and the power of the producers of credit vs. the power of the producers of food, goods and services.  And he and his followers didn’t get it right, and yes, he was wrong on some other big issues. But he and the Greenbackers resisted Organized Money, and so we should not be surprised that their resistance is deliberately forgotten. “The Wizard of Oz” is all that remains of their story, and the true meaning of that story is lost to today’s generations.

Then there are the shoulders of 1930s Americans, including American Democrats, who four years after the 1929 Crash resisted the predations of Wall Street, and elected a government that tamed the finance sector. So to watch a people’s movement rise up against finance again — on the shoulders of these great Americans — is indeed a privilege.

How important is the symbolic power of targeting Wall Street?

Targeting Wall Street is not symbolic. And Wall Street’s power is not symbolic either.  The 99 percent are right. Wall Street is where U.S. financial and political power lies. The United States is a bank-owned state that enslaves its people in debt; and Wall Street is home to the banks.  Congress is in debt to Wall Street. In other words, like many Americans, Congress is enslaved.

Although the movement has yet to coalesce around a set of demands (to the chagrin of more pragmatic, action-oriented activists) it’s clear that the issue of bank power and consumer debt is practically and symbolically resonating. Are there any parallels with the early development of the Jubilee 2000 movement? And will you briefly describe the movement.

Jubilee 2000 was a campaign that mobilized many millions of people in more than 60 countries behind an effort to “break the chains of debt” that effectively enslaved poor debtor countries to rich creditor countries.  Like the British 19th century anti-slavery campaign, Jubilee 2000 arose as a response to a movement – people in poor debtor countries demonstrating against and resisting decades of foreign debt repayments, and the associated International Monetary Fund “structural adjustment” programs.

The IMF was, and is, the agent of the finance sector, all global creditors, official and private. Riots and resistance in debtor nations were triggered by policies imposed by the IMF on behalf of bankers, and included hikes in food and gasoline prices, increases in unemployment, cuts in government programs – all designed to generate resources for the repayment of foreign debts.  Jubilee 2000 set out to place pressure on creditors, one of which was our own government, to cancel these debts, and thereby render the IMF and its policies redundant.

But let me make clear: Jubilee 2000 was not the anti-debt, anti-IMF, anti-globalization movement. It was a campaign that for a few years harnessed a part of the global anti-debt, anti-IMF movement behind a specific, achievable goal: to drop the debt [of the poorest countries] by the year 2000, under a fair and transparent process.

Movements are broad, collective mobilizations, often arising spontaneously in response to injustice.  They are vital in giving voice to the voiceless. Campaigns are organized, have institutional capacity and adopt specific goals and targets. If well-designed and thought through, campaigns can harness the energy and power of a movement to achieve specific goals. Examples of great campaigns that harnessed movements against injustice, and achieved transformative change, include the movements to abolish slavery, to win the vote for women, to expand civil and political rights to African-Americans, and in this case, to “Drop the Debt.”

All of these campaigns had a specific legislative goal that altered the balance of power: between slaves and their owners; between women and men; and between black people and white people.  Jubilee 2000 succeeded in one of its goals: getting about $100 billion of debt written off for 35 poor countries — a huge achievement.  But we failed to achieve structural legislative change.  We failed to alter the balance of power between international creditors and sovereign debtors.

Instead, under pressure from millions of campaigners, creditors caved in. They, not an independent tribunal, decided which debtor country would get relief, how much relief would be given, and the terms of the relief. If we had achieved structural change, the debt write-offs would have been much bigger, Greece would not be in turmoil, and the eurozone would not be in crisis.

I feel a little strange linking the American consumer debt crisis to the global crisis addressed by Jubilee 2000, which was an effort to help desperate impoverished nations get out from under their crushing debt to powerful nations, including the U.S. And yet, it seems as though we can link the forces pushing debt, with harsh conditions, on struggling countries, with the forces pushing debt on American workers, students and families. Can you help me tease that out a little?

There are strong parallels between the Wall Street resistance movement that is growing in the U.S. today, and the IMF resistance movements that mobilized people in poor, debtor nations from the 1970s onward. The most important is this: both sovereign debt – the debts of whole nations – and individual, household and corporate debt in the U.S. rose dramatically after the deregulation of the private finance sector in the 1970s.  Associated with this rise in debt, were policies that impoverished those without financial assets, and wildly enriched those who had gained financial assets – by fair means or foul.

These levels of debt did not exist in the immediate postwar period. There was not a single international financial crisis between 1945 and 1971 according to the great historian of the financial system, Barry Eichengreen. And similarly, Americans were not burdened by rising debts and falling incomes during that period. The unregulated, liberalized expansion of credit and debt began quietly after President Nixon unilaterally dismantled the Bretton Woods system in 1971. Liberalization was given further impetus by President Reagan and later President Clinton, and as a result the rise of ultimately unpayable debts accelerated in the ’80s, ’90s and ’00s.

Millions of Americans are today enslaved by what in biblical times was called “usury,” the exploitation of those without money by those with money.  Bankers and financiers whose place it is to act as “servant” to the real economy in which Americans work and live, have instead become “stupid masters” of a world crafted, designed, worked and built, not by financiers, but by ordinary hardworking Americans.

As Ramsay MacDonald, Britain’s first Labour prime minister, once argued, “No community can be free until it controls its financial organization….”

The Occupy Wall Street movement seems to understand this.

Not that you or I are in charge of crafting either demands or proposals for OWS, but what might be some ways to approach a call for debt forgiveness? Can you start with student loans? Mortgages?

I would not use the language of “debt forgiveness.” This phrase was strictly prohibited in Jubilee 2000, because it implied that the debtor was the “sinner” and needed “forgiveness.” Instead we argued that there is co-responsibility for the debt, and within that frame the more powerful creditor must take a greater share of responsibility for the losses associated with the debt. As things stand in the U.S., as far as I can see, Wall Street takes no responsibility for the vast debts it heaped on the shoulders of working Americans – debts vast as space.

Second, I would absolutely demand a “Debt Jubilee” – especially for students –  based on the biblical principle outlined in Leviticus 25. A very large proportion of the debts owed by the American people cannot and will not ever be repaid. And if this debt is to be deleveraged in a disorderly, unmanaged way, then America will have decades of economic failure and social unrest ahead. Unfortunately, Wall Street bribed and lobbied the second Bush administration to implement a much tighter bankruptcy law, which favors lenders and penalizes debtors.  This law will have to be modified, and a “debt Jubilee” introduced.

We must remember that Jubilee principle is not just a tradition of the Torah or Old Testament; it was fundamental to the American Revolution and subsequently to the fight against slavery. It is a powerful symbol of American independence, which is why the text from Leviticus 25 is engraved on the Liberty Bell in Philadelphia: “Sound the trumpet of Jubilee, and declare Liberty throughout the land.”

Are there lessons from other crises in other countries?

I think the lessons to be learned are American. There are the lessons from the Revolution; the failed “Greenbackers” movement, and their populist leader, William Jennings Bryan. Above all, there are the lessons taught by President Franklin D. Roosevelt. In the 1930s, under Roosevelt’s leadership, Wall Street was once again made servant to the people of the United States. The Pecora Hearings dragged bankers into Congress to explain their misdeeds.   Structural legislative change, in the form of the Glass-Steagall Act and the setting up of the FDIC, subordinated bankers to the interests of the economy as a whole.  In his famous Oct. 31, 1936, speech, Roosevelt describes the

… struggle with the old enemies of peace — business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me — and I welcome their hatred.

I’d rather look forward than backward, but did the Obama administration miss any key solutions as it dealt with the banking crisis and TARP in 2009?

Unlike President Roosevelt, President Obama and his advisors did not seem to welcome Wall Street’s hatred. Instead, in a fatal miscalculation, they bowed to “organized money.” Wall Street bankers were bailed out – unconditionally. Unlike the contracts that enslave millions of Americans, there were few “terms and conditions” for the bailout, and by the time the administration finally got around to discussing these in Dodd-Frank, Wall Street bankers had succeeded in turning Congress into a “mere appendage to their own affairs,” in Roosevelt’s words.

Occupy Wall Street is mobilizing a movement. We now need a second American revolution – a campaign that will structurally alter the balance of power between ordinary Americans and Wall Street.

Are there practical sorts of proposals, or next steps, you’d like to see this movement begin to coalesce around?

This one is tricky. I hear from friends that there is determined opposition to leadership, and therefore to organization. And I respect that approach by the movement, as well as their processes for communicating and mobilizing. There is profound disillusionment with both President Obama and political organizations, in particular the Democratic Party.

So it is not for me to suggest any practical steps. However, I do believe, as I am sure many of the 99 percent do, that just demonstrating is not enough. Specific campaigns and organization to achieve structural legislative change will be necessary.

But for now, let’s wait and see how this new movement spreads and grows. For the first time since the crash of 2007-09, I am optimistic!

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”

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 >

Bernard Madoff’s 90ft yacht ‘Bull’ is offered for sale in Monaco for €3m this week. Image source: associated press.

I learnt to my cost that the role of Cassandra is no fun.  Why “Apollo’s cursed gift is a source of endless pain and frustration.”

While it is possible to note that the ‘tectonic plates’ of the financial system are shifting and that those shifts presage a ‘financial earthquake’…unless one can get the timing of these things right – one’s insights are, rightly, scorned and ridiculed.

But I am now more attuned to the signs.

In the run-up to the 2007-9 crisis advertisements for yachts started appearing in the FT’s ‘How to Spend It’ magazine. First, there were one or two. Then more. Then they expanded and became double-page spreads. The vast backgrounds of sea and sky, set against the shiny white of the boats were blinding to the casual, disinterested reader. But as the credit-fuelled asset bubble expanded, text on these glossy ads disappeared. There was just the sea, the sky, the vast burnished white boat and some numbers: $7 million.

And then crash! bang! wallop! For almost a year or so, very few ads for yachts appeared. Simultaneously the property section of the paper was wiped out. We were back to fancy watches, gadgets and clothes.

Last weekend the FT devoted the WHOLE of the magazine to – you guessed it -yachts! And today the paper reports, hedge-funders are in Monte Carlo to buy up Bernard Madoff’s old yacht….

Could this be the sign? Or just BULL?

It really is very good.

“The official narrative today is that the plan of recovery is working. The narrative focuses on the rise of the stock markets to almost pre-crash heights. The failure of housing or commercial property markets to recover and the fact that unemployment is hideously high is simply no longer part of the recovery narrative. These things have been dropped. What has been added has been the ‘shocking’ level of public, national debt. In the new narrative the cause of the ballooning of public debt has been steered away from facts about the cost of the bail outs or how the disintegration of the speculative bubble caused a subsequent collapse of real economic activity. The new story is that the debts we have now are nothing to do with the banks and their temporary difficulties. They are due to a deeper incontinence in public spending.

“The narrative is being re-written so that the ‘debt crisis’ is seen as something that is under control and being solved, whereas the present and pressing problem in need of controlling is the cost of public services and the unreasonable expectations that underlie them. Public expectation of a free lunch for their children at school or a pension for their life’s work or a health service paid for through taxes – these socialist weapons of fiscal destruction are to blame for the vast public debt. That is the narrative we are being fed. The bankers are being air brushed out of the story and certainly any mention of blame being attached to them is being described as backward looking if not downright suspect and dangerous. Not far, I suspect, from being vaguely alluded to as financial terrorism or a ‘financial hate crime’.

“What we are left with in the official narrative is that our betters have one crisis under control – the cash flow/liquidity crisis and are now taking equally heroic steps to deal with the recently uncovered, deeper, systemic crisis – the ‘true’ crisis – of out-of-control public spending which is responsible for sovereign debt levels that are injurious to the efficient workings of the markets. Markets whose fearless leaders are trying, despite pubic profligacy and obstinate stupidity, to help us out of debt and back on to the true path of prosperity via necessary austerity and more ‘realisitic’ expectations of what we are worth and what we deserve.

“ The question for me is if the dissident narrative can hold its ground and find something more say. Or have we been been swept aside?

“Certainly we are outgunned and alone. The press are supine collaborators, the rule of law has been bought and whored, and academia is either captured by the dominant ideology and too dimwitted to escape or just too concerned with grovelling for tenure and a city sinecure.

“The dissident narrative I advance says that what we are told are temporary and extraordinary measures are nothing of the sort. The measures taken to ‘deal’ with the ‘crisis’ have in fact created, whether by accident design, a new and very much more reliable, system for ensuring that the super rich stay that way. The new system horrifies me because it has put finance above democracy, markets over governments, and it appals free-marketeers because it sets up an untouchable aristocracy within the markets who are not allowed to lose and who can therefore take what they want, when they want, from whomever they want and the law will not touch them. Neither the law of the land nor the law of the markets. Free marketeers and those on the left like me find ourselves in the unlikely position of sharing an abhorrence for what the super elite are doing.

“What we have in place now is a system of permanent and institutionalized acceptance that the largest accumulations of wealth and those who own, manage and serve them can never be imperilled or threatened either by democratic rule of law nor even the workings of the markets themselves. Both perils have been removed for the super rich and their banks because it is now established that the purpose of government is to make sure the system and the hierarchy of wealth and power at its peak, remains untouchable and unchangeable.

“With this accepted, the rules of sovereign democratic government and global finance have mutated beyond recognition. Today when banks need more of their assets purchased by the public purse in order to relieve them of possible losses, the public purse is opened without discussion. What this means is that you and I are NO LONGER simply buying up, as a temporary, emergency measure, mistakes made in the bubble of three years ago. We are there to buy up the results of any greedy speculations made in the last two years. Government purchases and the QE which fund them are no longer part of dealing with any ‘crisis’ at all. They are now part of how the banks do business. They are the new normal.

“This isn’t a crisis. This is the new business of profit without risk. It isn’t even really a ‘bail out’. The new normal is a no risk machine for expropriating public wealth. The banks can now buy what ever they want, the higher the risk the better, because the new system guarantees that there is no risk for them. The banks can speculate on sovereign debt, currencies and commodities knowing that if they are in the elite, they will be bailed out. Not in the spectacularly embarrassing fashion of 07-08 but in the low key ways dreamt up in the last two years. A plethora of ‘exceptional’ funding measures, bond purchases and abrogations of the rule of law in favour of bank profit, which are all, in fact, bank bail outs at public expense.

“Crisis? What crisis?

“The only crisis for the elite and their banks will be if the next round of QE in America and of ECB bail outs for German and French Banks via Greece, Portugal and Ireland somehow do not happen. If there is a minor miracle and our leaders remember we exist – THEN there will be a crisis for the banks and the financial elite and some small hope for us.”

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).

There’s a lot of rigging of jobs data, so it’s easy for any new announcement to get my adrenalin pumping. Add to that the way journalists and economists talk about these numbers – and it’s enough to get a girl blogging.

The particular article raising my ire today is James Politi’s in the FT: “US data send out mixed message as 1m more jobs lost”.

In it Politi writes: “Yesterday’s data included revisions to figures from a year ago showing 8.4m jobs were lost since the crisis started, nearly 1m more than earlier estimates, offering a stark (a touch of empathy inserted here) reminder” “of the trouble the labour market finds itself in.”

The labour market?  In trouble? Come off it James, the labour market is not in trouble. At least, but likely many more than 8.4 million people and their families have felt the trouble, the pain, humiliation and loss of unemployment, but the market I fear, feels nothing. It doesn’t get that feeling we get when the employer’s email goes around: “Oh, my gawd, I have lost my job. I am in trouble. The credit card. Bills to pay. Healthcare. The children. My elderly mother. Mortgage. I did not see this coming, now I am really in trouble.”

No the market does not feel a thing. It carries on working  as markets do.  Destroying people’s life opportunities, their incomes, and with that their personal lives, their marriages, their healthcare – and perhaps threatening their present homes as a future abode.  Does the market care? Does it hell.  Because ‘the market’ is also lowering costs to companies, and strengthening the hand of employers in relation to workers and trades unions. Call that trouble?  Pull the other one.

So why do journalists anthropomorphise ‘the market’ – why do they care about whether it is ‘in trouble’ or not?  Well, I suppose like doctors and nurses they have to distance themselves from this tragedy, if they are to go on working, and believing in the market. Furthermore, to keep the whole shebang going, they have to distance – and numb – their readers to this immense and quite unnecessary, personal, social and economic tragedy.

Be not numbed, I say.  Remember what Roosevelt said: “lay hold of the fact that economic laws are not made by nature. They are made by human beings.”  And the law of mass unemployment is amongst the most inhuman of those economic laws.

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.

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.

“A single day, 9 August 2007, will go down in history as ‘Debtonation Day’ – the beginning of the end of the deregulation and privatisation of finance that marks the era of globalisation.”

I wrote these words on 13 August 2007, in anticipation that the great stock-market collapse of four days earlier presaged the end of the era of neo-liberal globalisation.

So it has proved.

Read Open Democracy article>