Update: there is now a proper transcript here: thanks Dan Hind
The controversial (and widely admired) Australian economist Steve Keen gave a fiery talk at the London School of Economics recently, which was broadcast by the BBC. You can listen to it here.
I wrote down some of the things he said – here are some quite shocking quotes (check against delivery, I did shave off a few superfluous words here and there, in my haste to copy them down). His most central theme was that the financial bubbles that have built up constitute nothing less than a giant Ponzi scheme, and that the citizens of the UK in particular will cry buckets of tears before this mess is over. We are only about 30 percent of the way through the crisis, he reckons, and forecasts another UK-based Lehman-style event before too long. Here are some direct quotes:
I would say we are about 30 percent through the crisis, because levels of debt are only slowly being reduced: US private debt from 300 percent of GDP.
“The level of debt the UK has taken on is breathtaking. I thought the USA was bad when it had a total private debt ratio of 300% of GDP. Even the treasury has your debt at 450 percent of GDP. Whereas the US financial sector debt peaked at 120 percent of GDP, yours is 250 percent. And at various times in the last 3-4 years, something like 60 percent of (inaudible) demand in the economy has come from rising debt.
Turning that around is going to be painful. I can’t see you avoiding a credit crunch at some stage, that probably will be of the scale of Lehman brothers. The only reason you have avoided going down as fast as the Americans is that you have bounced up and down in debt levels . . . . but it is one and half times as high, and twice or three times as volatile. When it starts to go negative, all the hot money that gave you what looked like prosperity for the last 20 or 30 years will be out the exits to Kuwait or wherever else the Mafia lives.”
As I said, fiery stuff. He was then asked whether stagnation, 0.1 percent Japan-like growth, would really be so bad. His response:
Japan continued developing industry till the 1990s, and it still has it. There has been far more industrial development in Japan than in britain. You guys in Britain are specialised in the biggest Ponzi scheme on the planet. You have a much more difficult transition till you get to the productive malaise that Japan is still in. It won’t be as bad as the Great Depression, but it will be a continuous state of depression, where you fall into it and out of it and back into it, but without the social cohesion of Japan, and without the industrial base, and I think by the looks of it, a far higher level of private debt and financial speculation. So it’s a difficult road for britain to get to be Japan.
And another nice quote from him:
Capitalism was far more dynamic when engineers dominated in the 1950s. we need to get back to the time when the financiers were the servants of the engineers, not the other way around.
Steve Keen clearly loves bankers. He has a recipe for the sector, which sounds outlandish to those who haven’t come across it before, but is in fact being quite widely discussed here.
“We need a modern debt jubilee. You have to reduce the level of debt and the wealth of the financial sector without penalising people who purchased the goods that the financial sector spun off to them, that they call assets, or the loans they securitised. I would argue for “quantitative easing for the public.”
Instead of Bernanke giving money to the banks and saying ‘please lend’, you give the money to the public, saying to those who are in debt that they must pay the debt down; and if you are not in debt, here is cash. The banks would then find a lot of their loans paid off. Their cash reserves would rise, their income earning components would fall, so they might be illiquid rather than insolvent; so there would be challenges there.
People would have less debt, people with no debt would have a stack of cash to spend. The income earning capacity of the bonds would fall drastically, they would have less income to spend, but much more cash, and that would reduce the damage of the transition, and it would minimise the power of the finance sector overnight.
That would cause a lot of financial people to be unemployed. Tough.
“These Babylonian kings occasionally issued decrees for the cancellation of debts and/or the return of the people to the lands they had sold. Such “clean slate” decrees were intended to redress the tendency of debtors, in ancient societies, to become hopelessly in debt to their creditors, thus accumulating most of the arable land into the control of a wealthy few.
. . .
So something of a biblical measure to ensure that all debts in the context of land ownership are served within a 50-year cycle so as to prevent generational indebtedness and the concentration of wealth in a few privileged hands. From an anthropological point of view it’s even more fascinating because the move effectively ensured that the sovereign’s power was routinely bolstered every 50 years by undermining the wealth and privilege of the noble classes. Very Game of Thrones.”
I propose a combination of mandatory recapitalisation of the banks and a debt Jubilee for the household sector to remove the two key obstacles to an economic revival.
. . .
In preparation for the Jubilee, I am going long in ram’s horns. In good Torah/Biblical tradition, we should have one of these every 49 or 50 years. We skipped a few. Let’s have a big one now.
Oh, and did I mention? Britain has just been celebrating the Royal Jubilee, in typically British style.