20 Jun 2012

Renegade Economist with Ann Pettifor

Ann Pettifor talking about the problem of debt. My notes from the talk follow.

In 2003 AP predicted the Anglo-American debt crisis. She had been studying debt in 3rd world countries. The crisis seems to have begun in the early 1970's on the periphery in poor countries in places like Africa. She organised Jubilee 2000 which got the banks to write off $100 billion in loans that were never going to be paid anyway. [Sound familiar?] However the reaction from the mainstream was dismissal.

AP spent some time working at the New Economics Foundation studying sovereign debt. She became interested in why debt had not accumulated much in the period 1945-1971, but after 1971 began to accumulate rapidly. The popular view was to blame OPEC, but this did not ring true. She read Haliner (Sp?) and realised that the build up of debt coincided with the deregulation of credit.

In 1971 Nixon unilaterally bailed out of the Bretton Woods agreement, and the UK introduced something called Competition and Credit Control (which was all about competition with no controls). This lead to "lending without limits". And it also meant that central banks could no longer control the spread of interest rates, they could only control the base rate which is effectively irrelevant (i.e. unrelated to the interest banks charge consumers).

In 2003 it was "blindingly obvious it couldn't last" but only the New Statesmen took AP seriously. AP writes for the NS now. In 2006 worried that friends and family were borrowing unwisely she published The Coming First World Debt Crisis which warned of the collapse. The book did not sell well at the time, but does better post crash.

Neo-Classical economists have a silo mentality. Overly specialised. AP approach is more wholistic. She would "remove the financial sector claws out of the academic world". The current academic approach to economics is bizarre, but the economists are "hired guns", who mostly don't have tenure. Only a few tenured academics like Jeffrey Sachs can really say anything outside the mainstream. The finance sector is funding research and institutions.

Sidebar about INET conference and mixing with the old guard. Pluralism good even if old guard are boring.

AP reading paper ostensibly by Ben Broadbent, formerly of Goldman-Sachs, now on the board of the Bank of England (BoE). He says that the cause of the crisis is nothing to do with easy money, and all down to interest rates. [Saw this in Guardian comments recently; and c.f this from the New York Times 2008]. AP the paper showed signs of having been written in the Goldman-Sachs research dept. and delivered by Broadbent. [I think the speech in question was Deleveraging. There is another take on this speech on the FT website. JR]

He says stupid things like "for every saver there is a borrower", something apparently repeated by "dear of [Tim] Geitner". But we've had a monetary system since 1694 and money is just an entry in a ledger. Banks create money by double entry book keeping.

Neo-Classical economists are stuck in a ptolemaic [i.e. extremely anachronistic and empirically wrong] world view. We find such fundamentalism amongst religious people, but not expected on the board of the BoE. They are sincere, but frozen in time. What is amoral is that the banks finance the system, lend without regulation and at very high interest rates.

Lending interest rates is a huge issue, and underplayed by other non-orthodox economists. We need banks to lend at a low enough interest rate to allow entrepreneurs to pay back loans and still make a profit (eventually). But banks want a big return on an "effortless activity", they just make ledger entries to create money, but they charge rent on that money.

Interviewer raises the issue that "only 8% of loans went into the real economy". Response: "We have to regulate the banks." We know how to do it, because it's been done before in the 1930's when there was arguably more globalisation, more immigration for example. Keynes and Roosevelt championed regulation. We have to manage the banks, and in particular cross border credit so that we can control the money supply and the real costs of borrowing. We need to do two things.

1. We need to adopt Keynes dictum of keeping interest rates permanently low, to enable entrepreneurs to make a profit, but also to slow down resource extraction. If profits are low on mining, for example, we have to mine more to make it more profitable. But these resources are finite and the activities to get them destructive so the less the better.

2. We need to control the creation of credit.
"We need to say to banks in no uncertain terms: you may lend for productive purpose, but you may not lend for speculative purposes. You can't lend to a gambler, but you can lend to someone who's going to do something [in the real economy and create value, such as making goods & services"

There is no shortage of money is a monetary system

The Florentine banking system lead to the renaissance, while the founding of the Bank of England lead to the Industrial Revolution.

It is true that bankers have bribed and captures politicians, making them remove regulations, but it is the fault of politicians who took bribes and lacked backbone [and probably any deep understanding of economics JR]. One does have to be weak in the face of the banking lobby. Compare Roosevelt with the German politicians of the 1930s. In USA we got the new deal; in Europe we got fascism.

"We can't do much about Goldman-Sachs, or even RBS which we are supposed to own. But we can hold politicians to account. Part of the problem is that the public are ignorant, and even the economists struggle. But the Jubilee 2000 movement has shown that the public can understand things if they are explained. "People aren't stupid". And once they understand there's no stopping them.

Banks create money out of thin air by entering a number in a ledger. This is free money that the banks charge rent on, which is exorbitant and unfair.  Politicians changed the rules, they can be prevailed upon to change them back!

In presidential elections in France 1 in 5 people voted for the fascist Front National. 35% of working class people voted fascist. They're desperate and see the banker doing so very well. No on is listening to them, but Le Penn says "I am listening". In 1930's Hitler began with about 18% support, and he too told people suffering from economic hardship "I am listening". And yet the Bundesbank are saying "there is no alternative".

There is an alternative--
  1. Get a grip on the issues. Read the newspapers, especially the Financial Times and try to understand it. Use the web [interviews like this and others I link to].
  2. Go and meet your MP. Don't just write. Tell them you don't like what they're doing. Reign in the bankers. They need to change the rules. Changing the rules can only be done by politicians. "civil servants [in the IMF and World Bank] can't change the world". We need to get politically involved. Join political parties and apply pressure to policy makers to stop pandering to the bankers. Apply pressure to politicians.

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Keep is seemly & on-topic. Thanks.