if you believe republican politicians like paul ryan and john boehner the united states has a crushing sovereign debt problem but is private debt the mortgage and credit card debt held by every bit every day americans are a real drag on the economy for tonight's conversations the great minds i'm joined by steve keen steve is a professor of economics and finance at the university of western city us in sydney australia and a world renowned authority on a wide range of macro economic issues debt financial instability in monetary theory a frequent critic of mainstream economists who predicted the financial collapse of two thousand and eight received the revere award from the real world economics reviews for his cutting analysis of contemporary economic trends present keen's book economics now revise an expanded edition of the naked emperor dethroned is a must read for anyone interested in learning about how we got into our current

financial mess steve welcome a lot of the vehicle and thanks for joining us you could associated your name has been associated with modern monetary or modern money theory tell me about that in your association ok to see you nodding thing about my approach and modern monetary theory which we both believe that macroeconomics should be monetary and as opposed to the near classical view which paul krugman example follows on the on the left of the new. emphasis on the right wing of neo classical is that you can figure banks did in money one model in capitalism and i think that's a bit like saying you couldn't ignore wings when modeling it's essential part of the system. where we differ but we're going to converge over chaum is the focus on all laws being a private credit system a pool banking system with no government and that monetary dynamics their focus and then a loss in the monetary dynamics where the government injects money into the economy through different. it's untaxed out through surplices but some studies will

converge we're still working our way there and do really well that's so let's let's let's boil this down to make it pretty straightforward stuff. the united states do we have a debt crisis you have a private process and a public debt reaction to that private process but by private you're talking about . hell no should help but households credit credit cards and of course student loans. and then corporate. financial corporations and finally did taken out by the shadow banking system when they borrowed money from the banking sector creating money in the process and then lend it to finance fundamentally ponzi schemes the combination of those three large groups of dead is pigs at forty two trillion dollars right now that was about three years ago it's now thirty trillion sudden draws one small that gigantic level of dead rising through the two thousand period of the shadow banking system lent to finance the whole flick that one guy

knew applying here as well as the dot com bubble beforehand that gigantic bubble of debt is what gave you apparent prosperity during what neo classical economists called the great moderation and then when the debt stopped growing that's when this process began. is there a parallel between between this era of this last thirty years or so and the calvin coolidge era. new bit of you go to day one thousand i'm sorry nine hundred twenty four to twenty eight that was that was the we call that the roaring twenty's right now if you look at the roaring twenty's and they were just how much of that period was financed by borrowing money and spending it back into the economy again the peak level of spending during that whole period was about i don't know one percent a year to. help pick the level of debt finance spending private finance spending into the economy in the period from two thousand to two thousand and eight was twenty percent of today so we're far we're in a far off situations. now did that but that were you're defining both as

a bubble yes and the bubble that burst in the twenty five to twenty nine period sickly minute started as a housing bubble that burst in two thousand and nine hundred twenty seven in florida very badly and then it traveled up the east coast and across the west coast but. that was followed a year and a half later by the stock market crash we saw pretty much the same thing here i remember in two thousand and. six i think it was the summer of two thousand and six the kansas city fed came out and said housing starts to decline more than thirty percent and i went on the air saying i think it's time to get out of the market people call me crazy while the market went up another fifteen hundred points you know and still could. and i did and other people i know did but it was it seemed to me like we were in the twenty's i mean i. read that period the twenty's what drives those bubbles fundamentally the banking sector because the

banking sector. spike creating debt and if they simply finance productive investment by corporations and necessary consumption by households which you caught was it by house for cash they just limit themselves to that they'll make about a profit equivalent of between five and ten percent of the annual jay-jay pay with the rest of the microphone five and ten percent of profit with the rest going to industrial corporations the way they make large amounts of money by his watching us take on more debt than is necessary for that consumption and necessary and genuine investment and that's. borrow this money buy a house. so it was somebody else for a lot of amount of money do if the shares from montreux lending and so on and that gives you a positive feedback between the growth of date and the level of processes which give you a spike and we end up taking up so much debt as we did during the two thousand to two thousand and nine period that ultimately financial sector profits became fifty percent of total profit. that's not the sort of i thought you clung to me that's

a sick economy right and i'm positive feedback would be like if you wired your thermostat backwards so whenever the room got warmer the he got turned on exactly so it's going to make it hotter and hotter and hotter yeah. we. know i was going to say we know i'm my belief was that what enabled that in large part was phil gramm is to his efforts the commodity futures modernization act that allowed the banks to turn into a commodity that they can then trade on and on commodity exchanges that were unregulated and graham leach while that did away with steel that regulated the banks and divided commercial banks checkbook banking from gambling banking is that a correct analysis you see those like the aussie on the very rotten kike because you already had an enormous level of debt before that and this was just basically removing barriers to accumulation of yet mode it so if you go back to i think about . launching ninety two ninety three you had

a debt bubble and small collapse back then and by ninety four and already five i think it reached about one hundred seventy five percent of g.d.p. your private debt level that's the same with so that it could at the start of the great depression so you'd already reached that level and then it when you hit about two hundred percent of g.d.p. that's when you stop to see the financial sector pulling some losers during the dot com bubble you know the whole thing i'm going to give you a look at the daughter and see when to the bubble really begin then you're talking what forward not in a teacher goes right back to them before you start saying the american economy is now so dominated by the financial sectors lending to finance that speculation that it's fundamentally a ponzi scheme now you know i look back at eighty two and i remember i remember quite well in as much as that was the year if my recollection is correct that reagan basically said we're not going to the justice department prosecutor trust any longer we're going to allow mergers and acquisitions leveraged by debt in ways that haven't been allowed be. for and we're going to allow executives to be paid

stock in ways that didn't work before and that might come a little bit later but we had these m. and a artists and mergers and. buyouts and all you know this and this is going to school with the whole you know this whole when you history was there a specific point to a specific deregulation i mean i guess the reason i'm asking if you'd like to avoid this in the future what did we do that we shouldn't done well what you really did and then take a back now back to the great depression and the last eagle act you prevented banks from you separate the banks into wholesale and retail so that you know the whole cycle of a they could only they couldn't use retail funds to speak with that was the major division you did but you still banks asset prospects. and tomatoes what does that mean what that means is loading from banks and borrowing money to buy an asset with the motivation for buying the asset is the expectation it's profitable ross in other words you have people you love people borrow money in

order to speculate whether it's with stock in the stock markets or your house all commodities all in any form and all of speculation which is leveraged actually then sets up a positive feedback and then your analogy of a conditioning system gone crazy where when it gets hotter you turn the temperature up was a very good one give you a positive feedback between the level of the leverage and the asset process because the liberty actually helps you drop the process and then that's a process of one of borrowed money and off you go and this happened at the commercial level in the eighty's. and. and the personal and what was that legislation was a needs to change the structure of. the structure of finance so because when you look when you cited something like a regulation or a little you pretty much saying well if you let the system alone it would be a high semester's thing we did the chinese of that money did not with that well now this is where being a. follower of miscues. he sees inherent. instability in

a capitalist system is a wonderful frys of his word says that his instabilities in the system is spiced on aspects that a capitalist system must have in order to function now exactly it has to have a banking sector and assumes you have a banking sector and you have credit being created by the banking sector it has a inherent temptation to create as much that is a risk why the rest of us to take on so they will always want to lend more money because that's how they make their profit the few think about that go to the process of the product which is the interest right which they don't have a great deal of child control over and the volume. providers take on volume than the overall share of profits rises to the boys got that and toss them in there and they don't have this incredible you know infinitely you vision of the future that neoclassical economist alan greenspan believes that they have which stops them behaving irresponsibly they look at the short term and they will push volume as

much as they can so unless you find a way of breaking that link so how do you do that to me i think it comes down to you didn't bring in legislation it didn't bring in which would make it lending proportional to the income earning potential of the asset being purchased not of spross so you regulate lending you have to regulate lending michael devlin you have to get it you have to you have to direct lending where it's necessary you can't have a functional capital system without banks lending money to finance investment and what i call necessary consumption so that has to has to exist but you have to have the volume of the land being related to the income flaws that lending generates now my understanding is that one of the stories that i've heard is that from the founding of this republican till the thirty's we never went more than fifteen years without a major national bank feel pretty close and then from one hundred thirty five until the nineteenth until around two thousand and eight we didn't have a major banking tell you know the us i don't. but you had nothing as major so we

have just a minute before the break we can drill into this a little more after the break but what did we do during that fifty year window that prevented that we probably had such a terrifying experience off of the great depression and the second world will that you completely chime that bad behavior of the financial sector and people's willingness to take on debt and if you look at when people started to really take on debt again a particular country actually it was when the first baby boomers turned. i think we lost the memory and then that same irresponsible to have the guy puts the roaring twenty's sort of to so we're back to alford time when the last man who remembers the horrors of the last great war is dead the next great war becomes inevitable it seems to be the last man who or the person who remembers the horrors of the last big banking crash is dead the next break yet that's remarkable more of converts and it's conversations the great minds of economists steve keen let's bring.

let me let me i want to know we're going to let me ask you a question. here and this is what. we have. to do with this what's the best thing to get here in this. talk about the surveillance. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something

else and you hear or see some other part of it and realize everything you thought you knew you don't know i'm sorry welcome to the big picture. isn't talking about the same story doesn't make it news no softball interviews no puff pieces and one tough question. a little worse for those. white house superman. radio guys and for a minute they click. on what. to do because you've never seen anything like this i'm told.

and welcome back to conversations with great minds i'm speaking with steve keen on this professor and author of the book debunking economics the emperor dethrone so a lot of right wing politicians like mitt romney for example are just hysterical about depth here is mitt romney speaking last august. now the president promised that he was going to cut the deficit in half they had didn't happen did it he's more than doubled it he's added almost as much debt held by the public five trillion dollars as all the tryer presidents of the country combined. and when you look at all of the debt of the country what's about the size of our entire economy . this puts us on a path to become like europe you see we don't have to guess what the future looks like if we stay with the current president we can see what's happening over in

europe and what's happening so professor king. the sheriff laughing what there's a lot of people who are scared to death about this i mean if i said this is a really big dangerous. and it's five you know inches toll and you're scared of it and say well look there's one fifteen inches tall that's the profit it level talking about a five trillion dollar increase in public debt. that is compared to. a level of profit did when that began a forty two trillion tons of sky. and even now that there's been a increase in profit in public debt and a decline in profit it is still talking about public debt running at about the same level of straight about fourteen fifteen trillion or private debt is thirty trillion so the private debt is a real threat the real threat debt is not well public it is a response to a problem in the in the private system it certainly wasn't runaway public debt that

cools the boom before the crossest began all the crosses themself the public that didn't stop rising until about six months to a year off to the pro at the crosses that self again so the rise in the public good as a response to the private sector slowing down and you think about what the got how the government is structured the government gets tax revenues out of our incomes and it dies out on the basis of wealth and. fundamentally well if you have a downturn in the economy incomes will and will phoneys rod so the government's books necessarily respond that it's the big like the normal basis of a new conditioning system now if the room gets called up which is what happens when the economy shrinks and saw as when the government pumps aid in it's it's a negative it's always there when capitalism fails when capitalism pick ups and there's a lot of unemployment and government fills in that i thought was in that pick up a pick up is

a better expression than than files because capitalism not anybody believes capitalism will filed but i certainly believe it can have huge crossties caused by the financial sector and when that happens when there's a downturn the government. is beyond its control to some time if you look at long it takes to change anything in in in washington it's not the government responding to it the cold that says it's the no unnatural thing back effect but the getting out all of the automatic stabilisers what we call the social safety net i see them in a cash flow sense now because. the thing about a business i agree with a lot of people are critics of government spending a lot of it's wise full bureaucracy is kind of bureaucrats in general but what they do is when they spend it in sup in a car and in the cash flow of a private corporation or as if they didn't spend it wouldn't be there on the private corporation if we weren't difficulties wouldn't be able to step in because it wouldn't have that cash flow so the government gives the cash flow businesses

wouldn't otherwise have during a downturn so it's a necessary and appropriate thing so if the real the fifty inch spider the real danger is that it's forty plus trillion dollars in the private sector debt corporate debt personal. what do you do about. that i think you have to look at how did that come about wasn't the sort of lending which you which are responsible financial sector would have created and the answer is fundamentally no problem using a straw in the bloody. that was irresponsible lending to finance asset bubbles which we know were asset bubbles in stock market first of all and then in the housing sector should never have been created to take it out of the hides of the banks we should tell you out of the hundreds of the bank the trouble is the banks then on sold out to the public again the whole securitization thing that was one of the biggest mistake america in allowing that to happen because once you securitized it you take it off your hands first of all that encouraged a huge part of the responsibility because you know it was the tiles when hit you lose the top and i secure it as what it means is you have. money as

a bank and you have all have an essay on your on your books and you've been bundled us up and sell us who are the people that accept being a mortgage backed securities all the bonds that banks sell which people then by believing the aaa righted assets remember you have online now the size is is this triple idol cannot trust. that that that gets it off the off the books of the banks like a cash in return and ends up being on by the public and then anything goes wrong the public with the cost of it so we. that means you can actually simply say that's right off the dead because if you took it out of the hands of the banks or or if you took out of the hide of the banks really what you're doing to take it out of the hide of the people who have invested in these assets that these so-called assets of the bank of sold and that is pension funds and retirements and government units of qualities and individuals as well so the damage would be incredible it was just so how do we unwind to this is this is what i want people to think about the

government not as and i know this happens in american political bite all the time you know evil government goes is good private sector etc i want to say this just imagine the government is another form of bank and you've got evil bank the private sector which is simply stuffed up and we know it and you've got another banking system called the government and kind of particularly looking at the federal reserve how in the repellers that it has say this one stuffed up we can use the other one to do something which would be wrong in normal circumstances but to try to unstuff what's been done over here to unscramble that huge mis you've created and try to get back to the size from a very very bad rotten scam scrambled eggs back to something at least resembling the aig financial system should be so i would want the federal reserve to create money which would within give directly to households and businesses but on condition that if the household of the business was in debt they have to reduce the debt no choice you've got to pay your debt down but if you don't have debt. and you

actually maybe on some of those of on sold by the banks you get a cash injection now with the why this would work through the system and i call it a modern dribbling the way it works through the system is that that would then require the banks to write down the value of the loans they've got their assets wouldn't shy because that have less income earning assets but more cash effect of even people replying they day it people in the public eye on those ones would suffer from a drop in income stream but that benefit from the getting the cash injection people who had mortgages and debts and corporate jets and so on would have less of a debt burden to reply and. and there will be more likely to spend back into the economy as well so the whole thing would be to ultimately shrink the effective income earning sause of the financial sector so you'd minimize the damage to the public sector the corporations and households reduce the size of the financial sector and reduce that did quite dramatically without without paying laws and people who was psychos and book that died off the banks in the first place how do you respond to people who say that the moral lesson was the phrase moral moral has

a moral hazard thank you where was morality in the law did not in not is in two thousand the immorality with the banking said to get away with an enormous so i'm saying. what you have to prevent is that immoral behavior by banking and fundamentally banking will always be tempted to be immoral by the fact that so you brought in the regulation you have to then prevent it by regulation so once you've done that sort of proposal about the the cash injection to fix the the damage we've done to the financial sector to begin with you have to also link up with regulation to say in future when a bank lends for a house for example it's lending has to be based upon the earning potential of the house not the process but the rental flow you can expect from that house well if it's for personal use one of thousands of these games we have a history of a series of called the imputed rental series we look out you know you can impute what a house somebody would actually and if they rented it out instead of living at all we had a variation on that you know say it's twenty thirty years ago banks used to be used to say that you should buy

a house that's equal to what you would pay your house payment should be equal to what your rent. but there are no trouble this whole ratio that's similar to the trouble about that is the bench that was thought of that number of the time they talk about being thirty percent of your income level in the site thirty percent of your income and your was that it was thirty percent of your income in the waffen the kids are then you know and out they expand their range and that was thirty percent of income and hey if you've got a bunch of money in the stock market maybe your income is infinite yeah what how do you the other thing there romney said is we're going to become like europe it seems . to me that as a sovereign nation that can issue our own currency we're not going to run out of dollars italy is stuck with the euro they can't print euro's now the rebuttal to that always is oh you're going to print dollars inflation is coming can you unwind that little series of yeah i mean for a start two minutes we have romney's comment about you know compare us to europe i mean europe is showing what austerity does that's that's the enormous problem it

also shows what happens when you don't control your own currency that's the norm it's different when the share. inflation is not caused by the by the federal printing dollars it's caused by money circulating in the economy and driving up the demand for employment for wages for employment and productivity declining because those two factors together. into productivity reduces inflationary pressure on demand which drives up by edges tends to increase in pleasure and pressure the fed reserves money printing which is going on right now only goes it goes into the assets of the banks the product banks it doesn't go into the bank accounts of individuals that money is not actually going to cause inflation it's an accounting error to think that it's actually even turning up in our own bank accounts to begin with so so so printing money doesn't cause inflation what does well what causes that is why it should man's bargaining bargaining pressures and so on which then means that what happens is the it goes from what happens in the economy back to the

banks bravado because the banks. we have we have a reverse thinking about what happens we think reserves are created the banks lend the other way around banks lend reserves are created to match them so the banks the kinds of old analogy is perfect by thinking it can cause inflation by pumping money into the reserve accounts of the banks you can you can push on a string and you come. what what do you say to those folks in the minute we have loved to say we should go back to a gold standard. gold stand. commodity and if you look back what happened in the. history of capitalism we had. we had crosses. we need more flexibility in that with the flexibility the financial sector gives is good so long as the flexibility to go up and down with the amount of money being created with the needs of the industrial sector for investments so trying to look

us to a commodity i think is misunderstanding the role of money so money is more a social contract one is. fundamentally a social contract that people behave in a social one about it. and that's what we have to control the regulate the banks the largest you can thank you so much for being with us thank you it's great talking with you through this for all to see this another conversation of the great minds go to our website conversations the great lines. and that's the way it is the night friday march fifteenth two thousand and thirteen for more information check out our website it's a free speech dot org and hulu dot com slash. democracy is not a spectator sport it requires you. to. wealthy

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