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 of the great minds i'm joined by steve keen steve is a professor of economics and finance at the university of western sydney else in sydney australia and a world renowned authority on a wide range of macro economic issues clearly 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 for us are keane's book economics now revised an expanded edition 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 be here at home thanks for joining us you could associated your name

has been associated with modern monetary or modern money theory tell me about that and your association ok to use the uniting thing about my approach and modern monetary theory is we both believe that macroeconomics should be monetary and as opposed to the new classical view which paul krugman example follows on the on the left of the new across the coals and. emphasize on the right wing of neo classical is that you can feel ignored banks didn't money when modeling capitalism and i think that's a bit like saying you can ignore the wings when modeling it's essential part of the system theory agrees with me where we differ but we're going to converge over time is the focus on all laws being a private credit system up you'll 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 deficit syntax and out through surpluses so that some studies will converge . still working out why there were 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 reaction to that private process but by private you're talking about the yes hell no should help but households create 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. one small but that gigantic level of debt 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 stop 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 got a date nineteen i'm sorry one hundred twenty four to twenty eight you know 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 fun and spending during that whole period was about i don't know one percent of g.d.p. . how pick the level of debt finance spending private debt fine and 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 as situations are going to go bubble now did that but that the. you're

defining both as a bubble and the bubble that burst in the twenty five to twenty nine period the sickly minute started as a housing bubble 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 i still could. and i did and other people i know did but it was it seemed to me like we were repeating the twenty's i mean i. read that theory of 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 up as you buy a house for cash they just limit themselves to that they'll make about a profit equivalent of a site between five and ten percent of the annual j.d. pay with the rest so sorry of the microphone five and ten percent of profit with the rest going to industrial corporations the way they make large amounts of money above his wedding us to take on more debt than is necessary for that consumption a necessary and genuine investment and that's. borrow this money buy a house. so it was somebody else for our amount of money do if the shares from montreux lending and so on and that gives you a positive feedback between the growth of did it and the level of massive 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 one period that ultimately financial sector profits became fifty percent of total profits and that's not the sort of i thought your call to me that's a secret. i mean right and positive feedback would be like if you wired your thermostat

backwards so whenever the room got warmer the he got turned exactly so it's going to make it hotter and hotter and hotter yeah. we. 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 commodity exchanges that were unregulated and graham leash while that did away with steel that regulated the banks and then divided commercial banks checkbook banking from gambling banking is that a correct analysis you see those like the aussie on a very rotten kike because you already had an enormous level of it before that and this was just basically removing barriers to accumulation of yet mode it so if you go back to i think about. non chain 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. or private debt level that's the same with all the loops that it could at the start of the great depression so you'd already reached that level and then you get when you get about two hundred percent of g.d.p. that's when you stop to see the financial sector pulling some of these disasters in during the dot com bubble you know the whole thing i mean i think if you look at the daughter and she went to the bubble really again then you're talking what four of nine hundred rows right back to the end 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 prosecute and trust any longer we're going to allow mergers and acquisitions leveraged by debt in ways that haven't been allowed before 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 n a artist's and mergers and there is 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 would like to avoid this in the future what did we do that we shouldn't done well what you really did 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 style of the. they could only they couldn't use retail funds to speak with that was the major division you did but you still have banks and asset prospects. and tomatoes what does that mean what that means is lending 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 day 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 cross and then that's a process that want to borrow 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 the city change the structure of. the structure of finance so because when you look when you cited something like a red light regulation or a lawyer pretty much saying well if you let the system alone it would be a must and we did the chinese of that money did not with that will now this is where being a. follower of the miscues as he sees inherent instability in a capitalist system is a wonderful frys of his words so. is that his instabilities in the system it's

based on aspects that a capitalist system must have in order to function now exactly it's the it has to have a banking sector and as soon as you have a banking sector and you have credit being created by the banking sector it has a inherent temptation to create as much debt as a miswired the rest of us to take on right so they will always want to lend more money because that's how they make their profit if you 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. volume than the overall share of profits rises so 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 economists or alan greenspan believe that they have which stops them behaving irresponsibly they look in 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 look regulations you didn't bring in legislation didn't bring in which would make lending proportional to the income earning potential of the asset being purchased not of spross so you regulate lending you have to regulate lending speak you have to 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 paragon of the us had only small ones but you had nothing as major so we had just a minute. the breaking we can drill into this

a little more after the break but what did we do during that fifty year window that prevented that you had such a terrifying experience off of the great depression and the second world will that you completely chime but bad for 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 boom. we lost the memory and then that same irresponsible to have the guy who was the roaring twenties sort of to so we're back to alford twenty one the last man who remembers the horrors of the last great war is dead the next great war becomes another that seems to be the last man who person who remembers the horrors of the last big banking crash is dead the next breaking yet that's remarkable more of convert to his conversations the great minds of economists steve keen as for.

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download the official. language stream quality and enjoy your favorites. if you're away from your television. now with your mobile device so you can watch on t.v. anytime anywhere. and welcome back to conversations with great minds i'm speaking with steve king khan is professor and author of the book debunking economics the emperor dethrone so a lot more right wing politicians like mitt romney for example are just hysterical about death mitt romney speaking last august. how the president promised that he

was going to cut the deficit in half. yeah didn't happen did it he's more than double that he's had almost as much debt held by the public five trillion dollars as all the trier presidents of the country give mine. 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. 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

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 times to 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 of what debt is not well public debt 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 that sell for the the public that didn't stop rising until about six months to a year after the print the cross' itself began so the rise in the public debt as a response to the up to the private sector is 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 plays out on the basis of our wealth and spit on him

fundamentally well if we have a downturn in the economy incomes fold and. so the government's books necessarily respond that it's the abuse like the normal basis of a new conditioning system now if the going gets called up which is what happens when the economy shrinks and saw as when the government pumps aid in it states it's a negative it's always like when capitalism fails when capitalism pickups and there's a lot of unemployment and government fills in that but it was in that pick up and 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 close while the financial sector when that happens when there's a downturn the government. is beyond its control to. look at on the types to change anything in in in washington the government responding to it the cold that says it's a 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 if you think about a business i agree with a lot of people are critics of government spending a lot of it's wise to pull bureaucracy is kind. of bureaucrats in general but what they do is when they spin it ends up 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 stay it because it wouldn't have that cash flow so the government gives a cash flow businesses would know the laws 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 i mean using

a stronger than. that was irresponsible lending to finance as. that 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 hands 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 i will hit you lose top and i securitized what it means is you have. money as a bank and you have all have an essay on your on your books and you then bottle that us up and sell it to other people that accept being a mortgage backed securities all the bonds that banks sell which people then by believing the aaa righted assets. you have online now these sizes is this triple idol cannot trust. that that that gets it off the off the books of the banks they

get cash in return and ends up being and by the public and anything goes wrong the public with the cost of it so we would that means you can actually simply say oh that's right off the debt 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 do is you take it out of the hide of the people who have invested in these assets that these so-called assets and the bank of sold and that is pension fund retirements and government units of qualities and individuals as well so the damage would be incredible it was so how do we unwind of this is this is what i want people to think about the government not as in i know this happens in american political about all the time you know a full government versus 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 kind of particular working the federal reserve how in the repellers that it has. 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 out of the heat on. scramble that huge miss you created and try to get back to the side 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 all the sold by the banks you get a cash injection now with the why this would work through the system and 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 that go up the assets wouldn't shy because that have less income earning us said split more cash effect of even people replying the day it's people in the public would suffer from a drop in income stream but they benefit from that 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 therefore be more likely to spend back into the economy as well so the whole thing would be to ultimately shrink the effective income earning saws 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 a lot of people who was that debt off the banks in the first place how do you respond to people who say that the moral was the phrase moral moral has a moral hazard thank you where was morality in the law did not in the eighty's in two thousand the immorality with the banking set to get away with it is 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 proposals about that the cash injection to fix the the damage was

done to the financial sector to begin with you have to also link it 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 but what if you get it we have a history of a series of called the imputed rental series we look up you know you can impute what a house somebody board would actually owned if they rented it out and stayed there rather than living at all we had a variation on that in the united states 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 here your house payment should be equal to what your rent and strongly. but the rubble is whole ratio that's similar to the trouble about that is that banks always thought that number of the time they talk about being thirty percent of your income level in the site thirty percent of your income and then it was thirty percent of your income of the waffen the kids and 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 you 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 first 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 normal difference 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 demand which drives up by ages tends to increase

employment pressure the fed reserves money printing which is going on right now only goes it goes into the. the assets of the banks that probably 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 it is why it should men's bargaining pressures and so on which then means that what happens is that 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 a create it's a match them so the banks. kind says old analogy is perfect by thinking it can cause inflation by pumping money into the reserve accounts of the banks are you thinking 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 standard phrase trading money like commodity and if you look back what happened in the in the very pretty history of capitalism in the early history we had crosses called by too much gold turning up and walked up or trickle in spine we had crosses all the various times we need more flexibility in that with the flexibility the financial sector gives is good so long as that flexibility means you go up and down with the amount of money being created with the needs of the industrial sector for investment so shoes so trying to look is to a commodity i think is misunderstanding the role of money so money is more a social contract when it's done when you use credit fundamentally a social contract to make sure that people behave in a social what about it and let the banks behave in a totally empty social life and that's what we have to control the time to regulate the banks and i just you can thank you so much for being with us thank you it's great talking with you we can do this for all to see there's another conversation of the great minds go to our website conversations the great lines dot com. and

that's the way it is the night friday march fifteenth two thousand and thirteen. for more information check out our website so tom arbonne dot com free speech dot org r t dot com and who dot com slash the big picture and don't forget democracy is not a spectator sport it requires you get out there get active take your city. technology innovation all the list of elements from around russia. the future covered.

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