I was one of the only economists who predicted the financial crash of 2008 – in 2017 we need to make urgent changes The Independent

Economics is driven by ideology – it is ideology, not science, which drives them to assert that bank bailouts are tolerable but policies that protect the poor aren’t. Unsurprisingly, these flawed theories and models are a great comfort to financial elites – which is why so many economists are hired and funded by big banks, corporations and the wealthy

As someone who correctly predicted the financial crisis (first in 2003 and later in a 2006 book) I support Andy Haldane’s assertion that the economics profession is “to some degree in crisis”.

Source: I was one of the only economists who predicted the financial crash of 2008 – in 2017 we need to make urgent changes | The Independent

Tell the IMF to count the cost of public-private partnerships – Jubilee Debt Campaign UK

The International Monetary Fund is reviewing its framework for judging whether countries have a debt crisis. But currently, the huge hidden costs of public-private partnerships are not included.

Source: Tell the IMF to count the cost of public-private partnerships – Jubilee Debt Campaign UK

Don’t mention the war

Basil Fawlty would have been proud.

A French economist (Thomas Piketty) was interviewed by a German paper (Die Zeit).  This links to an English translation.

An extract gives you a flavour of Piketty’s no-holds-barred approach

Piketty:… After the war ended in 1945, Germany’s debt amounted to over 200% of its GDP. Ten years later, little of that remained: public debt was less than 20% of GDP…. We never would have managed this unbelievably fast reduction in debt through the fiscal discipline that we today recommend to Greece. Instead … our states employed … debt relief…

ZEIT: That happened because people recognised that the high reparations demanded of Germany after World War I were one of the causes of the Second World War. People wanted to forgive Germany’s sins this time!

Piketty: Nonsense! This had nothing to do with moral clarity; it was a rational political and economic decision….

via Thomas Piketty: ‘Germany Has Never Repaid its Debts. It Has No Right to Lecture Greece’ | The Wire.

It’s all about the deficit

This was going to be a quick post after the budget except that I then spent ages trying to find some statistics and had to give up!

The big thing George Osborne had to say (apart from a few gimmicky changes to pull in the voters in a few weeks time) was that he was “reducing the deficit.”

But what does this mean?

I remember taking out a mortgage and seeing it shrink. But not because I was paying any of it back – it was an interest only mortgage so I owed as much money at the end as when I took it out. But it did not feel like I owed as much. Why? Because I had just started work and my salary was increasing each year and the value of the house was on the way up. So every way I looked at it, my mortgage was smaller – it was a smaller proportion of the value of the house than when I took it out and it was a smaller proportion of my salary.

And this is what George means when he says he has got debt falling. His statistics are

George's budget debt percent“debt as a share of GDP falls from 80.4% in 2014-15; to 80.2% in the year 2015-16. And it keeps falling to 79.8% in 2016-17; then down to 77.8% the following year, to 74.8% in 2018-19 before it reaches 71.6% in 2019-20.”

But he is actually going to borrow more money.

The forecast amounts we will BORROW over the next few years are:

George's budget real debt

(source Red Book Table 1.3 or 1.4)

But he has not actually paid off any of the debt. (Yes he did talk about paying back some old debts

“I can tell the House that we will increase the number of long-dated gilts that we sell. We’ll also redeem the last remaining undated British Government bonds in circulation. We’ll have paid off the debts incurred in the South Sea Bubble, the First World War, the debt issued by Henry Pelham, George Goschen and William Gladstone”

But he has done this by remortgaging {see Red Book Table B.1 which shows borrowing through gilt sales around twice the level of repayments through gilt redemptions}. It is like paying off Barclays by going to HSBC.)

I would like to compare the amount this government has borrowed with its predecessor, but could not access the data to show that he has borrowed as much as the previous government if one excludes banking crisis debt (which is what all the quoted government statistics appear to do).

Those rotten bankers again

They’ve been at it again; or rather, we have found out about it. HSBC has got a branch in Switzerland which its clients were using to hide profits from tax authorities (and thereby evade tax properly payable in their home countries).

What has this to do with lending?

The simple answer is bankers.

You see the problem I am trying to address is not lending itself but the way in which it gets misused. And it seems that relying on bankers to change their ways is too much to ask. After all it was bankers that came up with the idea which led to the collapse in 2008 and it was bankers who came up with the idea of creating an artificial “LIBOR” interest rate which led to Bob Diamond, the chief executive of Barclays bankStephen Green, resigning in 2012.

Whether the former head of HSBC, Stephen Green, will need to take a similar course and resign as a Tory minister is yet to be seen.

And of course it is not just the bankers, but also borrowers who create lending problems. If you cannot afford it, you should not take out a loan and yet many people get into financial difficulties because they think they can borrow their way out of trouble and end up owing lots more than they can afford in pay-day loans and overdrafts and mortgages with negative equity and credit card debts. And not just individuals but countries too have ended up borrowing so much that they cannot now afford to pay for health and education or other important public services.

So the evidence is that we cannot trust bankers or borrowers and so need to do something about the problems associated with lending a different way. And my suggestion is legislation which outlaws commercial lending.

Yes, there are downsides. Yes borrowing does help some businesses to grow, but it is also the reason for most bankruptcies – if businesses could not borrow, they would have to grow more slowly, but would have a stronger capital base. And slower business growth probably means lower growth in living standards for those in the rich western countries.

The upsides are removal of debt (obviously) which would be good for highly indebted countries both poor and rich as well as those with unmanageable personal debt.

And how about some significant debt relief

According to the Jubilee Debt Campaign,

Sierra Leone, Guinea and Liberia are together spending millions of dollars on debt payments while trying to fight Ebola. This US proposal to cancel $100m of debt via the IMF is a good start, but more is needed. The three countries owe $3.6 billion in foreign debts in total.

US urges debt relief

Debt 101

Aside

I am worried.

One of the blogs I watch is published by Steve Keen and he has recently (at the beginning of the month) published a three blogs looking at whether governments should run surpluses or not.  This was in response to a proposition from the Australian National Commission of Audit that the government should “live within its means.”

His three blogs are:

Should governments run budget surpluses?

Should Governments run Deficits? a Minsky Model?

Should governments run permanent surpluses? (2)

His conclusion (based on some numbers using his modelling software) is that running budget surpluses takes money out of an economy and effectively reduces growth.

On the other hand running a balanced economy (no surplus or deficit) will see public debt reducing.  But running a deficit has higher growth.

So is a deficit economy a good idea?

It matters because if we remove the possibility of debt (commercial lending) from an economy, then it must follow that a government cannot run a deficit – because it cannot borrow.

Or is lower growth a price worth paying for the advantages of taking debt out of the system?