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.
It all went pear-shaped in 2008 but it is getting better now. Except the graphs tell a different story – but hey who cares about the facts…..
If this is recovery for Europe, well, I’ll be dipped! Some years ago unemployment rates at these levels were considered totally unacceptable. And then came the Reagan-Thatcher turnover and price stability was everything and being unemployed was something people freely chose to be …
It is really easy to blame the wicked bankers for everything. So I will.
One of the causes of the 2008 economic collapse was down to bankers lending money to people who could not afford it and then passing the problem on to other bankers. By passing the problem on the “risk” was supposedly lessened (if you have one debt you could be unlucky and have the one that goes really really bad; if you have lots, they are only averagely bad), but the problem was then shared with all the other bankers and when it did go wrong, all banks shared the problem and they all went wrong together!
And then governments got involved because they were worried (probably rightly) about the effects of a banking collapse, so we the people, ended up footing the bill the bankers should not have created in the first place.
But the problem is not so much with individual bankers, but that bankers keep on repeating the same old mistakes – lending too much money when the market is about to collapse.
It is not that bankers are bad at seeing when the market is about to collapse (although they may well be as there seem to be very few of us good at predicting the future), but that they are driven to lend (because that is how banks make money) and driven to lend to riskier and riskier customers because “experience” has shown them that this works. “Experience” in this case comes from what has happened over the last few years – looking back at the successful years, rather than looking forward to the possible consequences of high-risk lending or looking further back to the effects it has had in the past.
In each case we had a speculative bubble as people expected prices to just keep on going up and so many were tempted to borrow to speculate on the future profits they expected to make. And then there was a “correction” in the market – a collapse in th price – and the expected boom turned into a catastrophic bust.
How can we avoid these sorts of problems in the future? I would suggest that we get rid of bankers – or rather we get rid of bank lending. Rather than trusting bankers to lend responsibly when history shows us that they are incapable of knowing when we have moved into a speculative bubble, we stop them lending altogether!
I will talk about why we want banks and bankers and their role in the future in a separate post.
What I want to say in this post is that we cannot trust lenders. I am not saying that they are inherently evil, but that we all seem to be blind to the consequences of lending and that the world is therefore a safer place by removing this activity, so that we don’t get it wrong.
This is like putting a speed limit on our roads – it is not that speed is inherently wrong, just that when we get it wrong, the effects of going too fast can be catastrophic. Or it is like building a shield around nuclear reactors – they are dangerous and we need to protect ourselves from using them wrongly.
I may have coined a FLA (four letter acronym) in my white paper. “HIRC” is short for “Highly indebted Rich Country.”
Greece – is the answer to the obvious question (what country is a HIRC?).
How did it get that way?
If I have understood the situation properly – the government spent money it did not have in the expectation that this would generate an economic upturn which would increase government revenues to pay for the spending. This is the recommended response advocated by economists such as Keynes and followed by Gordon Brown and others following the global financial crisis of 2008.
Another way of describing this policy is “spend now and pay later” and is the opposite of the austerity measures being used by the current UK government in dealing with UK debt.
A particular problem that Greece faces is that it is within the Eurozone which means that it cannot realign its national currency to reflect its poor status – it does not have a national currency but is tied to stronger economies such as Germany and France. As a result, the only way it is allowed to deal with the problem is the sort of austerity budgetting we are seeing in the UK. And austerity bugdetting is not popular because it means fewer state-funded jobs, which means higher unemployment and therefore lower living standards.
Could this situation have been avoided?
Under my proposal that commercial debt is outlawed, governments would not be able to issue debt so, yes, this particular problem could not have arisen.
The big question is can governments operate without the flexibility that borrowing gives them. Should Keynesian solutions be allowed to governments?
And if governments cannot borrow, how are cash flows managed? The UK cycle involves payments going out throughout the year but a large proportion of tax revenues (income and corporation tax) coming in in January. Would we need to change tax payment dates? Or change the fiscal year so that the largest inflow of money came in at the start of the and set an automatic limit on what could be spent?
As I understand it the problem with mortgages which lead to the global financial crisis was not that people were borrowing money on mortgage.
The mortgages themselves were “high risk” – the amount lent was very high compared to the value of the property and the people who were borrowing had poorly paid jobs, which meant they were less likely to be repaid in full – but that was not the problem either.
The problem was that the mortgages were wrapped up as a package to be sold on to other banks – but that was not the problem.
The problem was that the package was rated as “lower risk” by the clever people who work out risk for financial institutions.
Steve Keen’s view of debt is that, now that we are moving out of recession, we are setting ourselves up for another crisis. We need to rethink international debt instead of doing it all the same way – or we will end up with the same answer,
Here is how his article starts:
My call a few weeks ago that the global financial crisis is over was very much an Anglo-centric one, and a US-centric one in particular (Closing the door on the GFC, March 10).
Europe’s continuing own goal from the euro and austerity, and credit excesses in emerging economies, could still derail a global recovery. But the epicentre of the crisis was the US, and the indications are solid there that this particular ‘Minsky moment‘ is behind it.
It might be felt that Minsky is irrelevant, now that the economy has begun its recovery from this crisis. But in fact this period — in the immediate aftermath to a crisis, when the economy is growing once more, and debt levels are only just starting to rise — is precisely the point from which Minsky developed his explanation of economic cycles.
In his own words: “The natural starting place for analysing the relation between debt and income is to take an economy with a cyclical past that is now doing well.
Although all of this is set out in the white paper, I thought it would help to go through parts of it and see if you agree.
So the starting point is that debt is a bad thing – not just for individuals but also for countries and ultimately the world as a whole.
Lets start with countries and I have highlighted Highly Indebted Poor Countries (HIPC) and also Highly Indebted Rich Countries (HIRC); but there may be other countries where debt is a problem – China for example is laden with debt – money owed to its citizens, rather than by it – and it seems that may be stifling its economy.
The Jubilee Debt Campaign and associated organisations have been campaigning since the mid 1990s to get debt waived for countries who are paying so much in debt repayments that they cannot afford basic services such as health care and education. Many of the debts themselves have been categorised as “unfair” because of the way they were incurred either on the lifestyle of the country’s leader or on “vanity projects” which whilst they exist were not a high priority for the country (such as palaces and infrastructure).
This sort of debt is a bad thing and the world has agreed to waive debt after agreeing suitable criteria for determining whether it is right to waive the debt.
The question is whether that is sufficient reason for outlawing all debt or whether an alternative solution would mean we can avoid these sorts of bad debts in the future. My argument is that when added to the debts of impoverished rich countries and what happens when personal debt becomes national debt that we cannot manage debt well enough and the right answer is to outlaw it all.
I have just listened to a BBC analysis program (which is available on iplayer and as a podcast). If you listen you may like to open the BBC News page advertising this, if only for the cartoon which illustrates the “Minsky moment” when an economy goes into freefall.
From the program it appears that economics is going to be taught differently in future. One of the fundamentals of classical economics was that a system would reach an equillibrium state and therefore we could rely on markets to move towards and then stay in a steady position. Minsky’s thinking “Stability is destabilising” is now being introduced into economic textbooks and thinking. This says, amongst other things, that we cannot trust the market to give us stability and we need to do something to manage any build up of debt.
The BBC article explains the theory in more detail but does seem to reflect what actually happened in financial markets quite closely with banks producing inherently riskier mortgage products during the years of apparent stability leading up to the 2008 crash.
It has inspired me to add a few more books to my bookshelf and see if I can get my head around Minsky’s thinking.
But I think it also adds to my argument that we do need to intervene to manage debt in the world. Economists will argue for controlling debt, I am suggesting that we might be better banning debt altogether.
As the first post on this new blog, I thought I would try and set out what I am trying to do.
I have been worrying about debt (personal debt problems and the global debt crisis) for a number of years and wanted to see if there was something that could be done about it. I even tried reading a few economics texts.
As a result I started to think that debt was a bad idea. Whilst I am not opposed to the idea of debt in principle, we just dont seem to be able to handle it. And then it becomes a problem and the problem becomes a crisis.
So can we live without debt?
I have started writing a paper which tries to address the issues that a debt-free society would face. I am not clever enough to have all the answers and some of my answers may not be practical.
So that is why I am starting this blog – can you help by helping me look at the issue and whether we can change the world!