Steve Keen, Economist HARDtalk

That's it from me. Now time for Another great depression is all but

inevitable. That is the view of my guest today. No wonder he has been

called the Merchant of Gloom. But then, Steve Keen is one of the few

economists to have predicted the global financial crisis. More and

more people are now listening to him. His way of avoiding

depression? Write off the debt, bankrupt the banks, nationalise the

financial system and start all over Steve Keen, welcome to HARDtalk.

Delighted to be here. Do you really think we're headed for another

Great Depression? We're are already in one. People did not call it one

until afterwards. You are always hoping that there is change around

the corner. Only after you have been through it will you look back

and say that it has been going for years. The Great Depression was not

called the Great Depression until some time in the 1930s. For those

people watching, thinking, OK, I can cope with things as they are,

it is OK because things will be the same? The situation that we're

hoping is transient will be drawn out. Japan is talking about having

a lost decade. The best we can hope for is it the last two decades? If

we leave it to the ordinary mechanisms, once we get back down

to the local debt system that we need which is far lower than what

we have now, the depression will be over. And that could take 20 years.

You have also suggested it could take a rising level of violence.

The trouble is that when you have a growing population and an economy

that is used to present people expecting to get employed, that

means that the population is a lost generation. That generation only

has the outlet of violence. It is not the way to manage an effective

society. As we know from the last great depression it had a profound

effect on things like the rise of Hitler. Absolutely. He got there

because he influenced the economic behaviour of his time. He built a

huge war machine in the process. We had the catastrophe of the Second

World War. He would never have risen to prominence had there not

been a total hysteria. You can have very bad social outcomes out of

problems like this. Even if people get enlightened about what caused

it and have more wisdom after it, the transition will be dreadful.

What we have seen so far is movements like Occupy Wall Street.

When you think about their anger, it is neither left nor right.

not right wing. That is one of the positives. The Tea Party was their

predecessor in terms of a visceral reaction. Occupy Wall Street is

progressive and a few politicians have typecast them as left. It has

been very broadly based. It is youth-based but also large numbers

of people who were led off industrial work. People who would

not normally sit in a tent. Why is it heartening? A major part about

their attitude is that they feel that they have had their trust in

society betrayed. They want to bring about a harmonious society.

They are not socialists in the old fashioned, overthrow capitalism

They are emphasising that society should be something you can trust.

That has been destroyed by what has happened in the financial sector.

They are trying to rebuild that trust. They're not trying to man

the ramparts and burn everything Some of them are against capitalism.

You are not. I am opposed to capitalism parasiting itself. It

generates far more debt than we need. Before we get into that, as

far as these protesters are concerned, you have told them that

they should be going further. should be to occupy the economics

You do not get into as disastrous a situation without extraordinarily

bad thinking. The economics departments were the source of that

How far should they go? Will you be telling everyone to go out on the

streets? We have to change the political power balance at the

Fundamentally, the creditors of the world were dominant politically.

They have set the political agenda for the past 30 years. We need to

reverse that and turn the power back towards the debtors rather

than the creditors. Your argument is that politicians will not listen

until there is something to make Politicians are not leaders but

individuals, mostly. They have been going along with the general trend

of believing that large financial sector is a good thing. Their

campaign donations come from there. To get them to change that they

have do see it as negative. They need to see it as a way to lose

elections. Your solution is remarkably radical. You said we

should write the debt off, bankrupt the banks, nationalise the

financial system and start all over If we have a situation of the 1930s

were the banks own all the debt it would be easy. The banks have not

simply created far more loans than they should have, the debts have

been bundled into pension funds. It is too interconnected? It is far

too interconnected. You have used the phrase, old-fashioned jubilee.

It is something that has happened historically. Writing off the debts.

If you take a look at the Forum in Italy, they are burning the books

of debt. It is a regular activity in pre-capitalist societies. If you

hadn't had that, none of the societies would have lasted. Whose

debts are you writing off? You have to see whether the debt is a good

or bad thing. Some of the debt is a good thing. Rising debt finances

productivity and new technology. It is the good aspect of debt. The

negative side is when we borrow the money to gamble. That is what we

have been doing. I want to borrow �1 million because it is a fabulous

idea and there will be a new innovation and society will benefit,

good. I want to borrow �1 million because of want to gamble on Wall

Street is bad. That is right. The current level of debt in America

peaked at 300 % of GDP. Five times the level of government debt. That

is not all bad debt. People want to own a house and in order to do so

they have to take the loan out. But that has caused a bubble in house

prices. The cause of it was borrowing money in the first place.

Without it they could be back to 75%. Where we are now, are you

saying that you should write off the mortgages and debts of people

like you and me? Yes. Even people who can afford to pay? We have to

look at the situation and to think about what we face if we continue

to try and buy out the debts. The best example of that is Japan. It

is a far more cohesive society. They have been in a 20-year slump.

We face two decades of that. It is an extreme change. But the benefits

should be obvious. In terms of what the solution is and we can get into

the details of why you think it is good, you are saying write off the

debts of anyone who owns a mortgage? No. There is a certain

level of debt which is necessary. There is a proportion of people who

wish to own their own homes. We should look at what level of debt

in terms of ratio to the GDP. In Australia that level of debt was

about 10%. It has since risen to 100%. Most of that extra 90% simply

financed the rise in house prices. Somebody under your solution is

saying that is a good debt, that is a bad debt? No. If we do it on an

individual basis that we will be here forever. It has to be an

intelligent Modern Jubilee. We can't say, unworthy borrower,

unworthy borrower. We need a systemic approach. Households did

not make the bad decisions. The bad decisions are made by the banks. In

trying to understand what the solution is, this systemic approach,

who are deciding in this new system It is not a choice between one

individual and another. It has to be a systemic process where we

reduce the level of debt and increase the level of government-

created money. We have two sources of money in a capitalist economy,

the banks and the Government. Back in the early 1960s, the ratio of

government created money to banks was 15%. It has fallen so far that

we have a debt based system. We need to create the government money.

We need to try and rebalance and reduce the private debt. The

government and the central banks prints money to pay off people's

debts? What I am worrying is about write-off debts. It is private debt

you want written off. How is it working? Up we would have to give

him money to the creditors. It up job would give the money to the

public. You could give the money to the public. If the person received

it was in debt be first thing they It pays the debt down first of all.

If you don't - you give money to everybody.

It's a tax cut? No. It's different to cutting a tax.

If you give the money to everybody and requires those in debt to

reduce their debt, they are better off. The debt write-off, what about

It's a moral hazard argument. You are rewarding failure.

The system has failed, not the individuals in it. If we don't

admit that, we will spend another 20 years miss guiding it.

You will have people running businesses who hear this and say

they have been managing themselves well, their rival who was a badly

run business and should have gone out in the process of a recession,

would have weeded them out because they weren't well run, are they

going to get a boost? Everybody gets a boost. We are not

trying to boost individuals, we are trying to eliminate a mistake in

the financial sector thas been going on for 40 years. The scale of

what I'm talking about sounds ex- terrorism in contrast to normal

policy. But normalcy has allowed a 40-year build-up to unsustainable

scales. One of my colleagues, Michael Olmert son puts it

beautifully. Debts that can't be repaid, won't be repaid. You have

to work out how you don't repay them. This is a sophisticated

approach to eliminating a systemic debt.

You give this money to individuals or companies, there is that measure

of how you give to companies. They pay back to the banks who they have

loaned to. You said if we keep the banking sector alive, the economy

dies. Under your model, these parasitic banks, as you call them,

would die? If you did a normal debt write-off,

the banks would have to be bankrupted and resold back into

private ownership. If you did this, they wouldn't need to be. What they

would lose in loans, they would gain in loan repayment. Their

assets wouldn't change. But what would happen, they make money out

of the loans so their cash flow would decline radically. You would

still have organisations which would be financially challenged by

that, their cash flows would drop drastically. The banks would still

have difficulty, we need to manage them in some fashion but it

wouldn't be a case of shutting them down. Most of them on current

conditions are insolvent. But if if you are effectively

ensuring their survival, what do you say "We need to kill off these

parasites". A small amount of money for

consumption, that's the positive role of banking. It's become a

negative role. They are financing Ponzi schemes. They are giving us

money to gamble on schemes but it is causing asset price toes rise.

This misbehaviour has taken over the financial sector in the last

30-40 years. That is the the pass sitic behaviour. It goes to the

heart of your argument about what has been wrong with the model of

economics for decades. I mean you talk about the instability there

which your argument is that actually instability is a good

thing or at least it can be a good thing.

This is a classic argument that instability is part of life.

Instability means you can see a potential opening for a solid state

recording device over walk man's or iPods that are part of Occupy Wall

Street on a grand scale. That is a creative instability. That also has

over the top of it, the possibility of financial instability. I'm

trying to promote what I see as creative instability and reduce the

destructive instability. Your argument said it is unchanged

Frankenstein monster. If you look at Robert Harris's book,

he starts with a quote from Frankenstein. The danger in the

system is that banks make money by creating debt. Most of us will

decline the opportunity to take that debt on because debt's not a

good thing. Having debt is an obligation. For example, mortgage,

the meaning of mortgage is a death contract in Latin, not a charming

thing to be in. The only reason we take on more debt than we need is

because we get persuaded we can make again out of it by leverage

speculation that. Lets banks to per said swayed us to take on more

department than they have. You talk about banks persuade us to

take on more debt. It sounds as though your model, which is

people's debts could be written off. Yes.

Would persuade them to do it again. You have to prevent the possibility

of asset bubbles being financed by leverage.

The example is Greece. They look to the figures, the EC task force is

trying to sort it out. 60 billion euros of outstanding unpaid taxes.

That is effectively private debt owed to the government. You know,

those people, if it's wiped off... We are getting confused between

private debt and sovereign debt and the peculiar nature of the Greek

taxation... They wouldn't have a debt problem

if people paid their taxes We have a sovereign debt problem.

America has rising levels of sovereign debt. Why? Because the

private sector is reducing et cetera debt, having caused far too

much to begin with. All this emanates across most of the globe

back to a private debt bubble. Greece is an anomaly. If we focus

upon the anomalies and analyse what to do in their cases, we will

mislead ourselves. Your argument has been, you did

have a light bulb moment which you identified at 1am in the morning

back in 2005 where you looked at the private debts figures for

Australia, growing exponentially, which you wrote and checked and

thought hold on a second, it is I had written the word the debt has

rids even exponentially compared to incomes in a court case. I'm not

the barrister, I can't use high per boli a. That was in the back of my

mind. I plotted the data. A perfect curve from 1964 through to 2005. I

thought this process has to change. When it changes, and debt starts to

reduce, we will have an enormous financial crisis, somebody has to

raise the alarm and I'm that somebody.

You were called a tall poppy for doing so?

Yeah. People weren't taking account of

private debt. They didn't think it was necessarily important. They are

worried about government debt but not what rationale individuals were

taking. Economists have a mythical view of

how money is created. They see banking being an intermediary

between people who save money and people who spend money. You can

forget about the average level of debt.

You say, and when you read a lot of your material t's very much you

alone are clever enough to see this. I'm standing on the shoulder of a

true giant which is Minsky. As other economists around the world

and identified by Minsky, I've just got the loud evident mouth.

You referred to things won't change until things change

I was using an analogy about Max Planck annex plaining why he failed

to convince his colleagues and abandoned the possibility they are

doing it and waiting until each of them die off and the young kids

come through who can cope with something as far as Kwan tam

mechanics. A similar thing applies in all sciences. They are so wrong

and you are so right? They are so wrong and they should

know they are so wrong. They don't know their own literature well

enough to know they are wrong. You do?

And a large number of non-orthodox economists. 10% of economists would

call themselves Austrians, some maerksists, evolutionary economists.

We have been watching this deludeed majority and been derided ourselves

by that majority, knowing they are following a totally foolish vision

of how capitalism functions. The only way they can convince

themselves they are wrong is after they cause a spectacular economic

cries. Now we are coming out of the woodwork. We have been there for 40

or 50 years. Just a final thing, can you see a

politician bold enough to do what you think is necessary?

Not yet. Obama had, had he been elected in 2012 rather than 2008,

it might have been possible. Somebody of his charisma could have