Friday, 2 June 2017

Steve Keen Says Don Brash Misleading New Zealand How Banking Really Works 28 May 2017

28 May 2017 Radio New Zealand interview by Wallace Chapman, with world renowned Prof of Economics, Steve Keen, re money system funding structure fundamentals and the New Zealand economy;

Full interview audio can be listened to here;

(Transcript done & added by Iain Parker is in brackets)

He says it’s all about debt – specifically private debt.
We’re focussing on the wrong topic. We’re so focussed on government debt, what actually caused the crisis was run away private debt.”
And he says there are a number of ‘debt zombies’ in the world economy - New Zealand among them.
He calls New Zealand ‘Schrodinger’s Zombie’.
The walking dead have already had a financial crisis, he says, and have been experiencing weak growth, while 'zombie-to-be' countries avoided the 2008/2009 crisis by borrowing their way through it.
Now they have a bigger debt burden to deal with when the next crisis hits, he says.
New Zealand sits in both camps. It had 190 percent of debt to GDP back in 2009, it bottomed out at about 170 percent then went back up to 180 percent of GDP. Most of that’s in the household sector so that’s driven the housing bubble in New Zealand, which of course the authorities normally deny, but it’s clearly there although in my opinion starting to turn right now.
So you guys have had two bites of the zombie cherry.”
He says there is no doubt the bubble will burst.

(WC – Just on a personal anecdote, listen to this steve, I can always recall, this is a New Zealand, back in, just before the global financial crisis, so early 2007, I was on a bus, and I saw this massive billboard, and I was looking around, for, to buy a little apartment or something at the time, you know had some savings, but it was a big billboard, and it said it was an advertisement for a bank, and said no more weird flatmates, 100 percent home loans.

Ive always remembered that, never forgotten it, and I thought to myself, how can that be, how can I call a bank and they can give me 100 percent deposit. I thought that was extraordinary, I thought then how sustainable is that.

SK - Youre right, it was unsustainable, and this is the other part of the logic which I cover a little bit in the book, as you are aware as well that banks create money by lending, people think they lend money, Ive actually imported a new term after I wrote the book, rather than saying banks lend, if you and I, you know, if you wanted to buy, I wanted to buy some New Zealand jewelery off you and you lend me the money to buy it, then that is actual lending.
Youve got to put aside money youve saved to give it to me, I then buy it, you cant spend it while youve given it to me, then Ive got to pay you back and its a bit like a seesaw.
If you lend money to me, my spending power goes up, your goes down, but overall the agregate doesnt change, and thats the model that mainstream economists have a lending as well, so they ignore the financial sector on that basis. If they are right, theyd be justified in ignoring it as well, but what banks actually do, is they originate money and debts. Im calling it bank originated debt or bombs, and when you get a bombed in an economy, the banks are creating the money literally out of double entry book keeping,literally out of nothing.
And, when they do it that gives them a claim on real resources. So theyre quite happy when the bubbles going on, to provide that hundred percent finance, Ive even seen evidence of 120 percent.

WC – Wow

SK – And, because they end up owning assets by double entry bookkeeping.

WC – Wow, my goodness. None of us are going to be reassuring to the local audience here to the New Zealand, to the local audience.

SK - Particularly to Don Brash I might add, because I saw hes been in newspapers deriding people who are talking about banks originating money, and hes dead wrong. This is one of these classic things, even central bank governors dont understand, some of them, how money and banks operate.
Thankfully some of them are waking up to it and that includes Bundesbank of all things, which contradicts, quite flatly contradicts Don brash on this particular point.)

The bubble will burst in the next one to two years - there’s been a real acceleration in house prices since 2012, they’ve increased by about 60 percent. But what I’m seeing now is the motivating force for rising house prices is rising mortgage credit. The wind in that bubble is starting to run out.”
So what would he do if he was New Zealand’s finance minister?
Because I’ve diagnosed the problem as being private debt, I’d work out ways to get private debt down. We’ve got two money factories in any capitalist economy: one, the private banks who create money by creating debt and, the other, the government which creates money by spending more than it gets back in taxes, which it’s quite capable of doing because it owns its own bank.
And we accept that bank’s money for anything we have to purchase.”
He wants to see the government create money and transfer it to individuals to pay back debt.
I’d be making a transfer to every private bank account but on condition that those who were in debt had to pay their debt down, whereas those who weren’t in debt got a cash injection - which you might say they’ve got to buy shares with it if you wanted to control the inflationary impact.

That would replace too much debt-based money with more fiat-based money and enable you to get out of the accounting trap you get into when the private sector has more debt than it can repay.”

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