Jubillee Perspectives with Steve Keen

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DEC 4, 2020
Is it time for a debt jubilee?

Steve Keen and Michael Hudson have both been arguing for a debt jubilee for some time. Now, as COVID-19 hits the poorest hardest, and leaves those with money better off than before, is this the right time to write off debt? Can the economy recover without it? After all, its stagnated since the 2008 global financial crisis. If you were to have a debt jubilee, how would you do it. Steve and Michael have different ideas about how it should be implemented. They explain their thinking to Phil Dobbie on this week’s free edition of the Debunking Economics podcast.


PHIL: It is obvious COVID-19 and our response to it is having a devastating impact on the world economy. And perhaps the biggest impact will be the rising rich poor gap, with the poor finding themselves deeper and deeper in debt and with the rich coming out of it better off than they went into it. Particularly if they’re holding lots of shares. So, why is this happening? And is it time to revisit the idea of a debt moratorium – we’ll talk to two people who think that yes, the time is right. One is Steve Keen, of course … after all, this is is his podcast … but we’re joined by Michael Hudson as well today .. and I’m Phil Dobbie, this is the Debunking Economics podcast, welcome along.

Steve has, of course, been talking about a modern-day debt jubilee for some time – we’ve talked about it on the podcast before, but not for some time. And with COVID-19 changing just about everything, it’s time to revisit the idea. And who better to talk about it with than Michael Hudson, Professor of Economics at the University of Missouri–Kansas City, and author of many books, including “Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy” … if ever there was a title that says it all, that’s it …

Michael, when you talk of debt, particularly right now, people’s first thoughts go to public sector debt, because so much has been racked up paying for furloughing schemes and the like. The main topic of conversation seems to be, how do we pay that back? Not concerns over private or household debt, the fact that, in the UK for example, government gross debt at the end of October was 107% of GDP. Every day the media is asking, how do we pay this back? That’s more in the mindset of people than the debts that individuals are carrying, isn’t it?

MICHAEL: Well, this is the result of a lot of propaganda. The point is that government debt doesn’t have to be paid back. It’s not supposed to be normally because if you pay, it back then you destroy the money supply and also the government simply won’t pay. When the United States runs at deficit usually, foreign central banks end up holding it and the US says, ‘well, you know, we can just write our IOUs’. And imagine if individuals could go to the store and you would pay for your groceries by writing an IOU, and buy a car, and buy things with IOUs and say, ‘well, you can just use my IOUs to pay among yourselves and use it as money’. Well, obviously, everybody would be in a much happier world that way. But that’s not how it happens. The private IOUs have to get paid and they have to get paid by somehow either earning the money ,or more often losing your home or losing your assets to pay. But governments can simply print the money, so government that can never in run a risk of nonpayment as long as it’s in it’s own currency.

PHIL: So, this is the idea behind modern monetary theory isn’t it, which for some reason just hasn’t got traction. I mean, there’s a lot of people talking about it. And yet governments and banks, the world over seemed to ignore it.

MICHAEL: That’s because the condition of being appointed to a central bank in the government is that you’re working for the financial interest of the banks, not for the government. The banks would love governments to borrow from the banks in the financial sector and pay them interest because then they get to tell the government what to do. If the government can just print its own money then it can decide what voters wanted to do and of course, that would be democracy and that it’s not exactly what the vested interests are for.

STEVE: But it’s also the accounting and I’ve got to take my hat off to Stephanie Kelton for making a best seller out of an argument over what is fundamentally issues of accounting. Because when you take a look at how the government actually creates money right now, it creates it by simply running a deficit. When it creates a deficit it spends into the private sector and increases the amount of money in peoples bank accounts.

When you tax you do the opposite, you take money out of their bank accounts. Now when you spend to put money in somebody’s bank account you have to deposit into their account, which is on the liability side of the banking sector’s balance sheet and then that is shown as an increase in the reserves on the asset side of the bank’s balance sheet, so the gap between the spending, which creates money and tax which destroys it, first of all adds money to the deposit account, which is on the liability side of the banking sector and, secondly, at the same time, it has to add to the reserves. So the increase in money is created by the deficit, which is what we get in our bank accounts, but the increase in reserves is also created in exactly the same act and that gives banks reserves, which either don’t earn interest or in some crazy countries like Switzerland actually give you a negative rate of interest so that’s where the money is created by running a deficit.

And when it comes to the government debt that’s the government issuing bonds to cover the gap, to cover the deficit. But what that means is the private banks are being offered, ‘do you want to help your money in an account with reserves at the central bank that earn you zero interest or even worse, negative interest? Or would you like to buy these Treasury bonds that earn you only 1% or 2% interest per annum?’ I’ll take the Treasury bonds, thanks very much.

PHIL: For a while, though they didn’t issue bonds. The Bank of England actually allowed the UK Treasury (the intention was that it would be issued as well as bonds down the track), but it was sort of like a short-term reaction to the crisis. We’ll just we’ll just let you run an overdraft in effect.

STEVE: And that effectively is what the bonds actually do, because normally when the government spends, it’s effectively creating negative equity for itself, which creates positive equity of the rest of society, and I’m looking at a set of double entry balance book sheets here to make this argument, so it’s a bit airy fairy for anybody hearing just the verbal side of things. But when the government spends more than it gets back in taxation, it wears that on its own overall government assets and government liabilities. Now, one of the government assets, of course, is its bank account at the central bank and, if that government didn’t issue bonds and out of that account the government spent more than a got back in taxation indefinitely, you would end up with a negative balance in its deposit account. Now, lots of us in the in the private sector end up with that as well and it’s called an overdraft.

Overdrafts are a common structure in private banking and if the government didn’t. issue bonds it would have an overdraft account at the central bank. So, when it issues bonds normally it issues bonds proactively, it knows that it’s got to it, it knows it’s got a rough estimate of what its deficit is going to be so it sells bonds before it incurs the deficit, but it’s driven by the deficit. So, when it issues those bonds, it’s fundamentally saying, ‘we’re going to sell those bonds to the private banks, they’re going to buy it with money which is reserves, which created by the deficit in the first place, and when we then pay that money into our Treasury account of the central bank, it can maintain a positive or non negative balance and we will end up with negative equity if we work out our overall sums’, but nobody ever tries to work out what’s the equity of the American economy or the British economy. So, it’s a way of the government running in negative equity so the rest of us can have positive equity.

The bonds themselves just mean that that means that rather than that negative equity turning up as an overdraft a bank account at the central bank, it turns up as debt that the government notionally owes to the rest of the economy, but that debt is an asset to the private sector. There’s an excellent blog by Richard Murphy, I must mention this. Taxresearch.org.uk, saying well what would happen if we try to pay off their debt back? Well, we would eliminate all the Treasury bonds that are currently held by pension funds ,so we drop the income of pensions. Does that sound like a good idea? And he went through each of the particular ways in which this debt is used and said, ‘getting rid of any of this is a bad idea because the private sector is benefiting from the cash flows generated by these assets.

PHIL: That was gonna be my next question for Michael actually. Nicely led into, thanks for that. The fact that if you look into the UK budget accounts sorry I’m in the UK, so I’m looking more at the UK figures, perhaps from the US figures Michael, but it’s it’s the same, the world over. The amount of money that that that is spent on paying the supposed interest on the on these bonds goes into the into the government accounts and it’s roughly an amount of money that is pretty much the equivalent of how much Britain spends on defence or educationally each year. It’s a slug of money, so that’s why people are fearful of this, because this is interest payments paid for bonds that have been issued, and everyone is fearful that that is going to increase. But do we need to issue bonds? Could we just I mean? Could we do without them? Could it just be an overdraft with a very low interest rate and and just. avoid the issuing of government bonds altogether.

MICHAEL: Well, I want to make sure that we don’t fall into a misunderstanding. When Steve uses the word ‘us’, it’s as if the government runs a deficit to ‘us’ well. He also made it very clear that it’s not the ‘us’ that gets the government money. The government runs a deficit. The government money helicopter only flies over Wall Street. It creates money for the banks. And the banks basically provide money to real estate and to the financial sector, not to the economy at large.

So, you can say that the government runs a deficit by putting money into the economy. But there are two ways of doing this. One is to put money into the banking sector, in which case you use quantitative easing, you inflate asset prices, you raise the price of real estate or at least loans for real estate, you raise stock and bond prices. Or the government can run a deficit by actually doing real physical spending into the economy, by building infrastructure, by doing social spending. And there’s all the difference in the world between whether the government spends the deficit on the FIRE sector (finance, insurance and real estate), or whether it does it on the real economy. And for the last quote 12 years, since 2008, the government’s been spending money on the financial sector, not into the real economy.

PHIL: But it has changed a bit this year though hasn’t it, because we have seen money being paid, furloughing workers. In the United States that money that was paid into everyone’s bank account. OK it only happened once, but that was money that was being thrown into to where it was needed rather than into the finance sector.

MICHAEL: Well, here’s what happened. The cares act with President Trump gave everybody 1200 dollars. The 1200 dollars for most people was paid into their bank account or their credit card account.

So what happened? More than half of the Cares money was spent on paying down the debts of companies and d the banks. It wasn’t spent on goods and services. People got a credit in the bank account, with the bank immediately using that for writing down the debt. So, what did by giving 1200 dollars to everybody was to defer their falling further behind in their credit card account, further behind in their bank account and overdraft, and you enabled them to avoid being even deeper in debt, but not that much was spent on goods and services. And you can see that from the statistics on retail sales and what was happening.

PHIL: Well that’s been the interesting, that we’ve actually seen an increase in savings for a large part of the economy. We’ve got this K shaped curve where we’ve got people who’ve got money saving money, and people on low incomes, they’re the ones who have been struggling through this whole thing. In fact, there’s evidence that they have reduced their savings and resorted to borrowing more than usual. The Resolution Foundations says 54% of adults and families from the lowest fifth quartile for income, borrowed more in March to June to cover everyday costs like food and housing, whereas in other parts of the economy the upward shape of the K, there were lots of people with enforced savings. They weren’t able to to spend the money that they did have. So that shows that maybe more of that was needed. There wasn’t anything wrong with putting money into people’s bank accounts, it just needed to happen more often. The helicopter needed to fly more frequently didn’t it?

MICHAEL: Well, there’s what a K-shaped curve means. The 1% at the top is doing the savings. What are these savings invested in? They’re loans to the 99%. So the 1% gets richer by lending its savings out to the 99%, borrowing at 0.1 percent for government and charging credit card people 29%. It’s a win-win game. Of course, there’s a K-shaped curve. Of course, the rich are getting richer and their savings are other people’s debts on the opposite side of the balance sheet. But the balance sheet is the 1% on the one hand with the assets, and the 99% with the liabilities. That’s what the economy is looking like.

PHIL: So is it just that 1% that’s been gaining through all of this then? Surely we’re also seeing there is more money being paid by the government into broader sections of the economy than there have ever been before. I mean, they’ve always obviously taken money away through tax. Just the notion that in the United States you would have twelve hundred dollars paid into People’s Bank accounts – okay a lot of it was used to pay off debt and it deferred what was a bad situation – but it’s a step in the right direction. And if they repeatedly did that, then those debts would be paid off and people would end up spending, presumably.

MICHAEL: But the reality is there’s been an enormous increase in debt because of the Covid crisis. So many people, 20,000,000 people, have lost their jobs, they are unable to pay their rents, the restaurants are not able to do business so they haven’t paid their commercial rents. Whole swathes of the economy have not only not paid their rents, but they haven’t paid their taxes and they haven’t paid their credit cards and their bank accounts. Now on January 1st, all of a sudden, the moratorium on evictions is going to be over and they’ve estimated 5,000,000 Americans will be thrown onto the street. The landlords have already been filling out the eviction notices for 5,000,000 Americans. So the Biden administration is going to begin right where the Obama administration left off. Obama threw 10,000,000 families – mainly Blacks and Hispanics – out of their homes by enforcing the junk mortgages of the banks, bailing out the banks, [and] not writing down the debts and the junk mortgages [of] the victimized, low-income borrowers. Well just as Obama kicked 10,000,000 families out, Biden’s going to begin, in the first week, [kicking] 5,000,000 more families out. This is going to put the class war back in business in an even more vicious way than Obama was able to do.

PHIL: So how do you fix that situation then, if you’ve got people who have got mortgages that have turned sour, I mean the natural tendency from the government, obviously, is to say, ‘Oh, this is bad for the banks because they’re going to lose out on all this money from these mortgages. So we’d better bail out the banks’, without necessarily thinking about the people who are being turfed out of their houses at the same time. So you’ve almost got to hit both sides haven’t you? You don’t want the bank to collapse, but also you don’t want people on the streets.

MICHAEL: There are numerous ways of handling it. The Germans handled it by paying about 80% of people’s income to them when they’re not at work or when they can’t go into work. The way that ancient society handled it was very simple. You’d have a moratorium on all ends of the financial process: a moratorium on rent, a moratorium on debt service, and a moratorium on what the banks – right down the line – what the banks had to do. This is what was literally written into the original document, called the act of God Clause, and that was in Hammurabi’s laws in 1750 BC. Hammurabi said that if there is a flood, or a drought, or a disease, the rents didn’t have to be paid, the taxes didn’t have to be paid; there was a tax holiday and they were cancelled out. Otherwise you’d have people losing their land, and all the land and homesteads would have been concentrated in the hands of a few wealthy creditors. Otherwise, you’d have a polarization and society would have fallen apart. So you already had – 4000 years ago – a plan to suspend payments at times, and obviously the payments can’t be made, and if you do insist on the rents being paid, then you’re going to evict 5,000,000 families, and the restaurants will go out of business permanently, and all the gyms and the other businesses that have closed down since March, and have not been able to make an income, obviously are not going to say, ‘OK now we’re going to reopen in January but we have to somehow pay the last 9 months rent, and if we do that we will never have a profit for the next 5 years. We’re just going to go out of business and close down’.

STEVE: Well, I think the thing that’s interesting about that historical example, Michael, is that you had a reason. The rulers had to give a bias towards the mass of the population because if you hadn’t enabled people not to pay those rents and not to pay the debts they had, they would have become debt-slaves and they therefore couldn’t have been part of the army and couldn’t have defended the empire. So that gave the ancient civilizations a reason to revise debt – to do a debt jubilee – that benefited the mass of the population. But what we have now is a world where the same thing would actually apply if the powers that be – the Obamas, the Bidens and even the Trump’s – realized that. But the whole thing has been turned in favour of the finance sector and every time there’s a crisis in capitalism, the behaviour of the governing groups is to say, ‘Oh, we can’t have the finance sector collapse! How do we rescue the finance sector?’, when to use your beautiful phrase, ‘That’s rescuing the parasite not rescuing the host’.

PHIL: But if you have some form of debt jubilee, if you say, well okay, there’s so many people in debt now, we’ve got to have some sort of moratorium, they’re in debt to somebody. So if you were in debt to me and, you know, the government was to say, ‘Well you’re not going to pay me back’, I’d want the government to pay me. You know, it has to work that way, and the problem is, of course, normally the person you’re in debt to is a bank, which is why banks say, ‘Well, okay, if you’re going to write this dead off someone’s got to pay us for the debt that you want to write off’, which is why we get to this situation where you’re bailing out the banks.

STEVE: This is where […] about Michael’s version of a jubilee versus mine, so Michael do you want to take the lead?

MICHAEL: Well, the virtue of cancelling the debts is that you also cancel somebody’s savings, and the Babylonian rulers and the Byzantine rulers 2000 years later said, ‘Look, we don’t want the financial class to gain the power because if they gain the wealth, they’re going to hire an army and they’re going to overthrow us and put in their own government instead of, you know, our government that’s looking out for the people.’ And the advantage of cancelling the debts on the liability side of the balance sheet, is, you cancel the debts on the asset side, and these were the debts of the 1%, or let’s say the 10%. All of the growth since 2008, for 12 years, all of the growth and wealth has accrued to this 10%. If you do not write down the savings that they have, you’re going to make them into an almost feudal type of landlord or finance-lord aristocracy that’s going to impose an oligarchy here, so if you don’t want it – oligarchy – you have to write down not only the debts, but you have to write down the enormous overgrowth of savings that is what’s holding the debtors in bondage.

PHIL: So you’d say that anybody who has any debt whatsoever, that debt gets written off. So if I if I owe my bank my mortgage, a few hundred thousand pounds, I would just not owe that money to the bank anymore. Is that what we’re saying.

MICHAEL: Well, not quite. That was the mistake that the Spartan Kings – Agis and Kleomenes – [made] in the third century BC. If you were to write down all the debts just by itself, you’d make the landlords, you make the Donald Trump’s of the world, the richest people, the old landlord class because most of them have very low equity. It’s all debt and all of a sudden you give them all this property without owing any debt. So you would have to have a debt cancellation go hand in hand with a tax on either the real estate so that they would pay to the government what they previously paid to the banks in interests – they’d pay the government a rent tax – or you do what happened in the Soviet Union when it dissolved, you’d give everybody their own houses. All the occupants of any business or home would get their own home, but instead of paying the mortgage to the bank they would pay the rental value to the government instead. So a debt cancellation would have to be hand in hand with a fiscal policy if you don’t want to create a new enormous ruling class.

PHIL: So you’re really talking, like, social housing aren’t you, where there are countries, which are quite capitalist in their nature, like Singapore, which are predominantly social housing in fact.


PHIL: So, how does that differ from.. it seems quite drastic then because the basically…

MICHAEL: It is drastic. We’re in a drastic situation today; look at the polarization, look at the people who are going to be put out in the street, look at the unemployment, look at the austerity that you’re having as a result of debt deflation. From America to Europe we are in a drastic situation and any solution cannot be marginal, it has to be structural and any structural solution is drastic.

PHIL: But under your arrangement anybody who has loaned out money, is going to lose that money.

MICHAEL: That’s correct, that’s correct.

PHIL: And that is not just necessarily going to be banks, but then your point is it’s always going to be someone pretty wealthy.

MICHAEL: No, take pension funds for instance, what do you do about pension funds, the pension obligations would be taken over by government and the government would pay the pensions out of the rent tax that it gets from the money that previously was financialized and paid to the banks as interest, instead of paid to the government as rent, which is what Adam Smith and John Stuart Mill and the whole 19th century of classical economists were pushing for.

PHIL: So, we will go to Steve’s approach in just a second, does this fix this problem though Michael, which I think is the real problem in the United States right now: I’m looking at numbers from the Bureau of Labour Statistics of permanent jobs lost in the United States. Now, this is figures to September totalling over 4 million. Of course, it was much worse than that; it’s bounced back a bit, but that is going to be the biggest issue and I’m just thinking, even if you cancel debt, is that going to bring those jobs back?

MICHAEL: You cannot bring them back without cancelling the dept: let’s put it that way, because if you leave the restaurants owing the rent debt, if you leave the businesses is owing the rent and back debts when they don’t have any and if you leave the states and localities; New York City is broke, the transport system is broke, the transport system is going to have, it doesn’t have the money now, the subways to fix the signals that are dating from the 1940s and the trains don’t run, there’s an almost complete breakdown. Unless you write down the state and local debt or somehow pay it off or fund it with a property tax, you’re going to have a close down on the state and local infrastructure and, without transport, nobody can get to work or out to get a job so we’re in a systemic crisis that is very close to paralysis that looks like it’s going to be peeking around March.

PHIL: But could those debts be paid back with government money rather than saying to the people who are issuing the debt or is that part and parcel of it, you want to change the system so to do that they’ve go to feel the heat or could you or could the government just step in and say, well ok, we are going to pay you the money to cancel out the debt; that I think it’s getting pretty close to your idea actually isn’t it Steve, that’s more your approach?

STEVE: Yeah, mine is, I mean I agree with Michael about the structural issues in the inequality, but I’m trying to get something which actually might get through politically as well, and one reason I had, like the last time I wrote on the debt Jubilee was about 10 years ago and the reason I haven’t bothered writing about it since is I thought it had a snowflake’s chance in Hell of actually happening. You know it’s one of the frustrations of being somebody like Michael or myself is, you would give an accurate analysis of capitalism, putting forward ideas that might make it less rentier dominated and more actually capitalist, which is my Michael’s point a moment ago.

Ricardo and Smith were both trying to stop the rentier class taking over capitalism. We have let them do so by letting the finance sector grow without restraint. But,I’m still trying to say, let’s get something that is politically feasible. And, within that context, that would be let’s abolish the debt, but not reduce the money supply at the same time, because part and parcel of the whole endogenous money vision is that when you eliminate debt you also eliminate money, because when you reduce the asset side of the banking sector, you reduce the liability side as well. The assets are the debts, sure that’s why we want to get down, but the liabilities are the money we’ve have in our bank accounts and if you wipe out one, you wipe out the other.

So, my idea was to give an equal amount of government created money to everybody, so everyone gets the same per capita amount and then those that are in debt have to pay their debt down. Of course, that’s going to be complicated by all the debt covenants that exists and so on, but some scheme by which the debt was either paid down or offset for those who had debts then those people who had debts have benefited but people always came back to me, saying what about people who didn’t speculate, didn’t gamble, of course that includes me, and the idea was well let’s make a per capita. To everybody and those that don’t have debt get a cash injection and then with the cash injection… when I was looking at this, this was back in the days when the economy had come out of the deepest part of the whole of the financial crisis in 2007, it was about 2010 /2011. So, you didn’t necessarily want that money to be spent on goods and services; but you could say well, we want to reduce corporate debt as well and then in the United States right now corporate debt and household debt are pretty much equal, so I want to get corporate debt down as well as changing the bias between debt and equity in the corporate system; so the proposal was that people who got a cash injection, who weren’t in debt, would have to use that money to buy newly issued corporate shares, which would have to be used to pay corporate debt down and reduce the corporate debt ratio as well as the household debt ratio.

PHIL: But it would be a big amount of money wouldn’t it so be a big broadening of the money supply.

STEVE: It wouldn’t change the money supply one cent, but it would change what the money supply is backed by, so at the moment, if you look at the American economy, is roughly a $20 trillion economy; its roughly got $20 trillion worth of cash, at the rate of turnover money is declined so much that it’s pretty much one for one. So, what you do is you change that being from being credit based, where like at the moment something in the order $18 trillion of that is debt based money, reduce that to say $5 trillion and you’d be injecting in $13 trillion worth of fiat money to cancel $13 trillion worth of credit money, leaving you with exactly the same amount of money in the economy, but at far lower debt levels.

PHIL: The ECB is saying the amount of bad debt that they’ve got this year could reach €1.4 trillion. That’s the bad debt; then obviously, they’re looking at, you know, how do they save the banks again for that bad debt, without thinking about those poor people have actually got that bad debt; there are lives sitting behind that you know, at times like this people are losing money through no fault of their own so, and they are the people who have taken out loans that have turned bad. Then there’s all the people who would have taken out loans, but they’ve been refused loans by the bank because the bank sees them as being too risky because they know their businesses are going to fail. So, we’re talking trillions and trillions just within Europe and around the world. This would be a massive amount of money that would be needed to cancel out debt and it’s just got that much worse this year of course.

STEVE: But it’s easy to do …….

MICHAEL: …..The amount is going to be much greater next year and much greater the year after that because accruals of interest and it’s going to; you know, you talk about bad debt, that’s the propaganda word! Why don’t you say bad savings, bad loans? When you say bad debt, you put all the blame on the debtors. The fact is the banking system has become dysfunctional, the debts cannot be paid. No economy can ever pay off all the debts because of the exponential growth of debt being faster than the S shaped curve in the economy. So, no matter what, we’re going to have rising and rising and soaring exponentially soaring volume of debts that can’t be paid. If you say they are bad loans what should be done to the banks is what you did, in Germany in 1948, ‘The Economic Miracle’, you start all over again.

You cancel the debts and the savings except for the basic bank balances of everybody so they have enough to get by, and you just sort of wipe out the whole financial overgrowth because if you don’t do that, then the economy cannot get out of the debt deflation that we are in and cannot recover.

PHIL: How do you stop it happening again once you’ve done that? How do you stop it repeating itself?

MICHAEL: You don’t, of course, it will repeat itself.

STEVE: Hang on., you’re being pretty radical about those changes there. This is radical policies about the financial sector as well.

MICHAEL: It’s natural for people to run into debt. The idea is to have a good financial system would be about productive credit, credit to actually enable people at the economy that produce more to earn enough to carry the debt, but the financial system is not focused on productive loans, it’s focused on loans to increase the asset prices. Yeah, banks lend against the real estate and stocks and bonds already in place, not to really help the economy grow, so all you have is a financial overgrowth of overhead.

STEVE: OK, yeah, yeah, as well as like trying to make up for the previous sin of accumulating far too much debt, private sector debt, my idea for modern a modern Jubilee would say, let’s stop it happening again by changing what the finance sector can do. Because the huge part of the problem is, we’ve trusted the finance sector, again in Michael’s terminology, that’s trusting a parasite that it’s really good to the host. Garbage, the finance sector, as Marx once said, is a great servant and a terrible master, so we need to send it back to the stage where it’s a servant once more, and servants get told by the master what they can do so my two proposals, fundamentally proposals to control what the banking sector lend for, was to stop it lending for asset speculation and force it to lend for productive investment. One, I called the Pill, which used to be very funny, people don’t know what pill is any more it seems; that’s Property Income Limited Leverage. You would say the banks, the kind of banks that pretend that they’re landing on the basis of the income of the borrower and therefore if you had a high income, you can borrow larger amount than a small income person can. Of course, they have been pushing that level up over time, you used to be able to borrow 70% and then you borrow 90%, 95%, so they’ve been gearing it up on the basis of a fictional measure of your income anyway. My idea was to say, let’s limit the amount that banks can lend to some multiple
of the income earning capacity of the property being purchased and we have imputed rented series throughout the world. People actually calculate what rent would be earned by an owner occupied property if it was on the rental market rather than owner occupied, so we already have the stats to say what this could be and my rule of thumb is to say, let’s limit the amount of lending to 10 times the annual income of the property being purchased, so in that case like if you look at a property, which is like where I used to live in London, the income earning potential of that place was 12 times my rent, which is £180,000 total, £15,000 times 12. I would limit it to 10 times that rental income with £15,000 that would be £180, 000, that’s all you could borrow to buy the place.

Now at the moment if you and I were competing over that property to buy it, the one of us that got the bigger loan would win. But if you said … neither of us could borrow more than £180,000, and that would be stated on the contract of sale and on all the advertisements, then the one of us [that] would win the contest […] would be the one that had saved more money. So rather than having a [negative] positive amplifying feedback between house prices and leverage, you’d have a dampening effect, and that’s to tame the property market.

PHIL: What do you do about equities though? The crazy thing we’ve seen this year, obviously, is the fact that share prices have been hitting new highs. We’ve had, you know, all this bullshit about the wealth effect, that it’s all going to trickle down and, you know, the counter argument is that, ‘Oh, well, you know, but everyone wins because, you know, their pensions are tied up in it.’ Well, some figures in the UK: pension funds account for 2.4 percent of all the shares that are held in the UK. More than half of UK shares are actually held by people who aren’t even in the country. 13.5 percent are owned by UK individuals, and private non financial companies own 2.6 percent, which is more than pension funds hold. So I mean, this just adds to the argument doesn’t it? It’s the top – well it’s actually not even the top 10% … it’s actually the top 13.5 percent who are the shareholders in the UK. Well actually, no it’s 13.5 percent of shares are owned by UK individuals.

STEVE: … A tiny fraction of the population. So they’ve benefited both from the … Government spending is actually benefiting them because it’s driving up share prices; quantitative easing has had that effect. So we’re doing completely the wrong thing. We’re making capitalism more unequal than it would be on its own merit, which is pretty damn bad to begin with. So my idea on the shares [is] what I call Jubilee Shares. And the idea there was that when a share is first issued by a company, and therefore when you buy it, you’re buying the share off the company, then that share lasts just like a normal share does, gets dividends, lasts indefinitely. As soon as you sell it, or maybe after one or two sales maybe – we might allow that – it becomes a Jubilee Share, and at that point, it has a life for 50 years, after which it terminates.

PHIL: Yeah, and we’ve talked about this before of course, and I had the other idea which was actually, ‘No, you sell it back to the company …’.

STEVE: …Which you could also do, yeah. I mean, the idea is not to eliminate the secondary share market as you want some “price discovery” to go on there, but to trivialize it compared to the Initial Public Offering asset, the primary market. … Like you said, people say we can’t touch shares because, you know, pension funds own so much. How much do they own? Less than 2%. It’s a bullshit argument.

Equally, the same thing applies on the share market discovery side of things … Rather than raising capital, you’re financing massive amounts of speculation, which again is all covered by levered money, with margin debt. So make it such that we make the stock market do what it pretends to do, which is raise capital, and therefore the primary market will become dominant, the secondary becomes trivial and then you’d have a tamed financial sector. Of course, again, the chance of that is a snowflake’s chance in hell.

PHIL: Then you are giving money to … Michael, your point, I saw you on an interview recently where you were talking about the difference between industrial capitalism and finance capitalism, and that’s what we need, we need share investments to fund industrial capitalism, not finance capitalism.

MICHAEL: Well, Steve’s suggestion is good to the extent that it replaces debt with equity. And of course, if you replace debt with equity then the money you owe is automatically reflected by your ability to pay. But I want to get back to what Steve began this whole discussion with, and that’s talking about real estate. What he’s suggesting, of rules for bank lending against real estate, is exactly what existed in the United States from 1945 for the next 20 years. Anyone could go into a bank and ask for a mortgage. The banks were limited … and the amount of money they could lend for real estate – it was limited. Debt service could not absorb more than 25% of your income. And that 25% of income would be in the form of a self-amortizing 30 year mortgage. So what that did was limit the amount of real estate lending throughout the country to the amount that anybody could afford, and housing prices were low.

Well, the banks fought against this, they lobbied against it and now instead of being the limit of 25% of your income, the government Federal Housing Authority guarantees mortgages – government guarantee the mortgages – up to 43% of your income, and the banks can fiddle by saying, ‘OK we won’t have to pay any amortization so you won’t own your house in 30 years. You won’t have repaid any of your debt at all. You’ll just be paying the … it’s an interest only loan and you don’t have to make any down payment’. After World War 2 you had to make 20 or 30 percent of the price of the down payment so the banks have added, they’ve leveraged the whole market because banks don’t ever want the loans to be repaid. They want the loans to grow and grow and that’s what makes, ultimately, the debts impossible to be repaid. So the banks and financial system have lobbied for a system that must mathematically collapse. That’s what Steve and I are talking about. It’s the way it’s set up.

PHIL: So when did this idea of risk disappear from all of this? Because logic would tell you, wouldn’t it, that a bank, you know …

MICHAEL: Well wait a minute, don’t fall for the propaganda. There never was any risk, banks don’t take risks. They have collateral. The banks gain when … When you can’t pay, the bank gets to grab your property. The risk is all on the part of the borrower, not the lender. This is just Chicago School propaganda … They don’t take risks.

PHIL: If we got to a situation where we said, ‘Well, okay, when debt levels get so high we will have some sort of debt moratorium, and people come to expect it, then … isn’t that going to actually grow risk even more, you know, we’ll get to the stage where people go, ‘Well if it’s going to be paid back who cares’.

MICHAEL: No, here’s the following reason. Most people’s debts are not as a result of borrowing. Most people’s debts are accrual. They just grow by leaving them in place and grow and grow and grow, and the bulk of debt for real estate, for corporations, are just accrued interest on the debts that mount up and mount up. That’s how the financial sector, essentially, gains money in their sleep. They don’t make new loans. They just gain the money in their sleep and they leave it. They recycle it and recycle it into more and more lending at an exponential rate, because any interest rate is a doubling plan. And the 29 percent, you know, for the credit card with [special?] rates that doubles in less than 3 years. So you don’t want to pick up their Orwellian rhetoric. You have to pierce the rhetorical shell and talk about reality.

PHIL: Just one final point then, because we’re running out of time now, you mentioned earlier about how in Germany, they were paying – basically furloughing workers – paying 80% of what would have been their salary if they’d been working. It was actually the same in the UK in fact, still is, and in Australia, many other parts of the world … The United States didn’t go down that road for whatever reason; it obviously costs the government too much money to do that. Does this become – you can take this on first Steve – but is this perhaps the beginning of a proof of the idea of a universal basic income. The fact that, you know, the government is paying money with money that the government can in effect create by overspending its budget … What will that do to debt, will that reduce this accumulated debt …?

MICHAEL: Well, if you give everybody a basic income of $1,000,000 a year because that’s how fast the debt will grow, they grow to infinity. Are you willing to pay everybody an infinity basic income to pay the 1% of predators at the top of the scale.

PHIL: Yeah, give me a million a year and then I’d get a very big house … an even bigger house. Well, it would cost a lot but it would be the same size as the house we have now. Your point Steve, on that …

STEVE: I think in one sense it is a proof that UBI can be done, because we had all these, you know, ‘This can never be done, this is not possible, etcetera, etcetera’, and then a crisis happens and ‘Wang’! They throw the neoclassical textbooks out [of] the window (which is where they bloody well belong, so long as they don’t kill a homeless person on the way down) and then they go into panic response so that capitalism won’t fail on their watch, and they do everything they say isn’t possible.

So for example, you mentioned earlier, the Bank of England directly paying for the Treasury’s furlough scheme rather than issuing bonds to cover it. We’re told that can’t be done, that can’t be done, ‘Bang!’ It was done during a crisis. And the same thing for the furlough itself, [it’s] a form of universal basic income, and again that couldn’t be done until it was necessary in a crisis, and then it’s done, it’s a mechanical thing fundamentally. So the trouble is, we try to … The ‘powers that be’, mainstream economists in particular, who don’t like this sort of stuff at all, but also politically conservative types want to ‘unlearn’ these lessons after the crisis.

I often think of the story of Rosie the Riveter (Remember that story during the Second World War? … Where the American government was trying to encourage women to come out and work in the factories when the men were off in the armed forces?) Rosie the Riveter, to sell the idea of women making all the weapons the men would use in the war, and then when the war was over and then we’re back, what do they do? Encourage women to become housekeepers! So, you have an attempt to manipulate public thinking and public opinion and unlearn lessons which were learned during a period of crisis.

PHIL: By the way on that Bank of England thing I think that was only a temporary measure. They allowed them to go into debt just because they couldn’t issue the bonds quickly enough. I don’t think the intention was that they would ever allow an overdraft to sit there.

STEVE: Yeah, it could be done? Absolutely.

PHIL: So Michael it seems your point, you don’t agree that universal basic income would be a step forward.

MICHAEL: No, I think it’s a good idea, I’m just saying that if more and more income is going to be paid for debt service, then more and more of the basic income is going to be paid to the 1% of the 10% of the creditor class . Do you really want that to happen because if we were only to pay for basic needs, then a basic income would be fine. But what are you going to do about the fact that debt is eating more and more and more into disposable personal income?

You have to figure out some way of writing down or limiting the existing debt. And if you do basic income right now, then so many people who run up arrears, but they’re just gonna be vehicles, to pay the pay the the fire SECTOR.

PHIL: Do we care about the top if the top 1% have got themselves heavily into debt? And universal basic income is only gonna take a tiny dent, an insignificant dent out of that? Do we care about how much that’s been carried by the top 1%?

MICHAEL: No, we care about the savings in the 1% that hold the rest of the economy in debt.

STEVE: One fascinating thing that’s happening right now in the data is that the household sector – individuals are having to borrow money as best they can to survive the impact of the coronavirus on their income stream. But when you look at the aggregate level, it’s all turning up on the corporate sector as an increase in corporate debt. To give you an idea, in the beginning of 2020, the level of corporate debt was 74.9 percent of GDP. It was 75.5 in February, 76.6 in in March, and 78% in April. So we’ve had this enormous increase in debt of the corporate sector and what’s really going on there I think is people are simply dipping into their lines of credit, their overdrafts, to avoid shutting their doors. So I think when this when we get through this, yes there’s going to be lots of people evicted from their houses – the rent holiday that were given, the mortgage holidays are gonna come back and bite them because it was only a delay, it wasn’t writing off as it should have been during the crisis. We’re also going to have a large level corporate failures. So I expect we’re going to see the first ever economic crisis without a boom proceeding it.

PHIL: So yeah, it’s an interesting thing there isn’t it because we’re seeing in the UK, (and again it’s the same around the world, but I think the UK’s got a particularly bad) so many retail chains that are disappearing now, there’s not gong to be many left and being put up for fire sales. So they’ve accrued massive debts, those debts are going to have to be written off, the business gets sold off at at a very, very low rate or zero. Someone else comes along, isn’t carrying that that debt burden, can undercut its competition. ’cause it’s set up for a song.

STEVE: The carpetbaggers so back again. Yeah.

PHIL: Are you seeing that sort of thing happening in in the US Michael?

MICHAEL: Yes yes exactly yeah, what’s happening. You’re going to have the very large companies benefiting as the small mom and pop stores go out of business. So you’re going to have restaurant chains surviving but not small restaurants. You’re going to have Amazon have an enormous game. That’s why Amazon stock has been rising so much because you have the small stories going out of business as people are not going shopping. So you’re going to have a huge concentration of wealth and we’re turning into an oligarchy.

And what Steve just said that the first depression was out of a boom. He’s absolutely right and people should realize that we’re still in the Obama depression that began in 2009, when Obama said. ‘I’m going to pay my campaign backers., the banks, and I’m going to kick 10, million families out. I’m going to cause a depression because I’m working for the 1%, and he invited them to the White House and he said, ‘I’m the only guy standing between you and the mob with pitchforks’, namely the people who voted for him. And we’re still in the depression from Obama’s refusal to write down the real estate debts to the realistic value of real estate and Sheila Bair of the FDIC said crooked banks like Citibank, that were mismanaged, hopelessly corrupt, should have gone under but it was all about the bondholders. And the Obama chose to bail out the bondholders instead of the people. This was the start of fascism in the United States and we’re still in it, and we cannot get out of it until we undo the damage that Obama did.

PHIL: You know Michael I really wish you would come out and say what you think! Those pitchforks by the way, those pitchforks are coming just as soon as we’re told we’re allowed out of the house. Maybe that’s part of it, maybe they’re running scared. The fact that they think that the pitchforks are coming so they’ll tell us everything we all gotta lock down for a good year or so..

It’s been fascinating talking to both of you, it’s been fun, as well. We need Michael to get you on again sometime soon, but thanks for your time today.

MICHAEL: Great good to be here.

PHIL: And that’s it. We do this every week, me and Steve Keen. If you want to listen then you need to become a subscriber at debunkingeconomics.com or become a supporter of Steve Keen on Patreon – go to patreon.com/profstevekeen. I’m Phil Dobbie. Thanks for joining us today. Hopefully we’ll catch you again next week, thanks for listening.

Thanks to Andrew Cox and David Moon for help with the transcript.

Photo by Michelle Bonkosky on Unsplash