Wednesday, 30 July 2014

Out of thin air - Why banks must be allowed to create money

by Ann Pettifor, 25th June 2014/Prime Economics

Blogger Ref

‘I know of only three people who really understand money. A professor at another university; one of my students; and a rather junior clerk at the Bank of England.’  Attributed to Keynes [1]
In a recent paper, ‘Money creation in the modern economy’[2] Bank of England staff explained that:
‘[B]anks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits … Commercial banks create money, in the form of bank deposits, by making new loans.’
Because there is widespread confusion about the role of banks in creating money, it did not take long for the Bank of England’s report to ignite debate on the comment pages of the Financial Times. In his regular column, Martin Wolf called for private banks to be stripped of their power to create money. [3]
Wolf’s proposals are radical, and would give a small committee – independent of the state – a monopoly on money creation. His ideas are based on the Chicago Plan, advanced among others by Irving Fisher in the 1930s, and shared today by the UK NGO, Positive Money. They agree that all ‘decisions on money creation would … be taken by a committee independent of government’.
Furthermore, Wolf argues, private commercial banks would only be allowed to:
‘…loan money actually invested by customers. They would be stopped from creating such accounts out of thin air and so would become the intermediaries that many wrongly believe they now are.’
Because I am a vocal critic of the private finance sector, many assume that I would agree with Wolf and Positive Money on nationalising money creation. Not so.

I have no objection to the nationalisation of banks. But nationalising banks is a different proposition from nationalising (and centralising) money creation in the hands of a small ‘independent committee’. Indeed, the notion to my mind is preposterous. It is an approach reminiscent of the misguided and failed monetarist policy prescriptions for controlling the money supply in the 1980s.
Second, the proposal that only money already saved should be made available for lending assumes that money exists as a consequence of economic activity, and equals savings. But that is to get things the wrong way around. Rather, it is credit that functions as money, and it is credit that creates economic activity and employment. Deposits and/or savings are the consequence of the creation of credit and its role in stimulating investment and employment. Employment, as we all know from our own experience, generates income – wages, salaries, profits and tax revenues. A share of this income can then be set aside as savings.
To restrict all economic activity to savings would be to contract economic activity to an ever-diminishing sum of existing savings. Furthermore, the restriction of all lending to existing savings would lead to higher rates of interest, because the level of savings is much lower than the level of potential economic activity and employment. Savers would be in a position to demand a higher return on the loan of their savings. This would return society to the dark ages, when investment and economic activity was subject to the whims of great feudal landowners, putting the financial elite in control of society’s surpluses or ‘savings’.
Money in an historical context
As Douglas Coe and I explain in a recent PRIME report,[4] the UK monetary system – complete with the power to create money ‘out of thin air’ – was established back in 1694 with the goal, among others, of facilitating commercial transactions and the financing of the king’s wars. But there was an additional and just as important goal: to mimic the Dutch in reducing the rate of interest facing commercial interests. British firms, households and individuals were keen to bring rates down and into line with those that prevailed in the financially more advanced Netherlands. Lower rates made investment and employment viable.
A return to a system based on existing savings would cause rates to rise, and once again harm both commercial activity and employment. And this is not to mention the role that high rates play in stratifying the imbalance of power between creditors and debtors, and with it poverty and inequality.
Society’s long struggle to evolve away from dependence for economic life on the savings of the few (the ‘robber barons’) was precisely the point of the development of a sound monetary system. It called for a financial system that could provide the whole spectrum of society – individuals, farmers, entrepreneurs and the state – with affordable finance for the achievement of personal and public economic and social goals.
If directed at productive activity, affordable finance can be used to meet society’s essential needs. In countries without sound monetary systems, there literally is no money. In these countries, only the savings of the fortunate are made available for lending at, invariably, usurious rates of interest. The result is that poverty is deeply entrenched, investment negligible and unemployment high.
Money creation in a wider economic context
Money creation must be understood within the context of the economy as a whole. To do so, it is important to emphasise that the money for a loan is not in the bank when a firm or an individual applies for a loan. It is the application for a loan that results in the creation of deposits, as the Bank asserts.[5] Without applications for loans, there would be no deposits.
In other words, while the banker or bank clerk plays a critical risk assessment role in the ‘creation of money out of thin air’, and while the state plays an equally critical role in transforming that private loan into public fiat money, it is the myriad numbers of Britain’s borrowers who are the real spur for the creation of money. When entrepreneurs and other borrowers apply for loans, they help create money (deposits) ‘out of thin air’.
If entrepreneurs and other borrowers do not apply for loans (because interest rates are too high, terms too tough, confidence low or business slack) the money supply shrinks, as now, and deflation may ensue. If the demand for and supply of loans exceeds the economy’s real potential then the money supply expands and inflation (of assets as well as wages and prices) is an inevitable consequence.
In a well-managed monetary system, private bankers should be regulated by the central bank to ensure that applications for loans are carefully assessed as both affordable and repayable, and that loans are aimed at facilitating transactions between economic actors engaged in productive, income-generating activity. Lending or borrowing for gambling and speculation would be restrained or even prohibited. Speculation, after all, does not increase an economy’s productive capacity, but speculative fevers increase both the risk that borrowers will not make the capital gains needed to repay debts and wider systemic risk.
Money’s dual nature
While a sound monetary system such as our own can, like the sanitation system, be used to promote the interests of society as a whole, the system can also be captured by what is often described as ‘the money interest’ or ‘money power’.
As Geoffrey Ingham explains, money has a dual nature: it is ‘not only infrastructural power, it is also despotic power’.[6]
It is the fate of the British economy presently to be in the grip of a small, wealthy elite who effectively wield ‘despotic power’ over society as a whole.
Wrenching that power away and ensuring the monetary system serves not only the private interests of the wealthy but all of society, including the public sector, is a vital challenge to our democracy. Ensuring that the financial system is the servant, not master, of the economy cannot be achieved on the basis of flawed monetary and economic theory. Nor can a more democratic allocation of finance be achieved by centralising the creation of money in the hands of a small, unaccountable committee of men and women.
The Wolf plan and flawed monetarist theory
Monetarist policy prescriptions have arisen from flawed orthodox monetary theory. Remarkably, orthodox economists do not attach much theoretical importance to money. And when they do theorise about money, ‘Austrian’ economists conceive of it essentially as barter, based on a commodity. So for most orthodox economists, money, like gold or silver, is simply the most exchangeable commodity.
This conceptual error discounts money as credit, based on trust – a major flaw. For as we all know, most economic transactions are based
on trust. To quote a Tory pamphleteer writing in 1696: ‘No trade is managed but by trust.’[7]
The ‘natural rate of interest’ is, according to the flawed conceptualisation of money, a consequence of the supply and demand for the thing that is money. Managing the supply of money came to be regarded by monetarists as essential to restraining inflation.
This is in stark contrast to the understanding of those who founded the Bank of England in 1694, and to that of our greatest economists. Money in their view is not the commodity for which we exchange goods and services; but the thing by which we undertake this exchange (increasingly, a bank transfer, credit card or prepayed card, such as London’s Oyster card). My credit card is not the thing for which I exchange goods and services, but by which I exchange those goods and services.
And that exchange is based on trust reinforced on the one hand by state institutions, including the legal, accountancy and criminal justice systems, and on the other (in the case of the UK) by a currency whose value is determined and issued by a nationalised central bank.
But the key to the UK’s money supply lies with borrowing decisions made at a micro level by hundreds of thousands of economic actors. It is in this sense that ‘money creation’ is a bottom-up, even democratic, process. To strip both entrepreneurs and bank clerks of decision-making about loans would be to strip society of many varied decisions about the necessity for and affordability of money. Yet this is what Martin Wolf and Positive Money effectively call for.
While wider debate on the nature of money and banking is to be welcomed, this debate must take us forward, not backwards to the flawed monetary theories of earlier generations.
Ann Pettifor is director of Policy Research in Macroeconomics (PRIME). The article was originally published in IPPR´s Juncture 21.1 Summer 2014.
[1] Quoted in Lietaer B (2001) The Future of Money, London: Random House.
[2] McLeay M, Radia A and Thomas R (2014) ‘Money creation in the modern economy’, Quarterly Bulletin,
2014 Q1, London: Bank of England.
[3] Wolf M (2014) Financial Times, 24 April 2014.
[4] Coe D and Pettifor A (2014) Bringing money back from ‘the underworld’, London: PRIME.
[5] McLeay et al 2014.
[6] Ingham G (2004) The Nature of Money, London: Polity Press, p4.
[7] Quoted in Martin F (2013) Money: The unauthorised biography, London: Bodley Head, p129


The Shadow Banking System is a Great Big Ticking Time Bomb

Web of Debt blog / By Ellen Brown via Alternet 

The rules of money and banking have changed every 20 or 30 years — now is the time for an overhaul.

Photo Credit:
Blogger Ref Link

One thing to be said for the women now heading the Federal Reserve and the IMF: compared to some of their predecessors, they are refreshingly honest. The Wall Street Journal reported on July 2nd:
Two of the world’s most powerful women of finance sat down for a lengthy discussion Wednesday on the future of monetary policy in a post-crisis world: U.S. Federal Reserve Chairwoman Janet Yellen and International Monetary Fund Managing Director Christine Lagarde. Before a veritable who’s-who in international economics packing the IMF’s largest conference hall, the two covered all the hottest topics in debate among the world’s central bankers, financiers and economists.
Among those hot topics was the runaway shadow banking system, defined by Investopedia as “The financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.” Examples given include hedge funds, derivatives and credit default swaps.
Conventional banks also engage in “shadow banking.” One way is by using their cash cushion as collateral in the repo market, where they can borrow to invest in the stock market and other speculative ventures. As explained by Bill Frezza in a January 2013 Huffington Post article titled “Too-Big-To-Fail Banks Gamble With Bernanke Bucks”:
If you think [the cash cushion from excess deposits] makes the banks less vulnerable to shock, think again. Much of this balance sheet cash has been hypothecated in the repo market, laundered through the off-the-books shadow banking system. This allows the proprietary trading desks at these “banks” to use that cash as collateral to take out loans to gamble with. In a process called hyper-hypothecation this pledged collateral gets pyramided, creating a ticking time bomb ready to go kablooey when the next panic comes around.
Addressing the ticking time bomb of the shadow banking system, here is what two of the world’s most powerful women had to say:
MS. LAGARDE: . . . You’ve beautifully demonstrated the efforts that have been undertaken . . . in terms of the universe that you have under your jurisdiction. But this universe . . . has generated the creation of parallel universes. And . . . with the toolbox with all the attributes that you have — what can you do about the shadow banking at large? . . .
MS. YELLEN: So I think you’re pointing to something that is an enormous challenge. And we simply have to expect that when we draw regulatory boundaries and supervise intensely within them, that there is the prospect that activities will move outside those boundaries and we won’t be able to detect them. And if we can, we won’t be — we won’t have adequate regulatory tools. And that is going to be a huge challenge to which I don’t have a great answer.
Limited to her tools, there probably is no great answer. All the king’s horses and all the king’s men could not rein in the growth of the shadow banking system, despite the 828-page Dodd-Frank Act. Instead, the derivatives pyramid has continued to explode under its watch, to a notional value now estimated to be as high as $2 quadrillion.
At one time, manipulating interest rates was the Fed’s stock in trade for managing the money supply; but that tool too has lost its cutting edge. Rates are now at zero, as low as they can go – unless they go negative, meaning the bank charges the depositor interest rather than the reverse. That desperate idea is actually being discussed. Meanwhile, rates are unlikely to be raised any time soon. On July 23rd, Bloomberg reported that the Fed could keep rates at zero through 2015.
One reason rates are unlikely to be raised is that they would make the interest tab on the burgeoning federal debt something taxpayers could not support. According to the Treasury’s website, taxpayers pay about $400 billion a year in interest on the federal debt, just as they did in 2006 — although the debt has nearly doubled, from $9 trillion to over $16 trillion.  The total interest is kept low by extremely low interest rates.
Worse, raising interest rates could implode the monster derivatives scheme. Michael Snyder observes that the biggest banks have written over $400 trillion in interest rate derivatives contracts, betting that interest rates will not shoot up. If they do, it will be the equivalent of an insurance company writing trillions of dollars in life insurance contracts and having all the insureds die at once. The banks would quickly become insolvent. And it will be our deposits that get confiscated to recapitalize them, under the new “bail in” scheme approved by Janet Yellen as one of the Fed’s more promising tools (called “resolution planning” in Fed-speak).
As Max Keiser observes, “You can’t taper a Ponzi scheme.” You can only turn off the tap and let it collapse, or watch the parasite consume its food source and perish of its own accord.
Collapse or Metamorphosis
The question being hotly debated in the blogosphere is, “What then?”  Will economies collapse globally? Will life as we know it be a thing of the past?
Not likely, argues John Michael Greer in a March 2014 article called “American Delusionalism, or Why History Matters.” If history is any indication, governments will simply, once again, change the rules.
In fact, the rules of money and banking have changed every 20 or 30 years for the past three centuries, in an ongoing trial-and-error experiment in evolving a financial system, and an ongoing battle over whose interests it will serve. To present that timeline in full will take another article, but in a nutshell we have gone from precious metal coins, to government-issued paper scrip, to privately-issued banknotes, to checkbook money, to gold-backed Federal Reserve Notes, to unbacked Federal Reserve Notes, to the “near money” created by the shadow banking system. Money has evolved from being “stored” in the form of a physical commodity, to paper representations of value, to computer bits storing information about credits and debits.
The rules have been changed before and can be changed again. Depressions, credit crises and financial collapse are not acts of God but are induced by mechanical flaws or corruption in the financial system. Credit may stop flowing, but the workers, materials and markets are still there. The system just needs a reboot.
Hopefully the next program that gets run will last more than 20 or 30 years. Ideally, we might mimic the ancient Mesopotamians, the oldest and most long-lasting civilization in history, and devise an economic system that lasts for millennia. How they did it, along with some other promising models, will be the subject of another article. For more on this, see The Public Bank Solution.
About Those Derivatives
How to kill the derivatives cancer without killing the patient? Without presuming to have more insight into that question than the head of the Fed or the IMF, I will just list some promising suggestions from a variety of experts in the field (explored in more depth in my earlier article here):
  • Eliminate the superpriority granted to derivatives in the 2005 Bankruptcy Reform Act, the highly favorable protective legislation that has allowed the derivatives bubble to mushroom.
  • Restore the Glass-Steagall Act separating depository banking from investment banking.
  • Break up the giant derivatives banks.
  • Alternatively, nationalize the too-big-to-fail banks.
  • Make derivatives illegal and unwind them by netting them out, declaring them null and void.
  • Impose a financial transactions tax on Wall Street trading.
  • To protect the deposits of citizens and local governments, establish postal savings banks and state-owned banks on the model of the Bank of North Dakota, the only state to completely escape the 2008 banking crisis.
These alternatives are all viable possibilities. Our financial leaders, in conjunction with our political leaders, have continually re-created the web of money and credit that knits our economy together. But they have often taken only their own interests and those of the wealthiest citizens into account, not those of the general public. It is up to us to educate ourselves about money and banking, and to demand a system that is accountable to the people and serves our long-term interests.
Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of twelve books including the bestselling Web of Debt. In her latest book, The Public Bank Solution, she explores successful public banking models historically and globally. She is currently running for California State Treasurer on a state bank platform.

More corrupt than ever: Thought the bankers who wrecked Britain's economy had reformed? In an excoriating book, the Mail's City Editor reveals they're greedier than ever

    The deeply sombre memorandum sent to Barclays’ 140,000 staff last month came straight from the top. In it, the Oxford-educated chief executive Antony Jenkins, who had got the job two years ago promising an ethical revolution, admitted that the Quaker-founded bank had, once again, been misbehaving.
    This time, the malpractice centred on the appropriately named but little understood ‘dark pools’ — a secretive marketplace where big-league investors conducted share deals far from public view, boosting the bank’s profits at the expense of ordinary customers.
    ‘These are serious charges that allege a grave failure to live up to the culture at Barclays we are trying to create,’ Jenkins asserted. ‘I will not tolerate any circumstances in which our clients are lied to or misled, and any instances I discover will be dealt with severely.’
    Strong words — but very familiar ones.

    The latest market scandal at Barclays has raised questions as to whether Britain's bonus-fuelled, get¿rich-quick approach to banking can ever be erased
    The latest market scandal at Barclays has raised questions as to whether Britain's bonus-fuelled, get¿rich-quick approach to banking can ever be erased


    When Jenkins took over as boss from his disgraced American predecessor Bob Diamond in the summer of 2012, amid an earlier scandal over fixing the rates at which banks lend money to each other (the so‑called Libor rate), he publicly vowed that Barclays would commit to five values of ‘respect, integrity, service, excellence and  stewardship’.
    To underline that commitment, giant Perspex signs were erected in the towering glass and steel entrance of the company’s Canary Wharf headquarters.
    The credo was even etched on the lift doors, while inside the lifts, visitors were shown videos of the wonderful charitable deeds of Barclays and its staff.
    To oversee this cultural revolution, a former Financial Services Authority chief executive, Sir Hector Sants, was hired on a £3 million pay package.

    Fast-forward to today, and what has happened since has made a mockery of those pious promises, raising questions as to whether Barclays’ bonus-fuelled,  get‑rich-quick approach to banking can ever be erased — either from its own Augean stables, or from Britain’s banking sector as a whole.
    For what makes all this so disturbing is that the alleged swindles at Barclays stretch all the way to the boardroom.
    At least eight of its current and former top executives, including the charismatic Bob Diamond, have been interviewed under caution by the Serious Fraud Office over alleged commissions paid to Middle East backers when the bank went in search of new capital in the autumn of 2008, to avoid it falling into the hands of the British government.
    Elsewhere, it has faced or is facing disciplinary action and penalties for a vast range of rotten trading activities, from cheating clients on the gold bullion market to rigging energy prices in California.

    Under investigation: Several high street banks have been dragged into the probe into the unregulated foreign exchange rate market - likened to the 'Wild West'. Barclays (pictured) has confirmed it is being investigated
    Under investigation: Several high street banks have been dragged into the probe into the unregulated foreign exchange rate market - likened to the 'Wild West'. Barclays (pictured) has confirmed it is being investigated

    Under investigation: Several high street banks have been dragged into the probe into the unregulated foreign exchange rate market - likened to the 'Wild West'. Barclays (pictured) has confirmed it is being investigated

    Along the way, Jenkins’ efforts at a cultural revolution seem to have melted away.
    His chosen reformer, Sir Hector Sants, stepped down citing personal stress. And at the bank’s annual general meeting earlier this year, Jenkins and the board faced an unprecedented challenge by leading shareholder Standard
    Life over a ‘fat cat’ pay policy that had created 400 new millionaire bankers at a stroke and paid out £2.38 billion overall in bonuses against a background of shrinking profits and diminished dividends for shareholders.
    This, then, is the reality — a bank that gives all the appearances of being run in the interests of its top executives and ruthless traders rather than its customers or the shareholders who ultimately own it.
    In that sense, it epitomises the culture of ‘bad banks’ that brought the global economy to the brink of collapse some seven years ago.
    Since then, the British people have been promised time and again that practices have been changed, checks and safeguards put in place, rogue traders weeded out, legislation tightened.

    Disgraced: Former Barclays CEO Bob Diamond quit amid an earlier scandal over fixing the rates at which banks lend money to each other (the so-called Libor rate)
    Disgraced: Former Barclays CEO Bob Diamond quit amid an earlier scandal over fixing the rates at which banks lend money to each other (the so-called Libor rate)

    Only yesterday, we were told of yet another major inquiry — this time by the Competition And Markets Authority  into the banks’ provision of current accounts and business lending.
    The constant message has been one of reassurance: our money was safe; our pensions protected.
    If only. For I believe that the toxic culture that underpinned the banking collapse is not only still in place, it is thriving.
    The shady deals may be more sophisticated, masked beneath that shiny new veneer of corporate responsibility, but the dangers are every bit as real — and I fear they may be dragging us inexorably towards a fresh global crisis.
    New scandals are being exposed on an almost weekly basis. The only reason they do not cause wider uproar is that some are so sophisticated that people do not fully comprehend just how they are being scammed.
    Take the ‘dark pools’ scandal as an example. This involves many of the world’s leading banks, including Barclays and Goldman Sachs, systematically cheating ordinary customers by hiding sensitive share trades in a twilight zone, far away from highly regulated stock markets.

    'Dark pools allow the market to be rigged in favour of big banks, shattering the fundamental principle that everyone has exactly the same access to a ‘best price’ quoted on an open market'

    Put it this way: if you or I want to buy shares in a company, we’d need to do so through an open stock exchange where prices fluctuate according to supply and demand.
    Dark pools, however, are essentially private trading systems which match share sales and purchases by favoured clients away from public view. Thus, large-scale transactions can be conducted without triggering a move in the share price.
    This allows big trading organisations, such as hedge funds or banks, to buy or dump large quantities of shares without anyone — except the parties involved — knowing what’s going on. And if you don’t know, then you won’t be able to protect your own investment as the share price begins to move.
    In other words, dark pools allow the market to be rigged in favour of big banks, shattering the fundamental principle that everyone — from the largest fund manager to the humble retiree cashing in their pension — has exactly the same access to a ‘best price’ quoted on an open market.
    But it gets even murkier. Dark pools are the perfect environment for other swindles.
    They are a magnet for computer-savvy, high-frequency traders who use technical know-how — including superfast fibre-optic cables — to buy and sell vast quantities of stocks before the rest of those trading have caught up.
    Just a nanosecond’s advantage can yield huge profits for those involved. To put that in context, a nanosecond is one billionth of a second: it takes hundreds of millions of nanoseconds to blink an eye.

    Murky: Dark pools are the perfect environment for other swindles. They are a magnet for traders who use technical know-how to buy and sell vast quantities of stocks before the rest of those trading have caught up
    Murky: Dark pools are the perfect environment for other swindles. They are a magnet for traders who use technical know-how to buy and sell vast quantities of stocks before the rest of those trading have caught up

    What this means in practice is that if your pension fund is trying to buy a big tranche of shares in a dark pool, a ruthless trader can see that order, race ahead and buy the shares himself — then sell them to your pension fund at a higher price, effortlessly picking your pocket.
    Only now are regulators waking up to the sheer scale of the problem. There were some months this year, for instance, when more than 910 million shares were traded in dark pools per day.
    At Barclays, traders allegedly routed almost all of the bank’s client orders through dark pools instead of passing them through official exchanges. By doing so, they would have boosted their own commission on the trades, and thus their potential bonus pots.
    Goldman Sachs has been fined for failing to protect 395,000 of its clients who lost out because of trades placed through dark pools. Other major banks with dark pool operations, including Credit Suisse, Deutsche Bank and UBS, are now expected to come under scrutiny.
    What we all need to grasp is that the ultimate victim of dark pool trades is not just the small-scale investor who dabbles in a little share-dealing. It’s every single one of us who has an ISA or pension.
    Hard line: The Bank of England's Governor Mark Carney has made similar pledges to clamp down on dodgy practices
    Hard line: The Bank of England's Governor Mark Carney has made similar pledges to clamp down on dodgy practices

    Why? Because honest fund managers who buy or sell millions of shares on our behalf are not competing on a level playing field with the dodgy dark pool dealers. Yet again, the bankers are gorging themselves on fat profits while ordinary families suffer.
    Nor is this the only recent manifestation of banking’s toxic culture and unchanging contempt for fair play.
    In the past few months, some 30 foreign exchange traders — working for banks in London and other major financial markets — have been fired or suspended for alleged corrupt behaviour on the currency markets.
    They are currently being investigated by enforcers on three continents.
    This particular scandal reaches so deeply into the system that even the Bank of England itself has suspended its top foreign exchange dealer and called in a QC to probe alleged wrongdoing in its own trading department.
    So how could these dealers have manipulated the exchange rates? As you’ll know by going to a bank or bureau de change, there’s one rate for buying foreign currency and another for selling.
    The problem is that both rates can be artificially manipulated by a ‘cartel’ of traders if they agree to shift the rate by a tiny increment all at once.
    In London’s foreign exchange (Forex) markets, the prices of currencies are fixed at 4pm each day, based on trades conducted in the 30 seconds or so before. It’s in this vital half-minute that manipulation is alleged to have taken place in recent years.
    Obviously, the rate will affect anyone about to go on holiday. But it also affects most hard-working people in the UK.
    Why? Because much foreign exchange dealing is done on behalf of big investors, such as pension funds. That means the financial future of millions of people is directly affected by any unfair shifts in the exchange rates.
    Every day, an astonishing £3 trillion of overseas currencies — a sum equal to twice Britain’s annual output — is bought and sold by banks around the world, with 40 per cent of the trades carried out in the City of London.
    Disconnect: Dealers are largely divorced from the consumers they should be serving, whether they be ordinary people or a large pension fund or insurance company

    And this is all taking place in a largely unregulated market which is truly the Wild West of finance.
    The growing stench of scandal on the Forex markets has forced the Government’s hand. In his showcase speech to the City at the Mansion House last month, the Chancellor announced that he intends to make it a criminal offence to rig rates on the foreign exchanges, in the commodity markets and in the bond markets.
    This follows new laws, passed earlier this year, which made ‘reckless banking’ a criminal matter.
    The Bank of England’s Governor Mark Carney has made similar pledges to clamp down on dodgy practices.
    Cleaning up largely unregulated global markets is, indeed, a matter of national importance and critical to almost every company and every pension fund in the land. The trouble is, recent history tells us that as soon as one scam is exposed and extinguished, another more complex one springs up in its place.

    That it is not just a legislative failure, it is a failure of morality at the very heart of so many banks today.
    For centuries, the motto of the City was ‘my word is my bond’, and the merchant banks’ honour code ensured that the wider community of investors was protected from dishonesty.

    'Every day, an astonishing £3 trillion of overseas currencies — a sum equal to twice Britain’s annual output — is bought and sold by banks around the world, with 40 per cent of the trades carried out in the City of London'

    Today, however, huge ‘casino’ banks conduct trades electronically on vast dealing floors that stretch as far as the eye can see.
    Dealers are largely divorced from the consumers they should be serving, whether they be ordinary people buying currency for a trip to Mallorca, or a large pension fund or insurance company buying shares in, say, Apple or Google to diversify its holdings.
    In this anonymous environment, personal responsibility for serving the client has been lost, and fiddling the system has become relatively easy. Punishments, meanwhile, have proven woefully ineffective.
    Since the banking crisis of 2007-2008 erupted, financial institutions around the world have paid £150 billion in fines and penalties for wrongdoing.
    Yet still the swindles continue, fuelling suspicion that for many banks, these fines are little more than an everyday expense to be set against their ever-swelling profits.
    The British government’s main reason for taking on the bankers at last is to try to preserve the City as the world’s leading trading centre. To do this, it must attempt to re-establish the integrity and trust that have been shattered in recent times. The big question is why is it taking our politicians so long to tackle the disgraceful practices that have skewered us all?
    For if the past seven years have taught us anything, it’s that the outrageous disregard of traders for the impact of their wrongdoing on ordinary people has continued unabated.
    Bad Banks, by Alex Brummer, published by Random House Business Books

    Read more:
    Follow us: @MailOnline on Twitter | DailyMail on Facebook

    Bad Banks: Greed, Incompetence and the Next Global Crisis review – a rogues' gallery of financial scandal

    Bad Banks: Greed, Incompetence and the Next Global Crisis review – a rogues' gallery of financial scandal

    Alex Brummer's demolition job on the scandals of the last 10 years is a work of controlled menace

    bad banks review brummer
    Just say no: Cypriots protesting against an EU bailout deal outside parliament, Nicosia, March 2013. Photograph: Patrick Baz/AFP/Getty Images
    Just under a decade ago I found myself in common cause with an unlikely ally. The middle of the 2000s marked the second coming of the "loadsamoney" culture that had first reared its head when Margaret Thatcher set the markets free in the 1980s. The big bang was by 2007-08 to lead to the spectacular big bust. But on its eve nobody seemed too bothered: except two print titles, the New Statesman (which I was editing) and the Daily Mail. The paper that liberal Britain loves to hate was the first to get hot under the collar about the banks and their bonuses. Week after week it would fulminate against the spivs and the crooks who were gambling recklessly on individual and corporate debt. Week after week I found that my magazine was in agreement. And so I hired as a columnist the Mail's city editor, Alex Brummer, and the meeting of minds was complete.

    I have long since departed that scene, but Brummer continues faithfully to ply his trade at the Mail. He has turned his reporting of the rogues' gallery into a book, Bad Banks, and has produced a superlatively dispiriting work. Like a surgeon at his operating table, Brummer dissects each British, American and European scandal of the last 10 years. He spares nobody, but his demolition job is made all the more powerful by the sparing language he deploys towards his targets. This is controlled menace at its best.
    The author works backwards, starting with the most colourful and recent target of his paper's stable, the Rev Paul Flowers, chairman of the ethical bank, the Co-op, aka the Crystal Methodist. Only last November, the Mail on Sunday exposed Flowers for his drugs and sex habits. That humiliation laid bare the extent of the complacency and obduracy at the heart of Co-op governance. We had all come to believe that Wall Street and the City might lack a moral compass, but not the Co-op, surely? Brummer concedes that in terms of scale, the scandal was minor compared with the bill of £18bn for wrongful selling of insurance by all the high-street banks, the money-laundering fiasco at HSBC, and Libor rigging by Barclays. But he adds: "The elements that make up the scandal are worryingly reminiscent of other banking disasters in recent years, and demonstrate that in this sector at least history had – and still has – a habit of repeating itself."
    Brummer provides a tour d'horizon of malpractice. The higher the reputation, the further is the fall. The author homes in on JP Morgan Chase, "a patrician bank with an enviable record", and its chairman and chief executive Jamie Dimon. Few bankers were more revered; Dimon visited the Obama White House 16 times. Whenever he appeared on Wall Street's favourite cable channel, CNBC, they rolled out the "Money Honey"correct, anchor Maria Bartiromo, whose job it was "to provide the suitably unchallenging questions". Dimon hated being challenged, not least over the billions the bank lost in a scam dubbed the London Whale. The deeper the bank was mired in scandal, the higher his pay rose, reaching a staggering $20m for 2013. Note the year: this was not before the global financial crisis. His package was awarded, as many others in the US and UK have been, long after governments declared that "lessons had been learned" and supervision had been tightened.
    Continental Europe was just as bad. The supposedly upright Dutch were forced to inject almost €65bn to rescue the industry, including bailing out insurers ING and Aegon and nationalising what remained of ABN Amro after its disastrous merger with RBS. The statist French took to the freewheeling antics of the City of London with considerable aplomb, as Brummer explains with pen portraits of some of its cavalier bankers.
    In July 2012, in the same month that Barclays and its famously combative boss, Bob Diamond, became embroiled in the Libor rate-fixing scandal, the US Senate's subcommittee on investigations issued an excoriating report on HSBC. It accused the bank of being a conduit for "drug kingpins and rogue nations" in Mexico, Saudi Arabia, Iran and others, from 2001 to 2009. For eight years, in spite of board meetings, annual general meetings, HR departments and other mechanisms for corporate governance, the bank was involved in brazen criminal activity.
    It was not just the investment side of the banks' operations – the so-called casino part of the banks – that were up to no good. The "customer-friendly", good old retail divisions were not averse to dodgy dealings. Between 2006 and 2011, 16m payment protection insurance policies were sold, most of them mis-sold, in other words fobbed off at a high premium to unsuspecting customers, and rarely to be recouped. In 2012, banks desperate to salvage their reputations were sending out up to 10,000 compensation cheques a day.
    The great strength in this book lies in the detail. Indeed, so deeply involved does Brummer become in the minutiae of scandals, it is sometimes hard for the lay reader to disentangle one from the other, and to make sense of the bigger picture. The author does bring it all together in the conclusion, making clear, as the subtitle of the book attests, that repetition is inevitable. It is just a matter of time. Governments have tinkered with regulation; they have rapped various individuals over the knuckles, but they remain as supine in the face of the financial services sector as they have ever been. Only in Ireland and Iceland have individuals actually been jailed. Most of the bankers who oversaw wrongdoing remain in situ and continue to be rewarded handsomely for their efforts.
    Brummer gives the last word to Justin Welby. Invoking the Archbishop of Canterbury might, at first glance, seem curious, but Welby spent 11 years as an oil executive and served on a parliamentary commission on banking. He notes he has heard nothing to convince him that the bankers were contrite, that the institutions they served had truly changed their nature, or that there had been a revolution in banking practice. He then muses: "At the heart of good banks have to be good people." Given everything that has happened; given the ease with which billions of dollars can be transferred around the world at the flick of a mouse, the idea of leaving moral rectitude to the individual's conscience seems just a touch naive.
    John Kampfner's new book, The Rich, a 2000-year History, is published by Little Brown in October.

    Tuesday, 22 July 2014

    Nobel Economist Joseph Stiglitz Hails New BRICS Bank Challenging U.S.-Dominated World Bank & IMF

    A group of five countries has launched its own development bank to challenge the U.S.-dominated World Bank and International Monetary Fund. Leaders from the so-called BRICS countries — Brazil, Russia, India, China and South Africa — unveiled the New Development Bank at a summit in the Brazilian city of Fortaleza. The bank will be headquartered in Shanghai. Together, BRICScountries account for 25 percent of global GDP and 40 percent of the world’s population. To discuss this development, we are joined by Nobel Prize-winning economist Joseph Stiglitz, a professor at Columbia University and the World Bank’s former chief economist. "It’s very important in many ways," Stiglitz says of the New Development Bank’s founding. "This is adding to the flow of money that will go to finance infrastructure, adaptation to climate change — all the needs that are so evident in the poorest countries. It [also] reflects a fundamental change in global economic and political power. The BRICS countries today are richer than the advanced countries were when the World Bank and the IMF were founded. We’re in a different world — but the old institutions haven’t kept up."

    (Blogger Ref Link


    This is a rush transcript. Copy may not be in its final form.
    JUAN GONZÁLEZ: A group of five countries have launched their own development bank to challenge the United States-dominated World Bank and International Monetary Fund. Leaders from the so-called BRICS countries—Brazil, Russia, India, China and South Africa—unveiled the New Development Bank at a summit in Brazil. The bank will be headquartered in Shanghai. Chinese President Xi Jinping said the agreement would have far-reaching benefits for BRICS members and other developing nations.
    PRESIDENT XI JINPING: [translated] Through the concerted effort from all sides, we have managed to reach a consensus in the creation of the BRICSdevelopment bank today. This is the result of the significant implications and far reach of BRICScooperation and is therefore the political will ofBRICS nations for common development. This will not only help increase the voice of BRICS nations in terms of international finance, but, more importantly, will bring benefits to all the people in the BRICScountries and for all peoples in developing countries.
    AMY GOODMAN: That was Chinese President Xi Jinping. Together, BRICS countries account for 25 percent of global GDP and 40 percent of the world’s population.
    For more, we’re joined now by Joseph Stiglitz, the Nobel Prize-winning economist, professor at Columbia University, author of numerous books. His new book is called Creating a Learning Society: A New Approach to Growth, Development, and Social Progress.
    We welcome you to Democracy Now!
    JOSEPH STIGLITZ: Good to be here.
    AMY GOODMAN: Talk about the significance of this bank.
    JOSEPH STIGLITZ: Oh, it’s very, very important, in many ways. First, the need globally for more investment—in the developing countries, especially—is in the order of magnitude of trillions, couple trillion dollars a year. And the existing institutions just don’t have enough resources. They have enough for 2, 3, 4 percent. So, this is adding to the flow of money that will go to finance infrastructure, adaptation to climate change—all the needs that are so evident in the poorest countries.
    Secondly, it reflects a fundamental change in global economic and political power, that one of the ideas behind this is that the BRICS countries today are richer than the advanced countries were when the World Bank and the IMF were founded. We’re in a different world. At the same time, the world hasn’t kept up. The old institutions have not kept up. You know, the G-20 talked about and agreed on a change in the governance of the IMF and the World Bank, which were set back in 1944—there have been some revisions—but the U.S. Congress refuses to follow along with the agreement. The administration failed to go along with what was widely understood as the basic notion that, you know, in the 21st century the heads of these institutions should be chosen on the basis of merit, not just because you’re an American. And yet, the U.S. effectively reneged on that agreement. So, this new institution reflects the disparity and the democratic deficiency in the global governance and is trying to restart, to rethink that.
    Finally, there have been a lot of changes in the global economy. And a new institution reflects the broader set of mandates, the new concerns, the new sets of instruments that can be used, the new financial instruments, and the broader governance. Realizing the deficiencies in the old system of governance, hopefully, this new institution will spur the existing institutions to reform. And, you know, it’s not just competition. It’s really trying to get more resources to the developing countries in ways that are consistent with their interests and needs.
    JUAN GONZÁLEZ: And the importance of countries like China, which obviously has huge monetary reserves, and Brazil, which had developed its own development bank now for several years, their being key players in this new financial organization?
    JOSEPH STIGLITZ: Very much. And that illustrates, as you say, a couple interesting points. China has reserves in excess of $3 trillion. So, one of the things is that it needs to use those reserves better than just putting them into U.S. Treasury bills. You know, my colleagues in China say that’s like putting meat in a refrigerator and then pulling out the plug, because the real value of the money put in U.S. Treasury bills is declining. So they say, "We need better uses for those funds," certainly better uses than using those funds to build, say, shoddy homes in the middle of the Nevada desert. You know, there are real social needs, and those funds haven’t been used for those purposes.
    At the same time, Brazil has—the BNDES is a huge development bank, bigger than the World Bank. People don’t realize this, but Brazil has actually shown how a single country can create a very effective development bank. So, there’s a learning going on. And this notion of how you create an effective development bank, that actually promotes real development without all the conditionality and all the trappings around the old institutions, is going to be an important part of the contribution that Brazil is going to make.
    JUAN GONZÁLEZ: And how has that bank functioned differently, let’s say, than other development banks in the North?
    JOSEPH STIGLITZ: Well, we don’t know yet, because it’s just getting started. The agreement—it’s been several years underway. The discussions began about three years ago, and then they made a commitment, and then they—you know, they’ve been working on it very steadily. What was big about this agreement was—there was a little worry that there would be conflicts of the interests. You know, everybody wanted the headquarters, the president. Would there be enough political cohesion, solidarity, to make a deal? Answer was, there was. So, what it is really saying is that in spite of all of the differences, the emerging markets can work together, in a way more effectively than some of the advanced countries can work together.
    AMY GOODMAN: Joe Stiglitz, you’re the former chief economist of the World bank. What’s your assessment of the World Bank under the tenure of Jim Yong Kim, who is the former Dartmouth president? We just passed the second anniversary of his tenure there.
    JOSEPH STIGLITZ: Well, it’s still too soon to say.
    AMY GOODMAN: When it comes to issues of debt and other issues.
    JOSEPH STIGLITZ: You know, because it takes a while for somebody to get in charge of the bank and to—you know, it’s like a big ship, and you’re trying to shift it. I think there’s a broad concern that he brings certain very positive strengths to the bank—a focus on health and other social issues—but successful development will have to continue to have a focus on some of the old issues. So, you know, you have to grow. And he has a little bit less experience in the fundamentals of economic growth. I think he has probably more sensitivity to some of the problems that have plagued these international financial institutions in the past, the high conditionality. But he faces a governance problem. And that’s what this issue is about, a governance problem, where the head of the World Bank is chosen by the U.S., even though the U.S. is not playing the economic role and the leadership role that it did at one time. And we all believe in democracy, but a democracy says it shouldn’t be just assigned to one country.
    One of the interesting aspects of the discussions that I’ve heard is, you know, during the East Asia crisis, one of the senior, very senior U.S. Treasury officials said, "What are you complaining about, about our telling countries what to do? He who pays the piper calls the tune." And what I hear now is the developing countries, emerging markets, China and the other countries, saying, "We’re paying the tune. We’re the big players now. We have the resources. We’re where the reserves are. And yet, you don’t want to let us play even a fair share in the role, reflecting the size of our contributions in the economy, in trade." And so, that’s one of the real grievances—I think valid grievances. And it’s hard for an institution where the governance is so out of tune with current economic and political realities to be as effective as it could be.
    JUAN GONZÁLEZ: I wanted to ask you about a subject we just had on—were discussing in an earlier segment: immigration and this whole issue of the world economy and financial systems. You have the contradiction that, on the one hand, globalization is breaking down barriers to capital everywhere, and yet, in the advanced countries especially, you have the growth of anti-immigrant movements, not just in the United States, but in Europe, in England and in Holland. And so you have a situation where there’s an effort to erect barriers to labor and to the free flow of labor. And the impact of these kinds of debates—just a few days ago, you had Warren Buffett, Bill Gates and Sheldon Adelson, a conservative Republican, all blasting Congress for not being able to achieve some kind of comprehensive immigration reform. The impact of this on the world economy?
    JOSEPH STIGLITZ: Well, I think there are a couple of aspects of this that one has to appreciate. On the one hand, it’s absolutely true that free mobility of labor would have an impact on global incomes that is an order of magnitude greater than the free mobility of capital. So, the agenda that the U.S. has pursued, that free mobility of capital, has been driven not by on the grounds of global economic efficiency. It’s really special interests. It’s the banks that wanted this. On the other hand, both the movement of capital and labor can have disturbing effects. You know, we saw how free mobility of capital, short-term capital, especially, going in and out, can cause crises. We also know that migration of labor has—social adjustment processes have to occur. One of the real concerns, increasing concern, say, in a country like the United States, is that—how do you share the benefits of globalization? And there are wages are driving—been driven down. You know, the median income, income in the middle, of the United States today is lower than it was a quarter century ago. Median income of a full-time male worker is lower than it was 40 years ago. Productivity of workers has gone up over 100 percent in, say, the last 40 years—
    AMY GOODMAN: We have 15 seconds.
    JOSEPH STIGLITZ: —but wages are down by 7 percent.
    AMY GOODMAN: We’re going to have to continue this conversation off air, and then we will post it at I also want to ask you about the Trans-Pacific Partnership—you talk about it being on the wrong side of globalization—your assessment of President Obama when it comes to the growing gap in inequality in this country. Joe Stiglitz is the Nobel Prize-winning economist, professor at Columbia University, former chief economist of the World Bank. He is author of many books; his latest, Creating a Learning Society: A New Approach to Growth, Development, and Social Progress.
    That does it for our show. I’ll be speaking at the Mark Twain House in Hartford, Connecticut, Monday, July 21st, at 7:00 p.m.; in Martha’s Vineyard, Saturday, July 26, 7:00 p.m. at Katharine Cornell Auditorium in Vineyard Haven. Check out

    with Amy Goodman & Juan González

    Are students revolting, or is it economics?

    Last week I made my first overseas trip on which I ticked the box 'Australian resident departing permanently'. It’s given me cause to reflect on my career as an academic economist (and part-time journalist) in Australia.
    Today I commence a new role as Head of the School of Economics, History and Politics atKingston University, London, 41 years after my life as an economist began in 1973. That’s not when my PhD was approved, nor when I got my first academic job, but the date on which I participated in the student revolt over the teaching of economics in a dispute that led to the formation of the Department of Political Economy at Sydney University in 1975.
    This dispute has always been tagged with a left-wing brush. Australia’s current Prime Minister Tony Abbott, when he was President of the Students Representative Council at Sydney University in 1979, supported cutbacks to University funding on the grounds that they would force Universities to stop running courses like political economy:
    Abbott: “Quite frankly I think that these courses are not only trivial, but they are attempts by unscrupulous academics to impose simplistic ideological solutions upon students, as it were to make students the cannon fodder for their own private versions of the revolution. And I think that if there were further cuts to the education budget well then we would certainly see the Universities cracking down on that sort of course. The fact that they can offer that sort of course is to me proof that there is room for further cuts.”
    Interviewer: “You also suggest cutting out political economy?”
    Abbott: “That’s right”
    There’s no doubt that the vast majority of the activists in Political Economy Movement were left-wing. But my core motivation for taking part in that dispute was that mainstream economic theory was simply wrong.
    The next 40 years of reading economic literature confirmed that gut feeling. Mainstream ‘neoclassical’ economics had a multitude of flaws, all of which had been documented in the academic literature, yet almost none of them were discussed in economics textbooks.
    Instead, textbook authors either ignored the problems, or did the mother of all Photoshop jobs on the frankly ludicrous assumptions that were made to paper over problems in the theory, so that the flawed models could sound halfway reasonable to someone who only read the textbooks.
    I decided that the best way to reform economics was to explain the technical problems in economic theory in a way that a non-mathematical audience could understand, and to “read aloud the dirty bits” as well: to publish the unsanitised assumptions as they were made in the journals themselves. Statements like the following, for example:
    The necessary and sufficient condition quoted above is intuitively reasonable. It says, in effect, that an extra unit of purchasing power should be spent in the same way no matter to whom it is given. (Gorman 1953 , p. 64)
    “Intuitively reasonable”? Delusional is closer to it.
    But explaining that the theory was unsound wasn't enough. There had to be an alternative way of thinking about the economy too that actually made sense, and there also had to be a reason for the public to actually worry about the state of economic theory in the first place.
    I found the explanation that in Hyman Minsky’s John Maynard Keynes, which is not a biography. Most non-orthodox economics portrayed capitalism as having a tendency towards stagnation. In contrast, Minsky saw the fundamental instability in a capitalist system as upwards: “The tendency to transform doing well into a speculative investment boom is the basic instability in a capitalist economy.”
    Banks, private debt, asset markets and money played essential roles in Minsky’s vision of capitalism, but they were completely ignored in mainstream economic models before the crisis. This is where Abbott was and is wrong: just because left-wing economists are ideological, it doesn’t follow that mainstream economics was logical. Crucially, its illogical decision to model capitalism as if banks, private debt and money didn’t exist led it massively astray when it came to perceive grave risks to the real economy.
    Minsky’s realistic vision of capitalism instead indicated that a pure free market economy --one with no government sector at all -- could collapse into a terminal debt-deflation after a series of debt-driven booms and subsequent slumps. On the other hand, a mixed economy in which government was a substantial economic force whose net spending rose when the economy went into a slump would avoid a debt-deflation, but it would necessarily be cyclical, though with milder booms and slumps.
    In 1992, I modelled Minsky by adding two elements of realism to Richard Goodwin’s highly stylised model of a cyclical economy. In Goodwin’s model, capitalists invested all their profits, while workers made wage demands depending on the level of employment. I added the reality that capitalists invest less than profits during a slump, but more than profits than a boom, with the extra finance being created by bank lending.
    Figure 1: The "black hole of debt" in my 1992 model
    Graph for Are students revolting, or is it economics?
    My mixed economy model included a government sector that defended a target level of employment spent more than taxes during slumps and less than taxes during booms, and financed this by its own money-creation capability.
    The two models generated the outcomes Minsky anticipated, but the real world fitted neither of these models precisely. So I expected the real world to display a mixture of the results of the two models. As I put it in my 1995 paper: "Increased government spending during slumps would enable recovery in the aftermath to lesser booms; larger booms, however, could result in the rate of growth of accumulated private debt exceeding net profits for some time, thus leading to a prolonged slump."
    Figure 2: The cyclically stable mixed economy 1992 model
    Graph for Are students revolting, or is it economics?
    So I had an alternative way of thinking about the economy, which cautioned against the many radical ‘reforms’ of capitalism that the neoclassical school was gung-ho about: deregulating finance, reducing the size of the government sector, eliminating trade unions, driving inflation towards zero.  From my “Minskian” perspective, what they were doing was making the real world less like the cyclical but stable system shown in Figure 2and more like the superficially stable but ultimately catastrophic system shown in Figure 1. I therefore felt that the economy could quite possibly fall into a serious economic crisis which would take the mainstream utterly by surprise. One look at the private debt data for Australia and the USA in 1995 (see Figure 3) convinced me that a crisis was certain in the near future -- and too soon to tolerate the lengthy publication delays that occur in the academic press. So I turned to the media and to the blogosphere.
    Figure 3: Australian & US private debt ratios when I started to warn of an impending crisis
    Graph for Are students revolting, or is it economics?
    That crisis duly occurred about two years later, and took mainstream economics completely by surprise, because neoclassical economic models then completely ignored the role of banks, private debt, and money. They instead focused on the levels of employment and inflation, and saw the apparent stability of the ‘Great Moderation’ as indicators that they have finally tamed the business cycle:
    "There is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy." (Bernanke 2004, “What Have We Learned Since October 1979?”)
    Figure 4: The crisis began when the rate of growth of private debt slowed down
    Graph for Are students revolting, or is it economics?
    The crisis shook mainstream policy economists to the core, and led to the biggest government economic rescue operation since the Great Depression. It was a scale of engagement that took me by surprise, until I realised that the rescue policies were driven not by economic theory but by sheer, blind panic:
    “We need to buy hundreds of billions of assets”, I said. I knew better than to utter the word trillion. That would have caused cardiac arrest. “We need an announcement tonight to calm the market, and legislation next week,” I said.
    What would happen if we didn’t get the authorities we sought, I was asked.
    “May God help us all,” I replied. (Paulson 2010, p. 261)
    As it turned out, sheer blind panic was a better guide to what to do in a crisis than was economic theory. The immense injection of government money stopped the downward plunge into Depression—as Minsky had argued that it would.
    But then the human psyche came into play. Mainstream academic economists excused themselves from their failure to anticipate the crisis with the mantra that “no-one could have seen this coming”, politicians and policy economists went back to obsessing about the level of government debt, and ignoring the dynamics of private debt, and another private-debt-driven boom began in the Anglo countries (see Figure 5).
    Figure 5: Today's recovery is driven by rising private debt from an unprecedented level after a slump
    Graph for Are students revolting, or is it economics?
    So business-as-usual has returned. But it won’t be business-as-usual at Kingston. I’ve been hired with the express mandate to take a University that is open to non-orthodox thought in economics and make it even stronger. We will teach neoclassical economics as well, warts and all. And we will teach the many non-orthodox streams of thought (post Keynesian, evolutionary economics, econophysics) too.
    In doing so, we’ll be responding to the successors of those students who, 41 years ago, fought for a different approach to economics at Sydney University. There are now at least 65 student organizations around the world calling for a new approach to economics in what they have titled ISIPE: the "International Student Initiative for Pluralism in Economics”.
    Today’s mainstream economists will surely regard them as hopelessly ill-informed about economic theory. They are not. They simply want a realistic approach to economics, as I did when I was in their shoes 41 years ago.
    Steve Keen is author of Debunking Economics and the blog Debtwatch and developer of the Minsky software program. A longer version of this article will be published on Debtwatchlater this week.