In today’s Europe, of course, the tables are decisively turned. It is not Germany that is suffering under an unsustainable sovereign debt burden, but its southern eurozone partners.

 

What is the German counsel? Answer: the economics of austerity. Countries with high sovereign debts must increase taxes and cut spending regardless of the consequences for the real economy. Angela Merkel likes to evoke the Swabian housewife: “In the long run you can’t live beyond your means.”

 

Underpinning the German position is the belief that resolving debt problems is the sole responsibility of the debtor. Keynes, by contrast, held that both creditors and debtors should share the task of getting economies out of holes they had jointly dug. “The absolutists of contract,” he wrote in 1923, “are the real parents of revolution.”

 

The economic effects of this policy are becoming clearer by the day: unlike the US, unlike the Bric countries (Brazil, Russia, India and China), Europe has essentially stopped growing – and there is little hope of growth resuming in the near term. Nor, evidently, have the debt problems been solved. Since the collateral for sovereign debt is citizens’ capacity to pay tax, recession and unemployment undermine the capacity to service debts and national credibility in capital markets, as shown again this week by rising yields in southern European debt markets.

 

The political consequences are, if anything, worse. Talks to form a Greek government have collapsed. This is unsurprising: no government pledged to unalloyed austerity in response to its debt obligations can face its voters with confidence.

 

Yet Greece is only an extreme example. Centrist governments across the Mediterranean are increasingly seen by their citizens as powerless. They have no independent monetary policy; no capacity to devalue; no right to impose capital controls; limited ability to support failing national enterprises; and now they are mandated to tighten fiscal policy. When moderation fails, the time comes for citizens to turn to those promising to take power into their hands, be they from the right or the left – anything but the pusillanimous centre!

That is what happened in the 1930s. It is a historical irony that European countries that avoided a repeat of the Great Depression after the banking crisis are now driving into the blind cul-de-sac that led to extremism in that earlier disaster. German historical memory has vivid recall of the hyperinflation of 1920-23. But it is possible to forget it was deflation and the Great Depression that brought Hitler to power in 1933.

 

One of the lessons of history is that sovereign debts must be managed in ways that do not destroy either the economy or the political centre ground. Europe hosts some of the best – and best paid – financial experts in the world; let their talents help governments shake off their paper shackles and devise ways of reducing debt without austerity.

 

If this means project spending – financed off-balance sheet by jointly guaranteed liabilities or by higher taxes, so be it. If it means substantial restructuring of sovereign debts swapped into indexed debt or growth bonds, or with grace periods until countries resume growth, so be it. If it requires shifting some of the burden of debt finance on to older generations who own the debt, that political issue must also be faced.

 

Eurozone countries must be allowed to grow again. For a country in such desperate straits as Greece, however, orderly exit from the euro to regain competitiveness looks to be the best option. But it is in the interest of both Greece and its creditors that the resulting devaluation be controlled. We must not add currency wars to our present pile of problems.

 

 

 

 

Full details about the event can be found here: www.exeter.ac.uk/news/events//details/index.php

 

There are two possible reasons for the discrepancy between forecast and outcome. Either the damage caused by the financial crisis was more serious than people realized, or the economic medicine prescribed was less efficacious than policymakers believed.

 

In fact, the gravity of the banking crisis was quickly grasped. Huge stimulus packages were implemented in 2008-9, led by the United States and China, coordinated by Britain, and with the reluctant support of Germany. Interest rates were slashed, insolvent banks were bailed out, the printing presses were turned on, taxes were cut, and public spending was boosted. Some countries devalued their currencies.

 

As a result, the slide was halted, and the rebound was faster than forecasters expected. But the stimulus measures transformed a banking crisis into a fiscal and sovereign-debt crisis. From 2010 onwards, governments started to raise taxes and cut spending in response to growing fears of sovereign default. At that point, the recovery went into reverse.

 

As Carmen Reinhart and Kenneth Rogoff tell it in their masterly book This Time is Different, there is no secure way of short-circuiting a deep banking crisis. The crisis originates with “excessive debt accumulation,” which makes economies “vulnerable to crises of confidence.” Commercial banks have to be bailed out by governments; then governments have to be bailed out by commercial banks. In the end, both have to be bailed out by central banks.

 

All of this, according to Reinhart and Rogoff, involves a “protracted and pronounced contraction in economic activity.” They reckon that the average length of post-war crises has been 4.4 years – the time it takes for the necessary “de-leveraging” to occur – after which the crisis of confidence is over and economic growth revives.

 

However, there is something missing in the story. Recovery from the Great Depression took about 10 years, more than twice the post-war average. Reinhart and Rogoff offer a couple of reasons for the difference in recovery rates: the slow policy response to the Great Depression and the gold standard, which meant that individual countries could not export their way out of depression. In other words, fiscal policy and the monetary-policy regime have a decisive influence both on the depth of the collapse and how long before the economy recovers.

 

It is also significant that big financial collapses occurred again in the 1970’s, after being virtually absent in the 1950’s and 1960’s, when the Keynesian system of managed economies and the Bretton Woods system of managed exchange rates was in place. The major post-war crises that Reinhart and Rogoff consider run from 1977 to 2001. They occurred because regulation of banks and controls on capital movements were lifted; they were shorter than in the 1930’s because the policy responses were not idiotic.

 

Indonesian president Susilo Bambang Yudhoyono emphasized that point earlier this month, boasting to British Prime Minister David Cameron that Indonesia’s successful recovery plan after the 1998 collapse was inspired by John Maynard Keynes. “We must ensure that the people can buy; we must ensure that industries can produce…”

 

Today, many governments, especially in the eurozone, seem to have run out of policy options. With fiscal austerity all the rage, they have given up ensuring that “people can buy” and “industries can produce.” Central banks have been handed the job of keeping economies afloat, but most of the money that they print remains stuck in the banking system, unable to arrest stagnating consumption and falling investment.

 

Moreover, the eurozone itself is a mini-gold standard, with heavily indebted members unable to devalue their currencies, because they have no currencies to devalue. So, given that Chinese growth, too, is slowing, the world economy seems destined to crawl along the bottom for some time yet, with unemployment rising in some countries to 20% or more.

 

With fiscal, monetary, and exchange-rate policies blocked, is there a way out of prolonged recession? John Geanakoplos of Yale University has been arguing for big debt write-offs. Rather than waiting to get rid of debt through bankruptcies, governments should “mandate debt forgiveness.” They could buy bad loans from lenders and forgive part of the principal payable by borrowers, simultaneously reducing lenders’ collateral requirements and borrowers’ debt overhang. In the US, the Term Asset-Backed Securities Loan Facility (TALF) program and the Public-Private Investment Program (PPIP) were in effect debt-forgiveness schemes aimed at sub-prime mortgage holders, but on too small a scale.

 

But the principle of debt forgiveness clearly has applications for public debt as well, especially in the eurozone. Those who fear excessive public debt are the banks that hold it. Junk public bonds are no safer for them than junk private bonds. Both lenders and borrowers would be better off from a comprehensive debt cancelation. So would citizens whose livelihoods are being destroyed by governments’ desperate attempts to de-leverage.

 

Philosophically, the debt-forgiveness approach rests on the belief that creditors share culpability for defaults with debtors, since they made the bad loans in the first place. As long as the borrower has not misled the lender at the time of taking the loan, the lender bears at least some responsibility for the transaction.

 

In 1918, Keynes urged the cancelation of inter-Allied debts arising from World War I. “We shall never be able to move again, unless we can free our limbs from these paper shackles,” he wrote. And, in 1923, his call became a warning that today’s policymakers would do well to heed: “The absolutists of contract…are the real parents of revolution.”

 

 

 

 

To order Skidelsky on the Economic Crisis, write to 207 Fielden House, 13 Little College Street, London SW1P 3SH, enclosing a cheque for £7.

 

 

 

He'll also be at the Judith Reppy Institute for Peace Studies on Thursday speaking at a seminar on "Globalization and Peace: The Missing Link": April 19, 12:15-1:30pm at G08, Uris Hall.

 

 

 

Behind the dismissal of economic history and the history of ideas lies the mistaken view of economics as a natural science, whose knowledge base automatically cumulates. For example, anything worthwhile in the old has been incorporated in the new, and can therefore be neglected. This ignores the fact that, unlike in the natural world, the reality that economics aims to study and understand is constantly shifting, largely as a result of our own actions. The future is not just full of unknowns, but, in Donald Rumsfeld's immortal phrase, of "unknown unknowns."

 

The study of the past can help economists narrow the scope of the "unknown unknowns" by casting their net wider. Models that tell us economic collapses cannot happen are no use in trying to understand what did happen in 2008; for this we must go back to such historical greats as Keynes, Hayek and Schumpeter. Forecasting models based on average data of five "good" years cannot begin to guard us against the manias, panics and crashes that have punctuated economic history. If the recent collapse can restore forgotten knowledge to the education of future economists, it will at least have done some good.

 

For the other contributions to Room for Debate: Rethinking how we teach economics, visit www.nytimes.com/roomfordebate/2012/04/01/how-to-teach-economics-after-the-financial-crisis

 

 

Such dark protectionist thoughts are far from the minds of the benevolent organizers of the United Kingdom’s annual “Fairtrade Fortnight,” during which I just bought two bars of fair-trade chocolate and a jar of fair-trade chunky peanut butter. Their worthy aim is to raise the price paid to developing-country farmers for their produce by excluding the inflated profits of the middlemen on whom they depend for getting their goods to distant markets. Fair-trade products like cocoa, coffee, tea, and bananas do not compete with domestic European production, and therefore do not have a protectionist motive.

 

This is how it works: In exchange for being paid a guaranteed price and meeting “agreed labor and environmental standards” (minimum wages, no pesticides), poor-country farming cooperatives receive a FAIRTRADE mark for their products, issued by the FAIRTRADE Labeling Organization. This certification enables supermarkets and other retailers to sell the products at a premium. Third-world farmers get a boost to their income, while first-world consumers get to feel virtuous: a marriage made in heaven.

 

The fair-trade movement, launched in the 1980’s, has been growing rapidly. In a notable break through in 1997, the British House of Commons decided to serve only fair-trade coffee. By the end of 2007, more than 600 producers’ organizations, representing 1.4 million farmers and 58 countries, were selling fair-trade products. Today, a quarter of all bananas in UK supermarkets are sold under a FAIRTRADE mark. But FAIRTRADE-labeled products still represent a very small share – typically less than 1% – of global sales of cocoa, tea, coffee, etc.

 

The economic rationale for guaranteed prices is well known: stabilizing the prices of primary products, which are subject to sharp fluctuations, stabilizes their producers’ incomes. This argument inspired proposals – most famously by John Maynard Keynes in 1942 – to create “buffer stocks” for the main commodities, which would take supply off the market when prices fell, and add to supply when prices rose. Keynes’s proposal never made it into the Bretton Woods Agreement of 1944, and, while buffer-stock schemes re-surfaced in the 1970’s, they, too, went nowhere.

 

Left-wing economists like Raoul Prebisch, moreover, later advanced the theory of “declining terms of trade” for primary products: their prices’ long-run tendency to fall relative to the prices of manufactured goods. This tendency seemed to be at work from the mid-1980’s, as commodity producers experienced a persistent decline in prices. In addition, price fluctuations throughout that decade were huge, with dire effects on sub-Saharan African and other developing countries that were largely dependent on commodities for export earnings.

 

Since then, however, the price decline has been reversed. Food commodity prices have increased by 150% since 2001. This has raised farm producers’ income independently of the fair-trade movement’s efforts. The “declining terms of trade” argument has collapsed.

 

But primary-product prices remain much more volatile than the prices of manufactured goods and services, causing large fluctuations in producers’ incomes. This exaggerates the effects of booms and busts. So the issue of price stabilization has not gone away.

 

It is hard to see how the fair-trade movement can contribute much to solving this problem, because the only serious policy for stabilizing producers’ incomes is to control supply. But this is beyond the scope of fair trade.

 

The target of all versions of fair trade is “free trade,” and the most damaging attacks on FAIRTRADE have come from the free traders. In Unfair Trade, a pamphlet published in 2008 by the Adam Smith Institute, Mark Sidwell argues that FAIRTRADE keeps uncompetitive farmers on the land, holding back diversification and mechanization. According to Sidwell, the FAIRTRADE scheme turns developing countries into low-profit, labor-intensive agrarian ghettos, denying future generations the chance of a better life.

 

This is without considering the effect that FAIRTRADE has on the poorest people in these countries – not farmers but casual laborers – who are excluded from the scheme by its expensive regulations and labor standards. In other words, FAIRTRADE protects farmers against their rivals and against agricultural laborers.

 

Consumers, Sidwell argues, are also being duped. Only a tiny proportion – as little as 1% – of the premium that we pay for a FAIRTRADE chocolate bar will ever make it to cocoa producers. Nor is FAIRTRADE necessarily a guarantee of quality. Since producers get a minimum price for fair-trade goods, they sell the best of their crop on the open market.

 

But, despite its shaky economics, the fair-trade movement should not be despised. While cynics say that its only achievement is to make consumers feel better about their purchases – rather like buying indulgences in the old Catholic Church – this is to sell fair trade short. In fact, the movement represents a spark of protest against mindless consumerism, grass-roots resistance against an impersonal logic, and an expression of communal activism.

 

That justification will not convince economists, who prefer a dryer sort of reasoning. But it is not out of place to remind ourselves that economists and bureaucrats need not always have things their own way.

 

 

Even Moody's, arbiters of global finance, is no longer confident that the coalition's current strategy is working: on 13 February, the agency changed its outlook on the UK's prized AAA credit rating to negative, citing uncertainty over whether the coalition government's strategy of fiscal consolidation will succeed in reducing the debt burden.

 

All these doubts ultimately derive from a single source. Cutting public spending is not by itself a growth policy. Considered in isolation, it is an anti-growth policy. If it is the only policy on offer, it will eventually defeat itself, by undermining the revenue on which the government depends to balance its books. This much is almost universally accepted across the political and analytical spectrum - and so, as a result, is the need for a "twin-track" policy mix: one that offsets the effects of government attempts to reduce its wasteful spending with measures to promote growth.

 

But it is here, on the question of what these complementary, growth-oriented policies should be, that agreement ends - and where the coalition government's policies to date have proved unfit for purpose.

 

 

There are two basic approaches available. The first - and the one favoured by the government until now - is what we might call the "indirect" approach. This is to use monetary policy as the offsetting device. As fiscal policy is tightened, monetary policy is loosened - in the hope that private businesses and individuals will respond to lower interest rates by increasing their spending.

 

The second approach is what we might call the "direct" approach. Rather than relying on loose monetary policy to counteract the drag of fiscal consolidation, the government takes action itself - by cutting taxes or by increasing its capital spending even as it reduces current spending.

 

Which policy mix is best? Quantitative easing (QE) - printing money - is a growth policy. The willingness to resort to QE around the world after 2008 is certainly what stopped the slide into another Great Depression. But QE is not enough. As a recovery policy, it suffers from two snags.

 

First, its effect on aggregate demand is weak and uncertain. It is not enough for the central bank to print money; the money has to be spent. The piling up of corporate cash balances - more than 5 per cent of GDP in the United Kingdom - shows that the new money is not translating into increased spending. Some argue that this is a reason to expand QE. Judging by its most recent £50bn injection, the Bank of England's Monetary Policy Committee seems to agree.

 

However, unless people expect QE to be permanent - in other words, that the gilts bought by the Bank will never be sold again and that part of the public debt will therefore be monetised - they may well go on piling up cash in order to cover expected future taxes. So there is a limit to how far QE can be pushed.

 

Second, QE does nothing to improve longer-term growth prospects. People have started to understand that the UK needs a more balanced economy - one in which financial services are a lower share of GNP, for example. In so far as it succeeds in raising aggregate demand alone, QE simply freezes the existing structure of the economy at a higher level of output.

 

Exactly the same objections apply to the tax cuts being proposed by business leaders and some Conservatives. These cuts will put more money into people's pockets - but their effect on spending is less certain. Unless they are expected to be permanent, a large part of the additional money will be saved. Likewise, tax cuts of the kind being proposed are unlikely to do much to improve the balance of the economy: they just put more spending power at the disposal of the structure that already exists.

 

They have one additional disadvantage. Unlike QE, tax cuts would increase the deficit and, therefore, to be consistent with the government's overall deficit reduction plan, they would have to be matched by spending reductions elsewhere - which would mean further cuts in public services.

 

 

The first two snags can be avoided by an enlarged and accelerated programme of capital investment. This would inject demand into the economy directly without having to rely on the vagaries of a private banking system that is still deep in repair mode, or on the uncertain willingness of businesses and households to spend the proceeds of tax cuts. And rebalancing public spending towards the capital budget - rather than away from it, as under the coalition's current austerity plans - would also have strong collateral benefits.

 

In the short run, it doesn't matter whether the increase in aggregate demand takes the form of employing people to dig holes and fill them up again, giving every household a time-limited spending voucher or building a new railway. All that matters is that the overall level of spending in the economy is maintained - so that unemployment stops rising and, with any luck, begins to fall again. But from any longer-term point of view, increasing aggregate demand by capital investment is better, because it creates identifiable future assets that promise to fund themselves and improve growth potential.

 

Yet it does not overcome the third disadvantage, which is that it will increase government borrowing at a time when the markets are demanding that the government reduce its debt. So, like tax cuts, it will have to be matched by cuts elsewhere - and again at the expense of the public services.

 

That is why we have argued for a British Investment Bank with the power to raise money directly from the private sector, and which therefore does not add significantly to the government's deficit. The government's commitment would be limited to capitalising it: the bank's lending would be funded from the private capital markets. It would charge lower interest rates for its loans than ordinary commercial banks; while the long-term returns that it would offer investors - being higher than those obtainable from gilts - would meet the desperate need for higher yields by pension funds.

 

A further advantage of such an autonomous set-up would be to shield the investment programme from the so-called boondoggle effect - building, at political behest, roads and railways that lead nowhere and therefore have no passengers or freight. Although there would be an implicit state guarantee of returns, the record of public investment banks in other countries - such as the European Investment Bank, the Nordic Investment Bank and the German Kreditanstalt für Wiederaufbau - shows that if an institution is well run, these guarantees are never, or rarely, called upon.

 

A final question might be: if these investment projects are worth doing, why isn't the private sector already doing them? A complete answer would take us deep into the theory of "market failure".

 

Here, it is important to make only one central point: the uncertain prospects for recovery as well as the impaired balance sheets of banks and firms have generated a massive "flight to liquidity", with savings stuck in bills and gilts while the riskier projects on which growth depends go wanting.

 

A British Investment Bank operating on the principles above, with a cogent and adequately funded investment strategy embedded in its mandate, would be an ideal vehicle for attracting "frozen" savings into the mar­-ket. It would help address the current deficit of confidence and certainty about demand directly, rather than just praying for spontaneous reignition.

 

In particular, a national infrastructure programme would not only make Britain a more efficient place to do business but could also contribute greatly to the rebalancing of the economy away from excessive reliance on the City of London and financial services.

Simple solution

 

In sum, while QE and tax cuts should not be excluded from the recovery policy mix, the main driver needs to be a programme of long-term capital investment. The simplest way to do this would be to use the government's balance sheet to bear some of the risk. But this will not happen under the current government. Fortunately, there is an alternative way of achieving the same objective.

 

On 21 March, George Osborne, in his Budget speech, should announce that he is transforming the Green Investment Bank into an institution that can make a macroeconomically significant - and direct - contribution to recovery and growth.

 

 

 

 

Government deficits incurred on current spending for services or transfers are bad, because they produce no revenue and add to the national debt. Deficits resulting from capital spending, by contrast, are – or can be – good. If wisely administered, such spending produces a revenue stream that services and eventually extinguishes the debt; more importantly, it raises productivity, and thus improves a country’s long-run growth potential.

 

From this distinction follows an important fiscal rule: governments’ current spending should normally be balanced by taxation. To this extent, efforts nowadays to reduce deficits on current spending are justified, but only if they are fully replaced by capital-spending programs. Indeed, reducing current spending and increasing capital spending should be carried out in lock step.

 

Brock’s argument is that, given the state of its economy, the United States cannot return to full employment on the basis of current policy. The recovery is too feeble, and the country needs to invest an additional $1 trillion annually for ten years on transport facilities and education. The government should establish a National Infrastructure Bank to provide the finance by borrowing directly, attracting private-sector funds, or a mixture of the two. (I have proposed a similar institution in the United Kingdom.)

 

The distinction between capital and current spending (and thus between “good” and “bad” deficits) is old hat to any student of public finance. But we forget knowledge at such an alarming rate that it is worth re-stating it, particularly with deficit hawks in power in the UK and Europe, though fortunately not (yet) in the US.

 

According to proposals agreed at an informal European Council meeting on January 30, all EU members are to amend their constitutions to introduce a balanced-budget rule that caps annual structural deficits at 0.5% of GDP. This ceiling can be raised only in a deep depression or other exceptional circumstances, allowing for counter-cyclical policy so long as it is agreed that the additional deficit is cyclical, rather than structural. Otherwise, violations would automatically trigger fines of up to 0.1% of GDP.

 

The UK is one of two EU countries (alongside the Czech Republic) that refused to sign this “fiscal compact,” acceptance of which is required to gain access to European bailout funds. But Britain’s government has the identical aim of reducing its current deficit of 10% of GDP to near zero in five years.

 

An argument commonly heard in support of such policies is that the “bond vigilantes” will demand nothing less. And the finances of some European governments (and Latin American governments in the recent past) have been so parlous that this reaction is understandable.

 

But that is not true of the US or the UK, which both have large fiscal deficits. And most countries were adhering to reasonably tight fiscal discipline before the crisis of 2008 undermined their banks, cut their tax revenues, and forced up their sovereign debt.

 

At the same time, we should not attribute current enthusiasm for fiscal retrenchment to such contingencies. At its heart lies the belief that all government spending above a necessary minimum is wasteful. Europe has its own Tea Party crackpots who loathe the welfare state and want it abolished or radically pared, and who are convinced that all state-sponsored capital spending is a “boondoggle” – just so many roads, bridges, and railway lines to nowhere that soak up their money in corruption and inefficiency.

 

Those who believe this are unfazed by the corruption and waste that characterizes much private-sector spending. And they prefer the total waste of letting millions of people sit idle (Brock reckons that 16% of the American workforce is unemployed, underemployed, or too discouraged to seek work) to the possibly partial waste of programs that put them to work, nurture their skills, and equip the country with assets.

 

One can criticize details of Brock’s case: a deeper understanding of Keynes would have given him a more persuasive response to the objection that, if state-financed projects were worth doing, the private sector would be doing them. Before long, we will have to provide answers to these questions, because the pre-slump fiscal rules that the Europeans are vainly trying to strengthen were not up to the job.

 

We are far from having worked out a post-recession theory of macroeconomic policy, but certain elements are clear. In the future, fiscal and monetary policy will have to work together: neither on its own can stabilize inherently unstable market economies. Monetary policy will have to do much more than it did before 2008 to restrain financial markets’ “irrational exuberance.” And we need a new, unambiguous system of fiscal accounting that distinguishes between tax-funded government spending and public spending that pays for itself.

 

Above all, we need to recognize that the state’s role goes beyond maintaining external security and domestic law and order. As Adam Smith wrote in The Wealth of Nations:

 

“The third and last duty of the sovereign....is that of erecting and maintaining those public institutions and those public works, which though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual, or small number of individuals; and which it, therefore, cannot be expected that any individual, or small number of individuals, should erect or maintain.”

 

Chief among these public works, for Smith, are those that “facilitate the commerce of any country, such as good roads, bridges, navigable canals, harbors, etc.” Another piece of forgotten knowledge that Smith also mentions is the importance of education. He is right to do so, however much today’s deficit hawks seem, by their behavior, to prove the opposite.

 

 

 

Robert Skidelsky, Juliet Schor, Tim Jackson and Anna Coote discuss the need for a shorter working week to distribute work more evenly across the population.

 

 

 

It doesn’t seem to be helping. Their economies are still tumbling, and the debt continues to grow. The credit ratings agency Standard & Poor’s has just downgraded the sovereign-debt ratings of nine eurozone countries, including France. The United Kingdom is likely to follow.

 

To anyone not blinded by folly, the explanation for this mass downgrade is obvious. If you deliberately aim to shrink your GDP, your debt-to-GDP ratio is bound to grow. The only way to cut your debt (other than by default) is to get your economy to grow.

 

Fear of debt is rooted in human nature; so the extinction of it as a policy aim seems right to the average citizen. Everyone knows what financial debt means: money owed, often borrowed. To be in debt can produce anxiety if one is uncertain whether, when the time comes, one will be able to repay what one owes.

 

This anxiety is readily transferred to national debt – the debt owed by a government to its creditors. How, people ask, will governments repay all of the hundreds of billions of dollars that they owe? As British Prime Minister David Cameron put it: “Government debt is the same as credit-card debt; it’s got to be paid back.”

 

The next step readily follows: in order to repay, or at least reduce, the national debt, the government must eliminate its budget deficit, because the excess of spending over revenue continually adds to the national debt. Indeed, if the government fails to act, the national debt will become, in today’s jargon, “unsustainable.”

 

Again, an analogy with household debt readily suggests itself. My death does not extinguish my debt, reasons the sensible citizen. My creditors will have the first claim on my estate – everything that I wanted to leave to my children. Similarly, a debt left unpaid too long by a government is a burden on future generations: I may enjoy the benefits of government extravagance, but my children will have to foot the bill.

 

That is why deficit reduction is at the center of most governments’ fiscal policy today. A government with a “credible” plan for “fiscal consolidation” supposedly is less likely to default on its debt, or leave it for the future to pay. This will, it is thought, enable the government to borrow money more cheaply than it would otherwise be able to do, in turn lowering interest rates for private borrowers, which should boost economic activity. So fiscal consolidation is the royal road to economic recovery.

 

This, the official doctrine of most developed countries today, contains at least five major fallacies, which pass largely unnoticed, because the narrative is so plausible.

 

First, governments, unlike private individuals, do not have to “repay” their debts. A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it. This is not true of countries in the eurozone. But their governments do not have to repay their debts, either. If their (foreign) creditors put too much pressure on them, they simply default. Default is bad. But life after default goes on much as before.

 

Second, deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit. The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010.

 

Third, the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.

 

Fourth, there is no connection between the size of national debt and the price that a government must pay to finance it. The interest rates that Japan, the United States, the UK, and Germany pay on their national debt are equally low, despite vast differences in their debt levels and fiscal policies.

 

Finally, low borrowing costs for governments do not automatically reduce the cost of capital for the private sector. After all, corporate borrowers do not borrow at the “risk-free” yield of, say, US Treasury bonds, and evidence shows that monetary expansion can push down the interest rate on government debt, but have hardly any effect on new bank lending to firms or households. In fact, the causality is the reverse: the reason why government interest rates in the UK and elsewhere are so low is that interest rates for private-sector loans are so high.

 

As with “the specter of Communism” that haunted Europe in Karl Marx’s famous manifesto, so today “[a]ll the powers of old Europe have entered into a holy alliance to exorcise” the specter of national debt. But statesmen who aim to liquidate the debt should recall another famous specter – the specter of revolution.

 

 

 

 

 

nef's event About Time takes forward the ideas from its highly acclaimed report 21 Hours to examine how this could help to address a range of urgent social, economic and environmental problems we face.

 

On 11 January, the event brings together a panel of leading experts in partnership with the Centre for Analysis of Social Exclusion (CASE) at the London School of Economics:

 

Lord Robert Skidelsky, Emeritus Professor of Political Economy at the University of Warwick and biographer of J. M. Keynes, and Dr Edward Skidelsky, University of Exeter, and co-authors of the forthcoming book, How Much is Enough? Economics and the Good Life.

 

Juliet Schor, Professor of Sociology at Boston College, and author of Plenitude: The New Economics of True Wealth, and The Overworked American.

 

Tim Jackson, Professor of Sustainable Development at Surrey University, and author of Prosperity without Growth.

 

The evening will comprise of a public lecture followed by a drinks reception with the speakers.

 

If you are interested in attending please RSVP to Cam Ly (cam.ly@:neweconomics.org).

 

Save the date! This is an open conference, with places available to all on a first-come-first-served basis. Please arrive early to guarantee your place in the main theatre. Join us afterwards for a drinks reception at 7.30 pm.

 

Read more about the event at nef's website or at the LSE's public events page.

 

 

Had Cameron brought an economic-growth agenda to the summit, he would have been fighting for something real, and would not have lacked allies. As it was, he fully accepted Merkel’s austerity agenda – which his own government is implementing independently – and chose to veto proposals for a new European treaty to protect the City of London. This cheered up the Euroskeptics in Cameron’s Conservative Party, but it offered nothing to counter the lethal medicine prescribed by Germany’s Iron Lady.

 

The agreement reached in Brussels forecloses any possibility of Keynesian demand management to fight recession. “Structural” budget deficits would be limited to 0.5% of GDP, with (as yet undisclosed) penalties for violators.

 

This is the wrong cure for the eurozone crisis. The Merkel doctrine holds that the crisis is the result of government profligacy, so only a “hard” balanced-budget rule can prevent such crises from recurring.

 

But Merkel’s analysis is utterly wrong. It was not deficit spending by governments that fueled the economic collapse of 2007-2008, but excessive lending by banks. Government’s mounting debts have been a response to the economic downturn, not its cause. What ought to have been hard-wired into the EU’s institutional structure was not permanent fiscal austerity, but provisions for economic stability.

 

More immediately important is the failure of the proposed “fiscal union” to do anything for European recovery. The figures are grim: before the summit, the European Central Bank slashed its eurozone GDP growth forecast for 2012 from 1.3% to 0.3%. That is almost certainly optimistic. In fact, the eurozone will contract in the first half of next year – and probably in the second half, because of the deficit-cutting policies now being pursued – placing further pressure on banks and sovereigns.

 

The reason why recovery from the crash of 2007-2008 has been so anemic is straightforward. When an economy shrinks, government debt grows automatically, because its revenues decline and its expenses rise. When it cuts spending, its debt grows even more, because its cuts cause the economy to shrink further. This makes the government more, not less, likely to default.

 

In the eurozone, most government debt is held by private banks. As this debt increases, the value of banks’ assets falls. So the crisis of the sovereigns engulfs the banks. To put weakened governments on iron rations, as Merkel did, was to make a financial crisis inevitable. To continue to preach salvation through austerity as the economy declines and banks collapse is to repeat the classic mistake of German Chancellor Heinrich Brüning in 1930-1932.

 

To be sure, the eurozone needs more than a bailout. The periphery needs to recover competitiveness, and some have taken heart from the Mediterranean countries’ shrinking trade deficits – the structural trade imbalances within the eurozone are correcting themselves, they say. Unfortunately, these corrections are not based on increased exports, but on declining imports, owing to depressed levels of economic activity.

The idea that a country can achieve a trade surplus by importing nothing is as fanciful as the idea that a government can repay its debt by starving itself of revenue. One person’s spending is another person’s income. In insisting that its main trade partners cut their spending, Merkel is cutting Germany off from the main sources of its own growth.

 

So, will the single currency survive? Two policies that might, in combination, save it are off the agenda. The first is quantitative easing (printing money) on a heroic scale. The ECB should be empowered to buy any amount of Greek, Italian, Spanish, and Portuguese government bonds needed to drive down their yield to near the German rate. This might stimulate real growth through several channels: by reducing lending rates, by raising the nominal value of public and private assets, and by weakening the euro against the dollar and other currencies. But the effects of quantitative easing on economic activity are uncertain, and such an inflationary policy might well invite retaliation from Europe’s trading partners.

 

That is why quantitative easing should be run in conjunction with a eurozone-wide investment program designed to modernize the creaking infrastructure of eastern and southern Europe. Capital spending by governments, unlike current spending, can be self-financing through user charges. But, even if it is not, well-chosen public investment produces high returns: new roads reduce transportation costs, and new hospitals produce a healthier workforce.

 

An institution, the European Investment Bank (EIB), already exists to carry out such a program. It should be recapitalized on a sufficient scale to offset the contractionary effects of Europe’s national deficit-reduction programs.

 

Quantitative easing, combined with public investment, would impart the growth impetus that the eurozone sorely needs to bring about a gradual reduction in its aggregate debt burden. But it is almost certain that neither policy, much less both, will be implemented.

 

The ECB is stealthily buying government bonds on the secondary market, but its new governor, Mario Draghi, insists that such intervention is temporary, limited, and intended solely to “restore the functioning of monetary transmission channels.” No one at the recent EU summit suggested making the EIB an engine of growth. So the bleeding will go on.

 

This means that the eurozone is beyond saving; the euro will survive, but the zone will shrink. The only question is the scale, timing, and manner of its breakup. Greece, and probably other Mediterranean countries, will default and regain the freedom to print money and devalue their exchange rates.

 

This will send shock waves throughout the world. But sometimes shock waves are needed to break the ice and start the water flowing again.

 

 

 

You can listen to the programme or download it as a podcast at www.bbc.co.uk/programmes/p00lzhr8, or join the discussion at the Forum's Facebook page.

 

Let's start with the theory of the matter. "Look after unemployment," JM Keynes said, "and the budget will look after itself." This was a neat way of saying that a credible deficit reduction plan depends on growth. All governments have large deficits at present because their economies have shrunk. The deficits will decline automatically as their economies start growing.

 

But policies of deficit reduction will not in themselves produce growth. Nor will they eliminate the deficit. Trying to reduce the deficit by cutting spending and raising taxes means taking spending power out of the economy, when what a depressed economy needs is more spending. A government can always cut its own spending. But it cannot control its income. If cutting its spending leads to a fall in its revenue, it is little nearer "balancing the books" than before. One person's spending is another's income. If the government reduces the economy's spending, its own income will fall.

 

This grisly truth is at last starting to pierce the fog of rhetoric. The latest report of the Office for Budget Responsibility predicts that the government will miss its borrowing target this year because of reduced revenues. Even though it has cut spending by more than its goal, the fall in tax revenues – £15bn less than expected this year – has knocked it off target.

 

The economy has not grown for a year and, says the OECD, is now likely to contract. Lower growth over the next five years means the government will have to borrow £111bn more than planned. The brief recovery is over. The shrinkage in demand is becoming a collapse. Unemployment will still be rising in 2013, real wages will continue to decline and as households stop spending, company profits will suffer. The deficit will not be gone by 2015. Even to get rid of it by 2017 – the latest estimate – will require a further £23bn of cuts. But as these will reduce growth even further, the elimination of the deficit can safely be postponed to never-never land.

 

We come to the question of confidence. The chancellor has repeatedly claimed the deficit reduction programme was, and is, necessary to maintain investor confidence in government finances. Confidence is very important, but also mysterious: the bond markets can believe a dozen contradictory things before breakfast. The main point is that confidence cannot be separated from the economy's performance. As it stalls, the creditworthiness of governments declines as their debt increases, raising the likelihood of default.

 

A year ago bond traders, having forgotten what little economic theory they knew, were inclined to believe that deficit reduction would in itself generate recovery. For several months the Osbornites fed them the fantasy of "expansionary fiscal contraction", the idea that as the deficit falls the economy would expand. This story is now exploded. It's the economy that determines the size of the deficit, not the deficit that determines the size of the economy.

 

The chancellor is right to say that Britain is not at the "centre of the sovereign debt storm". But for how much longer? The eurozone financial crisis – on both its sovereign and commercial bank sides – is the direct result of policies which have brought about the slowdown of the European economies. From August to September industrial production turned sharply downwards in the EU, and especially the eurozone. But our government has been pursuing the same policies, with the same results. This suggests that, without a change of policy, the price of our own government debt will start to go up.

 

I agree, therefore, with Ed Balls. The government's debt-reduction strategy is not credible, either as theory, or in term's of maintaining the markets' confidence. The chancellor's plan would have looked good had it worked. It has fallen so far short of it that Osborne sees the need to introduce a subplot into the main narrative. This goes under the name of "credit easing".

 

He has authorised the Bank of England to buy an extra £75bn worth of government bonds – known as "quantitative easing" – to increase the reserves of the banking system. Then there is "credit easing": banks will be given government guarantees to raise money more cheaply provided they lend to small and medium-sized businesses. The government will offer to secure part of the loans taken out by first-time buyers of new-build homes, enabling them to get larger mortgages with a smaller deposit at lower interest rates. The government also intends to "mobilise the finance" for an infrastructure programme, though how it can get the pension funds on board without subsidised interest rates and/or guaranteed income streams is not clear. These are steps in the right direction. But, according to the OBR: "It is far from clear how much additional lending [credit easing] will create."

 

What the chancellor is trying to do is to increase the supply of credit. But the austerity side of his policy is choking off the demand for credit by reducing the market. The new policy is therefore incoherent. What we need is not a subplot but a new narrative, which recognises that the most important requirement for recovery is to increase total spending in the economy. In this story, increasing capital spending is the main plot, cutting current spending the subplot. The chancellor is edging towards this, but he has not arrived. Events may force the pace.

 

 

So we have embarked on Plan B – printing money, though only to a modest extent, a £75bn programme of “quantitative easing” announced by the Bank of England on 6th October. For those who never believed in Plan A – chancellor George Osborne’s original view that cutting public spending would automatically produce economic recovery – resort to monetary policy is the start of a more interesting debate, about whether monetary policy alone can engineer a recovery from recession.

 

Milton Friedman said yes, arguing that it was the Fed’s failure in 1930 to pursue “open market operations” on the scale needed that deepened the slump. Against this view is Keynes’s famous retort: “If, however, we are tempted to assert that money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips between cup and lip.” Keynes postulated two possible slips.

 

Firstly, monetary policy may not succeed in reducing the interest rates faced by borrowers. The relevant interest rate is of course the risky interest rate faced by corporate borrowers – not the risk-free gilt yield. So the question is whether QE will reduce not only gilt yields but also the risky interest rate.

 

Secondly, lower interest rates may not stimulate growth in lending and economic activity. This is a question of demand – even with a lower risky interest rate, will demand for borrowing increase? This is the only channel whereby the interest rate can drive spending.

 

So how did the first round of quantitative easing, which pumped £200m into the economy between March 2009 and February 2010 fare on these two counts? The Bank has just published its own assessment.

 

On interest rates, it concludes that QE was effective in reducing risk-free interest rates (gilt yields). However, even for the very few companies that can borrow in the bond markets, the effect on the interest rate faced by investment grade companies over and above this was virtually non-existent. The net result was a very modest reduction in the interest rate they faced (of around 0.7 per cent), which was dwarfed by changes driven by the evolving macroeconomic picture.

 

For the majority of companies that can only borrow from banks, even this small victory was absent. The Bank reported “little evidence that effective new bank lending rates for households or firms fell significantly following QE purchases”.

 

On the second slip, the evidence is pretty damning. Lending to private non-financial companies has fallen by more than 12 per cent since QE1 began in March 2009, and lending to small and medium sized enterprises has been even harder hit.

 

There are two reasons for the two slips. Risky interest rates remain stubbornly high. The banking sector is broken and is not transmitting monetary policy through to borrowers. And borrowing is shrinking for two reasons: over-indebted households and companies do not want to borrow at any interest rate. Among those that are not over-indebted, confidence is shattered – uncertainty is so high that few want to put capital at risk.

 

The verdict is already in. Indeed, the Bank’s governor has given it on countless occasions: monetary policy cannot save the economy. Seriously negative interest rates might work – but only at the cost of debauching the currency, which is the last refuge of a desperate government. Since the governor rejects both this and fiscal stimulus, his only remedy seems to be to grin and bear it until the global economy is set to rights.

 

The most terrifying thing to emerge from the Bank of England’s reports is that the Bank embarked on its experiment without any macro-economic model specifying how money was to be transmitted to income. In other words, QE was launched on a wing and prayer.

 

So it is up to the politicians to rescue the economy from years of stagnation. As I have said before, we urgently need a Plan C: a strategy for investment and growth. The chancellor will have a chance to unveil one in his pre-budget statement of 29 November. But will he have an ace up his sleeve?

 

 

 

The economy is a classic field for this strategy. Three years after the global economy’s near-collapse, the feeble recovery has already petered out in most developed countries, whose economic inertia will drag down the rest. Pundits decry a “double-dip” recession, but in some countries the first dip never ended: Greek GDP has been dipping for three years.

 

When we ask politicians to explain these deplorable results, they reply in unison: “It’s not our fault.” Recovery, goes the refrain, has been “derailed” by the eurozone crisis. But this is to turn the matter on its head. The eurozone crisis did not derail recovery; it is the result of a lack of recovery. It is the natural, predictable, and (by many) predicted result of the main European countries’ deliberate policy of repressing aggregate demand.

 

That policy was destined to produce a financial crisis, because it was bound to leave governments and banks with depleted assets and larger debts. Despite austerity, the forecast of this year’s UK structural deficit has increased from 6.5% to 8% – requiring an extra £22 billion ($34.6 billion) in cuts a year. Prime Minister David Cameron and Chancellor George Osborne blame the eurozone crisis; in fact, their own economic illiteracy is to blame.

 

Unfortunately for all of us, the explanation bears repeating nowadays. Depressions, recessions, contractions – call them what you will – occur because the private-sector spends less than it did previously. This means that its income falls, because spending by one firm or household is income for another.

 

In this situation, government deficits rise naturally, as tax revenues decline and spending on unemployment insurance and other benefits rises. These “automatic stabilizers” plug part of the private-sector spending gap.

 

But if the government starts reducing its own deficit before private-sector spending recovers, the net result will be a further decline in total spending, and hence in total income, causing the government’s deficit to widen, rather than narrow. True, if governments stop spending altogether, deficits will eventually fall to zero. People will starve to death in the interim, but the budget will be balanced.

 

That is the crazy logic of current economic policy in much of Europe (and elsewhere). Of course, it will not be carried through to the bitter end. Too much will crack along the way – the banks, the monetary system, social cohesion, the legitimacy of the political regime. Our leaders may be intellectually challenged, but they are not suicidal. Deficit reduction eventually will be put into cold storage, either openly, as I would prefer, or surreptitiously, as is politicians’ way. In the United Kingdom, there is already talk of Plan A +.

 

Those who see the need for such a growth strategy, but who also want to help their friends, like the idea of tax cuts – especially for the rich. This knocks a hole in current deficit-reduction plans, but, provided government continues to cut spending, it has the benefit (from a conservative’s point of view) of shrinking the state’s role over time.

 

Apart from questions of fairness, cutting top tax rates is an inferior way to increase spending, because the rich have a higher propensity to save. Tax reductions should be targeted specifically at the poor if one wants the money to be spent to stimulate the economy.

 

In fact, the best option of all is for the government to spend the money itself. Governments can do this consistently with a medium-term deficit-reduction plan by making a crucial distinction between their budgets’ current and capital accounts. The current account covers spending on services and perishable goods that produce no assets. The capital account is for buying or building durable assets that give a prospective future return. The first is a charge on taxation; the second is not.

 

If today’s accounting rules are too insensitive to make this distinction, a separate entity could do the investing. A national investment bank would be capitalized by the government, borrow from the private sector, and invest in infrastructure, housing, and “greening” the economy. This would simultaneously plug a hole in demand and improve the economy’s long-term growth prospects. There are signs that officials in the UK and the United States are starting to move in this direction.

 

If nothing works, it will be time to sprinkle the country with what Milton Friedman called “helicopter money” – that is, put purchasing power directly into people’s pockets, by giving every household a spending voucher with an expiration date. This would at least keep the economy afloat pending the development of the longer-term investment program.

 

It would be better if such schemes could be agreed upon by all by G-20 countries, as was briefly the case in the coordinated stimulus of April 2009. If not, groups of countries should pursue them on their own.

 

The European Union desperately needs a growth strategy. Its current bailout schemes only help countries like Greece and Italy to borrow money cheaply in the face of prohibitively high market interest rates, while the schemes’ insistence on more budget-deficit reduction in these countries will reduce European purchasing power further. The recipient governments will have to cut their spending; the banks will have to take large losses.

 

In the long run, the eurozone must be recognized as a failed experiment. It should be reconstituted with far fewer members, including only countries that do not run persistent current-account deficits. Everything else that has been proposed to save the eurozone in its current form – a central treasury, a monetary authority that does more than target inflation, fiscal harmonization, a new treaty – is a political pipe dream.

 

 

 

The banks, however, are not just part of the problem, but an essential part of the solution. The same institutions that caused the crisis must help to solve it, by starting to lend again. With global demand flagging, the priority has to be recovery, without abandoning the goal of reform – a difficult line to tread politically.

 

The common ground of reform is the need to re-regulate the financial services industry. In the run-up to the crisis, experts loudly claimed that “efficient” financial markets could be safely left to regulate themselves. Reflecting the freebooting financial zeitgeist that prevailed at the time, the International Monetary Fund declared in 2006 that “the dispersion of credit risk by banks to a broader and more diverse group of investors…has helped make the banking and overall financial system more resilient…” As a result, “the commercial banks may be less vulnerable to…shocks.”

 

It is impossible not to hear in such nonsense the cocksure drumbeat of the Money Power, which has never failed to identify the public interest with its own. For 50 years after the Great Depression of the 1930’s, the Money Power was held to account by the countervailing power of government. At the heart of the political check was America’s Glass-Steagall Act of 1933.

 

Glass-Steagall aimed to prevent commercial banks from gambling with their depositors’ money by mandating the institutional separation of retail and investment banking. The result was 65 years of relative financial stability. In what economists later called the “repressed” financial system, retail banks fulfilled the necessary function of financial intermediation without taking on suicidal risks, while the government kept aggregate demand high enough to maintain a full-employment level of investment.

 

Then the Money Power struck back, aided and abetted by its apologist cohort of economists. The Big Bang of 1986 in London ended the separation of banking functions in the United Kingdom. After prolonged lobbying by the financial-services industry, US President Bill Clinton repealed Glass-Steagall in 1999. From that point on, commercial and investment banks could merge, and the composite entities were authorized to provide a full range of banking services, including underwriting and other trading activities.

 

This was part of a wave of deregulation that swept away Franklin Roosevelt’s promise to “chase the money changers from the temple.” Clinton also refused to regulate credit-default swaps, and the US Securities and Exchange Commission allowed banks to triple their leverage. These three decisions led directly to the sub-prime extravaganza that brought down the US banking system in 2007-2008.

 

Since that crash, efforts have been made to reconstruct the dismantled system of financial regulation in order to prevent the “over-lending” that led to the collapse. The new doctrine is called “macro-prudential regulation.” Under an international agreement known as Basel III, banks are to be required to hold a higher ratio of equity capital against “risk-weighted assets,” and leverage is to be limited to a smaller percentage of such assets. National regulators are exploring ways to vary ratio requirements over the business cycle, and have started subjecting banks to regular “stress tests.”

 

In the UK, a Financial Policy Committee within the Bank of England is to monitor the “systemic risk” of financial failure, with a Prudential Regulatory Authority supervising systemically important institutions. According to monetary economist Charles Goodhart, a significantly faster-than-normal growth rate for bank credit, house prices, and leverage will give the authorities sufficient warning of impending crisis.

 

The new orthodoxy places its faith in regulators’ ability to improve on banks’ measurement of risk, while leaving the structure of the banking system unchanged. But, when it comes to upping equity requirements against “risk-weighted assets,” who is to do the weighting, and according to what methodology?

 

Goodhart concedes that banks’ “risk weightings” in the pre-recession period were subject to political pressure and “financial-industry capture and manipulation.” This is inevitable, because, as John Maynard Keynes pointed out, the “riskiness” of many investments, being subject to inherent uncertainty, is immeasurable. In short, the new regulatory philosophy replaces the illusion that banks can safely be left to manage their risks with the illusion that regulators will do it for them.

 

Meanwhile, initial enthusiasm for restoring Glass-Steagall – breaking up banking functions into separate institutions – has fallen by the wayside. It is only logical that banks with state-guaranteed deposits should be safe and boring, with other necessary, but risky activities hived off to separate companies. But little progress has been made in (re)implementing this idea.

 

The “Volcker rule,” whereby commercial banks would be barred from trading on their own account, and from owning hedge funds and private-equity firms, languishes in Congress. In the UK, an Independent Commission on Banking, headed by Sir John Vickers, rejected separation of retail from investment banking, recommending instead “ring-fencing” deposits from the investment arms of universal banks.

 

Trust-busters argue that such “Chinese walls” always break down under pressure, owing to huge shareholder demand for universal banks to boost profits at the expense of a sound commercial banking core. And senior executives will still have a legal obligation to maximize profits. The Vickers commission’s proposals also depend on sophisticated regulation, which assumes, against history, that regulators will always be one step ahead of bankers.

 

The Money Power never surrenders easily. Whether relying on regulation, or gesturing towards institutional separation, most proposals for banking reform remain at the drawing-board stage, and are sure to be emasculated by financial lobbies.

 

Moreover, whatever their intrinsic merits, none of these proposals addresses the global economy’s most immediate problem: undersupply, not oversupply, of credit. In other words, the challenge is to revive lending growth in full awareness that we must begin devising ways to rein it in.

 

If you missed it, watch the debate online at Youtube