It’s time to “drastically reduce the size [of the financial sector].”
Cross-posted from Peak Prosperity
Over the past decade, the world’s central banks have distorted the price of money by bringing interest rates to record lows.
With credit so cheap, asset prices have risen dramatically as companies and governments have borrowed to the hilt.
And now with the “Everything Bubble” threatening to burst (perhaps in mid-bursting already?), we’re suddenly realizing that the phantom asset price gains were ephemeral, while the debts are permanent.
How will the economy cope with dangerously overleveraged nations, industries and households? Not well.
To discuss this massive problem and propose some potential solutions is Steve Keen, professor of economics at Kingston University in London and author of Debunking Economics:
The basic idea behind a modern debt jubilee is we’ve let far too much private debt accumulate by allowing the financial sector to exercise the rights of being able to create money without exercising the responsibilities that should come with it.
What they’ve done is do the brain-dead thing of funding asset bubbles because it’s easy to just give somebody money to buy a house. That causes the price of the houses to go up. And then you get nice large bonuses on that. And when the bubble bursts, who cares? You’ve already moved onto another company or you’ve taken out so much it doesn’t matter to you.
It’s been incredibly irresponsible lending not for producing physical infrastructure but for speculation on the price of assets which your own lending is causing. And then of course we’ve had all these people who used to be decent engineers and physicists becoming financial engineers, which is absolutely disastrous for our capacity to build our way out of the ecological crisis we’re facing.
I’d like to see the private debt level in America for example, go back to the level it was in 1945 and 1965 was between 40-80% of GDP. It’s currently running at 150%. To accomplish this, we can actually exploit the limitless capacities of the Federal Reserve — it can create money for QE plus via double entry bookkeeping, and it can create money for the public in exactly the same way by making an injection to everybody’s bank accounts.
For anybody who has debt, then that money becomes an offset to their debt, which reduces their effective debt burden. But anybody without debt gets a cash injection. If the jubilee is of the order of 100% of America’s GDP that would bring it back to a debt level of 50%. And then we can have it set as a policy not so as not to get anywhere near 100%.
I want to reset the debt clock, take the debt burden off the economy, reduce the size of the financial sector, make the financial sector back into a servant of the physical economy rather than its master, and basically get rid of the rentiers — the main danger in capitalism. They are far too big, have far too much power; and this has resulted in a sluggishly growing economy for everybody but the parasites.
So, after my proposed jubilee, the banks will suddenly be far less profitable and afford far less people. They will basically sack a lot of people and go back to doing what banks used to do, which is lending to the person on Main Street with a good idea.
If you look at what’s called the FIRE sector — financial, insurance and real estate — at various times the profit levels of that FIRE sector were equivalent to 50% of the profits of the entire American economy. That’s actually a cost. They don’t produce anything.
One of my students put it very well: is the finance sector, profit sector or a cost center. It is fundamentally a cost center. It has gotten far too big. We need to drastically reduce its size.
That’s what happened during the Great Depression and that’s why when you came out–and the second World War that’s why when you came out of it bankers were incredibly meek, subservient characters who were secondary to the industrial capitalists of the day. But as you let more debt accumulate they become over time the masters of the system.
Click here to listen to Chris Martnenson’s interview with Steve Keen (59m:55s).