 I thank you all very much for coming and welcome to this event making money work. We're really pleased to see you all. I'm Fran Boyd, the Executive Director of Positive Money and I want to start with a proverb that says that the fish is the last to know the water and I want you to say that because I think it's kind of the same with human beings alive to date and money. Money's all around us, it's playing a part in absolutely everything we do, Mae'r ymddindol yw, mae'n gw Hold-Dyn nhw, mae'n gwaith ar gyfer byddai iawn i gweithio. Felly weithio i gweithio cyngorwyr am ein bod ni, a gennymoho'r gweithio a gwrthodol, ac rwy'n cael eu bod ni'n ddinch. Felly rwy'n holl gweld bod ni i gyfnod o'r llawol o'r gwrth oed yôl. A bod wnaeth y gallu gweithio a'r mae'r gwaith o'r gwrthod o'r llawol o'r gwlad. Yn rhai yma, dyma'r gwaith ar gyfer pobl wneud rŵr hyn o'r 100 oed 100 to see, well, we wanted to gauge their understanding of the money system, and only one in ten knew that when a bank makes a loan, it creates money, and that when that loan is repaid, money disappears. 71% of them thought that the Bank of England was the sole issuer of new money. Having said that, it's not that much better with economists except for a few. Banking, money, credit is all basically ignored in the big models of the economy that academic economists do. I can quote Mervyn King, who said in 2012, the dominant theoretical modern model of monetary economics lacks an account of financial intermediation, so money, credit and banking play no meaningful role. Positive money really exists because we think a debate about the monetary system, about how it works, the problems it causes and possibilities for reform is well over due. We believe that there is a huge potential in innovations in the monetary system to help support balancing of the economy, to help drive sustainable prosperity, and to foster stability in the financial sector. Over the last few weeks, the Labour leadership race has provided a forum for some big questions around the future of the UK's monetary policy to be discussed, and obviously that was kicked off by Jeremy Corbyn's proposal, people's quantitative easing for infrastructure, not banks. And although there's been criticisms and confusion around the proposal, it's been a big and important step forward in the debate. And now we really see civil society as our responsibility to make sure that this debate continues, and to also make sure that leaders of all UK parties really consider how the UK monetary system could be made fit for purpose in order to tackle the challenges we face. So quite surprisingly, there are actually a lot of people interested in this topic. So Positive Money now has over 50,000 supporters. We've got 30 local groups across the UK organising, and 22 sister organisations in other countries. And recently a Wall Street Journal writer wrote about us, we are online and on the fringes of mainstream economic and political life, a vibrant subculture of monetary crusaders is emerging. So we're quite pleased with that. We're calling for a money commission to be set up by the UK's treasury to establish whether the money and credit system is effectively serving the public interest. The UK hasn't actually examined how the money and credit system works, or maybe some of the problems with it, since the 1930s, which was the Macmillan Commission. So I'm really delighted today to be hosting an event with Lord Adair Turner, just as he's finished his brilliant new book, which I have read, it's called Between Debt and the Devil. And he's going to be on a panel with Steve Keane and Chris Styles, and we're really thankful for them for coming onto the panel at quite late in the day. Unfortunately, Michael Cymhoff from the Bank of England couldn't join us, there's just some miscommunication about his appearance on the panel with the Bank of England. And Philip Coggan, from the Economist, was diagnosed this morning with bronchitis. So rather than coughing and spluttering all over us and potentially giving us all bronchitis, then he agreed that he'd stay at home. He thought that'd be better for everyone. So Chris is the economics editor at the FT, and Professor Steve Keane is the head of school of economics, politics and history at Kingston University. And importantly, he was one of a handful of economists to realise that an economic crisis was imminent and publicly warn about it from as early as December 2005. So we're going to start with Adair, who's going to give us a talk about the dangers of debt fuelled growth and monetary financing as a policy tool. Then we're going to move into a panel discussion. And whilst I'm really keen to hear from all of our experts, I also am aware that there's a huge amount of knowledge in this room. So with that in mind, I'm going to be really tough on timing with our experts because I know they'll want to hear from as many of you as well. So, before I introduce Adair, I just wanted to show what collective knowledge we have in this room by asking you a couple of questions. So, could you put up your hand if you think there is some risk of a some kind of financial crisis potentially happening again in the coming years? Almost unanimous. And could you put up your hand if you think we should start considering new innovations in monetary policy? Again, we're nearing you now. So I hope the experts will see what an engaged audience we've got and that we really want to hear from you as well. So Adair is one of the world's leading economists. He became chairman of the Financial Services Authority five days after Lehman Brothers collapsed. Since then he's been on a self-described intellectual journey. And now he's chair of the Institute of New Economic Thinking. And he's also one of the directors of the Challenger Bank, Oak North. So if you'd join me in welcoming him, I'll hand it over. Thank you Fran. It's a great pleasure to speak at this event organised by Positive Money. Because I think Positive Money is an organisation which has rightly focused our attention on some of the really fundamental issues in economics about the nature of money and where purchasing power comes from. Now I don't actually agree with the extremely radical proposal that Positive Money supports, which is to entirely abolish what are called fractional reserve banks. I don't only have what are called 100% reserve banks but I do believe that it is impossible to understand why the 2008 crisis occurred and even more why the recovery from that crisis has been so extraordinarily difficult and slow without addressing those fundamental issues about the nature of debt, the nature of credit, the nature of money and where purchasing power comes from which Positive Money have encouraged us to think about. You are either having your hand or you are sitting upon two slides. And if you look at slide one, it sets out what I believe is the most fundamental reason why the recovery from the 2008 financial crisis has been slow and difficult. And what it shows is that private credit as a percent of GDP credit owned by private households and companies rose from about 50% of GDP in 1950 to 170% by 2007 on average across all the advanced economies. And that rising leverage, which was primarily focused on real estate purchase, left many households and corporates severely over leveraged when confidence broke and property prices fell. And it was that that then unleashed in 2009 a wave of attempted private sector deleveraging paying back debts which depressed nominal demand and drove economies into recession. And that in turn created an environment, the environment in which we've been living for the last seven years in which that pile of debt doesn't really go away, it just shifts around the economy. When the economy goes into recession we end up with large public deficits as an inevitable consequence of recession and slow growth and indeed those deficits become essential to help stimulating growth. But the resulting increase in public debt as a percent of GDP then makes people think that we better get that under control and pay that back through austerity and that then depresses the economy again. You end up with this situation where once you've got the debt it simply seems to shift around and we end up with what is called a debt overhang trap. Now I think that is the essence of what's been going on across the advanced economies for the last seven years. It's an analysis which a very fine economist called Richard Koo in a book called The Holy Grail of Economics described occurred in Japan after 1990. It's an analysis which Atif Mian and Amir Sufi in their book last year House of Debt described for the US. And I think it is the overall picture of what has been going on in advanced economies. But what is striking about pre-crisis economic orthodoxy is that it looked at that rise in leverage over 60 years and it really wasn't worried about it at all. Indeed if you went to what are called the finance theorists at one end of the academic corridor they were determined to tell us a story of why we needed debt as well as equity contracts in order to stimulate capital investment but really didn't answer the question at all well okay if you need a bit of debt can there be too much. And if you went down the other end of the academic corridor to what are called the macroeconomists and the people who sit in central banks and design central bank policy they had gravitated to the thesis that as long as we achieved low and stable inflation they really didn't have to worry about the details of what was going on in the financial system at all. And Fran gave you earlier that extraordinary quote from Mervyn King that modern macroeconomics lacks an account of the financial system so that banks and credit play no meaningful role. How on earth would we expect to have an account of our macroeconomy which tells us how it is going to work if it has excluded from consideration the financial system. Those assumptions were based upon what I think was a huge intellectual mistake and at the core of that mistake was a wrong assumption about what banks do. If you pick up almost any undergraduate textbook and to the extent that it describes banks at all and actually undergraduate textbooks don't focus much on banks compared with what they did 30 years ago. To the extent that they do at all it will say something like banks take money from depositors and lend it to businesses or entrepreneurs thus allocating savings between alternative capital investment projects. Unfortunately as a description of what banks do in modern advanced economies that is an almost mythical description. First because banks don't just take pre-existing money and lend it on as Fran said as positive money have increased have argued as indeed the Bank of England in a fine article in the quarterly bulletin last year set out. Banks create credit which are bank assets and matching money or other bank liabilities which did not previously exist. And through what's called maturity transformation which is that the loans are longer tenor than the deposits that effectively creates purchasing power in the economy. Now what is interesting is that lots of early 20th century economists whom you might think of of different sides of the ideological divide so I'm talking about Friedrich von Hayek quite as much as John Maynard Keynes spent a lot of time thinking about that money creation process. But from about mid-century and certainly from about the 60s and 70s it largely disappeared that focus on what is money and what it does largely disappears from modern mainstream macroeconomics. And that was dangerous because if banks can create purchasing power it matters a lot how much they create and to whom that purchasing power is allocated. Now clearly if they create too much purchasing power that might lead to excessive inflation and a very fine Swedish economist called Knutwyx Cell in a book called Interest and Prices spent a lot of time thinking about well how do we stop banks creating so much credit that produces excessive inflation. But in the years running up to the crisis of 2008 we had low and stable inflation so that seemed to justify the predominant macroeconomic belief that we didn't really need to worry about that growth of leverage growth of credit on the asset side and money on the liability side. But that turned out also to be wrong and one of the reasons why it turned out to be wrong is the other thing which was wrong with that description of what banks do. Banks lend money, the textbooks say, to entrepreneurs stroke businesses to fund new capital investment. Actually if you look at what banks in advanced economies do and in the US what the capital markets do in terms of credit about 85% of the credit extended has nothing to do with new capital investment but essentially funds either an increase in consumption or above all a competition between ourselves for the ownership. Of real estate assets that already exist. That is the core of what banks do in modern economies. And as a result inflation targeting is insufficient to ensure financial and macroeconomic instability and public policy has to seek to constrain, manage or influence both the total quantity of private credit created and its allocation between alternative uses. But should we go beyond that trying to influence and constrain what banks do and have a more radical approach. Many of the economists who observed the havoc created by private credit creation and subsequent deleveraging in the 1920s and 30s argued that we should and it was they who initially argued in the Chicago plan that we ought to actually get rid of fractional reserve banks. The bank called Henry Simons said that the trouble is that in the very nature of the system banks will flood the economy with money and money substitutes during booms and perpetuate futile efforts at general liquidation thereafter producing recessions. So he and Irving Fisher and various other economists Frank Knight proposed that we should abolish fractional reserve banks and instead have 100% reserve banks where all of the deposits are matched by reserves at the central bank therefore there isn't what is called a money multiplier because the money supply is the monetary base which ultimately central banks create. And it's actually quite striking that they said this and actually Milton Friedman also said this in an article in 1948 because what is striking is not just how radical that is but who was saying it because Milton Friedman, Henry Simons and Irving Fisher in all other aspects of their economics were extreme free market liberals. Who believed that you should basically leave markets to the private sector and good results would come about. But they believed that banking was so radically different because it creates money and purchasing power that those free market approaches applicable in the market for restaurants or the market for cars simply shouldn't exist in the market for banks and money. So should we abolish fractional reserve banks and instead move to 100% reserve banks? Well I don't actually think we should because I think there is a role for the private sector creation of credit and money and purchasing power which to a degree imperfectly but nevertheless to a degree might under some conditions be disciplined by market disciplines. And we can come back to that later of why I disagree on the radical position. But I do believe that if we are to continue with fractional reserve banks I think the fraction, the extent to which they hold their deposits in monetary base should be much much larger than it is today. I believe we should have far less leveraged banks which have to have far more capital and which have to hold far more of their deposits in reserves at the central bank. My argument is don't get rid of fractional reserve banks but make the fraction much much bigger. But the impact of that will be less debt in the real economy, less credit to the real economy. But that of course raises a question how in such a system to achieve adequate nominal demand growth. Before the crisis of 2008 in order to achieve adequate nominal demand growth we relied on private credit creation and the essence of what was going on is set out in the second slide that you have in front of you. What that says is that you can think about what was going on in advanced economies before the crisis as being this. Private credit as a percent of GDP was on average growing at about 15% per annum. Nominal GDP was growing at about 5% per annum and it seems that we needed 15% private credit growth in order to keep nominal GDP growing at 5% per annum. That 5% seemed a pretty good result because it combined sort of 2-2.5% growth with 2-2.5% inflation and the central banks patted themselves on the bat and said very well achieved. But the trouble is it was only achieved with 15% private credit growth and if you have 15% private credit growth and 5% nominal GDP growth in perpetuity eventually the system will blow up. In formal terms it is a system without an equilibrium. So is there a more stable and sustainable way to stimulate nominal demand growth? Well those mid 20th century radicals thought that there was and the way they proposed they had to propose given that they ended up proposing 100% reserve banks because once you've got 100% reserve banks you can only stimulate nominal demand growth by increasing the monetary base. And that ultimately means that you have got to create some central bank money to finance some fiscal deficits. And let's be clear who said it most clearly. Not some mad left wing socialist inflationist but Milton Friedman who in 1948 said the chief function of the monetary authority under the scheme I am proposing would be the creation of money to meet government deficits or the retirement of money when the government has a surplus. So a series of people who believe very strongly in sound money and low inflation as I do believe that there were some circumstances in which it was appropriate for governments to create money to finance fiscal deficits. What is called helicopter money. So should we do that? The crucial thing that I want to say is that in assessing whether we should do helicopter money under some circumstances or what I call overt permanent monetary finance of an increased fiscal deficit. I think you crucially have to distinguish between what I call the technical arguments and the political economy arguments. I believe that there are no reasons whatsoever why it is technically impossible to do helicopter money and no reasons whatsoever why that will necessarily lead to excessive inflation. Because essentially the impact depends crucially on how much you do. If you do a small amount you will stimulate nominal demand to a small extent. If you go out and fund permanently say a fiscal deficit of 10% with money yes you will create hyperinflation which will destroy the economy it depends on how much you do. That is actually quite easy intuitively to understand if we were operating an environment where the only money was paper money and there wasn't bank money the more you printed the bigger the effect. But it also turns out to be the case in an environment with fractional reserve banks where it's all a bit more complicated because what the central bank and the government together do is create what's called monetary base. And there's a monetary multiplier. Now I'm not going to have time today to explain why even in the situations where you have fractional reserve banks I am still confident that we can under some circumstances use overt money finance without producing excessive inflation. But that's just as well because I have to leave you with some reasons to buy and read the book where it is explained. But I want to simply assert that I am absolutely convinced that there is no technical reason whatsoever why overt money finance cannot be used to stimulate aggregate demand and no technical reason why the extent of that stimulus should not be calibrated to an appropriate level. And all of the supposed arguments of technical impossibility which I have encountered simply dissolve on closer inspection. If there exist circumstances in which it is desirable to stimulate nominal demand and back in 2009 everybody was agreed that those circumstances exist then we should consider overt monetary finance as available tool to be compared with the other tools such as ultra loose interest rates and standard QE maintained for many years or debt financed interest rates. And I believe that there are some circumstances in which overt money finance is also superior to those other tools of either debt financed deficits or of long term continuous ultra loose monetary policy. And again I won't go through those arguments so I'm happy to deal with them in questions but they again are set out in the books. But what is striking is how difficult it is to persuade even many fine economists of what I think is a technically absolutely robust case. And that I have come to believe reflects the fact that many people do not want to believe that overt money finance is technically feasible and for a very very good reason. For once we accept that overt money finance is technically feasible and potentially unsung circumstances desirable once we break what is a taboo against its use we face very severe political economy risks. For while it is undoubtedly possible to use overt permanent money finance in appropriately moderate amounts to avoid deflation and stimulate the economy. For instance that is what the Japanese Finance Minister Takahashi Korikeo did in the early 1930s he's known as the Japanese Canes. It is also obvious that we can print money in excess as we know from Weimar Germany on modern day Zimbabwe. And the problem is once you've said this is possible why wouldn't politicians want to do it all the time in order to win elections or to satisfy their constituencies. And why wouldn't they allocate the money created to their favoured political regions or their favoured and potentially inefficient projects. So the crucial issue on overt money finance is not the technical feasibility but the political economy of its use. The crucial question is whether we can construct credible constraints of rules and institutional responsibilities which will ensure that politicians do not create money and purchasing power in excessive quantities nor allocate the new purchasing power created in inefficient and politically biased ways. In principle I believe it should be possible to construct such constraints and I think the most obvious way to achieve that would be to build on the system of central bank independence and of explicit inflation targets. It could for instance be possible to give the monetary policy of the Bank of England the authority to determine what quantity of overt money finance would be compatible with achieving the inflation target and a monetary policy committee which had been equipped with such authority might well I believe in 2009 have determined for instance that 35 billion of overt and permanent money finance of increased fiscal expenditure might have been a more effective mechanism to stimulate aggregate nominal demand than 370 billion of supposedly temporary QE. Now other mechanisms might also be possible but the essential point is clear the key issues here are political not technical and we should only take overt money finance out of the taboo box and use it to stimulate aggregate demand if we are confident that we have a robust mechanism to prevent its misuse. And I think those mechanisms must be based on rules and clearly defined independent authorities. Broad promises that a politician would only do a sensible amount or would promise in future to cut off the taps once some rather vague concepts such as full employment had been achieved I don't think would be sufficient disciplines. Equally however we should recognize that if we do leave overt money finance in the to do box that also creates severe dangers because it leaves us relying on private credit growth to ensure adequate nominal demand and on pretty much permanent ultra low interest rates and QE to stimulate that credit growth. In essence and in conclusion I think we have two mechanisms by which to ensure growth in aggregate nominal demand. First states can create nominal demand via fiscal stimulus funded with fiat money creation. Second fractional reserve banks can create nominal demand via maturity transformation and credit and money creation. Both mechanisms are potentially very dangerous. States politicians subject to political pressures may create too much money or allocate it badly. And the private banking sector if unconstrained by public policy may create too much private credit too much leverage and allocate that private credit badly. We face a balance of dangers not perfection on one side and inevitable position on the other. States fail and markets fail and optimal policy requires us to strike a balance. I believe that before the crisis we were far far too relaxed about private money creation and that in the aftermath of the crisis we have been too terrified of the potential role of constrained and moderate over money finance. But there are severe risks on either side which is why my book is entitled between debt and the devil. Thank you very much. Thank you there. That was brilliant. Before I forget because I forgot before we have got a hashtag which is making money work and it should be on the sheets in front of you. So if you want to tweet please do and I'll try and pick up some questions from there but preferably from you directly. OK so I want to start by going back to talking about one of the main myths that positive is challenging which is that banks are these neutral intermediaries between savers and borrowers when in fact they create money every time they make a loan and the vast majority of new loans go into property and financial markets. So Steve you notoriously had a public debate with Paul Krugman about the importance of banks creating money. And since the financial crisis there has been a number of publications including the one there mentioned by the Bank of England last March which highlighted that the mainstream understanding of money creation is wrong. So are you sensing that there's a shift on this issue among economists? Let's see. What's such a shift but the group that was a minority and not listened to beforehand which is the larger the post Keynesian school of thought and they're focused on endogenous money right from the days of Basil Moore back in the 1980s. That's now become more obvious but in terms of the mainstream they're trying to fit money into the framework in exactly the same way they fit everything else which is they're adding what they call frictions. Now any of you who don't know what I mean by frictions think Tommy's epicycles. They've got a model of astronomy with the earth centre of the universe and the planets and the sun orbiting us and they can't explain why one of the planets suddenly threw a meteor at us so they threw an extra epicycle in there. So that's what they're doing. They really are not trying to break away from seeing them as a source of frictions that slow things down not speed things up and they're also not escaping from seeing them as intermediaries. The real problem they have with once you see the banks actually create money as a dare said in his talk they also create demand. I mean you look at total demand and economy and total income is not just the turnover of existing money it's that plus new money and new debt which when it's created we then spend. So the huge volatility we see in the economy comes out of the volatility and that change in debt. Now as soon as you allow for that you're in a non-equilibrium system and mainstream economists don't know which universe they're in but on which planet they're on. And you're a specialist in modelling Heimann Minsky's financial instability hypothesis but hasn't Minsky become more famous now after everyone's been talked about at the Minsky moment and has that not helped at all? It's helped a bit but a good mate of mine Roddo Donnell who's a specialist in history of economic thought on Keynes made a wonderful comment once at a conference I was at telling a mainstream economist look please stop reading Keynes. Reason being you read it you see something that totally isn't there. It's like I don't know it's like having somebody reading in and blighting from a totally different culture and occupation and they see naughty as something quite dangerous. They simply can't understand it so when you see what Janet Yellen called her interpretation of Minsky or like Krugman back to Krugman again his paper with Eggerson supposedly about a coup Minsky fishing model. As I said in this way our fight began I said I can't see Minsky in what Krugman has written and that's the trouble. What they do is they take an idea which is completely foreign to their way of thinking and they if those of you know Star Trek they do a borg to it they assimilate and by assimilating they destroy what's unique about that idea. So the great danger is you really can't rely upon this lot it's again my I'd love the analogy George Cooper hasn't his book Money, Blood and Revolution which I recommend for those who haven't read it by the way very good book. George makes the analogy that there's no way that a Ptolemaic astronomer could include Copernicus' insights into their model because you cannot make the earth the centre of the universe and the sun at the same time. But that's what happens when the Ptolemaic astronomer tries to assimilate Copernicus and that's what happens when a mainstream economist tries to assimilate Minsky. Does Adele Cresti want to pick up on any of those points? It's very interesting you've had the debate with Paul Krugman and I've had that debate with him as well. Was he polite to you as he was to me? No, maybe a bit more polite, I don't know. It's interesting that the inability or unwillingness to accept the endogenous role of money creation is actually shared both by the rational expectations, efficient market, modern sort of neoclassical economics and by people who are very strongly attached to the post-war formalisation of Keynes in an ISLM framework. I mean Paul is very close to asserting that you can understand the entire world in an ISLM framework. And I think he's wrong about that debate. So it's Higgs? Well it comes out of Higgs. And even very clever people actually did argue that banks don't create money. One of the cleverest people who said that was James Tobin on the whole, I think he's a very fine economist, but the bit where he said that, he's wrong. And you can set out the mechanism why he was wrong. I also agree with you very much and I haven't thought about it that that article by Paul Krugman and Gowty Edgerton which is called a Cew Minsky Fisher Hypothesis. I think it is legitimately a Cew Fisher Hypothesis, but I don't think it has much Minsky in it, which is why it's sort of two thirds right but not quite all the way there. Even there having Fisher based his analysis on rejecting equilibrium, so I think it's only one third. I'd just like to, I think my role on the panel here is to be slightly sceptical about some of this. It's going to be sceptical about two things just now before we come on to some of the other issues. One is that I think I don't disagree that money is important in the economy. I don't in any way want to associate myself with people who say it has no effect whatsoever, but we mustn't also think it has the only effect on the economy. It isn't the only driver of demand and Adair if he says that in the pre-crisis period you needed to have 10 to 15% private credit growth to get nominal GDP growth of 4 to 5%. You would then have to explain why we're not having that credit growth now and we do have that nominal GDP growth now. There are other things that affect the economy as well as money. Actually I'll leave it there for now. I'm going to ask you another question if that's okay. The Bank of England is now charged with targeting inflation as well as maintaining financial stability. Adair talked a bit about this, how it's not really possible to do both with only one tool which they've got, which is interest rates. Do you think it's time to start considering new ideas, new policies such as monetary financing or even Jeremy Corbyn's People's QE? I'd absolutely say we should never rule anything out and it is absolutely also the case that we needed whatever tools we could throw at the economy in 2009, whatever form of demand stimulus we had. But I would say that we can easily sometimes confuse ourselves. Adair makes a very, very clear distinction between the quantitative easing that the Bank of England introduced in 2009 and overt monetary financing. I don't see it as that different really. I agree with it. We might never get rid of the money we created, in which case it is overt monetary financing. It's just exposed. We only know about it after the fact. We did need £375 billion, which allowed us to run fiscal deficits, public finance deficits, much larger than we otherwise would have been able to do. You can quite easily see QE that the Bank of England did in those terms. We should absolutely not rule anything out. We can look at People's Quantitative Easing. I think it's a rather mess of a policy because it's one of these policies that feels in some ways magic that you get marvellous outcomes, but it doesn't cost anyone anything. The problem with it is because it's merging too many things. There's a QE element, which is the money creation by the authorities, and an infrastructure element, which you can separate, and an investment bank element, which, depending on how you see it or not, is also entirely separable from the other things. You can put them into their own boxes. We should look at all policies that affect the economy. The reason we had such high private credit growth, you could argue before the crisis, is our planning policy. That created the house prices that went very, very high, which created the need for mortgages to rise. We have lots and lots of tools at our disposal, and I think we need to be aware that it isn't just interest rates. If it was the bank of England person sitting here, he or she would say, we've got macro-predential policy now. We can affect essentially how much banks are allowed to lend directly, and that's also something very untested but well worth looking at. Where it does exactly right is that we need to be aware much more about what's going on in the economy than just looking at inflation, and if it's roughly to say everything's fine, we do need to be more aware because we know it blew up in our face in the crisis. Can I pick up Chris's point as to whether over money finance is different from QE, and Chris is absolutely right that it is possible that QE could post facto turn out to be monetary finance, and indeed there is one country in the world where I will bet a large amount of money that that will turn out to be the case. The Bank of Japan now owns about 60% of GDP going up at about 2% or 3% per month of Japanese government bonds, and I think anybody who thinks that the Japanese government bonds are going to be repaid in the normal sense of the world repay, which is that the Japanese government is going to switch from a primary deficit to a primary surplus and is going to pay back those bonds, or anybody who thinks that the bank of Japan is at some stage going to sell those bonds off its balance sheet just is not looking at the mathematics. It's not going to occur. It will turn out post facto to be a helicopter money. They ignored Ben Bernanke when he said they should do it in 2003, but post facto this is going to end up as a permanent monetisation of Japanese government debt. The good thing is there, I'm just betting you that as a sort of positive statement, not a normative statement. We don't need to debate whether it's a good thing or bad. I'm just telling you that is going to occur and I'll take a bet on that. However, I still think there is a difference. Suppose there is an environment in 2009 where the government runs a fiscal deficit of say 4% of GDP and does 350 billion of QE, which it asserts at the time is going to be reversed at some future date. Suppose it instead says, no, I'm not going to do 350 billion of supposedly reversible QE. I am going to do a 5% fiscal deficit of which the last 1% was financed by money creation, which I am telling you in advance is going to be permanent. I think it is reasonable to say that those would have different effects and I think there is also an importance in signalling. Now signalling can never be perfect. It's quite possible for a central bank to say that it is doing temporary QE and for that to turn out post facto to be permanent. It is also quite possible for a central bank to say that it has permanently created money, but to come back five years later and to suck the money back out of the economy. So these signalling mechanisms are not absolute, but I don't think they're nothing. I think the intent of the policy can still have an effect. Can I also just comment on the point you made Fran, about the Bank of England only having one tool. Now the Bank of England actually has two sets of tools, but what I think is interesting is that the philosophy at the moment is that they are supposed to be achieving two different things. We're meant to be using interest rates including QE to influence the long end of the yield curve to hit the inflation target and everything to do with macroeconomic stability. And at least as legally defined, the Financial Policy Committee is meant to use things like loan to income ratios, bank capital requirements to make sure that the financial system is safe. It's not meant to be using those to manage the macroeconomic demand, but actually if you look at what the Bank of England has ended up doing, it has already started muddying that story. When it introduced the limits, there was like mild limits on high LTI lending last year, the argument that they put forward was definitively not something about the financial stability of the banks, the solvency of banks. It was about the consequences of asset and credit cycles for macroeconomic demand. And in its liquidity provision, if you look at the funding for lending scheme, the Bank of England has crossed an extraordinary rubicon which it has decided that it will provide liquidity to the banks specifying where it wants that liquidity to be used. Because it quite overtly says this liquidity is to be used for S&E lending and not for residential mortgage finance. Now if you'd have said five years ago that the Bank of England should have policies which favour one category of lending across another against another, they'd have said we'll never do that. All our policy tools are completely neutral. We pull the interest rate, but we have no interest in the allocation of credit, but faced with the reality of the current situation, they have already changed. And my argument is that those developments which we are seeing there will turn out not to be simply things that they have to do in exceptional circumstances and then we'll eventually get back to business as normal with the FPC doing pure financial stability and the MPC doing inflation just through the interest rate. I think these are signs of the way the world will be and has to be. Thank you. Did you want to comment at all on that, Steve? I'd say one thing I want to see the bank add. This is general for central banks globally. They have to include the ratio of private debt to GDP as another target and not let it get out of control. My rough ball parkour I think private debt should be of the order of 50% of GDP. It shows about 180% of GDP now. And the reason why that's so dangerous when you get that level of debt, a slowdown on the rate of growth of debt is enough to cause a crisis, which is exactly what's happening in China right now. Debt grows from 800% of GDP to 180% over about five years, growing as fast as 35% of GDP in any one year. If that slows down to the same rate of growth of nominal GDP, that actually causes a decline in demand. And that's why we've got to target it and that's why I actually argue in favour of using the capacity of the central bank to create money to actually cancel private debt in a form of a modern debt year by year. So you've already picked up on the fact that monetary financing you see as technically possible and that there's a big kind of political economy question around how it would actually be implemented. And that's kind of because what it does is blur the boundaries between monetary and fiscal policy which have in the last kind of 20 years at least been seen as needing to be completely separate. But as Adele you've just talked about we've already had in the last few years schemes like funding for lending helped to buy and QE which already has started to blur these boundaries. So is it time that we kind of start openly emitting and talking about the fact that the Treasury and the central bank need to work together in order to maintain financial stability? Well, interestingly I'm just trying to find it in the book. When Ben Bernanke proposed in 2003 to the Japanese that they faced such a severe problem of debt overhand and that as a result they should consider helicopter money he actually had and I know the quotes in here from where but I can't immediately find it. He observed that this would necessarily require some degree of coordination between the Treasury, the Ministry of Finance and the Bank of Japan. But he also commented that such coordination should not necessarily be seen as an impediment of central bank independence. Actually I found it now. Under some circumstances greater cooperation for a time between the central bank and the fiscal authorities is in no way inconsistent with the independence of the central bank. So that is Ben Bernanke. Again, not a crazy in 2003. What is the nature of the coordination that's required? To me the crucial thing is that if one is going to ever use overt money finance the absolute control over the quantity which is allowable has to be reside in an independence central bank which I think is best guided by an inflation target. I think that is the best way to make sure that the tool is not misused. But an independent central bank cannot possibly be the one that decides whether the stimulus is going to take the form of a tax cut and whether that tax cut is going to be proportional or the same for each person or whether it's going to be an increase in public expenditure. So that is a decision which is necessarily a political decision and I think that is essentially what Ben Bernanke is saying in that quote that if you ever use overt money finance the specific way in which you use it has to be something where there is a significant role for the Treasury but you would probably want to locate the decision on how much is appropriate and how much would usefully stimulate the economy versus overstimulate the economy. You probably want to locate that I believe in an independent central bank. Thank you. Chris or Steve do you want to comment on this blurring of fiscal and monetary policy? Yes I think we made a mistake before the crisis thinking it was very easy that essentially demand management, the control of the ups and down of the economy we could pass over to the central bank but all other sides of fiscal policy balancing the budget or running our prudent public finances we could do through a democratic process. And we found in the crisis ultimately that that was very difficult and when you have a really severe demand problem it is very difficult because the two policies begin to merge and if you had overt monetary finance you clearly have to have them working together in some form or other. So I think this is one of the reasons why using monetary finance as a demand management tool is rather difficult in any time other than a crisis because it's quite nice to be able to separate demand management generally from the political process because we know from quite bitter experience that politicians aren't actually very good at doing the demand management role and that is quite a good thing to hand over to technocrats. If we're going to do it in normal times again I agree with Adair it's perfectly possible it would be better if the Bank of England decided on the amount I agree with him there the technicalities of this would get very difficult because if you were to take a Jeremy Corbyn view of the world I'll do this because it's very public and he says we've got to spend any money we print on public infrastructure proposals. This is actually the equivalent of saying that Adair were he the technocrat at the Bank of England would be saying that they were going to stop the diggers on HS2 or some other infrastructure programme at the moment they think demand is too high in the economy. So it's really something it's a bit like hypothecation of taxes quite often it's either not hypothecated or this link wouldn't be actually there wouldn't be a link between money creation and infrastructure because if there was then it would be really a bad thing to do because he wouldn't want your infrastructure determined by when the central bank decided there was too much or too little demand in the economy. So you've got to be very very careful about those tools if it's just about putting money into people's bank accounts or not it's perfectly reasonable but you need to be very careful about whether it's one bank account per household if people took out 25 bank accounts would they get 100 pounds each. There are some very difficult public policy issues so outside of slump I would still be very cautious about using overt monetary finance as a public policy tool. I dare mention having an inflation target is the main thing the bank should have. I don't think that's enough. I think what we'd learn after the financial crisis and this is Minsky's lesson again is financial fragility as well is the other issue and you measure that fragility by the degree of private leverage and the rate of growth which it's growing. So you've got to go beyond just the inflation target but again you do need to have technocrats there. Technocrats have to know what they're talking about. On that front I've got to say the Bank of England stands out as one where it does. I'm really quite impressed with what the bank is doing now and the openness they've got far more so than say the Federal Reserve which is still a closed shop, a neoclassical closed shop. So there's openness there and the technocrats here are more likely to make sensible decisions. The trouble is at the same time we have political class that believes they should be running a surplus. Now that is equivalent to banks believing they should take in more in repayments every year than they make out in loans. The end game but which is there's no money in the economy whatsoever. So we need to have technocrats and politicians realising the government should be running a deficit, should be money creation financing a large part of that as a sustained part of policy because a growing economy needs a growing money supply and both the private sector and the government should be producing that. Otherwise we get the sort of private debt over hand crisis we've been through already once already. We have a change in mindset not just amongst the technocrats who need to build a non-equilibrium, monetary aware view of how the economy operates. We also need politicians to change how they think they should behave because at the moment the toughest thing one politician can say to another is my surplus is bigger than your surplus. Can I just go back to a point Steve made earlier that I completely agree with the fact that we have to pay attention to the aggregate amount of private credit within the economy. I think this is a very difficult thing because once you say that you end up saying well how much is too much and we know I mean I also think one needs to not have too much public debt within the economy but we know that having asserted that Ken Rogoff and Carmen Reinhardt said well the optimal was the maximum you want is about 80 or 90% and then warfare broke out about their precise figures. This thing is these things are never precise results but I do think that what has happened, what happened in the new regulations that we introduced on banks, what's called the counter cyclical capital requirement within Basel 3 took us a tiny step but an insufficient step towards that because what we said was we want to constrain the growth of credit when it is above trend but that implies that if it's growing at 15% and always has been growing at 15% that's fine but if it's growing at 15% nominal GDP is growing at 5% you will have more and more credits and I think there is now an emerging body of economic theory which is getting to grips with how much private debt is too much. I think it's very early days in terms of the empirics of that. There is a paper by Steve Cicetti and Anise Carubi, the BIS two years ago. There is a very interesting paper put up by the OECD this year, fundamentally saying that the relationship between increased private sector debt as a percent of GDP and the efficiency of the economy is not linear and limitless. It's not more leverage is better. It's an inverse you. It's better to have 50% private credit as a percent of GDP than 10% and a country like India could do with some more private credit but beyond the point it turns negative. The difficulty is we don't know where that we know for pretty sure that there is a turn point but we don't know where it is but that is a vitally important growing area of I think of economic science which people are beginning to get to grips with. Can I actually just go back to something Chris said where he said and quite rightly picking up my slide two, well you know we are now growing the economy without private credit growing faster than GDP but what I think is going on there Chris is we are going through a series of phases. Before the crisis we were growing private credit faster than GDP. For the last seven years we've slightly deleveraged the private sector but public debt has gone up even more so that if you add private and public together total leverage has gone up and if you take the OBR forecasts looking forward over the next five years. I know they are occasionally wrong. They say as we get public debt under control we will only grow the economy by increasing private debt so that we end up with even higher leverage in 2020 than we had in 2007. So I think there is a sort of one of the reasons why we've kept growing over the last seven years despite some private deleveraging is precisely because there has been public leveraging. The other point which is very clear in my book is I basically say it seemed as if we needed 15% credit growth to grow nominal GDP by 5%. But then I argue that we didn't really need it and that actually relates to some of your points about the housing market and the fact that a huge amount of this credit is not credit extended to finance what Richard Verner calls GDP transactions. It is essentially credit extended to finance the purchase of assets that already exist and for that reason it's a growth of credit which creates a vulnerability to a debt overhang and a deflation but it is not essential to the growth of the economy in the upswing. Really quick question. So if the OBR is kind of predicting that we're going to see household debt really high around 2020, I think they're saying it's going to be higher than pre-crisis levels and that we are re-leveraging banks and household debt, then whose role is it to be watching that private debt? Is it the Treasury? Is it the central bank? Is it both? Because it kind of seems like these statistics which are saying we're heading for another amount of financial instability aren't really getting out there into the political and public consciousness. It's both very clearly. It's certainly the Bank of England's role partly because of Prudential Bank. They have to make sure banks don't get themselves into a mess by overlending but it's also the Treasury's role because they have many more tools at their disposal, things like or the government as a whole, planning policy, all these things that can matter for the reason people are demanding credit themselves because credit isn't only foisted on people by banks but it's also people want credit. I just bought a house in the last couple of months and I took out a very big loan which is much bigger than the loan the people we bought the house off and that was because house prices are so high, not because the banks were chucking credit at me. It could be a correlation. There could be a correlation. No, well house prices are so high because we don't build it off fundamentally. Japan, Japan. Controversial, okay. Leverage causes rising asset prices, period. The statistics are overwhelming on that front so. You can't separate. You can't separate but you can suddenly say which ones lead and the growth of mortgage that has started in every country on the planet. The equity in the UK housing stock has been rising and rising and rising so the house of balance is looking. Turkeys have a fantastic time and talk. Thanksgiving. Well that's what you said in 2007. It didn't really fall. It happened in Japan. It happened in Japan. What happened here? It happened in lots of countries and what's prevented is continuing leverage still growing in the countries where it hasn't happened or foreign buying. You're basically getting it down to about four or five countries now. It's only a minority where you're still seeing that growth occurring. Canada's now left the party even with Vancouver being pumped up by China's buying. You can only continue levering for so long. I think we've reached what you can call peak debt and in that situation it really doesn't matter. The building of houses is a factor of the supply. It's really the demand factors that are driving it up when they're under overwhelming leverage driven. Well I'm going to say they're both right. My hypothesis on what goes on on housing is the following. I think that on average over time as society gets richer there is a limit to the number of washing machines we all want to buy. I mean for me it's one. I don't necessarily need two washing machines. There's a limit to how many clothes you want to buy etc. There are some things in life which display an income elasticity of less than one. There are other things where as society gets richer we observe a very strong income elasticity. For instance healthcare and that is true whether you organise healthcare in a private fashion such as in the US where people vote with their wallet or in a public fashion such as in the UK where we want higher public expenditure. Everywhere over time healthcare expenditure goes up as a percentage GDP. I believe that as people reach degrees of satiation in the physical goods that they can buy one of the things that they will inevitably spend more money on because it is a logical and crucial determinant of their welfare is to compete with one another for the ability to live in the nicer parts of town to have the more pleasant houses more close to the countryside to stay at the hotel which is close to the beach rather than away from the beach etc. I believe that desire for locationally specific real estate is a high income elasticity. That relates to Chris's point that if then your supply of locationally desirable real estate is inelastic and constrained then that high demand can only produce a one way movement in the price. Part of what is going on is rooted in real supply and demand but then you get the second factor that the moment people realise that there might be a tendency rooted in real supply and demand for housing and in particular the more desirable housing to go up faster than average earnings then they start treating it as an asset class and they start treating it as an asset class either because they buy two or three houses and do buy to let or even people who don't do that implicitly treat it as an asset class when they say I wouldn't normally buy a house yet but I'm going to buy a house now because otherwise I'll be left out of the house price appreciation that is an owner occupier treating it as an asset class and that's important as well but then you get the third factor which is that seen from a bank point of view lending against real estate whether it be residential real estate or commercial real estate always seems to be the easiest and the safest thing to do because when you lend against a business or a business project you have to make an assessment of the specific cash flows of that specific business whereas when you lend against real estate collateral you know that that real estate collateral has many people who could use it many residential people who could live in that house many businesses which could occupy that relatively generic commercial real estate so there is a huge bias for the banking system to head towards lending against real estate and that gives a further twist so I think we have a real supply and demand factor multiplied by the treatment of property as an asset class and multiplied by leverage on that point one thing you said earlier in your talk you mentioned how we compete against each other for an asset we win by taking out more leverage in that competition this is coming back to the nature of lending now as well we can't let banks do that because we see the crisis that lets us get into we have to find a way of redefining what banks do so we don't find ourselves competing against each other and actually desiring higher leverage so I can buy the house over you because I take out more debt than you do but also we have to get banks lending to businesses in a way which is profitable for the banks as well because at the moment if a bank lends to entrepreneurs the oil and musks of the world four out of the five of them fold they make money out of one but they make interest on the money they've lent to that one they've lost the principle for the other four so there are issues about what banks do now which limits what they can do in a creative sense and we have to also change that to make it possible for them to be profitable in ways that are socially desirable except for them Thanks Steve so there are still clearly many questions around we need some new policy, new regulation to stop us having this hugely unstable financial system which is driven largely by these asset bubbles especially in real estate and I mentioned earlier the UK hasn't looked at its money and credit system or examined how it operates since the Macmillan Commission in the 1930s is it time that we actually the Treasury or Bank of England or I'm not sure which body took the leadership and said actually we need to understand this if we're going to have financial stability and we need to actually look at some more regulatory regulation and policies Well I think it's important for us to continue to debate this and my book is intended as a fairly radical Not quite as radical as positive money but a fairly radical Radical contribution to the debate and what I will say is that I don't think we're out of this crisis I think we face some very deep deflationary tendencies across the world in particular and Steve mentioned it earlier don't underestimate the impact of what has happened in China China is a key part of this story that once you've got a lot of debt it doesn't go away, it just goes somewhere else and then it eventually produces a problem The reason why the Chinese debt soared from is lots of different ways of measuring it say from 120% of GDP to about 220% of GDP post 2009 is that the Chinese authorities were terrified that deleveraging in the advanced economies would depress demand for their exports and therefore lead to unemployment which would lead to social unrest in China To offset that the decline in global demand for their exports they unleashed an enormous credit boom to finance essentially real estate and infrastructure investment driving the level of investment in the economy which was already at an extraordinary high 40% all the way up to 50% and all debt financed and the net result was for every sort of dollar of hard for deleveraging which was going on in the private sector in the US many many dollars of up leveraging go up in China and that increase was necessary to help make the global economy balance but that is coming to an end it's coming to an end in a big way at the moment because China has suddenly realised that enormous credit splurge has led to massive overbuilding very significant waste a relentless decline in what is called the incremental capital increase in the capital output ratio declining the incremental output to capital ratio as more and more of this investment has been incredibly inefficient they have huge bad debt problems they have a real economy problem this is going to slow the real economy down all of which means is one level this is the good news for radicals we are not about to go back to easy times in which we get back to just inflation targeting and 5% interest rates this debate is going to go on and on and on as we realise just how deep are the problems we face from probably a combination of what Ken Rogoff would call a debt overhang and what Larry Summers would call a secular stagnation I think there are both at work and that does mean whether or not there is a commission or something like that I'm not sure that's the way forward I think there is going to be a continual debate about this I mean what I believe is that we are going to get to the late 20's 2018 and I'll give another prediction the Bank of England and the Federal Reserve are going to increase interest rates sometime in the next 6 to 8 months but in 2018 I doubt whether their interest rates will be higher than 2% to 2.5% and in most of the rest of the world and the major central banks I think they'll be exactly where they are at the moment which is zero and in China I think they'll be approaching zero versus the 4% they are at the moment I think we're in very very deeply deflationary times and this debate of why we're in those is going to go on Thank you Steve or Chris do you want to comment on I'm not going to make a prediction but I agree with him entirely that it's not going away I don't think a commission is the right thing because even if it came out with a whole bunch of very radical conclusions we might then decide that they're not very good within 6 or 12 months because I think that's the sort of uncertainty we're in so the reason I'm not going to make a prediction is I think Adair's view of what 2018 could look like is entirely plausible it could be much worse than he thinks as well but it could also be better and we must remember that sometimes there are good surprises as well as downside surprises and that's not me predicting there will be one it's just that we could have a world in which our current fears about deflation globally don't become realised and we realised it was one of these things we worried about in 2015 and it's gone away and we're back to a more normal world I'm not predicting that's the case but we have to have that as a possibility in our minds or we should be doing the countermeasures right away that's an entirely consensus view everyone essentially thinks that it's not particularly radical it does show that we're in a world that's remarkably different to where we thought we'd be in 2007 and the real reason for that is that we found that we were running an unsustainable economy and we thought we'd be a lot richer now than we are and those are real economy reasons we're not as productive as we thought we would be and that's just unfortunately very bad news for us all I named my website debtdeflation.com in 2006 for a reason and that is I saw a debt bubble occurring and we're going to meet a deflationary crisis so I'm at one with the dare except that I don't think you can even get to see the rates get anywhere in your 1% here because they'll start putting them up as they did back in 1937 in America and try to run a budget surplus as well they did in 1937 in America and unemployment skyrocketed then from 11% to 20% we're going to do the same thing because government spending will counteract how bad things gets to be this time round but any attempt to tighten which is ignoring the level of private leverage will just cause the private sector to go back into the leverage again and will fall back into another slump so I think we're permanently in that case of a permanent slump now to get out of it we need not just to change in our monetary system we need to change the way we look humans are very good at losing good old lessons as you said I'm mentioning people who are on what look like the conservative side of money back before the Great Depression one thing I was amazed to find courtesy of a remarkable undergraduate student in America a couple of years ago is that a name you would not normally associate with talking about the dangers of too much credit and bubbles in the financial sector is Pagoo but Pagoo's book industrial fluctuations has graphs that I next produced so you'll find this awareness of money was back there in those days so we can forget these things unfortunately and we need to get this appreciation we cannot model the economy without taking into account bankstead and money and non-equilibrium and that's a huge change in the mindset for the economics profession I won't take bet on whether that's ever going to happen but we need to start working with the central banks and with the treasuries to get some awareness of the nature of money and then change how we manage it thank you so we've only got one roaming mic so we're going to take three questions at a time first of all from this side of the audience then from the middle and then from the other side so there's a lady in a red coat to what extent does the general public need to be informed and well interested in innovations in monetary policy like Dares, OMF so that the changes are feasible but also effective thank you another one from over here okay there's a man in a grey jacket yep wait for the microphone wait for the mic thank you my name is Charles Bazalinton I come from Hampshire we're starting a local community bank but lateral thinking on your topic of discussion it'll be a not-for-profit that is the profits will be directed to the local community and it will be aimed the lending will be aimed at local businesses and local causes and so on local industry that's my statement do you think it's a good thing as a foil to the problems that we have of highly centralized international banking right down to the local level in their platform Mary Fee I wonder if anybody can explain why they think it's okay given that they were rescued by QEE to continue giving bonuses to these failing businesses which are banks thank you okay so to what extent to the public need to know and understand these issues in order to make innovations more feasible and I want to take that fully I think is the answer they absolutely need to know what technocrats are doing in their name I think one of the big problems before the crisis was that monetary policy with A that the Bank of England Governor was going around saying it should be boring we shouldn't be looked at at all but that was definitely his view very strongly held and it was I think we've learned was a very bad view it shouldn't be boring it's part of our democracy if we're going to give something that powerful over to technocrats we should be informed about it and it should be done in the open thank you and of course the technology now what they're doing and obviously we've learned after the crisis economists didn't if they're engineers it would be a different story the public actually understands money creation and also in the economics profession the person the public say you know banks create money by lending money yeah that's fine what's the next topic economists that's heresy and they call people like myself in a dare banking mystics in fact the economics profession is dominated by what I call barter mystics who believe you can model capitalism as a barter system like we're in a New Guinea tribe I apologize to any New Guinea tribes people who might be here because and what we think they are and David Graver's book confirms that too so the world in which neoclassical economists live is a totally fictional world not even in the same universe we're in so the public understands that better but the public at the same time falls for the argument that a government should run a surplus that's a recipe for a future financial crisis if the government actually pulls it off and so the public itself needs to change just thinking about that particular issue and a range of others I think this is really quite how wide we can expect to be able to spread a deep understanding of some of the issues we've been talking about in my book in the preface which is called the crisis that I didn't see coming I recount the fact that I thought I was quite good at this stuff I'd studied economics at Cambridge I'd taught some economics at Cambridge I'd spent my life dealing with private banks I'd spent a period of time advising central banks and ministries of finance in Russia and Eastern Europe in the 1990s I read the stuff but I didn't see the crisis coming and I actually found that in order to understand it I had to go back to some stuff that I'd ignored now Steve had been reading this the Minsky etc. I didn't really know about Minsky I certainly didn't know about Hortree I hadn't read for years Vicksell's interest in prices and to me this was an intellectual journey to understand what is going on and Steve may be right that people intuitively understand well, when a bank lends money suddenly there's some money that wasn't there before but as he also says it's very difficult for people to get away from I'm going to think about the problems of the national economy as if they were problems of the household economy and the household economy must balance it but not spend money you don't have etc etc and the very very essence of what macroeconomics is what macroeconomics is is a realisation that the national macroeconomics and global economy is not simply multiple household economies added up that is the central insight of macroeconomics that there's something called macroeconomics and indeed something called monetary economics which cannot be reduced to what Joe Siglett calls a seed and corn economy in which you can model it in terms of physical realities so what can we do well I think at the very least educating those people who do economics at university better than we do I think economics went down a set of sort of cul-de-sacs intellectual cul-de-sacs in assuming the rational expectations hypothesis the rational expectations hypothesis is one thing about when you write it down you find it almost impossible to believe that a sensible person could believe it it's just clearly wrong the efficient market hypothesis clearly disproved by I mean nobody who makes money speculating in the markets believes in the efficient market hypothesis and if they did they'd never get up in the day and take any positions because they'd know in advance that they couldn't possibly make any money but somehow this entered the core of the economics faculty in a highly mathematical way now we need maths in economics but one of the dangers of over-mathematising economics is we start making very simplistic assumptions in order as people say to make the maths tractable and that is a very dangerous thing to do so I think we probably need to do two things I think we need to teach economics better and we need to make it plain to the general public at very least that economics does not have definitive certain answers which tell you everything it's a continual exploration under conditions of uncertainty that's why it's such an interesting discipline and the thing we must not do is propagate a belief under the general public that we've got all the answers and that the answers are not inflation targeting is going to make it all perfectly good and then finally I think we do need to encourage the general public to understand the bits which are intuitively understandable about this which is well okay if private debt grows faster than the national economy every year isn't that going to produce a problem at some stage so I think there are there's a genuine challenge here but I think there are things in the way that we educate undergraduate economics and maybe people who do A level economics and in the way we talk about the certainty but it ought to really to be the lack of certainty of our economic propositions when we try to explain to the general public what we do and don't know the fact is economics is an uncertain discipline it's not as robust as building a bridge if we tell people that we know how economics works in the same way that engineers can legitimately say I know how to build this bridge and it will last for 25 years we're lying that's just not the way economics is Does anyone want to quickly comment on the local bank and getting resources into local area and bankers bonuses in QE? I think it's an excellent idea because local banks actually have local knowledge and you find this is what we've lost in the corporatisation of banking in the last 40 years I get contacted by all sorts of people who read my blog and one of them was a person who wrote the software that's used pretty much globally to do credit evaluations 30 seconds after you click on a web form and he said he was so horrified that banks actually bought his own software because he just knew what would actually do and he knew the algorithm is inside then he was stunned with how many banks took it up because it basically cut out a layer of decision making and made things happen more rapidly and they could cut out an expense layer and improve their profitability but that is what that leads you to and you have that centralised decision making it's all about collateral backing as Adair was saying earlier you lend for real estate because even if the person who buys it off you goes bust you get the asset so it's very dangerous because local banks have to know the local area and you therefore provide and Richard Werner makes this point very well on the banking system it is still very much locally based I've got one of my remarkable instances of that one going to a conference in Bonn and being invited to stay in a local village with 5,000 people in it and my host took me to a local concert held in a volcanic holiday a gorgeous experience walking past an old couple sitting on a bench and they said they run the major business in the town and I said what's that going to be I thought maybe a little worse processing it was making satellites great trying to pick up on the witnesses I'll do the local bank very very quickly I'd say if a local bank will finance successful ventures which otherwise wouldn't be financed it's obviously a very good idea if a local bank starts financing things locally just because it likes the people and starts not having the governance structures that means it actually finances a load of local turkeys it's obviously a bad idea so there's a scope for both but I do need to be careful about the governance and that you don't just say because this is a business that's local it must be a good idea so the bank has to do the due diligence and use the local knowledge so it can't just assume things locally are going to be good in terms of QE going to bankers bonuses I think we have to be slightly careful that QE didn't recapitalise the banks that was public money that was tax payers we sold guilt to recapitalise RBS and Lloyds QE is actually separate of that but I'll take your question as should public money if it recapitalise RBS and Lloyds then go into bonuses? No I think we essentially own these banks or not Lloyds anymore but RBS we still do and we at the moment have a lot of control over it and should use it Thank you We're going to take three from the middle so you can make comments or questions but keep it to about a minute so there's Richard with the blue jacket on five weeks ago on my name is Richard Murphy and five weeks ago I hadn't heard of Corbynomics but since then I've been credited with writing it I created people's quantitative easing so you've got me to thank for that one too I've got used to saying quantitative in public as well I would like just to step back a bit I mean this has been really interesting I have quite a lot of agreement with Adair apart from central bank independence so if you want to have a summary of where I am pretty much Adair apart from central bank independence but I want to stand back because we talked about economists here we talked about political economists here I think we should talk about politics because actually we do have to involve them in this process I'm not at this point of time a politician and who knows but I'm not a politician I'm a political economist but the point is that I think that actually and this is where I know Jeremy Corbyn is and I was sitting about as close as Colin is to me now to Jeremy Corbyn last night the point is that he's actually looking at what does the economy need he starts with actually we do need to have investment in public infrastructure so he isn't starting with money that isn't his first point and he is saying we do need to fund public services and that might result in a deficit and you know what he says that doesn't matter because people want to buy bonds and he is saying he's quite sure that the banking system is actually too powerful and that actually one reason for having people is quantitative easing and even selling bonds at a point of time when there's no apparent need to repurchasing bonds from the National Investment Bank at a point when there's no apparent need to do so is simply to say to the banking system we aren't wholly dependent upon you we actually will change the fraction by our own choice and that's a small point and I would also make the point that last night he said we don't need to do people's quantitative easing if the economy is booming we actually could then sell all the bonds that we need so in fact it's about choice and that's the fundamental point and which is not in this debate we have been a bit technical in this debate with looking at money as being too important money is a tool and in the political process that's vital and that's why politicians have to be at the top of the pile they cannot be told how much of monetary finance there can be because that is if to say you can decide how much tax cut there is going to be or not from a banker no that's not democracy we live in a democracy politicians have to make that decision they have to listen to very able technocrats and they might be in the Bank of England but please let's not put the bankers in charge can we please have democracy in charge so should we take Natalie over there with the brown jacket stick with the political theme I've been a leader of the Green Party of England and Wales so I am a politician I've got a question to direct to the panel that I'm not, or two questions really that I'm not necessarily expecting an answer today but I'm going to really ask you to go away and think about and I'm going to focus on the dilemma slide which focuses on adequate nominal GDP growth and I will point out that we're shortly going to go into the Paris climate talks and talk about needing to drastically cut our carbon emissions and that's not the only issue there's the state of our oceans the state of our soils we are trashing the planet while we're creating a profoundly unworkable economic system and the other point I'd like to throw in here was the issue of inequality and now I'm not going to start a pickety debate I promise but I believe that inequality is tackling inequality is part of the answer to tackling the issue in our environmental limits so here's my question and again I don't necessarily expect a full answer now but I challenge you to go away and think about what does a money system look like that creates a society where we're globally living within our environmental limits while ensuring that everybody has enough for an adequate quality of life and what does the money system look like to achieve that one more comment man with the red tie thank you very much I'm Daniel Rajkumar from Rebuilding Society I think we're really exciting time and I think if we visualise what money can do for us socially it can actually play a massive role in shaping our futures I'd like to hear some ideas on the vision for the future of what QE can really do for society and for people I'd like to share a few of my own I believe that we can drive a consumptive educational system we're already moving education to be driven by having to pay fees for universities but actually if everybody's given an allowance to spend on education I think that by making an intrinsic link between what we value in society and connecting that with the consumerism that we already have then we can really develop our civilisation tremendously the same could apply within healthcare the same could apply we can have a Queen's Prize for Social Justice I think the monarchy could be involved in disseminating helicopter money I've got some really great ideas about where we can go with the future for money creation and money supply I don't think it should be in the hands of the politicians I think it should be independent bodies that administer and are involved in this but I really am excited about where this can go I'd like to see some of the ideas for the future from the panel as well Thank you Okay, so shall we start with where do you want to start? Richard Murphy's comments about democracy and the central bank not being independent I don't often agree with Richard Murphy but actually I do agree with him on this democracy is in charge Richard and if politicians want to take monetary policy back from technocrats that's fine and they're very clear that's what they want to do I think that's absolutely fine I think you can make quite good arguments as long as you make them very, very clearly saying that we think the technocrats have ballsed it up we can do it much better that is absolutely fine I don't disagree they are in charge at the moment they are still in charge they've given delegated authority to the Bank of England to take those decisions and to disagree with you and I think you make the case very powerfully that's what you think and that's a perfectly legitimate argument and I have some sympathy for that as well I don't in terms of what naturally very quickly I don't think money creates I don't think there is a monetary system that's going to create a much better environment and much better or more equal society I don't think money is the solution to this but in places you have to look You go see it On the politicians in control I'm sympathetic both ways but there's a very important political point that Adair's partly raised earlier as well certainly democracy should be in control I think you can see the whole EU project as being an attempt by bureaucrats to take economics out of politics and constrain politicians and that's given us the European Union and the Euro which is a total European expression here but I'll leave it out disaster at the same time if you look at why politicians particularly in the Anglo-Saxon nations are willing to seed control to the technocrats you've got to look back and see the period of high inflation in the 70s and 80s and politicians were just glad to get it out of their hands and handed to the technocrats let's not forget the Humphrey Ample be principle of politics he's the sinister decision minister to the minister and he'll back right off so the politicians are generalists they are not going to be people who are going to be they're going to be too easily swayed and they've been swayed by the neoliberal agenda in recent times and that's where this whole belief that people like Jeremy are what they call deficit deniers identifying Jeremy's position with being anti science and this is the other problem as well it is anti science if you take neoclassical economics as science it's not it's about as I mean it's told me had better predictions than these guys have ever managed so it's partly the economists have confused it as well we've got all that mess there and of course don't the capacity to fall back on ignorance again is still going to be there these are complicated issues and like a dear mate at another point I like as well saying that what you teach economists at university that's essential because economists are generating most of the confusion that leads the public to fall into the trap of believing they can think about the economy as a household to begin with fundamentally that's what rational expectations and the whole Lucas Critique nonsense led to because they take a single individual the so-called representative agent which they prove didn't exist of course before they used it and they scale the entire economy up as a single consumer and that's where in comes out of the mess in economics which is why the rethinking movement is so important it's not a straightforward answer in other words we have a lot of things to try to extricate ourselves out of here thank you let me pick up first of all Richard Murphy's point about democracy and I think Chris has made an important point ultimately we live in a democracy that's what we want to live in and we have to make democratic decisions but democratic decisions democratic decisions democrats, politicians can sometimes decide that it is useful to create what I call commitment devices mechanisms to make sure that you stick to a path even if in that 6 month period in that one year period you prefer not to stick to that path now I was chair of the climate committee as well as the FSA the climate change act is a commitment device it says that having decided that we're going to get an 80% reduction in our carbon emissions by 2050 we set up a set of legally binding targets on route to that budgets and we set up an independent body the climate change committee whose job is to tell parliament and government are we on track for that and if a government was not on track for that and broke the budget then the green groups can bring judicial reviews of the government which are not perfect processes but they are processes which have some power and I think the climate change act is a brilliant act of parliament but its specific design is to somewhat limit the discretion of each government month by month six month by six month to make the decisions which appear sensible at that time by placing it under a constraint that we've all agreed is a good idea and central bank independence is the same and let's remember what used to happen before we had central bank independence on setting the interest rate we would routinely get reductions in the interest rate but the day before the governing parties party conference in the autumn in order to make sure that the party members felt good we allowed the interest rate to be used by Chancellor's Exchequer as an overt tool of manipulating public opinion and steadily over time with a number of other factors we can debate what were the causes of the inflation of the 1970s we ended up with inflation 25%, I think it was when I first went to university in 1974 75, 76 and that inflation at that rate was I think severely harmful to the balance of the economy and we only really broke that inflationary element by saying we are going to give to an independent body the ability to set the interest rate now they're going to do it according to a rule which we've told them Parliament in the UK said we're going to hit inflation plus or minus 1% and I think that's a better way to do it than what happened in relation to the ECB where they were told not only that they had to hit price stability but they had to define what price stability was I think the demographic role should be to define fairly clearly as the climate change act does and as the Bank of England act does what the technocrats are to achieve but I think there is a role for commitment devices that are freely chosen by politicians that they are, as it were, going through a self-denying ordinance that they do not have complete freedom to make decisions month by month year by year as they want and then just make one comment on Natalie's comments I tend to agree with Chris that I would be wary of the belief that there's something in the money system which is going to solve our climate change challenges everybody expects me to say that there are because I've been chairman of the FSA and I've been chairman of the climate change committee they say, well Deb, try to put together both sides of your brain and what I tend to say is look, I'll only stay sane by keeping them somewhat separate and I think most of the tools by which we achieve the emissions reductions that we should achieve in a do not require changes to the monetary system but I do think the other point is an important one which is inequality I think inequality is probably and there is a very fine paper by Michael Cumhoff on this can't be with us today but Cumhoff-Narancia set this out there is a reasonable argument that rising inequality has produced, helped producer situation where the economy then only balances with too much debt again this argument brilliantly said out by John, now the Reserve Bank Governor of India in his book, Fault Lines essentially the argument is it's a variant of the sort of Keynesian secular stagnation argument but broadly speaking if you have a rising level of inequality in society richer people will tend to have a lower marginal propensity to consume and a higher marginal propensity to save than poorer people and there will however not necessarily be any matching tendency for investment to go up in line with their savings desires in which case you will have a deficiency of aggregate nominal demand unless essentially the savings of the rich end up in the borrowing of the middle income and the poor I think that is part of what is going on and it does imply that in thinking about how to have a more stable macroeconomy we probably can't rely just on anything that central banks do or financial regulators do we also need at very least to stop the relentless rise in inequality which has tended to be a feature of the last 20 or 30 years Thank you Does anyone Is overt money financing a way of stopping that? No I think we have a tool for dealing with inequality it's called progressive taxation I've been around for quite some time on the whole I'm wary of not addressing that issue head on and believing that there's some magic way where there's a costless way to do it I mean bluntly you've got to tax me a bit more So does anyone want to comment on the last kind of question the last kind of vision that we can hope for that new innovations in monetary policy could be I might go back to the environmental question and inequality as well because actually when my own modelling of Minsky a direct cause of inequality is rising private debt so addressing the private debt will actually reduce the inequality I'm willing to argue that but not over I think it's a two way tenancy there But at the same time we have an environmental overshoot as well and we're going to look back on this period because that's really the situation we're in I don't include environmental issues in my modelling because it would swamp everything else but I'm working with groups to read the limits to growth and include finance and the economy in the models of ecological feedback we are going to be we're already using 1.5 renewable planets per year if you look at what's called the human ecological footprint so we have to do something about that and the obvious thing is it's not going to be done by anybody for a profit it's something which the state's going to need to fund that I mean state globally more likely countries like China are going to be better equipped to do that than wishy washy democracies like the one we're in so we do need to have the capacity of the state to redirect spending and it will be money creation that does it and it will worry about money creation in that situation just as much as worried about it during the Second World War which is not one bloody little bit at all so when you do it of course we're going to have a huge increase initially in our carbon impact on the planet because to actually go about producing the level of renewable technologies to reduce our carbon footprint we're going to increase it in the meantime the investments inevitably going to cause that sort of effect so we have a very complex mess we're in money creation or getting a sensible attitude to the state's capacity to create money and to finance infrastructure building on a grand scale I think is vital and because we deliver to the private sector we're going to create 60mots rather than waste to a direct climate renewal Thank you I stand between you and a glass of wine but I think our panellists are happy to take one more round of three questions so the kind of people in the middle of the back so Josh with the brown sweater on in the door has had his hand up for a while Thanks Josh Ryan Collins from the New Economics Foundation we've been talking about avert monetary financing and these things as if they're techniques you only use in emergency situations maybe for short periods actually in the post war period some countries use them for decades and you have this thing called financial repression where interest rates are kept extremely low and central banks bought huge amounts of government debt Canada for example held about 25% of government debt from 1935 to 1975 and there was a fairly explicit agreement between the Treasury and the government that this arrangement made sense Canada had inflation around 5% for that entire period it was also the fastest growing period in its history in terms of growth and employment obviously there was a lot of other reasons why that happened but this technique was used by a number of countries including the US and the UK we did it to some extent as well and the focus of course of government spending was to a large extent on infrastructure and I just wondered if any of the panellists would like to reflect on that period we did have capital controls as well and that one could argue was an important factor as to why this level of monetary financing was possible and that sort of ties to my other point which is the deficit we haven't mentioned today which is the balance payments current deficit in the UK which is currently at 6% of GDP my feeling is that the UK has managed to keep going partially as a result of lots of foreigners buying up a lot of our assets and I wonder how that reflects on the discussions we've had today Thank you So Lady Bob with the green shirt I'm Bob Jacobson from Basic Income UK and I just wanted to just point people to another way of spending the money which would be to actually give people the money in their pockets not necessarily in their bank accounts I think that obviously we have the national insurance system and so we've got the people have their numbers and I think they're very simple ways of making sure that one person doesn't get more than one lot I just want to say in terms of the debt that one thing that hasn't been mentioned is that personal debt has certainly gone up in the wake of severe cuts to welfare and severe cuts to in to job benefits like vacation pay and retirement and all that sort of thing and also just and wages just to try to kind of bring this kind of meta conversation down to what is actually happening in people's lives and the other thing I wanted to also point out is that inflation in the things that people actually need still seems to be as strong as ever I live in a council house I noticed the other day that in fact my rent has gone up by 10 times it's by 10 times in the last 15 years so just to say that look the way it feels on the ground it does not feel like a deflationary environment on the ground the best food if you want to actually cook for yourself food has gone up incredibly those sorts of things that people in fuel those sorts of things that people actually have to have to spend on for survival those things have gone up I think those are two meaty questions so we'll stop like that Dan should I go to you? Well Josh's question is essentially is this a tool that you only use when you're in a deeply post crisis debt overhang and you're trying to in 2009 where everybody's agreed that you need to stimulate demand in some way or other there are people saying rather huge debt finance fiscal deficit there are other people saying 375 billion of QE there are other people saying as Ken Rogoff says make interest rates negative by abolishing paper money should we in that point say okay well there's another one which is over money finance that it's part of the normal procedure which by the way is what Friedman was suggesting in 1948 that every year the government might have a half percent of GDP as a deficit and that bit would be money financed rather than debt financed what I say in the book is I don't want to go into the second space because I'm more confident that we can constrain the political economy risks of this if we see it as a one off thing that we do in extremis and then as I put it put this potentially useful but also potentially fatal medicine back in the medicine cabinet and lock the door till we're in a crisis again but logically there are conditions in which if you believe those conditions apply we ought to use it on a regular basis if the proposition which Larry Summers is now putting forward that we face something called secular stagnation and that we are in an environment where the economy just does not balance without interest rates being held permanently at zero or Ken Rogoff would say negative then I think you'd have to think whether you would not prefer to use this tool on a steady permanent basis but if you did that then you'd really have to have the robust constitutional constraints to limit the amount that I talked about in terms of the experiences you talk about I think you're right that some countries de facto did it most of them stopped doing it after a period of time I mean for instance if you look at the US essentially it lasted from 1942 to 51 under what was called the US Treasury Federal Reserve Accord it was put in place during the war and the Federal Reserve stood ready always to buy however many bombs the Treasury issued in order to keep interest rates at a flat rate and as Friedman and Schwarz point out in their monetary history of the USA effectively this means that at the end of the day something like 20% of the US war effort was paid for by money finance not by the issue of interest bearing debt that Accord ended in 1951 and what happened was it was never reversed the increase in the the reserves of the on the liability side of the central bank the monetary base increased they stopped increasing because they stopped doing it but they never went down so in a sense that was a to use Chris's point it was a QE which turned out post facto to be permanent and they financed part of the war and recovery with money and it's a pretty good story the American economy in the 1940s but relatively few countries I think have done it sustained decade after decade because most of them are worried about the political economy risks of so doing just on the if we're going to do QE shouldn't we just do distribution of money, basic income I agree that you could do that and I think the one thing I did disagree with Chris was your sort of what people have multiple bank accounts we can get round that we have a tax system and a national insurance system we know what people have we could do either one off debt reductions that was proposed last year by two Italian economists Guido Tavolini and Francesco Gavazzi in relation to the ECB quantitative easing they said look we should agree around Europe a temporary reduction in tax which is exactly the same percentage in all countries and therefore as it were fair in a distributive sense across the eurozone but paid for with permanent monetary finance so you can do that not surprisingly it didn't get very far with the eurozone but it certainly is possible if you look at the America's economy for the last 40 years the average deficit that the American government has run is about 3% of GDP so even when they try to run a balanced budget reality ends up meaning they've run about a 3% deficit and that's roughly the level that I think should be sustained we need to have if you have a growing economy and needs a growing amount of money there are two sources of money domestically one is the private banks lending more than they get back in repayments and the other is the government spending more than it takes back in taxation that's all it comes down to fundamentally both can get out of control we focus on those politicians and stop them getting out of control and let the bankers run riot we need to get the station I know you need to control both groups because a growing economy needs a growing amount of money and the government running a deficit is one way to go about that and it is again it's excessive how you do it and how sensible you do it rather than whether you do or don't do it at all unfortunately the economics profession has led to people believing it shouldn't be done at all and that's fed into the household analogy that people fall into which is why it's become so difficult to shift on that front with direct payments to the public I've been in favour of what I call a modern debt jubilee for at least half a decade now you use the state's capacity to create money to put in bank accounts generically nobody gets it it doesn't go to people that only in debt it goes to everybody and then anybody in debt is required to cancel their debt and you do it in that way to bring down the level of private debt and get us back to where it should never have got beyond which is the order of about half the level of private debt we currently have Chris do you want to comment on also Bob's point about how we're being told we're in deflationary times and yet inflation of the main cost of living, housing, food, energy is going up First of all very quickly on whether it's for all times or not people have been quite nasty about Paul Krugman on this panel today I'm quite often quite nasty about Paul Krugman but one thing he said in 1994 is utterly true he said that productivity isn't everything in economics but in the long run it's almost everything in the long run we get richer as a society because we get better at doing stuff and that's how we get richer we don't get it by spraying money about so if you do have permanent monetary financing you'll have to have some other tech, you'll have to have some other tool to ensure that demand isn't running ahead of productivity and supply unless you can explain why monetary financing makes us more productive as a society I can't see that mechanism now unless it's why normally we think about it as a demand management tool when other things have failed in terms of inflation and the basic income one thing about why it is quite technically difficult to give money to everybody I don't think it's wrong in any way but in 2009 the Treasury wanted to flood individuals with money that's exactly what Alice Darlings' policy wanted to be he was told by the civil servants that if you were to do a helicopter drop in the traditional style it would take nine months you wouldn't be able to do it quickly and that's unfortunately the situation we're in where we could arrange our economy such that we made that better for the future and that's I think a perfectly good thing to do but we don't have those tools right at the moment and that's why he cut VAT it's not the policy he wanted to cut VAT it's just that that was the thing you could do very quickly in terms of is there inflation or deflation well there is clearly inflation I don't think we massively measure inflation wrong clearly shelter is one of the things that has gone up in price significantly over the past ten years and we've devoted more of our incomes to it it is a shame really because it's one thing that we could if we supplied a lot more not have inflation in house prices or the cost of servicing or buying shelter which is actually what we're actually doing and it is a problem so I don't think when we talk about global deflation we age we're talking more in the sense that for the world as a whole we might be in a situation where we're no longer having enough demand for the supply of the output of the whole world there's not really a UK income versus prices issue okay thank you nine months I know I'm in England because in Australia it took them two weeks to do the same thing not that I'm praising Australia so we've made it to the end so I'm sure you'll all agree that was an absolutely fascinating conversation thank you for being here we heard from Steve about how economists are essentially thinking about money as if they were thinking about the sun and the earth being in the centre of the universe and talking about a modern day debt jubilee Chris has told us we need to look at many policies on the table and that politicians can take back monetary policy if they want to from the technocrats we do live in a democracy and a very important point that both the Treasury and Bank of England should be looking at the projections for private debt that are coming out of the office for budget responsibility and Adair has really clearly laid out some of the big problems that aren't going away in terms of having debt fuel growth and very clearly laid out this option of overt monetary financing which is clearly technically feasible we can do it the big questions are around political economy how to do it, what role would the Bank of England play and we're going to continue having those discussions so just two notices we would really like to film some people about their thoughts on these issues and the event so if you do feel like being filmed make your way over there and finally we have wine provided for us by Rebuilding Society which is a peer-to-peer investment business they are getting money from investors to businesses which is really clearly a positive model of finance for the future so thank you to Daniel Rajkommar the CEO so if you can stay please do but finally if you could join me in thanking our panellist and yourselves for being here