 We've seen that money is debt and that the wrong allocation of debts mainly to property and financial markets where the key reasons we are now in a crisis. So what should we do now? Many different solutions are being thrown around because there's no agreement on what the cause of the problem is. Many of the debates are about symptoms, not causes. For instance, bankers' bonuses or consumer confidence. But we won't solve anything by letting bankers promise they will behave in the future or by telling households who are deeply in debt that they should start spending. These arguments distract from the real issues. This is especially true for the government deficit. For some reason we decided that the real problem is that governments spend too much. By cutting their spending they should make sure that their debt goes down and then all will be well. Except that it won't. What actually matters is the debt burden, the ratio of debt to income, not the debt level. If by cutting government spending we are reducing our incomes faster than the debt, then the debt burden will be rising instead of falling. This is now happening in several European countries. The second problem is that the focus itself on government debt is mistaken. Government debt levels only increased when they took over enormous bank debts after 2007. After the private debt boom turned into a bust and banks were called out. Government debt is the consequence, not the cause of the crisis. Private debt levels are the cause and private debt levels are still high. With low income growth, repaying private debt down to sustainable levels may take a decade or more. This debt repayment drains money away from the economy. This means a decade of recession or very low growth. Remember, running up these debts has taken us two decades, so how long will repaying them take? In fact it's very likely many loans will not be fully repaid at all, given our much lower capacity now to repay debt. Many of the loans, which are now still being serviced, are already bad loans in all probability. We will have to face that fact sooner or later. And until we do, we are in a so-called debt deflation. Low growth due to debt repayments and falling asset prices. The alternative to this dismal scenario is that we do something now to reduce the debt burden. And since debt is what banks live from, in consequence many banks will have to downsize quite a lot. So the flip side of debt reduction is reducing the financial system in size. All loans are held in the financial system. So too many loans means too large a financial system. This is the key reason we must cut down the banking system to size relative to the economy. So instead of merely saving banks as we do now, we do need to start thinking about intelligent ways to shrink banks. If we don't, then the flow of money out of the economy into this oversized financial system to serve our oversized debt burden will continue to be a drag on growth. We must make the banking sector a force for good again, something that helps rather than hurts our economy. This means two things. We need to deal with the consequences of the past, which were high debt levels, and we need to regulate for the future, preventing banks from issuing again too much debt to property and financial markets. So let's agree on one simple point. Any policies to help us out of this debt crisis must address the debt problem. It's no rocket science, is it? So next time you hear or read that we should reform our labor markets or cut wages or bailout banks, just ask yourself, do these policies do something about the debt problem? And guess what? A lot of them do not. What's now holding back growth is lack of investment and demand. And this is because firms and especially households have so much debt, for instance, as home mortgages, that too much income must be devoted to repaying this. And all this money cannot be spent in the economy. In Japan, they did not tackle this problem after their asset bubble burst in 1990. And this has led to decades of low growth and recession. If the amount of debt is too large to be maintained, then the longer we avoid facing this fact, the longer our economy suffers. This is not to say that the downsizing process, which we will need to enter, will be painless. Loan assets and financial instruments on banks' balance sheets is what many institutions like pension funds have invested our savings in. So if these assets turn out to be worthless, that will cost us savings. But remember, much of these are bad loans already. We just need to face up to it. Other problems will arise because if loans are not being repaid, this weakens banks' balance sheets so that they may stop creating new productive loans, hurting the economy again. But again, banks are already hoarding money instead of lending it to firms for investments, just as they've been doing in Japan for two decades. So one way or another, we are in for problems. But it's best to bite the bullet now instead of going for a slow Japan scenario. We need to think through the consequences as far as we can. And then we need to isolate and protect those parts of the banking system which are vital to the economy, that is, lending directly to the real sector, the payment system, and vital savings functions. Much of the rest of the financial system may well spontaneously shrink once we stop supporting it with taxpayers' money. It is unclear how much the economy will suffer from this. We are now told we need to save banks in order to save our economy. But large parts of the banking system had little to do with the real economy to start with. So perhaps we can do without them much more easily than we are now telling ourselves. In any case, keeping all of the banking system is simply not an option. It is more than twice the level it was only a few decades ago. And we don't have the income to service that level of debt and still have decent growth rates. So ending support to parts of the financial system, letting it shrink, is one part of the solution. But this is a long-term process. Short-term relief could be achieved by a consortium of banks led by a public institution or a dedicated government agency buying up loan assets such as mortgages from banks and then isolating them. These would be so-called bad loans in a bad bank. In this way, the loans do no longer burden banks' balance sheets. And by then allowing longer mortgage repayment schedules, households with high mortgage debt levels could be helped through a difficult period. A long-term public investor could hold the loan assets until house prices have recovered and then sell at the profits. And even if that is not fully possible, any public costs of these policies must be weighed against their public benefits. Policies like these were applied in the previous Dutch mortgage crisis around 1980. These are ways to reduce and to manage the large debt burden we have now. The other challenge is to redirect lending to productive purposes. Combine this means bringing down the ratio of debt to income. In order to achieve this, we should discourage banks to lend with the purpose of blowing up asset prices. For example, using the current Basel bank regulations, mortgage or stock market loans could be weighed as being more risky in banks' capital ratios. And this prohibits banks from creating too many of these loans. Another proposal which has been made in the UK is taxing such loan assets on banks' balance sheets. This will both discourage such lending and it will provide government tax revenues to pay for other policies and for its own debt burden. And there are other options. The most proactive measure to get productive lending going again is to have a dedicated investment bank. For instance, the Germans did this when they set up the Kredit Anstalt für Wiederaufbau, or KFW, in 1948. Literally a credit institution for reconstruction of their economy. The KFW indeed played a vital role in the development of the German economy. And it continues to do so with currently a loan portfolio of over 70 billion euros. About the third of this is in building up environmental protection know-how and applications such as solar cells. The other two thirds is investment in public transport, sanitation, small and medium enterprises and startups, and project finance related to German exports. This is how credit can actually help the economy. Now we have another crisis, globally the biggest in 80 years. Will there be a revolution in economics again? Recognizing that there is something big we've missed all the time. What will the new economics be about? In one word, debt. This is the elephant in the room that economists have managed to miss for decades now. This is the revolution in economic thinking that we need. No one knows if that revolution will occur. If it does, it may have started already and it will be a long-term thing. Remember, the stock market crash that started the 1930s Great Depression was in 1929. Keynes wrote his book in 1936 and widespread acceptance of his policies came only after the Second World War, nearly two decades after the crash. We are only five years into our great recession now. So we may have some time to go. And meanwhile, we are cutting down investment in our education, health and infrastructure systems. Businesses are going bankrupt in their hundreds. Unemployment is rising to levels not seen in 30 years. Tensions within Europe are rising. Let's hope it doesn't take us two decades and a war to find our way out of this mess. So far, the role of economics as a science and of economic policies in practice have not been particularly helpful. The neglect of credit and debt got us into this mess. And the neglect of credit and debt now means that our politicians burden us with policies that do not address the actual problems. We should restructure debt levels resulting from past mistakes so that they will not hinder recovery today. We should regulate banks and financial markets so that they do not again produce so much unproductive debt. And even better, they should produce more productive debt. But we can only do this when we first start thinking again about how our economy is shaped by credit and debt.