The MOST Important Thing
The world is full of noise, distraction and now dis-information. How do we extract the truth and become better informed? Join broadcaster Ivan Yates and finance expert Dr Alan O’ Sullivan as they meet the best and brightest minds in finance, investments, economics, and geopolitics. The Most Important Thing reveals what really matters.
The MOST Important Thing
The Crisis They Warned Us About: Why We Ignore Experts Until It’s Too Late
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What happens when the people who understand the risks are ignored?
In this week’s episode, I explore why listening to genuine experts matters, especially when their warnings are uncomfortable, inconvenient, or years ahead of the crowd. My guest is Professor Steve Keen, one of a small group of well-known figures who warned about the conditions that led to the 2008 Global Financial Crisis before it unfolded.
This conversation looks beyond the crash itself. It asks a bigger question: why do institutions, investors, policymakers, and the public so often dismiss the voices that challenge the consensus?
From financial bubbles to economic fragility, Professor Keen’s warnings offer a powerful reminder that expertise is not always popular in the moment. Sometimes the people worth listening to are the ones telling us what we least want to hear.
A timely episode about foresight, denial, credibility, and the cost of ignoring expert voices.
We're in for a global famine this year, quite probably, courtesy of your stupidity in the Middle East. Um and we're focused just on the price of oil rising, okay? That's not the real problem. It's this it's the availability of oil, plus also fertilizer, helium, and sulfuric acid. Those are some of the major products that pass through that region of the world. Something like half the sulfuric acid that we use on the planet passes through it. Now, most people have only seen sulfuric acid in a science experiment back at school. But if you talk to any people working in industrial processes, engineers, and so on, it's an absolutely critical element for doing everything like refining copper, uh virtually every process, everything you have in your desk, probably involves sulfur dioxide at some point.
SPEAKER_06So we've got part two of Steve Keane coming up, Professor Steve Keane. I want to do something a little different uh this week. Uh I was talking to a client and we got into a bit of conversation about the podcast and how it was going and the motivation behind it. And I told the person really that my aim is to speak with the experts around the globe so investors really don't have to. And that's the main approach. And I have this real bugbearer about experts, they're very rare, and experts really show their value in a stressed environment. It's like you know, you're trying to identify the best fund managers. No point looking and assessing a fund manager during a bull market. Let's see how they did during a 9-11 or a COVID or a 2008 financial crisis. That is where the rubber meets the road. So it's like yourself, you learn more about yourself during tough periods. And same with if you're assessing fund managers, if you're assessing economists, policymakers, how do they react during the stressed environments? So I explained to the client that main motivation is to speak with experts. I'm very selective of who I speak with, as you can see with the calibre of the guests that we've had so far. So during my first interview with Steve Keene, I looked at five experts. There was Anne Pitifor, who forecasted the 2008 financial crisis, Professor Keane himself, Peter Schiff, we had Irish Professor Morgan Kelly from UCD, and we had the central banker, Indian central banker Rajan Rajaran. So we really need to be careful of the gurus, the so-called self-proclaimed gurus. And I know Instagram, all social media is just a pack with these people, and you have to really question do they know what they're talking about, what are they selling? Go back to 2008. There was normal people, real people like you and me, watching financial news, watching prime time, and they were looking for insight, they were looking for expertise. Maybe you were uh an owner of Bear Stern stock in March 2008 as the financial world was starting to collapse. And perhaps Jim Kramer was your was your guy, was your go-to guy. Okay.
SPEAKER_10Peter writes, should I be worried about Bear Stearns in terms of liquidity and get my money out of there? No, no, no. Bear Stearns is fine. Do not take your money out. This isn't really if there's one takeaway other than a plus 400 celebration. Bear Stearns is not in trouble. I mean, if anything, they're more likely to be taken over. Don't move your money from bear. That's just being silly.
SPEAKER_06So, Jim Kramer, the guru, was advising you to hold on to your Bear Stearns stock. And he was right about one thing, I suppose. The company was taken over. We're well aware of property bubbles, asset price bubbles in Ireland. Look, less than two decades ago, we lost our economic sovereignty. We're all aware of what happened. But maybe we were looking at purchasing a property in 2007, 2008. Maybe we tune into prime time looking for some guidance. We need to be careful who our who the experts are, who are we listening to. So people might remember this from Morgan Kelly.
SPEAKER_04The assumption here is that we are the first country in human history that's ever had a boom. Lots of places have booms, property prices go up, then something happens, they slow down, people's expectations change, property prices collapse. But the point here is that the fundamentals here are not the same. Highest growth rate in Europe? No, just look at what's happened to rent relative to prices. That you have rents have stayed stable since 2000, prices have doubled. We've now got the highest prices in Europe, we've got among the lowest rents.
SPEAKER_03We've the youngest population, rising population.
SPEAKER_04If that were there, they're not there are not enough of these to fill the houses, to drive up the rent. We've got over a quarter of a million empty house empty units in the economy. We're building about 80,000 a year. This is a classic bubble. It's going to end in tears, no question about it. I mean, I I fundamentally disagree.
SPEAKER_06It wasn't really that difficult. If you had done the work, obviously Professor Kelly had done the work. He had looked at previous uh financial crisis in uh other countries. There was this assumption, which he says in the next clip, that Ireland was the first country in history to go through a property price uh boom and buzz cycle. It just wasn't. There was data there. If anybody had bothered and had looked at it and done a little bit of work, they would have seen what was really inevitable.
SPEAKER_03There are going to be very worries, specifically people at risk. What's your advice to people? Is it the sell up now, get out when you can, and buy back in ten years?
SPEAKER_04Rent now, don't buy. Rents are low, rent for a few years, see what's going to happen. You bet the house in it, you'd sell the house now. No, no sell that's it that's a different matter. That's up to you if you want to do it. Where's what we are going to be satisfied from? That means we've got these 210,000 empty units, we've got 80,000 coming on. We are facing major job losses in the building industry. Houses are not selling right now. We are going to see massive job losses.
SPEAKER_06We're going to have between now and the office leave it there. So just a short week later, Professor Kelly was back on again, another debate, uh calling out nonsense as he saw it. There was a claim made that the potential loan losses of Irish banks could be one percent of their loan book. We now know that that was a colossal underestimation. But before all of this was laid bare, Professor Kelly, Morgan Kelly, questioned this pushback. And I imagine there was people that were listening to that debate that perhaps did take his advice.
SPEAKER_02We know what the Irish bank's bad loans are.
SPEAKER_04They're going to be uh about 1% of their loan buildings. No, that's complete nonsense. We have a situation, Irish Bank. You disagree with that.
SPEAKER_02Deutsche Bank, you disagree with the banking.
SPEAKER_04I disagree entirely, yes. They have $25 billion in loans to builders. All the ghost estates you can see around the place, that is the capital of the Irish banks right now. They're going to make horrific losses on the bigger.
SPEAKER_06Perhaps some of the most infamous uh conversations relate to the US and the subprime crisis. Video series on YouTube called Peter Schiff was right. It's well worth uh view. Peter Schiff was very early in calling out the property speculation, the lack of real productivity growth in the United States, and the over reliance on the US consumer borrowing. And in this conversation, he's met with stiff opposition from Art Laffer.
SPEAKER_13I think it's gonna be pretty bad. Whether it starts in 07 or 8, I think is immaterial. And I also think it's gonna last not just for quarters, but for years. See, the basic problem with the U.S. economy is we have too much uh consumption and and borrowing and not enough production and savings. And what's gonna happen is the American consumer is basically going to stop consuming and start rebuilding his savings, especially when he sees his home equity evaporate. And when you have the economy 70 percent consumption, you can't address those imbalances without a recession. You know, rather than the recession being resisted, it should really be embraced because the disease is all this debt finance consumption. The cure is that we stop consuming and start saving and producing again, and that's a recession. And sometimes, you know, medicine tastes bad, but you've got to swallow it.
SPEAKER_11Art Laffer, you hear him says the consumer is going to slow down in order to rebuild the savings. And you know that two-thirds of the American economy is driven by the consumer. Do you believe that?
SPEAKER_08No, I don't believe any of it whatsoever, Michelle. Excuse me, but you know, what he's saying is that savings is weighed down in this country, but wealth has risen dramatically. The United States economy has never been in better shape. There is no tax increase coming in the next couple of years. Monetary policy is spectacular. We have freer trade than ever before. And not only that, but there are no incomes policies things here. I I think Peter is just totally off base, and I don't think it's going to be I mean, I I just don't know where he's getting his stuff.
SPEAKER_13One of us is off base, but it's definitely not me. I mean, it's not wealth that's increased in the last few years. We haven't increased our productive capacity. All that's increased is the paper values of our stocks in real estate. But that's not real wealth, no more than that was wealth. When you see the stock market come down and the real estate bubble burst, all that phony wealth is gonna evaporate. And all that's gonna be left is all the debt that we accumulated to foreigners.
SPEAKER_08Peter, I'm gonna give a bet with you on this one. I'll bet you a penny on this one that if you'll sign a letter saying that if you're wrong, you'll you'll sign a letter that you were wrong to me in this, but you're just way off base. There is nothing out there that tells us we're gonna have a nice slowdown, but it's not gonna be a good thing. All right, let me ask you this.
SPEAKER_11I'll bet you a lot more than a penny.
SPEAKER_06The next clip is even tougher to watch. We can see p these other two debaters really just laughing at Schiff. And it's it's kind of cringe now when you look at it to see how right he was. He was spot on. And these other two knuckleheads, to use uh U.S. expression, really didn't have a clue what they were talking about.
SPEAKER_02Big question. Will homes be worth more or less in 2007? Come on, what do you think? Because prices go up about 10 percent. Because why? Because if you're gonna come into a regular normal market, and in regular normal markets, that's about what kind of appreciation you get. Peter, what do you say?
SPEAKER_13Well, today's home prices are completely unsustainable. They were bit up to these artificial heights by a combination of temporarily low adjustable rate mortgage payments, by a complete absence of any lending standards, and by speculative buying. And what's gonna happen in 2007 is a lot of these artificially low arm payments are gonna be reset upward. You're gonna start to see uh both the government and the lenders reimposing lending standards and tightening up on credit, and you're gonna see a lot of the speculative buyers turn into sellers, and these sky-high real estate prices are gonna come crashing back down to earth.
SPEAKER_01I I first of all have no idea what Peter Stiff is talking about. I agree with Tom. I think they're gonna be up probably up to about 10 percent. What artificial lending standard are you talking about?
SPEAKER_13Most of the profits that people have in real estate are gonna vanish, just like the profits in the in the in the dot coms in 1999-2000. It's a fantasy. People can't sell their house, the inventories are exploding all over the country, houses are on the market for six months, a year, there's no bidders, the price is gonna fall through the floor. You guys are looting it. We heard it.
SPEAKER_06We heard it loud and clear from all of our past So if we move from the knuckleheads to, you know, the so-called experts, presumably you wouldn't get an expert as more esteemed than the U.S. Federal Reserve Chairman. So what did Ben Bernanke have to say about the US economy and a couple of months before uh things started to implode?
SPEAKER_00What is the worst case scenario if in fact we were to see prices come down substantially across the country?
SPEAKER_12Well, I I guess I don't buy your premise. It's a pretty unlikely possibility. We've never had a decline in house prices on a nationwide nationwide basis. So what I think is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don't think it's going to drive the economy too far from its full employment path.
SPEAKER_06So there you have it. That in a nutshell is why I am doing this series. I don't want investors, retirees, young professionals to make the same mistakes. I want people to be informed. They can never say they weren't told. This series is about democratizing knowledge, uh sharing knowledge. The people that I've spoken to are very generous with their time. They're willing to share what they have learned. And a lot of the time it's the mistakes they have learned. So that's my role here. We're going to go on to Steve Keene. Again, Steve is very forthright in his views. I would recommend viewing this if you can, because we share the screen and he goes through his spreadsheets. Very, very interesting. Uh, well worth looking at that. He also talks about his course, uh, numerous courses he has, uh, which I haven't done them, but I may take a look at them. Uh, I'm sure they're they're they're fantastic. But always interesting with Steve Keene. Keep an eye out for his interview in 2008 on Australian Primetime, the 730 Primetime show. His claim is that that show led to a huge policy move within the Australian administration because he was basically screaming at Toffee's lungs, there is a problem here, too much private debt. Uh so hope you enjoy the show and talk soon.
SPEAKER_07So, the what what I was looking at that the mainstream ignored is the level of private debt and its rate of change. So, and then that comes out of my focus on Hyman Minsky's financial instability hypothesis. We emphasize the same thing. So, what you can see there is the level of government debt and private debt in America between 1950 and 2025, basically. And this is the one that all the politicians obsess about, and this is the one that matters. Okay? That's common. Now, neoclassical economists argue that credit, which is the change in private debt, has no impact upon the economy. They're totally wrong. And that's what I focus upon, the role of private private credit. So what I saw coming back in 2005 when I saw the level of private debt both in America and Australia, I said the rate of growth of debt can't sustain itself. It'll change, it's likely to go negative, and when it does, we'll have a recession. So there's the annual change in private debt as a percentage of GDP from the end of uh World War II, so 1948 basically, uh, through to uh today. And you can see that all the way through from 1950s, 60s, 70s, 80s, 90s, and early 2000s, credit never went negative. Every year the level of private debt rose. Then you have the global financial crisis, and credit went from being 15% of GDP in 2006 to minus 5% in 2009. And that's what caused the crisis. That's what I was looking out for. The mainstream economists completely ignored it, and they still ignore it today. You mentioned Australia.
SPEAKER_06We're getting a delayed response in the Australian economy, but the Australian economy, Canadian economy, they had high levels of private debt as well, but we didn't get the same reaction. Obviously, there's factors associated with those.
SPEAKER_07And I'm I can blame myself for the Australian situation because I scared the pants off the Australian government uh in an interview that was done on the country's leading this is Australia's level of private debt, by the way. And you can see that it actually has a higher level of private debt than America. Had America peaked at 170%, Australia's level of the crisis was almost 190%. So a higher level of private debt in Australia. That's why I expected the crisis to happen there. But what happened uh was with the government in control at the time that Kevin Kevin Rudd's Labour Party government, uh, I was warning like crazy because I could see this crisis coming. And of course, being Australian, I was warning mainly about the Australian situation. And I ended up being interviewed on the country's leading current affairs program, the 730 Report.
SPEAKER_09Associate Professor Stephen Keene has been uh has uh come increasingly to prominence over the past couple of years, specialising in the economics of Australia's spiraling household debt burden. Initially, he was almost a lone voice with his pessimistic view of how dramatically that burden could impact on us all. He's not alone now, and he believes Australia faces its own savage correction, including an inevitable housing slump. I spoke with Professor Keane earlier tonight. Steve Keene, I would think that uh when the reserve announced its interest rate cut yesterday, that the reaction from most Australians, the first reaction, would have been to work out what the saving was on their mortgage repayments. The next question for many homeowners would be will the value of my home start going up again? What is going to happen to the housing market now, particularly with the assumption that we're going to see more interest rate cuts?
SPEAKER_07Well, I think for a while there will be people who do the calculations and think, oh boy, happy days are here again onto the next housing bubble. But the reality is housing prices in Australia now are running at about seven times median incomes when the affordable level, which the demographic survey works out rather well, is about three times. And to put that in context, the American market, after all the crashing it's been through, is down to three and a half times uh median income level. So we're talking about a house price level in Australia, which is twice the level that America got to. And that means I think unfortunately the only direction in the long term for house prices is down.
SPEAKER_09And yet the local w wisdom that has emerged from America's credit crunch, its subprime crisis, is that our problems, whatever they are, are nothing like these. That the subprime crisis has been a very dramatic collapse in the housing market.
SPEAKER_07Trevor Burrus, Jr. Incredibly dramatic. And the reason was the the subprime was really about lending money to people who had a record of not repaying it and claiming you could make money out of doing it, which was a classic American scam, and it's now falling apart, of course, not just in the hands of the poor Americans, but in the hands of some of the scam merchants as well. So that's something which is peculiarly American. But at the same time, our debt levels here are in fact slight slightly higher than those in America.
SPEAKER_09So, in other words, you're you're saying that there is a significant way for Australia's housing market to to drop?
SPEAKER_07It has to be. It's simply unaffordable at the level it is now. The only way you can get your house to be sold for a higher price than you bought it for is if somebody takes that even more debt than you did relative to their incomes. And that's got to the point where it's simply unsustainable. The proportion of Australians who can afford to pay for the median home has dropped well below the the actual median of the population.
SPEAKER_09Are we going to see home building start up again, or is that going to continue to slump? Are we likely to see those spiraling rents stabilize, or is that going to keep going up?
SPEAKER_07Well I think, Kerry, I can actually make a reference to what's happened to the Australian dollar today and say every price you see is crazy. There is no way that the prices of anything make any sense at the moment. However, I think ultimately the most senseless prices are our house prices. They have to fall. In that environment, nobody is going to go into trying to build properties when there's a expectation of losing rather than capital gain. This has happened in New Zealand, it's happened in England, happening in America. The ratio of house bills to population has dropped dramatically once this crisis has hit, even when there have been housing shortages.
SPEAKER_09In your latest debt watch blog, you've compared private debt ratios for the U.S. and Australia with those same debt ratios at the time of the Great Depression. How valid is that comparison uh comparison? How do they compare? And what do you draw from it?
SPEAKER_07Well, if you look back to 1929 when the stock market bubble burst in America, the ratio of debt to GDP then was 150%. It rose to 215% as the economy collapsed. Not because debt was rising anymore, but because prices were falling and output was also falling. It is now 290%. That is gigantic, virtually twice the level. Australia had a lower level of debt back at the start of the Great Depression. Our debt ratio is 64%. It is now 165%. So we have that much more debt than we had, and really the only sensible explanation of what caused the Great Depression is a combination of excessive debt and falling prices. Now we have one of those two in spades now, twice as bad as during the Great Depression on the OECD scale. So for that reason, I think that the compression the comparison is extremely valid and the prognosis is extremely bleak.
SPEAKER_09So within the landscape of the global economy, which again we're not sure uh nobody really seems to have a lot of people. What do you think is likely, most likely to happen to the Australian economy now over the short to medium term?
SPEAKER_07I can see us going into a serious increase in unemployment, a serious economic slowdown, credit levels collapsing. We've already seen that starting to happen in the most recent figures. And a credit-driven downturn in the economy, driven largely through a collapse in retail sales, because this time round the group of part of society that's carrying the debt is the household sector. It was the business sector back in the 1920s and also, of course, in the 1990s. Households can't sack the kids, and they can't declare themselves bankrupt anywhere near as easily as a corporation can do. So the only thing they can do to control the situation is to cut back drastically on their retail spending, and that will, of course, mean the retail sector is the first one to collapse.
SPEAKER_09Well, the household squeeze in the past year has been driven substantially by rising interest rates and rising petrol prices. Both those are now coming down quite dramatically. Won't that combine with the big tax cut now flowing through uh into household pockets to free up consumer spending again against what you're suggesting?
SPEAKER_07It certainly will help, and we're lucky in one sense that we have, first of all, a higher reserve rate than America's help. Got further to drop that reserve rate, and our mortgage rates are closer to the reserve rate. In America, there's absolutely no relationship between the reserve rate and mortgage rates. Reserve rates there have fallen from over six percent down to two percent, and mortgage rates have actually gone up across that period. So Americans got a much worse situation than we have. But even if you do have a dramatic drop in interest rates, that's nothing in terms of its impact on spending compared to what's happening to people deciding no longer to borrow. This is where you need a monetary perspective on the economy. Our total spending is the sum of our GDP plus the change in debt. Last year our GDP was roughly a trillion dollars, and the increase in debt was roughly a quarter of a trillion dollars. Now, if we suddenly have people deciding not to borrow anymore, that means $250 billion of spending power, even though it's borrowed money, disappears from the economy. If you're trying to top them up on the other side by reducing the interest payment burden, even knocking off 1% off the rates reduces the debt repayment burden by $18 billion, because debt now is roughly $1.8 trillion in this economy. $18 billion of an increase in spending power versus $250 billion of a fall in spending power, I'm sorry, the nays have it.
SPEAKER_09In your scenario, it would seem likely that interest rates are going to fall very significantly beyond what they've already done.
SPEAKER_07I was saying, uh, even when the first rates cuts were being talked about before the last quarter of a percent cut, that I expected the reserve to be down to about two percent by the end of 2009 and probably zero by 2010.
SPEAKER_09The share market. We saw Australia's share market tumble uh five percent again today. Over the course of this calendar year, Australia's down thirty-one percent in share market value, Europe down thirty-three percent, America down thirty-two percent.
SPEAKER_07Has that got a long way to run? Unfortunately, yes. The American market is more overvalued than we are. Australian stock market isn't as big as the the bubble there, is it isn't as big as the American stock market bubble got to be. But in the case of Japan, again, the NIC eye was thirty-eight and a half thousand points at right at the very end of nineteen eighty-nine, it fell down to seven thousand. It's now bouncing around ten, having reached fifteen. That's the scale of drop we can expect to see in America. And it's the same scale of drop they got back in twenty nineteen twenty-nine when it fell from three hundred and eighty to forty-four.
SPEAKER_09Very briefly, your best case scenario for Australia out of all of this, your worst case scenario?
SPEAKER_07Aaron Ross Powell, Jr. Best case scenario is a recession more severe than nineteen ninety and lasting about one and a half times as long. Uh worst case scenario is something up to the level of the Great Depression, which has 20 percent unemployment and lasting up to a decade.
SPEAKER_09What's your advice to individual Australians right there?
SPEAKER_07Aaron Ross Powell, Jr. Get out of debt. Simple as that. It's not that simple, though, is it? It isn't that simple to make it. It takes difficult decisions to get out of debt, but that's the only thing to do. If you're liquid and if you have a secure job, you will do very well out of the coming environment. But if you are not liquid, if your assets are tied up and if your job is at all vulnerable, then it can be very dark times ahead. But it also involves a political shift. We have to get away from the acquisitive society we've been part of, which really is driven by speculation rather than genuine production. Stephen Keane, thanks for talking with us. And the day after they interviewed the Prime Minister, Kevin Rudd, and the host Kerry O'Brien, and then there's a good name for you, uh, Kerry savaged the Prime Minister over my views. And six days later, he announced the doubling and the trebling of the grants that were given to ha by the government to buy an existing house or a new house. So it went from seven thousand dollars to twenty-one thousand if you're buying a new place. And then the Victorian government, in one of the major states in Australia, added another $14,000. So the government's giving you $35,000 and saying go and buy a home. What do you think happened? And what the result of that was the credit, I showed how credit in the American situation went substantially negative. The credit was higher in the Australian case, it peaked at about 25% of GDP, but it didn't fall negative. It went to about 5% and then it started to rise again. And that's the bubble, the housing bubble, taking Australia out of the crisis. So even though I got criticized for getting the housing bubble wrong in Australia, uh the reason Australia didn't suffer from that was because I I scared the Prime Minister so much that it was either his decision or somebody's in cabinets. It wasn't the Treasury. I've heard this internally from the Treasury itself, was a policy decision by the politicians to restart the housing bubble. And and and that's why Australia avoided the crisis.
SPEAKER_06How many thank you cards have you got for that?
SPEAKER_07Exactly. I get abused by it instead. Well let's take a look at Ireland here. Okay, and just uh see how Ireland rates on that front. You had the mother of all bubbles in some way. You kept on going. I mean, a lot of the Irish debt includes a huge amount of debt that's fictional debt by by multinational companies using you as a base to avoid taxation in the rest of Europe. So it isn't entirely reliable, the Irish data. But you get the same basic story, this incredible growth in credit, and then a plunge, first of all, that's this is the actual plunge when you you know the Irish the Celtic tiger died. Okay? So the same look at that fifty percent of GDP, more than fifty percent in cr credit-based increase in aggregate demand that year, uh courtesy of borrowing money, and then you go down to a I'm guessing that's about minus ten, minus twenty percent on the other side. So the swings, the round swings and roundabouts that the global economy has had are all things you can see in the data, but the mainstream economists don't even look at that data. Well just to get it a bit granular on that that data, uh Steve, well that that's coming from back back when I when I first saw the crisis coming, it was about it was a bit it's a bit silly, it's some silly idiots syncretic ideas behind it, but I started checking the data in late December of 2005. And then I saw the crisis and I started warning from about the 18th of December, roughly 2005, that a crisis was inevitable. Now, at the time, I had to use the Australian Bureau of Statistics to get the Australian data, or the Reserve Bank of Australia, and I had to use the Federal Reserve in America to get the data from there. And it was laborious and they weren't necessarily consistent ways they defined things. So the Bank of International Settlements, uh, which is the only official organization that had any warning of the crisis coming, uh because the guy who was their research director, Bill Bill White, uh a Canadian economist, who's now a close friend, as you can imagine, Bill has all read Hyman Minsky, convinced by Minsky's analysis, he saw the crisis coming. He published reports in 2006 saying a crisis was highly likely to occur. Um he doesn't get anywhere near the recognition he deserves. Uh, but in as a result of that, he then got the research department of the bank international settlements to get all the uh reserve banks that the their members to start recording debt data on a quarterly basis using standardized reporting tools. So that's the Bank of International Settlements maintains that database today, and that's where I'm getting the data from now.
SPEAKER_06I I think I think it's important to maybe speak to Hyman Minsky. I know he's had a huge influence on you. And what I've read of Minsky, the the main quote I take, you know, stability breeds uh instability. Yep. And that's that this kind of circular feedback loop of constant credit creation, boom bust cycling, and the reaction function of central banks during financial crisis. I know Ben Bernanke is somebody that you're not a huge fan of in relation to the 2008 financial crisis. Uh in Ireland, we know very well uh all those austerity measures, the socialization of the debt. You know, this country was ravaged uh less than two decades ago. So what is the optimal solution here? We need somebody to regulate this thing.
SPEAKER_07Is it a purely regulatory role they have and just leave everything else alone? Banks are staffed by neoclassical economists, and that's why they didn't see the crisis coming and why they actually made it worse in the aftermath. Uh, Ben Bernanke, I mean, three weeks before the crisis began, Ben Bernanke made his report to Congress and said what a great year 2008 was going to be. He predicted two and a half percent economic growth was actually minus two and a half percent year after. Okay.
SPEAKER_12So we expect moderate growth going forward. We believe that if the housing uh sector begins to stabilize, um, and if some of the inventory corrections that are still going on in manufacturing uh begin to be completed, that there's a reasonable possibility that we'll see some strengthening of the economy sometime during the middle of the year.
SPEAKER_07Doesn't lose his job, okay? Make the biggest mistake in the history of prediction and not suffer as a consequence of it, and gets the bloody Nobel Prize for work that still pretends that the banks are intermediaries. So you've got the wrong people running them to start with. But on top of that, it also is those focusing on the wrong thing. They're only controlling the interest rate. Of course, that's the interest rate on bonds rather than government uh bank loans. Uh but I they don't do any credit uh credit direction. Now I would uh if you let banks lend for whatever they like, they'll lend for a Ponzi scheme. Because that's the easiest thing to support. I'm basically housing and shares are the ultimate Ponzi schemes. So what happens, and you can see this particularly in the English data, but also the American data, uh when the when the banks lend money to buy housing, that increases house prices. So you get an amplifying feedback loop between the two. Changes in the level of new mortgages causes change in the house price level, which inspires people to take out new mortgages, and you get an amplifying feedback loop that leads to a crisis. So my gabrilbut is saying let's dampen that feedback loop by saying the money you lend to buy a house is proportional to the income earning property of the house, not the income earning arguments of the of the supposed borrowers, which that's how we got ninja loans, you know, knowing no income, no jobs, no assets, and the bank still gave them bloody loans because they were worried they were thinking mainly about the fees they were getting and lending. They weren't thinking about the long-term consequences. So stop letting banks do that. Let them lend to entrepreneurs. I'd change some of the rules around lending. So at the moment, banks must Western banks must lend and take a debt position. The Islamic banks are supposed to lend and take an equity position. Now they normally don't. They fudge around and still make it based on interest rather than risk sharing. But something of that nature where banks could lend to entrepreneurs and then get a capital gain if the entrepreneur succeeds to make up for the others that fail. Uh that those sorts of changes I'd bring in as well. You you can't let banking self-regulate because without fail, they'll end up in asset price bubbles. They'll fund share purchases, which has got its own amplifying feedback, they'll find they'll finance mortgages, and they'll stop thinking about industry because that's too hard. So I'd I'd make them do the hard work. Um and I'd uh also I'd reduce interest rates, generally speaking. They're uh they're not a control mechanism. Uh there are very and in fact when you put up interest rates uh on existing you devalue existing bonds, which makes the financial system more fragile, but you increase the amount of money you're giving, not borrowing from, you're giving money to the finance sector as the interest rates rise. And at the moment we're talking, given the level of government debt and the uh rate of interest, we're giving uh the the big the government is giving the finance sector something of the order of five percent of GDP worth of free money every year for interest on bonds.
SPEAKER_06Yeah, I I interviewed uh David Kelly, JP Morgan Global Strategist there, uh also a fellow Irishman a couple of months back. And he had a particular view on central banks that you know this idea of central banks cutting interest rates stimulates growth, and that's completely backwards. His view is you can raise rates and it actually encourages growth because people that have money, they're you're actually giving them more because all those money market funds are getting five percent, four percent on money market funds, and actually and also the psychological factor of oh, they're cutting rates, there must be something wrong. So I thought that was an interesting take. Just in terms of um Minsky moment with government debt, just moving it looking at government debt now, Steve, right? Talking about the US situation and even in Europe, France, uh, Italy, and China, where does this play out?
SPEAKER_07It doesn't. This is a mistake, another mistake from the mainstream, because the mainstream, just like they ignore private debt, they they obsess about government debt. So that's that's China's level of private of private debt, red line, black line, government debt. There's questions about whether all the government debt is properly recorded, but again, private debt is much larger than government debt. That's the standard situation for virtually every any any functional economy on the planet has a higher level of private debt than government debt. So we're we're obsessing about the small one and ignoring this one. Okay? That's which is just the ridiculous element of how what economic theory has got us to do. Um but when you when a government a government does not borrow to create money. This is something which people uh th they they they just pe people you know, they scratch their heads when I say this sort of thing, and other people on the same side of analysis as me. But the government doesn't create money by borrowing. It creates money by fiat. And this is I'd rather talk about the debt rather than the the gap between government taxation and spending the deficit, I'd call it fiat because the government says we're going to spend this amount of money, we're gonna tax this much back. There's a difference between the two. The difference is actually how fiat money is created. So the government doesn't need to borrow at all. When you look at what the gov what what happens, what is the impact of the government selling bonds to match the deficit? The impact of that is to m is to ensure that the central banks, that the that the treasury's account of the central bank doesn't go into overdraft. That's what that's those that those bond sales do. Uh there's no way that those bond sales finance government spending. What they do is they give people who are the banks themselves and the primary auctions, they give them a r a not quite risk-free asset, but they give them an asset which they like uh the bonds which earn an interest in the past they didn't earn interest from reserves. So they get interest, they they swap a non-interest earning income, which is reserves, for an income earning asset, which are bonds. And of course you can't trade reserves, but you can trade bonds. So the the the bond market is a creation of this process of selling bonds to match the deficit. But there's no way in which that's actually borrowing money. And so this is the all all the people panicking about it. My little way of saying, look, you're panicking about nothing is say, you want to get rid of government debt? Simple solution. On day one, appoint me reserve bank governor. Okay. On day two, I'll buy all the bonds. And literally, that's there's quite there's no limit whatsoever on the capacity of the central bank to buy all outstanding government bonds. That's, you know, you and if if you're in debt, can your wife go and buy all your debt and then get you out of having to pay interest? Not possible. So the the the structure of government spending is such that the government debt is not debt, it's bonds that they've sold to match the deficit. And when you see that the running the deficit itself creates fiat money, then to some extent, it's not completely true, but to some extent, the level of outstanding bonds reflects the amount of money the government's created over time. And rather than those being liabilities of the private sector, which is the way it's described in textbook, you know, the government owes this money, so you owe this money, the government is in defic is is in it has it as a liability. You've got it as an asset. The government debt, so-called, is a measure, not a perfect one, but a measure of the amount of of of wealth in terms of financial assets that the government has created for the non-government sector. So if we start from the banks here, then banks obviously an asset that banks have is loans, okay? And they also have a liability which is deposits. Now, what's a loan what's an asset for one entity is a liability for the other. So I've got it loans as an asset, they're a liability to the household sector. Okay. And then deposits are a liability of the bank, they're an asset of the private sector. You put those two together, and then if you show bank lending, then what that amounts to is banks putting credit dollars per year into people's bank accounts and recording that they increase the debt they owe by credit dollars per year. Now that's showing you bank money creation. Loans create deposits. It's just pops right out of the accounting. You don't need any economic theory at all to see that that's what's happening. Now let's look at a government taxation. Um and of course, everybody would understand that taxation takes money out of your bank account. So I put a minus tax here. That's come out. Now, what's the balancing item? Because double entry requires a balancing item in every case. Well, there's also accounts we call reserves, and of course, they're an asset of the private banks, but they're a liability to the central bank. So now they turn up over here. Now, when tax goes down, uh also do reserves. So reserves fall down here minus tax, that turns up over here. Where does the money go? Well, the treasury has an account at the central bank, and I'll just call this treasury um CRF because the the basic way it's described is the consolidated revenue fund. CRF. Okay. So the tax gets transferred to the CRF. Okay. Now who owns the CRF? So that who's the who's the the consolidated revenue fund an asset for? It's an asset for the Treasury. So there's the Treasury. Now the tax revenues come in. There's no liability associated with that for the central for the Treasury. So if we look at the Treasury's uh net worth here, which I'll call it net worth, okay, then that gets increased by tax. And I can simply balance that and say the taxation increases the net worth of the government. And if I look at the private uh net worth over here, what does taxation do there? I've got a okay, there's private net worth. Well, taxation reduces your net worth. So that's pretty obvious, okay? Taxation reduces your net worth, it increases the net worth of the government. No argument with that. Where people flip out is what I show what about spending? So let's do that. Okay, so you've got spending by the government. And so spending is going to come out of the Treasury CRF, so you're going to have a minor spend coming out of there. That turns up over here, the spend goes into reserve accounts over here, it turns up over here, and the government the the banks then put that money in your bank accounts, and that spending increases your net worth. Okay? So if the government spends more than it takes back in taxation, it puts more money in your bank account than it takes out, it's increased your net worth. So a government deficit makes you better off. Now that's the complete opposite of what textbooks will teach you, okay? But I've done it using accounting. Okay, and there's absolutely no debt inside there. But let's look what's happening in terms of the central bank. Because as the if the government taxes more than it takes back in spending, that account goes positive, this one goes negative. Now, of course, what happens is the government spending tends to exceed taxation. So this one goes negative, this one goes positive. So if you don't have any bond sales, necessarily the treasury goes into overdraft. Okay. So let's now bring in bond sales. And uh I'm I'm going to be a bit agnostic about where the sales come from, but you have bond sales. Uh what that means is that those uh I'll call this auction here because there are auctions that take place. That auction increases the amount of money in the Treasury account, and of course it comes out of the reserve accounts. So I've got the auction coming out of there. That then turns up uh in terms of the um Treasury's net worth. I haven't finished up over here, the spending by the Treasury puts it into negative equity. So you've got a minor spend over there, but the auction gives them a liability of bonds that are owned by the banks. So I'm going to say bonds subscript B for bonds owned by banks here. So the auction increases the money in the bank account of the Treasury, and so long as the auction equals the deficit plus interest on existing bonds, but I'm I don't need to include that detail just yet. Uh but so long as the b that's the scale of bond sales, then the treasury account doesn't go into overdraft. That's the main impact of the tre of the auction sales. Now I've got the bond sales turning up there, uh, and I've given the allocated the bonds to the to the uh to to the private banks. Uh but you know there's two ways I can go here. I could show the auction the the bonds being sold directly to the central bank, which is what I'd prefer to see, but I'll cover the current system because when the auction occurs, the money that the the funds that the banks have that back the money that's been created uh are reserves, and what happens is that it goes across to being bonds instead. So what the bank what the banks do is doing an asset swap. They're swapping reserves that don't earn any interest, didn't in the past, and and and can't be traded, into ones that earn interest and can be traded, which is why the banks will do it. They all absolutely, because they're swapping something, you know, it's basically a something for nothing to the banks, relatively speaking. So that's that's the overall system we're in at the moment. And when you look at it, the bond auctions, first of all, don't actually raise any money for the government. There's no notice that money is basically what's in deposit accounts. So credits increased deposit accounts, taxation is reducing it, spending has done nothing to it, the auctions don't affect the money supply either. So the whole proposition the government's borrowing from the private sector is just wrong. Again, this is what because they don't understand the accounting. You know, I'm the person who invented this software. Uh mainstream economists Won't use it, don't even look at this sort of stuff, don't even know that it exists, most likely. So they've got an ignorant idea of using supply and demand curves for all this stuff, and they make literally make completely wrong statements. So they think that the government spends more than a tax back in taxation. That reduces the money supply that's available for the private sector to lend out. The exact opposite applies. It increases the money supply. And you covered this uh in a course that you're offering. Yeah. I give a I mean I'm uh I I've I spent fifty years fighting academic economists in various guises, thirty years as an academic economist fighting on the inside. And I've realized ultimately that there's simply no way you're going to uh reform academic economics from the inside. And the reason is simple, uh that to actually change what's called a paradigm in a discipline, you need a scientific revolution. And when you look at how scientific revolutions have occurred in the past in genuine sciences, things like physics and chemistry and so on, which are real sciences, uh they don't occur by somebody coming and saying, I've got this great idea and I'll teach it all to you, and you'll change your minds. They don't. They die believing the stuff that's wrong. And but because they do die believing the stuff that's wrong, they get believed they get replaced by young people who know there's some problem with the existing theory, and they're not wedded to it in the way the old professors were. So they're willing to say, Hey, this is exciting, I'm going to come in and change the paradigm. Well, that happens in in physics, that's why we've got quantum mechanics coming out of the Maxwellian approach and all the revolutions in thought we've seen in the last one and a half centuries. But in economics, you can always find some idiot in the class, or some intelligent idiot most of the time, unfortunately, who gets seduced by the vision that he gets taught by the professors of this self-regulating equilibrium system, and they can live through something like the Great Depression and still imagine that capitalism is an equilibrium system. So, like when I was being a student radical at Sydney University, overthrowing the teaching of the mainstream department, lots of people continued on to get their PhDs in that area and continue pushing out the same old shit because they think capitalism is the ideal social system. And they've they've got a model which says it is, which leaves out essential elements of the real world, so they don't even look at those elements, which is why they didn't look at the level of debt and they didn't understand the crisis was coming.
SPEAKER_06We've covered the economics, we've looked, touched at uh financial markets, but on political economy, I'd like to finish on on that. I mean, and get your thoughts really on what's going on in the world today with uh President Trump and his uh escapades in the Middle East.
SPEAKER_07How do you read what's going on? We're in for a global famine this year, quite probably, courtesy of your stupidity in the Middle East. Um and so I mean the the we're focused just on the price of oil rising, okay? That's not the real problem. It's this it's the availability of oil, plus also fertilizer, helium, and sulfuric acid. Those are some of the major products that pass through that region of the world. Something like half the sulfuric acid that we use on the planet passes through it. Now, most people have only seen sulfuric acid in a science experiment back at school. Okay. But if you talk to any people working in industrial processes, engineers and so on, it's an absolutely critical element for doing everything like refining copper, uh virtually every process, everything you have in your desk probably involves sulfur dioxide at some point. Uh equally these days, your computer involves helium. If you don't have helium, you can't cool the devices that make the semiconductors to the level that's necessary to enable that construction to occur. So uh we're going to lose both and a fertilizer. Most of us think we eat green stuff. No, we eat brown stuff because a huge amount of the food we consume on the planet is coming out of stuff that's fertilizers by superphosphate and uh a range of other artificially produced fertilizers which are based on oil stock. And so like 30% of the apparently something like 30% of the world's fertilizer passes through the Strait of Hormos as well. Now, if that's blocked and it doesn't get to farmers at the right time, then you go back from the yields you get out of fertilized farms to the yield out of unfertilized farms. And the arg the arguments from agronomists of course I'm not an expert in this area, but I I listen to experts in this area, and they tell me that the carrying capacity of the planet without superphosphate fertilizers is probably two billion people. Now that means with eight and a half billion people on the planet, and we're losing about, you know, something of the order of one-third of the world's fertilizer supply out of this crisis. People are going to starve to death. And it won't just be in third world countries anymore. It could quite possibly be in advanced countries which aren't food self-sufficient and which don't produce their own fertilizer. Now that includes UK. Okay? It includes Australia. So we could quite possibly see something that's unthinkable this year, which is famines in West in Western countries.
SPEAKER_06That's unbelievable. We don't hear about this unsurprisingly in in the media. But in terms of an end game with this, he's obviously uh in a corner, and the Iranians, correctly, correctly, if you think about it rationally, are playing the long are playing the long game here because he's just going to get hammered, he's going to get wiped out uh in the midterms, but that's eight months away.
SPEAKER_07So no, but it w will America still have elections in eight months' time. My feeling is Trump's still in charge, they won't.
SPEAKER_06My own view is that the tide is turning a bit now.
SPEAKER_07Eventually the Americans are getting sense. How do they implement it though? I mean, you need a coup in America, okay? Uh you if you rely upon the constitution, who's got the constitutional power to remove the president? Well, if the impeachment the vice the vice yeah, the vice president has that power. Who appointed the vice president? The president. Okay. Um, you know, he's chosen nut he's got then I mean Pete Seghu likes to call himself the Secretary of War. My nickname for him is P Pete Hogsbright, you know. Remember his name better that way. He's the lunatic. He's a lunatic. Um so these are the people who're supposed to implement the constitutional protections against a tyrant. It's not going to work. You've already got a tyrant and the tyrant's chosen the people who are supposed to remove him. Yeah, I I I I'm not sure how how how it ends, but uh I think uh no nobody is.
SPEAKER_06That's that's that's that's the problem. But uh again, again, the inequality of all this means that poor people will suffer. Uh and and you know what what you don't hear about at the very start of this war, there was a strike on an Iranian school, over a hundred kids just killed. You know, and and you don't you don't really hear anything about that. Um in terms of how people can follow your walk. I know you're very, very active on YouTube. You've got a huge following. I know that you have a course. Um how do how do people learn more about you and what and the course?
SPEAKER_07Well, the cour but I'll put an apology in advance. The marketing is annoying, okay? I I wish I could change it, but I don't control the marketing. I'm I'm partnering with a marketing firm that put it all together for me. They're great people, okay, but the marketing is a bit like buy one, get one free, which really annoys the hell out of me. But that's that's they use it for a whole lot of people. I'm just one of their customers. Okay. But they do a very good job, and they uh so you ultimately put up with it, you'll get to the course at the end. And what I'm now offering, I I give three courses. Uh one is called the Rebel course, and that's the short one. That's seven lectures. There's actually nine. I have a lecture zero and a lecture infinity either end, but there's seven lectures there. Uh that's the overview. Then I have an extremely detailed course, which is called the legacy course, and that's like two years worth of lectures with me. Uh and then there's another one I'm doing, which is a live uh you know, ask me anything live tutorial thing. Uh those are the three components that are offered. And uh if you go to uh Steve Keen.com, uh then you'll find each of those offers there. So to stevekeen.com. And then of course you mentioned YouTube. I'm also on Patreon and Substack. Uh so you know, I'm spread far too thinly. But the best way to get it is to join that course. And like I'm I've obviously I'm gonna say it's a great course. Uh but the the feedback that people are giving me in it, they're thoroughly enjoying it and people are renewing for multiple years. Uh there are there are research groups that are now forming inside it. So they're developing an AI based on my ideas, which is a community activity. Um it it's amazing what's coming out of that community itself. So even if we can't save the world, at least learning a bit more about it makes it feel less depressing. At least you're making an effort anyway. Uh but what I do each week, I give two on Tuesdays I give the the the seminar uh one, on the Wednesdays the short course, on Thursdays the long course, and I repeat them once for each hemisphere, Eastern Hemisphere and Western Hemisphere. So six o'clock Sydney time, which happens to be uh like in the England time, it's or the U UK time it's nine, nine a.m. Uh that's the first course, and that's for the Eastern Hemisphere, and then at at 1 p.m. New York time, which for us is about 7 p.m., uh there's the one for the Western Hemisphere. So they're all live, and there's now I'm there of course, uh there's anything from 30 to 150 people who'll turn up to watch the lecture live, and uh yeah, it's a lot of fun. I mean, it's bloody hard work, uh, but I'm delighted I'm delighted because this is now my biggest extended community that I'm very closely in touch with are the people in that course. Yeah, well done.
SPEAKER_06Congratulations on that. I will put links to all that, Steve. Thank you. I just want I just want to say uh really enjoyed this and uh really appreciate. You know, you've got a big profile, I'm sure you're very busy, and huge thanks, and look forward to doing it again sometime. Thanks so much, Steve.
SPEAKER_07Indeed. Thank you, mate. Okay, well, it was good fun.