Archiv der Kategorie: Geld und Kredit

Adair Turner Keynote on ‚Overt Money Finance‘ at INET Hongkong, April 2013

In einer bemerkenswerten Rede spricht Adair Turner aktuelle Probleme des Finanzkapitalismus an, und diskutiert mit großer Klarheit geldpolitische Lösungsansätze.

Turner war Chairman der britischen Banken-Regulationsbehörde, der Financial Services Authority. Er bewarb sich 2012 um die Nachfolge von Mervyn King als Governor der Bank of England, es wurde ihm jedoch von der britischen Regierung Mark Carney, der Governor der Bank of Canada, vorgezogen. Turner ist nun Senior Fellow am Institute for New Economic Thinking. Der Investor, Philanthrop und INET-Gründer George Soros hält dies für glücklich, denn nun sei er frei, seine Meinung auszudrücken.

Unverständlicherweise gibt es zu dieser wichtigen Rede bisher nur eine automatische Transkription auf youtube, die manchmal unrichtig und sinnstörend ist.
Für die Leser dieses Blogs – und für mich – folgt hier meine eigene Transkription der Rede. Eine kritische Reflexion der Rede ist einem späteren Blog-Beitrag vorbehalten.

Video von Turner’s Rede auf youtube:

Hier die Slides zu Turner’s Rede.

Ich empfehle, 3 Browser-Fenster für Video, Transcript und Slides parallel zu verwenden.

Introduction by Robert Johnson, Executive Director of INET

„Ladies and Gentlemen,
I believe in every one of our lives,
we can find someone
who helped us
become more than we thought we could be.

When he turned eighty
at his birthday party in London
I was asked to give a speech,
and characteristically on a birthday party
people talk about the gifts
that they want to give
the person celebrating the birthday.

But on that night
I decided to turn things inside out
and celebrate the gift that George Soros gives to all of us
and speaking
very frankly
through his example
I have learned more about the value of discomfort
than from any other individual I have ever met.

And I don’t mean by that entirely that he has made me uncomfortable at times.
He has helped propel me to do things
that I had never envisioned trying to achieve;
more I think about his example.

This gentlement who is more than eighty years old
sometimes wears me out
with the intensity
and the drive and the sense of purpose and the sense of urgency that he exhibits
in his business life when we were once partners
but now in his philantropic life.

I don’t know how to share with you
last summer
the powerful experience
of seeing George
concerned about the disintegration of Europe.

To me to go on there you remember
whene we were after dinner in Brussels
and we worked
to help George
that there was nothing more he could do.
But he had given so much of himself
and the love in his heart
to the conflict in the society where he grew up
and where he saw
the capacity for pain and evil.

And when George and I began to talk about INET,
what he really impressed upon me at the time of the bailouts,
and the TARP legislation,
and the distrust that was growing in the United States,
is that the stakes were not some simplistic or technocratic
cost-benefit analysis,
but it’s wheter or not our society
could be resilient in the face of a challenge
to a feeling of trust and order
in the continuation of that society.

As Harold James, on of the scholars who works closely with INET,
has often talked about,
the nineteen thirty one banking crisis in Austria and Germany
created a pressure on the fabric of trust,
on the nerve center of society
that led to as we all know some very very
unfortunate experiences and results,
showing the dark side of human kind
and so
for me,
as I try to think of examples in my life and I try to prepare myself
to make a contribution,
I will always remember that summer
I always remember
the deep emotional heartfelt energy
that George gave to Europe,
and the continues to give
in all his endeavours right now.

Ladies and Gentlemen, Gerge Soros.“

Introduction by George Soros, INET founder:

„Well after this introduction
it is my privilege
to introduce another member of our mutual admiration society.

As you have heard from Rob Johnson at lunch time
INET is now entering a new and contructive phase.

The initial task was to show
that the prevailing paradigm
of efficient markets and rational choice
is fundamentally flawed.

I think enough progress
has been made in accomplishing this task
to take on the next one,
which is to produce new insights and new theories.

As Rob Johnson explained
the primary objective of INET is to reform economics
as it is taught in universities,
but perhaps he didn’t emphasize sufficiently
that economic policies
also need to be reformed.

Now we could not have found
a better person
to lead that effort
than our next speaker
Lord Adair Turner.

He was the chairman
of the Financial Services Authority
of the United Kingdom
and he also chaired
the European Financial Stability Institute.

He was a candidate to be the next governor of the Bank of England
but fortunately for us and I believe also for the world
he was not selected.

And this is fortunate for the world
because it frees him up
to speak his mind,
and he has some very original ideas
that we will all benefit from.

I think Adair Turner is the most brilliant and most penetrating mind
preoccupied with the unresolved questions of financial stability and financial regulation.

I know this for a fact
because he was the first financial regulator
who took an active interest
in the theory of reflexivity.

What more convincing evidence could I possilby ask for?

Now I am really very pleased
and very proud
that he agreed
to join INET
as senior research fellow.

If the recent economic crisis is going to produce
some profound new insights
such as John Maynard Keynes did in the nineteen thirtees
he is the one.

Truth be told
I had some aspirations myself,
but I am somewhat old
and I don’t have half his qualifications.

So I am really pleased to hand on
the baton to him.

I am pleased to present Adair Turner.“

Main speech of Adair Turner:

„Thank you George,
Good evening Ladies and Gentlemen.

Thank you George very much.
I am not quite sure what to do after that introduction
first of all I have got to produce a new general theory
in about the next hour and a half.

But I am very glad
becoming a senior fellow of INET,
it’s an arrangement we had made which is going to give me
the freedom both to help INET in all of it’s activities
which I believe are incredible valuable.

I think that before the crisis there was a real failure
of academic economics to address in an effective fashion
the problems which were facing the world,
and that the rebuilding of economics with new thinking
is a vitally important task.

So I am very glad to been given by INET
the support and the freedom both to support their activities
and to pursue areas of personal research,
where I hope to be looking at the integration
between some issues to do with the nature of finance,
the nature of technology,
where jobs are coming from
and inequality.

It’s also a great pleasure to be speaking here at this forth plenary.
We are four years old we were told earlier today by Victor Fung,
we are a bit older than the Fung Institute.

They are still in their terrible two’s
where as we all know who’ve had children,
troubles have tantrums
at two years old,
but hopefully you move beyond whatever tantrums you’ve got.

We are beginning to head into sort of preschool age and hopefully
therefore in a position to make major contributions.

So I am very pleased to be speaking here
at this fourth plenary,
as I have on the three previous occasions.

But I do have three problems or concerns about my speech this evening
to which I have no solution whatsoever.

First I am a bit concerned to be speaking over dinner.
As those of you who have been at the last three plenaries
at Cambridge, Bretton Woods, and Berlin know
I’ve done for three occasions in the past this dinner gig,
and on each of those gigs I’ve been asked to talk on a general subject
on the whole of what was going on at the conference.

And I said to Rob earlier this year
well I’ve done three of those
but I’d like to do something different this year,
because I’d really like the opportunity of presenting a sustained argument.

You know a serious argument an argument with some facts
and some exhibits and slides
and theory and that sort of stuff not
I don’t wanna be just the joke man just not … (inaudible) the light entertainment.
And Rob said ok that’s fine
you’ll be on the agenda to do that,
but what he didn’t tell me is
that I would still be talking over dinner.

So those of you
who after the cocktail
thought that at the end of a long day
another Rob Johnson organized
intellectual feast,
in which you start working and keep working and keep working
that now is the time to relax and take it easy
well – I am sorry.

You’re gonna have to look at some exhibits,
you have to do some work,
and well – you know – you just have to stick it

My second problem or concern is
that I’m gonna talk about financial stability and monetary economics.

And financial stability in monetary economics is the sort of
intellectual ghetto that I’ve had to inhabit for the last four and a half years
at the FSA in response to the financial crisis.

And I hope at INET conference next year wherever it is
to be able to escape from that ghetto,
and to perhaps talk on some of the wider issues
which we’ve discussed during the day.

I mean, during the day you’ve discussed
the whole future of China,
you’d just a fantastic session on the nature of innovation
and where technological innovation comes from,
and then a fascinating session also on mimetic desire,
the fundamental nature of what we are as human beings.

So I’m not that sad to bring us back
to this technical issue of finance and monetary,
because when you think about it
the area of macroeconomics and financial stability
is not actually addressing the fundamental issues
or fundamental constraints or difficulties in the world,
like resource allocation,
or fundamental opportunities
like innovation and technology,
it is actually basically dealing with the avoidance of negatives.

What fundamentally macroeconomics is about
is making it sure that we don’t screw up,
it’s making sure that we can somehow have enough stability
in the development of nominal GDP and of the price level,
that there is an opportunity for the really important things in economics
which is innovation and human capital and creativity
to express themselves.

So I am at the negative end of today’s agenda,
but that negative aspect of monetary economics and financial stability
is still very important,
because although monetary economics and financial stability issues
is really about the avoidance of self-inflicted wounds –
when we have those self-inflicted wounds
they’re terrible.

The whole of the 1930s Great Depression was a self-inflicted wound.
As Roosevelt said in his inauguration speech
America was not challenged by some sudden loss of productive capacity
it’s factories were no less productive, it’s workers no less skilled,
but yet it has suffered a terrible, terrible depression.

On a fortunately minor scale what happened in 2007 and 2008 was not driven by any fundamental conflict between social classes
about the distribution of income which is always a difficult issue,
it wasn’t driven by an inability to continue the process of innovation.

It was a self generated failure within the financial system.
It was a totally self inflicted wound.

So although I am afraid I am concentrating this evening
on the negative issues rather than the fundamental issues,
or the positive opportunities of economics,
again I am not apologetic –
I think is an important though limited agenda.

My third problem is something Rob said at lunchtime
in his welcoming remarks.
He said well we call ourselves the Institute for New Economic Thinking,
and he said that places some burden and responsibility with us after a time
to come up with some new economic thoughts.

But – and if I could have my first slide could just come up here –
the problem that I have in that respect
is that I have entitled this evenings presentation (slide 1)
‚Private Debt and Fiat Money:
Lessons from the crisis and from some old economics texts‘

So I feel somewhat worried why am I going back to old economics texts.
Well it’s because despite the need first to think about new thinking
there’s still a lot of wisdom in old economics texts,
and also I think I can defend myself
that going back to old economics texts
is right from the beginning
established as a key INET activity.

Those of you who were at Kings College Cambridge
three years ago in twenty ten at our first plenary
will remember that the very first session,
which was … (inaudible) excellently by Robert Skidelsky
took us back to the relative merits
of Keynes and Hayek,
and many of us noted them with somewhat irony
that the Institure of New Economic Thinking
had begun by thinking
about a set of debates which occured seventy years ago.

But there is still huge wisdom
in old economics texts
and I’m gonna begin today
by referring to some old economics texts and perhaps surprising ones –
because I’m not gonna talk about my great intellectual hero Keynes –
but to some of the founding fathers actually of the Chicago school of ecoomics:
people who supported a very strong clear laissez-faire economics.
Perhaps more laissez-faire in some respects than I would agree with,
but who in particular issues to finance were not laissez-faire at all.

And I’m talking about Henry Simons,
I’m talking about early Milton Friedman,
Milton Friedman in nineteen forty eight,
and I’m talking about Irving Fisher.

And those economist came up with two really quite radical propositions
in their writings in the thirties and forties.

The first was that finance was subject to such potential instability
and that in particular banking was subject to such potential instability,
that not only should we regulate banks tightly,
but that we should regulate banks out of existence.
They didn’t believe that fractional reserve banks should exist.

They believed that we had made a major elementary mistake
in allowing banks to create private money and credit,
that the creation of money was an esential monopoly function of the state,
and therefore they argued for hundred percent reserve banks
in which the monetary base is the money supply.

So that was radical idea number one.

Radical idea number two which is clearly set out in Milton Friedman’s
nineteen forty eight article
is that contrary to the idea
that monetary finance of fiscal deficits should be the ultimate taboo –
written into the constitution of the ECB the worst possible thing you could do the thing that is bound to produce inflation –
but actually
we ought not sometimes but always
to finance one hundred percecnt of fiscal deficits with newly-created money.
That is precisely what Milton Friedman argued in nineteen forty eight.

So here you have these Chicago school laissez-faire economists
believers in a free market
believing in one hundred percent reserve banking
and one hundred percent money financing of public deficits.

And I will going to use that set of radical thoughts
that provocation
to simply explore why did they think that,
and what implications should we draw from that
even if we don’t go all the way in that radical direction.

Because often when you have radical ideas
in economic theory and economic thought,
it’s valuable even if you don’t agree completely with their conclusions
to understand what the argument is,
and perhaps to understand that they are right up to a degree.

So, let me begin with suggesting
in relation to this issue of the role of finance, banking,
and why they ended up in such a radical position
on what banks should be and how we should regulate them,
with suggesting four pre-crisis, pre our latest crisis delusions (slide 2):
Four failures either of economics or of policy.

We assumed we could ignore the details of the financial system –
that’s a statement from Olivier Blanchard the chief economist of the IMF –
we largely created macroeconomic models from which the details of the financial system and the banking system were almost entirely absent.

We assumed that financial activity and financial innovation were axiomatically beneficial because we know that market completion is good
so yet more market completion is even better.

We believed therefore that financial deepening was limitlessly beneficial because again why wouldn’t it be if you believe in market completion
and you believe in laissez-faire economics
everything that the free market does must be beneficial and must be taken as close to a sort of nirvana … (inaudible) Pareto equilibrium.

And finally there I think this is less a failure of a rigorous economics
but a failure of much policy making.
We assumed that credit growth was essential to nominal demand growth
and that we couldn’t drive an economy of growth without accepting
or in some cases deliberately stimulating
a relentless increase in the credit-to-GDP ratio.

Now, those propositions were, I believe, incredibly harmful propositions
and may be proposition which were rejected entirely
by the mid twentieth century economists to which I have referred.

And I think it’s useful to think through why they were so completely
against those assumptions.

First they believed broadly speaking that finance was different,
and I think that is a key insight
that the propositions in favour of free markets
which are pretty good in relations to how to run the restaurant business
break down for a whole set of reasons
which have been explored by many people in the INET community
in relation to finance.

But even more importantly thos mid twentieth century writers
believed that banking was different and that debt was different,
and they believed that we have to understand
three potential drivers –
or at least they focused on two
and then the third one is added by Minsky –
three potential drivers of financial instability which I want to run very quickly through (slide 3).

The first,
debt contracts create specific risks.
Debt is different from equity,
and the more debt contracts we have in our economies,
the more we have potential for instability.

unregulated bank credit and private money creation is inherently
subject to instability
and unless tightly regulated will run out of control.

And thirdly,
and this is where Minsky comes in because this is not really
in the writings of Fisher or Simons,
lending secured against real estate or against any asset which can rise in value as you extend more credit is deeply pro-cyclical.

From which it follows that real economy leveraged credit
and credit creation dynamics,
and credit asset prices cycles are crucial macroeconomic variables and phenomena,
and variables and phenomena which we ignored
and overtly stated that we could ignore in the pre-crisis period.

Let me run very quickly through
the arguments in favour of those three propositions.

First of all debt contracts in general.
I think one can identify three reasons why debt contracts are different
from equity contracts (slide 4).

The first is
the tendency for myopia or what Andrei Shleifer has called local thinking.
When you hold an equity contract you see the value of that going up and down every day.
You know that you hold something which has risk in it.
The difficulty with a debt contract is that if you think about the frequency distribution of returns,
it has a significant probability that you will get all your money back,
and then a tail of the probability where you lose.
But in the good times that tail is not observed.

So as Shleifer has said
you’re subject to local thinking:
a strong tendency in the good times for people to assume
that inherently risky debt contracts
are riskless.

And therefore to be willing
to extend those in excessive quantities.

And Shleifer has made the point that in the pre-crisis period
there were many debt securities
that in his phrase
‚owed their very existence to neglected risk‘.

And there was a totality of debt contracts across the economy
which is larger that could possibly be supported
by the objective risks which existed
at the level of the pre-debt servicing
operating risks of the economy.

And that creates the possibility of multiple equilibrium.
And you want an example of multiple equilibria,
think about Greek debt.
Two thousand and six
Greek debt is trading
at about thirty basis points higher
than German bunds.
And people are queuing up to lend the Greek government debt,
because they have fallen into that local thinking
where they are no longer doing the objective analysis
of the underlying risk.

So debt in inself
is subject to local thinking,
volatility of credit assessment:
first unreasonably optimistic and then swinging to extreme and the denial of … (inaudible) to extend new credit,
and multiple equilibria.

when debt goes wrong it goes wrong in a non-smooth crunchy fashion.
When you hold the debt equity instruments and you lose money,
you lose money gradually,
you know that you could lose money,
and the system can absorb that.

Debt contracts go through processes of default,
and default is a denial of a complete market system.
Ben Bernanke in his essay on non-monetary feaures of the Great Depression –
of the banking crisis – has this great phrase that in a complete markets world
bankruptcy would never be observed.

There would be a smooth adjustment of the value of the debt contract
as you approached bankruptcy.
But in fact, in the real world we see bankruptcy, we see default,
we see those non-smooth adjustment processes.

And then the third difference is
the need for continual roll-over,
because debt contracts have a specific term,
they continue to come to an end,
the economy needs them to be continually rolled over.

Victor Fung earlier today talked about what happened to trade
in 2008 when trade finance got cut back
a sudden shock to the real economy.

There is a real distinction here between equity and debt.
You could image an economy in which new equity issues was zero for five years
and which still functioned,
there would still be a process
because the equity investment that you’ve given in the first place
is perpetual.

But because debt has to be continually recyled because it is not perpetual,
the process of new credit provision
is fundamental to the macro economy,
and when it gets interrupted
severe bad things happen.

So first, debt contracts are different. They create specific risks,
Secondly, banks are different.

And I think this is a crucial insight that we often miss,
but which Fisher, Simons, and Friedman really focused on.

It is often said in general text books or discussions what the banks do,
and you often hear descriptions where they take deposits
and they intermediate it to to investment.

This is a lousy description of what banks do.

The idea that banks intermediate
a pre-existing set of liquid asset savings
is wrong.

Banks simultaneously create new private credit and new money.

They do that because they have a maturity transformation function and the fact that they do it is a fundamental macroeconomic variable of vital importance to the dynamics of nominal demand growth.
And it is crucial that we understand,
as Simons and Fisher and Friedman did,
that difference.

And then thirdly,
lending secured against real assets which can rise in value (slide 5) is inherently subject to the sort of cycles which Hyman Minsky described
in which increased credit extended
– increases asset prices,
– produces expectations of future asset price increases,
– produces increased borrower demand for credit,
but simultaneously produces
– low credit losses,
– high bank profits,
– confidence reinforced,
– increased bank capital basis,
– favorable assessments of credit risks,
– and increased lender supply of credit.

That process is inherent
to why credit is provided in such a strongly pro-cyclical fashion,
over provided in the upswing,
and then under provided in the down swing,
as all those elements go into reverse.

Now the implication of all that,
debt is different,
banks are different,
lending against secure assets is different,
is that the size of the banking sector,
the amount of real economy leverage,
and the amount of money being put against real assets and asset price cycles,
these are fundamentally important economic variables
but variables which we largely ignored in the pre-crisis period.

And we sat for many years
watching or rather not watching
what we should have been watching,
dramatic changes in the size of these variables across our economy
without realizing
what a large effect they must be having on the degree of financial instability.

So that for instance (slide 7) if you look at –
this is headed ‚The growth of the financial sector‘
it ought to be the growth of the real economy and financial sector leverage –
if you look at the UK on the top and the US at the bottom
you will see over the last twenty years in the UK
significant increases in corporate leverage,
in household leverage but also included interestingly
in financial sector leverage,
which is the scale of the financial sector lending money to itself.

On the longer time series on the US,
look at that extraordinary impacts of the deleveraging
of the nineteen twenty nine,
and then the huge leveraging up of the economy not just over thirty years,
but over a sixty year period.

We now have compared with
the nineteen fifties or sixties or forties
a massively more leveraged economy
with massively large financial and in particular banking sectors.

Because what we have seen (slide 8)
is that process of simultaneous bank credit and money creation.

You can see here for the last fifty years in the UK
household credit as a percentage of GDP
has gone from fifteen to eighty percenct of GDP –
that’s a transformation in the scale of credit,
and you can see on the red line here
the somewhat matching increase in deposits.

Because broadly speaking in a total closed economy
the credit is balanced by the deposits,
it isn’t in this picture because the ability of the UK
to run current account deficits and borrow wholesale money from overseas.

What we also saw again (slide 9) –
and again these are the figures of the UK economy –
is major changes in where credit was going.
The orange area on the top there
is the increase in commercial real estate lending.

No further increase you notice
in the UK or in the US
in non-commercial real estate PNFC lending,
so lending to non-commercial real estate companies
not going up as percentage of GDP,
but dramatic increases
in real estate.

so we have sat
through varying significant increases in the scale of the banking system
in the amount of leverage in the real economy,
the balance between debt contracts and equity contracts,
and with an increase in percentage of that
supporting a real asset
which is capable of entering an asset and credit cycle such as Minsky described.

And finally – I want to show the charts on this –
in addition to that occuring within the banking sector,
we saw the development before the crisis of the shadow banking sector
which is essentially a mechanism of .. (inaudible)
outside of formal bank regulation
the precise economic equivalent
of bank credit and quasi money creation.

So we had I am suggesting
four pre-crisis delusions (slide 11)
and those delusions led us to be largely indifferent and blind
to very major changes in the leverage in our economy
and the financial risks within our economy.
And in particular they made us blind –
on the fourth line there –
to the growth of credit  as a percentage of GDP.

We developed a thesis
in some cases that we needed credit growth to grow faster than GDP
to maintain adequated demand,
certainly than if it kept on growing faster than GDP
there was nothing wrong with that
so there was no limit,
we didn’t have to pay attention to the stock figures
of debt-to-GDP.

I think that is a major mistake,
and I think a lot of good economic research is now going to challenge that.

If you look at the work of Alan Taylor and Moritz Schularick
who are recipients actually of INT grants,
they have been looking at the increase of credit
which is therefore an increase in financial intensity –
financial deepening you might call it –
and concluded that financial deepening at least in the developed economies
over the last thirty fourty years
has at very least not provided any beneficial impact on growth.

But more seriously I think we are beginning to see the emergence
of hypothesis for instance suggested by this work (slide 12)
which comes out of the BIS –
a study by Steve Chechetti and Enisse Kharroubi –
which are suggesting that if you look at the relationship between credit and GDP,
then maybe an inverse U-function,
that up to a certain point
financial deepening,
the creation of the banking system,
the provision of credit,
is positive for growth.

But there you can reach levels of credit-to-GDP
which are negative.

Now what is interesting is
that wouldn’t at all have surprised
those mid twentieth century economists (slide 13),
because they believed –
as it says here Henry Simons in his famous article ‚Rules versus Authority‘ –
that in the very nature of the system
banks will flood the economy
with money substitutes during booms and precipitate futile effects
at general liquidation afterwards.

They believed that private initiative
has been allowed too much freedom
in determining the character of our financial structure,
and in directing changes in the quantity of money and money substitutes.

Now, in that phrase Simons in focusing
on the money side of the bank balance sheet,
but always remember the money side of the bank balance sheet
is just the flip side of the credit side of the bank balance sheet.

So, from both points of view
the hypothesis is
that you can create too much credit and too much private money.

Why did Simons and Fisher in particular writing in the thirtees believe that?
But of course they believed it because they were the inheritors of the crash of twenty nine,
and they were trying to understand what it had gone wrong
in that huge creation of credit
as a percentage of GDP
in the nineteen twenties.

And they ended up as a result
ending up with a very radical position.
They believed that it was so clear
that credit could be created
to excess and money created to excess
that they ended up believing that we shouldn’t have
fractional reserve banks at all.

They wanted hundred percent reserve banking,
so every deposit would be backed by a central bank reserve,
the monetary base would be the money supply,
the only money would be in …  (inaudible) terms outside money,
there would be no inside money created privately by the financial system.

Now, I think they were too radical.
I think there is an argument for fractional reserve banks up to a point (slide 14).
I think there are reasonable arguments put forward for instance by Walter Bagehot in ‚Lombard Street‘
that the existence of fractional reserve banks
performing a maturity transformation function
may facilitate the mobilization of savings and investment
which might otherwise not occur.

I think it is also the case
that fractional reserve banks facilitate
welfare enhancing smoothing of consumption across the cycle,
and I think that that can be a welfare optimal function
even if it has no positive effects on growth.

I therefore think
that actually abolishing fractional reserve banks –
as has been proposed recently by a number of people,
Michael Kumhof for instance, Larry Kotlikoff,
in the last few years –
I think it is too radical.

But I do think that when you think about the arguments
I mean when you think about the fundamental nature
of the risks that debt creates,
although I wouldn’t go as far as fractional reserve banks –
I think these arguments provided good argument for dramatically increasing
the fraction of liquid reserves and the fraction of capital resources.

Because once you’ve thought about those arguments
about what private money and credit is
and what debt contracts do,
I think you realize that the regulation of the amount
of private money creation and of private credit creation
is a crucial function,
and that through our capital and liquidity regulation
we are essentially controlling the amount
of that credit and money creation.

And that is why from a macro point of view –
not just from a micro corporate finance point of view –
but from a macro point of view
I am certainly attracted to the idea
that if one were a benevolent dictator of a greenfield economy,
which is of course what everybody in this room dreams of being,
and unconstrained by transition problems,
one would set capital ratios of banks not of the sort of
seven percent risk weighted ratios to which we manage to creep them up
in the basel three reforms,
but more twenty-five or thirty percent or something like that.

I think we are the inheritors.
I have felt for the last four and a half years as a financial regulator
as the inheritor of a fifty to one hundred year mistake
in which we have allowed
the banking system to run with far too low fractions of capital and liquid assets.

And i further believe
that we have got to identify
the total level of debt within our economy,
that overall balance between debt and equity contracts
as a crucial determinant of instability,
and therefore if necessary focus on it –
not only through the mechanisms of banking regulation –
but also through the direct regulation
of the amount of loans out there in the economy,
for instance through loan-to-value ratio or loan-to-income ratio limits.
Now of course or other constraints on the total amount of credit extended
against real assets.

Now of course that doesn’t always make you popular
Norman Chan was just telling me over drinks
that his latest operations to slow down the Hongkong property market
had made him a bit of a hate figure
among the thirty thousand real estate agents here in Hongkong.

But I think we do have increasingly have to treat
the total amount of debt as a crucial variable,
and that therefore suggests (slide 15)
the first great insights of those early laissze faire writers.

Finance is different,
debt is different,
banking is even more different,
and the arguments from laissez-faire which are strong in some other sectors of the economy
are simply not applicable.

But the second thing which those mid twentieth century laissez-faire economists believed
was that monetary and financial stability are very closely interlinked concepts,
and that I think was the other thing that we missed in the pre-crisis period.

The implication of what i have said before –
one implication is that we mustn’t let leverage get to excess levels.
The best thing is not to allow leverage to get to an excess levels in the first place.

But, and that’s because it tends to produce a crisis
and because when you go through the crisis
you then enter an immenseley difficult macroeconomic phase
of private sector deleveraging
and potential deflation.

But once you are in that position
you got to deal with that position
and you got to have macroeconomic policies to deal with that position.

Once you go through a crisis (slide 16)
which follows many years of lending growth above GDP
when by definition
debt-to-GDP is a stock ratio is gonna go up
and you can see that over many years
where lending to UK businesses is well ahead of nominal rates.

When you have a financial crisis
and you enter this phase
you then end up
with very low credit growth.

Now that is partly
because your financial system is impaired
and credit supply is impaired,
but it is also because the credit demand simply isn’t there.

And i think
one person who has described
better than anybody else why that occured
is Richard Koo who is seated over there
within his concept of understanding what has happened in Japan
as a balance sheet recession.

When you end up with too much credit,
too high levels of leverage,
and you go through a crisis,
you enter a period in which either corporates or households –
it depends on which sector of the economy is over leveraged –
are determined to get their balance sheets back into balance,
and who therefore become pretty much totally inelastic
to anything which you can do
with the intererst rate.

So that if you look at Japan (slide 17)
you see in the red line
the reduction in the policy rate in the early to mid nineteen ninetees
effectively to zero,
but you see credit growth essentially negative or zero as well.

Because what is going on in that environment again in the red line here (slide 18)
is that the private non-financial corporations in Japan
are running a continual financial surplus to get their balance sheets back in balance,
and they are imposing a deflationary deleveraging effect on the economy.

In that environment as Richard (Koo) I think has persuasively argued
the government has to run a large fiscal deficit,
which you can see in the blue line there,
because without that you have a deficiency of nominal demand.

But the problem with them running that deficit
is the stock effect (slide 19).
The stock effect in the blue line there
is general government debt-to-GDP in Japan
going up from sixty percent in nineteen ninety
to over two hundred percent today.

Because what you enter is an environment
where the private sector attempt to delever
works in the private sector,
but it simply shifts leverage
to the public sector of the economy.

So that for every percentage point you see on the red line there the corporate sector,
there is two or three percentage points increase in the fiscal deficit, in the fiscal debt-to-GDP.
That’s the pattern we have seen in Japan for the last twenty years,
and it is the post crisis pattern in the UK, the US, and Spain.

In each of those I hope you can see (slide 20) what you have is the private sector attempting to and beginning to achieve a small amount of deleveraging,
But you have a shift of that leverage over to the public sector of the economy.

This creates a major problem,
a major danger of deflation,
as indeed in the nineteen thirtees.

And you therefore have a major issue for macro policy.

In this environment, how do you maintain adequate nominal demand,
and therefore a reasonable combination of real output growth and price stability as defined in the way that I think it ought to be defined,
as low but positive inflation rates.

On that issue, should we here consider also the radicalism
of Simons, Fisher, and Friedman in forty-eight.

Because what they said was ‚Fund fiscal deficits with money finance‘.

Well to think clearly about that issue
I think we need a framework of how the levers of macro policy
relate to the effects, and I like to suggest this framework (slide 21),
which I suggest is important to think straight on this issue.

At the middle of the framework in the red box is aggregate nominal demand
which is nominal GDP.

That is really the fulcrum of macroeconomics what determines
and what are the implications
of the rates of growth
of nominal GDP.

On the right hand side you have the simple mathematics
that an increase in nominal GDP can either be
an increase in prices or an increase in real output,
and therefore also that is true in total and it’s also true at the marginal level.

When you increase nominal GDP you might increase the price level
or you might increase real output.
So those are the effects.

On the lever side, there are a set of policies which might influence nominal GDP. Those include fiscal policy, deficits and surpluses, monetary policy, interest rates, QE, forward guidance, central bank private credit support, such as US credit easing or the UK’s finance funding for lending scheme, and also macroprudential policy, the level which the regulators set in terms of the capital or the liquidity requirements of banks.

Now, those are the classic levers, and what I want to discuss among other things is one extra lever which I am going to call O.P.M.F (slide 22),
which stands for Overt Permanent Money Finance.

Overt Permanent Money Finance, sometimes later qualified Overt Money Finance (OMF) – but it has to be permanent to be effective – is essentially a combination of the fiscal and monetary levers.
It’s running a fiscal deficit which you finance with central bank money.

So that’s my framework – effects and levers.
And I would like to make two points about that framework.

The first I want to assert something which I call the independence hypothesis which I think is important
and that is that I want to assert that the division of any increase in aggregate nominal demand between prices and real output
is not determined by the lever that you pulled,
but by a set of real economic characteristics
such as the level of spare capacity in the economy, in capital or physical capital,
or the flexibility of price setting processes in labour or product markets.

Basically if there is spare capacity,
and if there are flexible price setting processes,
a large amount of that aggregate nominal demand will go into real output.

But if you are at full capacity utilization,
or if you have inflexible price setting processes,
a large amount might go into prices.

But broadly speaking (slide 24),
the division of the aggregate nominal demand increase
between prices and real output
is independent of the lever,
the tools that you pulled to affect aggregate nominal demand.

Now the reason that is important is that a lot of debates about what we do in the present deflationary period are bedeviled by random non-independence assumptions which are not well specified.

You get people who simultaneously say ‚You can’t run a fiscal deficit and print money because it would be inflationary‘
but they say ‚We go to reduce the capital requirements on banks
in order to extend credit to the economy
because that will get the economy going.

Now what they are assuming there
is that they’ve got one mechanism in increasing aggregate nominal demand which is necessarily going to have a price effect,
and than another is necessarily gonna have a real output effect.

But my assertion is it’s not believe that determines that,
it’s those real factors on the right hand side.

That’s my first assertion about this framework.

My second is that the one problem in economics
to which there is always a solution
is inadequate aggregate nominal demand.

I don’t know of any other problems in economics to which there are always solutions,
but what I mean by that is if we face absolute deflation
which is both falling output
and falling prices –
so we definitively know
it would be good to have more aggregate nominal demand –
there is always a solution
and that if we fail to take that solution
we should really be condemned for having failed to be imaginetively enough.

But not at all that imaginatively because it simply requires doing what Milton Friedman and John Maynard Keynes both said we should do.
Milton Friedman said ’spread helicopter money around‘,
John Maynard Keynes said ‚put banknotes in bottles in disused coalmines –
a bit odd that relatioship because Keynes was not normally the puritan
who demanded that you work for your efforts – he was a believer in the good life – but essentially the same proposition.

At the limit we can always increase aggregate nominal demand.
Let me make one final point on this framework:
I suggested an indepence hypothesis,
but I also recognize that you can challenge that independence hypothesis.
You could suggest that there are links (slide 25) which directly link
something on the left to something on the right.

For instance if it is believed wrongly or rightly by the market
that either fiscal policy or monetary policy or permanent monetary finance
will tend to have an inflationary effect,
we have to be somewhat alive to the danger that
that in itself might become self-fulfilling.

So it is possible to define an expectation channel
where that particular form of stimulus does have more of a price
and less of an output effect.

It might also be possible to convince ourselves that we are clever enough to define some left hand side levers which would simultaneously increase aggregate nominal demand and the capacity of the economy –
for instance by infrastructural capacity and investment –
in which case you might say you can do something which would skew the results to real output.

But the crucial thing I do argue is that whatever non-independence hypothesis you are making you must specify what it is,
and you mustn’t simply leap to your favorite policy response
by assuming that it will tend to have more of a price or more of a real output effect,
without specifying why you are breaking away from indpendence.

So that’s my framework.
Let me as quickly as possible now talk about the different ways that we could stimulate aggregate nominal demand.

We could do it (slide 26) through the three boxes shaded darker on the right hand side,
through a combination of things in the monetary policy,
central bank credit support,
and macroprudential space
and broadly speaking this is the policy being pursued in the UK and the US at the moment.

We are doing things like (slide 27)
standard quantitative easing buying government bonds,
wider quantitative easing buying private bonds, equity, property, FX,
as did Japan at the moment,
liquidity support in the European environment through LTRO,
direct credit subsidy in the UK through ‚Funding for Lending‘,
macroprudential policy,
some degree of forbearance in terms of the pace of which we would otherwise increase capital and liquidity standards to acceptable levels.

That is certainly the UK policy mix at the moment,
fiscal austerity supposedly offset by this combination of monetary and macroprudential levers.

And let me make it plain that several of these levers I have directly supported
in my own role within the UK policy environment,
and if I had in addition been on the monetary policy committee,
I would have also argued for the level of QE which we have in the UK.

So I am not against these levers,
but I do believe that we have to be aware that these levers may be subject
both to diminishing marginal effectiveness and to adverse side effects.

Why might they be subject to potential limitations (slide 28)?
Well – it’s crucially important to realize that these levers work through indirect channels.
They essentially stimulate credit growth or seek to.

They seek to stimulate asset price increases and a search for yield.
And it is possible those are limited.
First of all if borrowser are – as Richard Koo has suggested – totally focused on strengthening balance sheets,
then the extension of QE to the long run of the yield curve may bring down long term rates as well as the policy rates,
but you may still not get a credit amount response.

Long as well as short term interest rates may approach the ZLB (zero lower bound).

As for adverse side effects, this policy commits us to low interest rates over many years, or in Japan – decades.

It is essentially trying to work through a stimulus to private leverage
and that’s a slightly odd thing to do.
This is the hangover cure which is another drink,
or the hair of the dog that bit you.

Relaxed prudential standards are bound to produce future financial stability risks,
exchange rates spillover effects might be significant,
and then there are also distributional effects.

These policies tend to be very good for asset owners at the top end of the income distribution, and less good for other people.

So I am concerned that this policy mix relying entirely on monetary and macroprudential levers is subject both to diminishing marginal returns
and to adverse side effects.

So the alternative – the classic alternative – is funded fiscal stimulus (slide 29).
You run a budget deficit and if it isn’t sufficient you run a larger budget deficit.

And the great benefit of that of course is you’re either cutting someones taxes, you’re increasing expenditure,
you are putting money directly into someones pocket.

As Milton Friedman said in his 1948 article „you’re doing something which directly goes into the income stream“.
You are not working through this complicated portfolio asset balance effects. You are directly impacting the income stream.

But beyond that against those mechaisms,
funded fiscal stimulus
has always been twofold.

First of all that you wouldn’t use a crowding out effect whereby you simply increase interest rates,
because you are borrowing more money to fund this fiscal deficits.

Or you produce a Ricardian equivalence effects,
because the person who is getting the benefit of those tax cut knows that they’ll have to pay for it in ten or fifteen years time
by servicing the debt which has been called up.

Now in relation to the first of those,
the crowding out effect (slide 30),
I think Brad DeLong and Larry Summers in a recent important article
have put forward a very important counterpoint of view,
and they have argued that when interest rates are contrained by the zero lower bound,
discreational fiscal policy can be highly efficacious as a stabilization tool,
indeed under plausible assumptions it could actually improve long-term debt sustainability.

And the core of their argument
is that the fiscal multiplier –
which is in low in normal times,
because the bigger the debt you run
the higher the central bank would put the policy interest rate,
but that’s not true in current times that we face,
because the central bank is committed
to keeping interest rates at the ZLB – the zero lower bound –
for the foreseeable future.

So they basically say,
if you’ve already got a Ben Bernanke who said I’m keeping interest rates low to twenty fifteen,
the crowding out effect of higher fiscal deficits
simply is not there.

And I think that is fairly compelling,
but it still leaves the Ricardian equivalence effect,
it still leaves the problem of
‚What you’re gonna do if with large fiscal deficits
you have a relentless increase in debt-to-GDP (slide 31),
such as we have had in Japan?‘

The headline level, the top level, the red line,
going over two hundred percent of GDP,
over a hundred fifty percent of GDP even when you take out the holdings of the Bank of Japan,
and a hundred percent even when you take out the holdings of the commercial banks.

What do you do about the fact
that funded fiscal stimulus can produce the relentless rise in government debt?

And I will do something I never would normally do in a speech,
I am gonna to make a prediction,
a market prediction:
Japanese government debt is not going to be repaid in the normal sense of the word repaid.

If we mean by repaid that Japan having run large fiscal deficits,
is at some stage going to run surpluses sufficient to pay down this debt,
forget it, it is not going to occur.

This debt is either going to be monetized or restructured at some stage,
is going to be offset by a high level of inflation which essentially means that people will abort this debt at a negative real interest rate.
It will not be repaid in the normal sense of word.

So what do you to if you’re in that situation?
What Ben Bernanke said (slide 32) in two thousand and three was
that you do a money financed tax cut.
He argued quite overtly then for a tax cut for households and businesses that is explicitely coupled with incremental purchases of BoJ (Bank of Japan) purchases of government debt,
so that the tax cut is effectively financed by money creation

He said it was important to be clear that much or all of the increase in the money stock arising from that is viewed as permanent,
he said the good news is that consumers and businesses will spend that tax cut,
since it is a tax cut which creates no current or future debt servicing burden –
don’t worry about Ricardian equivalence even if they were that sort of consumers who wonder each day of the week about Ricardian equivalence –
and he said the debt-to-GDP ratio will fall because there is no increase in nominal debt,
but nominal GDP would rise owing to increased nominal spending,
and he said ‚I am proposing this for a tax cut, but you could use exactly the same argument to support increased spending programs to facilitate industrial restructure.‘

That’s what Ben Bernanke argued in two thousand and three.

He argued that you just do it in special circumstances.
Interestingly (slide 33), Henry Simons and Milton Friedman argued you should do it as a perfectly normal procedure in all times.

Milton Friedman on the right:
„Under the proposal, government expenditures would be financed entirely by tax revenues or the creation of money, that is, the issue of non-interest bearing securities …“
Money is simply a non-interest bearing government security.

The chief function of the monetary authority would be the creation of money to meet government deficits, and the retirement of money when the government has a surplus.
And Henry Simons argued exactly the same.

Now, there is an important wrinkle here,
it was much easier for them to argue that,
having already argued for a hundred percent reserve banking,
because they’ve created an environment in which the monetary base is the monetary supply.

But even when we are not in that world even when we have fractional reserve banks,
I think there is still an argument under some circumstances
for overt money finance.

I think it’s advantage over monetary credit support and macro stumulus (slide 34) is it works directly,
rather than by a set of indirect levers,
and it’s advantage versus funded fiscal stimulus is that it clearly is not subject either to crowding out or to Ricardian equivalence effects.

But isn’t it inflationary?
Isn’t money finance of public deficits inflationary (slide 35)?

Well if you go back to my independence hypothesis
though, if you’re in an environment where you want to stimulate aggregate nominal demand,
and if you don’t want to stimulate aggregate nominal demand,
you shouldn’t be talking about all those other mechnisms
by which we might stimulate aggregate nominal demand.

Your prior first step is to work out:
do you want to stimulate aggregate nominal demand,
and if you do, we should then look to all the levers available.

So why are we so terrified of money finance of fiscal deficits?
Well there is a very, very good reason.
Technically, overt money finance of fiscal deficits
is no more inflationary then any other way that we stimulate nominal demand,
and like all other ways
it’s impact on inflation will depend upon the amount that you do.

You do a billion dollars you’ll have a very small amount,
if you do ten trillion,
you’ll produce hyperinflation.
It’s simply a spectrum like most things in economics.

But the argument against it,
is that it isn’t a spectrum,
but as you’ve let the cat out of the bag,
because you’ve broken a taboo.

The arguments against overt money finance –
and again, Friedman said it in forty eight,
is that this proposal (slide 36) has of course dangers,
explicit control of the quantity of money by the governement
and the explicit creation of money to support actual government expenditures
may establish a climate favourable to irresponsibel government action and to inflation.

The difficulty here is not a technical problem,
it’s a political economy problem.
Once having admitted
and revealed to the population and politicians
that this is technical possible,
how to we make show that we do it
in the small number of years out of each century
where I would argue it’s appropriate
and in the quantity that is appropriate
rather than all the time,
and in an appropriate amount.

OMF carries political economy risks,
that is why
overt money finance has in central banking and in economics
a close to taboo status.

And taboos –
I think we very probably quite close to this in that session
in mimetic synchronous systems this afternoon,
taboos have valuable roles within human society.

But sometimes,
if you’ve got a powerful potential mechanism,
you should have the confidence to take it out of the taboo box,
and I believe it is proper applicable
for us to use it,
and to use it in responsible amounts.

Now I think it is possible to locate it
within the same discipline of central bank independence,
in pursuit either of inflation targets
or in nominal GDP targets,
with which we have constrained the use
of all policy levers.

But it is because it’s such a taboo subject,
that even when highly respected economists propose it,
they don’t actually
call it that.

So I think of overt money finance (slide 37)
as a sort of policy that dare not speak it‘ name.
If you look at the highly erudite speech which Michael Woodford –
one of the great can0ns of New Keynesian monetary eoncomics –
gave at Jackson Hole last August:
he talked about the fact that optimal policy now requires
„Policy action that would stimulate spending immediately, without relying too much on expectational or indirect channels.“

He said the most obvious source of the boost to aggregate demand
which would not depend on expectational channels
is an increased fiscal stimulus,
and then he said,
„You need to be clear that having funded that with money,“
which is what he described:
„the increase in the base money is intended to be permanent.“

Now put that together,
and that’s pretty much what Ben Bernanke said,
that is overt money finance.
But he doesn’t quite call it that,
because we have a taboo against it.

I think we need to be able to break a taboo,
I think that taboo just did got broken in Japan earlier today,
by the interventions of Mr. Kuroda.

So I want to end with two thoughts (slide 38)
What I’m really saying by four major economic currency zones:
One, for Japan Bernanke was right.
Japan has been absolutely right as Richard Koo has suggested to run large fiscal deficits,
but those fiscal deficits will not be serviced
in the normal sense of the deficit turning into a surplus.

They need to be montized.
If they had started to monetization ten years ago,
Japan would have been in a better state today.
It has left it so late,
that there are some dangers that ther’s so much debt out there,
that the process of monetizing it could get out of control,
but Bernanke was certaily right in two thousand three.

In the US,
you could argue that the policy mix is damn close to overt money finance.
Ben Bernanke keeps on signalling
to the fiscal authority that they should be happy
to run large fiscal deficits,
and making it plain that he will monetize them if necessary,
in which case why scare the horses by telling them what’s going on,
if we’re roughly doing the right stuff in any case.

In the Eurozone,
optimal policy is blocked by incomplete currency union.
It’s damn difficult to agree to monetize financial debt,
when monetizing it in the Eurozone,
would be like the Fed buying State of California debt or State of Illinois debt,
not federal debt.

But that’s what Spanish debt and Italian debt are,
they are the functional equivalent of State of Calfornia and State of Illinois,
so a whole load of distributional and discipline issues get in the way of optimal policy.

In the UK –
actually that’s the area where I am least convinced
that we are absolutely certain we need more nominal demand –
because the odd think for the UK for the last four years,
is that eighty percent of all our increase in nominal GDP has gone into a price effect rather than a real output effect.
So I am little bit weary in the UK
of simply believing we need more nominal demand.

But to finish,
although I am setting out those four possibilities of policy there,
actually my main purpose tonight is not to suggest these specific policies,
but to draw this lessons from those earlier writers.

financial stability and monetary policy issues are closely linked
in a way which we dangerously ignored before the crisis.
we need to understand,
that debt contracts are different,
banks are different,
credit and asset price cycles are different,
and therefore the level of leverage within the economy,
the pace of growth of leverage,
these are crucial macroeconomic variables.
The economy, the monetary system is not neutral to the financial system,
and we have got to have specific policies to focus on it,
and to contain the level of leverage.
And thirdly,
if you don’t do that in advance
you end up with excess levels of leverage which produce financial crisis,
and that financial crisis tips you into an extremely difficult deflationary and deleveraging period,
in which you’ve got to be innovative and creative and open-minded
about the policy levers available to pull you out of that situation.

So that is my hypothesis,
and I now look forward to hearing the various ways in which Bill white and Hiroshi Watanabe are going to disagree with me.

Thank you very much indeed.


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Eingeordnet unter Aggregierte Nachfrage, Geldpolitik, Inflation, Management der aggregierten Nachfrage

Economics, Politics and Democracy in the Age of Credit-Rating Capitalism

Ein Gastbeitrag von Srinivas Raghavendra

Der Originalbeitrag erschien im Economic and Political Weekly der Graduate School of Social and Political Science der University of Edinburgh

Unlike in earlier major economic crises, the current turmoil in the global economy has seen the consolidation of orthodoxy as the dominant paradigm. This essay traces the political economy of change in the current situation and discusses how credit-rating agencies have assumed a pivotal role in delinking politics from the conduct of economic policy, thereby undermining the legitimate role of the state in the economic domain.

Srinivas Raghavendra ( is with the J E Cairnes School of Business & Economics at the National University of Ireland, Galway.

The author would like to thank Amit Bhaduri, Torsten Niechoj, Frank Conaty and Thomas Boylan for their valuable comments without implicating them in any of the remaining errors in the essay.

Every crisis in society is also an opportunity for change. This is no less true for economic crises. Major economic crises in the past have overthrown the incumbent orthodoxy in economic thinking and replaced them with an alternative. The Great Depression in the 1930s stands out as the most striking example both as the severest in living memory and for the sharpest change in economic theorising and style of management that it induced. Neoclassical thinking based on the belief that the market mechanism of demand and supply has the inherent capacity to recover automatically from a crisis was replaced by a new vision.

The chief architect of the new paradigm, John Maynard Keynes urged his fellow economists to break away from the “habitual modes of thought” for solving one of the worst economic crisis capitalism ever faced. The change in economic thinking had a profound impact on many spheres ranging from teaching economics1 to economic policymaking; indeed, it is aptly called the Keynesian Revolution. The revolution brought about a change in the political nature of the state. While both fiscal and monetary policies were informed by scientific research based on Keynesian economic theory, the politics of feasibility and implementation of those policies was very much at the centre of policy debates at that time.

The post-war political climate with systemic competition between capitalism and Soviet socialism also contributed to the winds of change in economic thinking, which in turn provided an economic rationale for the welfare state. The post-war reconstruction aid from the US was instrumental, not by design, in experimenting with the economic policies of the Keynesian revolution in Europe. Not only did Keynesian policies demonstrate, based on the new theory of how even unproductive war expenditure could result in full employment and turn around ailing economies, it also provided the intellectual basis for the politics of social democracy to bring about cooperation between the contending economic classes of labour and capital. Furthermore, with the advent of the welfare state, there followed one of the most prosperous periods in European history, dubbed the “Golden Age of Capitalism” (Epstein and Schor 1990; Bhaduri and Marglin 1990).

The uninterrupted growth in western economies created a kind of positive feedback between the politics of the welfare state and Keynesian style economic management. They reinforced one another over time and became institutionalised, and, in Keynes’ own phrase, had evolved into a habitual mode of thought. The state was seen as the driver of the economy and its political nature was not questioned. More importantly, state action was not seen as detrimental to the interest of capitalists as long as Keynesian style class cooperation created an investment climate conducive to private investment driven by profit.

However, profit as the engine of growth slowed down with an ensuing profit squeeze in the 1970s and the limit to such cooperation began to emerge. The twin oil shocks (1973 and 1979) created inflationary pressures on already stagnating economies and questions were raised about the suitability of Keynesian policies, which by then had become conventional wisdom. As economists led by Milton Friedman, in particular, began to question the established doctrine of Keynesianism, the foundational behavioural assumption of the money wage bargain on which Keynes’ General Theory was built was challenged.

Friedman argued against expansionary fiscal policy on the ground that it could provide more employment only if real wages were lowered to satisfy the profit maximising firms. But this requires money illusion on the part of the workers, which would at best be transitory and ineffective in the long run simply because you cannot fool all the people all the time. With the argument that fiscal policies of the state-influenced inflationary expectations of the economic agents, Friedman went on to prove that those policies would be ineffective in the long run and the economy could end up having a “natural” level of unemployment so long as it is consistent with the individual labourer’s choice between work and leisure.

The argument in effect resurrected the notion of “voluntary unemployment” (i e, unemployment was a matter of individual choice), which is the core of the neoclassical orthodoxy argument that counterposes individual freedom against state intervention. The fiscal policies of the state were seen as distorting the “expectations” of the agents in the economy while it had no real impact on the level of output and employment in the long run. The second phase in the development of Friedman’s theory, often referred to as Monetarism Mark II, or the “New Classical School” led by Robert Lucas, demonstrated the ineffectiveness of monetary policy because workers endowed with rational expectations would not be fooled by money illusion even in the short run. Crucial to the argument is the idea that every agent determines his or her action by adapting and forecasting the future on the basis of the same model so that no space is left for surprise effects of economic policy of the state. Paraphrasing the poet T S Eliot: “[I]ndeed after such awesome rational knowledge (of individual agents), what forgiveness (for the state)”!

Monetarist Counter-Revolution

From the Keynesian revolution to monetarist counter-revolution, macroeconomics underwent a full circle2 comprising both fiscal and monetary policy ineffectiveness. The counter-revolution had a profound impact on the style of economic management. The new classical model claimed that monetary policy is ineffective because economic agents are rational in a sense that they would adjust their supply decisions even when the policy is simply announced by the monetary authority or the state. This allowed them to take the argument further and claim that given its political compulsions, the democratic state may not be in a position to stick to its monetary policy commitments and this would cause inconsistencies in individuals’ expectations about the future conduct of monetary policy. Such inconsistencies would have a negative impact on the sentiment of the investor about the future growth of the economy and thereby affect their supply decisions. Hence, the proponents of the new classical school argued for an “independent” monetary authority, viz, a central bank that would conduct a rule-based monetary policy devoid of political interference from the state. The idea was set in motion of delinking politics of the state from the conduct of the monetary policy by the central bank.

The idea of an independent, objective, non-partisan and apolitical central bank targeting exclusively the inflation rate resonated well within the financial community and was initiated in New Zealand. Many developed and developing countries today claim to have an independent central bank. Thus the monetarist counter-revolution, like the Keynesian Revolution, redefined the role of the state in the economic sphere. In the pursuit of its ideal of a minimalist state as a counter to the Keynesian Revolution, it took away from the state, as a first step, its control over monetary policy. However, fiscal policy still remained within the control of the state.

The counter-revolution provided a perfect economic rationale for the conservative political ideology that advocated a minimalist state. The economics of the counter-revolution and the politics of conservatism centred on the minimalist state aligned perfectly at the turn of the 1980s. This is hailed as a period that ushered in the “second wave of globalisation”. It was marked by the rise of “high finance” – the financialisation phase of globalisation. With the counter-revolution providing an intellectual justification for “freeing” monetary policy from the politics of the state via an independent central bank, the stage was set for the development of an unfettered financial sector around the globe.

Fiscal policy was reined in to create a conducive tax climate and boost private investors’ sentiment vis-à-vis the financial markets.3 Even though the financial market went through a few “shocks” in the late 1980s and the 1990s, e g, the 1987 one-day crash and the dotcom meltdown in 2000, the resilience of the modern financial sector was hailed as robust4 and its contribution to the overall prosperity of the economic expansion was applauded. Indeed, the relatively uninterrupted growth in the second phase prompted Robert Lucas, a leader of the second phase of monetarism or rational expectation-based macroeconomics, to unequivocally declare,

[I]ts [macroeconomics] central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades (Lucas Jr 2003).

New Consensus Macroeconomics

The enthusiastic declaration of depression prevention had to bite the dust with the onset of the “Great Recession” in 2007 in both the US and Europe. The weight of history was pointing unequivocally towards a new revolution that would dismantle the incumbent monetarist orthodoxy. However, it did not repeat itself; on the contrary it rhymed, as Mark Twain would have insisted, better with the pre-Keynesian era of the 1920s. Monetarist orthodoxy has returned although under a different guise called the New Consensus Macroeconomics and it would appear to have consolidated its position during this recession.

The orthodoxy that dislodged the state from its monetary policy commitments by invoking market sentiments got irrevocably locked into the process of circular reasoning in a self-referential way. Monetary policy was conducted by independent central banks, which supported the expansion of the financial sector that was to be overseen by an objective and scientific risk-rating mechanism. Credit rating agencies provided such a service and gradually they became the underwriters of risk for the entire financial system, including central banks, for their financial market operations conducted within the ambit of monetary policy. The apparently objective and scientific process of underwriting risk provided a perfect barometer that gauged market sentiments. In this process, the logic of market sentiments became institutionalised via the risk-rating mechanism of the credit rating agencies. A pliable theory was restored from pre-Keynesian history to put in place a perfect self-referential setting by which an independent central bank was assumed to deliver consistent and credible monetary policies that supported the expansion of the financial sector, which was certified in turn as sound by a presumably objective process of risk-rating by the credit rating agencies. The result was massive financialisation driven by financial innovations justified by this self-referential logic, which circumvented the state during the so-called second wave of globalisation.

As the rating agencies began playing a more central role, the process of financialisation in the 1990s was characterised by the expanding capacity of the credit rating agencies to underwrite complex debt instruments. The developing system of an extremely complex network of claims and counterclaims was justified in terms of the same self-referential logic and was believed to have efficiently allocated the available liquidity to optimally distribute risk across the financial sector. In hindsight, it is clear nobody understood this enormously complex and opaque system but it went largely uncontested because almost all the players were willing or unwilling victims of that self-referential system of rationalisation.

Rise of Rating Agencies

During the expansion, it was understood that financial innovation, which improved the efficiency of the resource allocation function, combined with the objective of a scientific underwriting process would improve the resilience of the overall financial system by sharing and distributing risk. A “competitive” market for the underwriting process5 developed and the efficiency of that market was considered vital for the resilience of the financial system and the overall economy. As the process of financialisation deepened, the business and influence of rating agencies grew in proportion and began to shape market sentiments and their activities became integral to the functioning of the modern market economy.

The catastrophic collapse of the financial markets in 2008 and the ensuing economic crisis in the western economies did not affect the influence of the rating agencies. On the contrary, the agencies that endorsed as optimal the rising level of systemic risk before the crisis have strengthened their position, which now seems politically unassailable despite the deepening of the crisis. In fact, using the current crisis the agencies have moved beyond rating the risk of private financial institutions to decisively underwrite the capacity of the nation state in conducting its economic affairs.

Such a position of power of the rating agencies and their influence during a crisis, comparable in proportion to that of the Great Depression, should be seen in the broader context of the dominance of the monetarist paradigm that still governs policymaking in many central banks and in the International Monetary Fund (IMF). This dominant monetarist paradigm, which is endorsed by the respectability of the award of several Nobel prizes in economic sciences to their theorists, reinforces its unwavering commitment to the primacy of the role of market sentiments for the growth of the capitalist system and in turn provides the intellectual source from which the rating agencies draw their economic justification for the underwriting process. Moreover, in the current crisis the rating agencies began to perform the role of “enforcer of discipline”, i e, disciplining the state from its extravagances via the rating of sovereign debt using an “objective and scientific underwriting process”, reinforcing the dominance of the monetarist orthodoxy and, in fact, providing it a great opportunity to implement its vision of a minimalist state.

The self-proclaimed disciplining role played by the rating agencies is not legally prosecutable for the reason that they merely give “opinions” on the riskiness of assets, including sovereign debt. For instance, in the US the rating agencies claim protection under the First Amendment as a matter of free speech and freedom of the press.6 This advantage without accountability, ironically protected by the US constitution, makes the self-referential system dangerously powerful as the rating agencies assume a pivotal role in the economy and polity in capitalist democracies. As a result, they shape market sentiments and through their opinions control almost every domain of economic policymaking, laying the foundation for “Credit Rating Capitalism”. Their power does not merely stop at inhibiting the state and its agencies from borrowing from the market, it goes beyond the bond markets into the realm where it is beginning to reshape the politics of representative democracy in the conduct of the fiscal affairs of the state.

The economic rationale for delinking politics from fiscal affairs is to eliminate uncertainties concerning the conduct of economic policy in general and fiscal policy in particular. The discretionary nature of fiscal policy is questioned because it adversely affects investors’ expectations and market sentiments, and it is desirable to minimise uncertainties in the conduct of fiscal policy. This argument echoes the 1980s debate when monetary policy was delinked from the politics of the state on the ground that discretionary monetary policies induced inconsistencies in individual investors’ minds regarding their expectations about future policy change, which, in turn, adversely affected market sentiments. Similarly, it is now argued that discretionary fiscal policy should be replaced by “fiscal policy rules”, which enhance transparency and consistency to sustain the stability of the markets.

Such a move to impose fiscal policy rules without discretion and separating it from “political pressures” is clearly articulated in the economic policy framework of the European Central Bank (ECB). The framework is succinctly described by the ECB as follows:

The (Maastricht) Treaty foresees three different modes of policy-making in the various fields of EMU: (i) full transfer of competence to the Community level for monetary policy; (ii) rules-based coordination of fiscal policy; (iii) ‘soft’ coordination for other economic policies (ECB 2008: 22).

Having reached the limit of manoeuvrability in terms of monetary policies, the ECB has broadened its remit by using its “technical” capacity to advise and influence both the formulation and conduct of fiscal and other structural policies in the member countries of the eurozone. Drawing from the intellectual wisdom of the New Consensus Macroeconomics, the ECB has been pushing the so-called expansionary fiscal austerity or fiscal consolidation view7 in the conduct of fiscal policy to boost market sentiments in favour of the troubled countries, viz, Ireland, Italy, Greece, Portugal and Spain. Moreover, the ECB has also been using the soft coordination approach using both “peer pressure and support” and, more importantly, the logic of market sentiments to influence the structural policies in reforming the labour markets in the troubled countries.

Thus, the ECB has engineered its way to control fiscal policy indirectly through various means, including the way it pressed the Government of Ireland to seek a bailout using the argument of contagion risk to other European countries.8 Again, using the bailout terms and conditions, the ECB has insisted on the establishment of fiscal councils in bailout countries like Ireland, Portugal and Greece to advise the government in fiscal matters. These independent technical experts will assess and advise the government on various aspects of fiscal policy. For example, the role of the Irish Fiscal Advisory Council is:

[T]o provide an assessment of, and comment publicly on, whether the Government is meeting its own stated budgetary targets and objectives. It will also be charged with assessing the appropriateness and soundness of the government’s fiscal stance and macroeconomic projections as well as an assessment of the extent of compliance with the government’s fiscal rules. The latter are also to be brought forward in the proposed Fiscal Responsibility Bill.9

The argument of a rule-based fiscal policy devoid of any political interference echoes both in ideology and in substance the argument in the late 1980s for rule-based monetary policy and for an independent central bank that could conduct monetary policies without any political interference.

Final Act of Drama

However, in contrast to the rule versus discretion debate of the 1980s over monetary policy, the monetarist counter-revolution is no longer replacing the incumbent Keynesian orthodoxy. Instead, in the current crisis the incumbent monetarist orthodoxy is getting further entrenched in the same economic rationale that pushed the western economies to the brink of collapse. The final act of this drama has just begun to unfold. The central banks themselves, once the bastion of the monetarist counter-revolution against Keynesianism, are now being coerced and dictated to by the rating agencies based on their power to shape market sentiments. Has Aladdin’s genie gone out of control?

The emerging politics of the present crisis is driven by the coercive power of the rating agencies over the institutions of the state through the delinking of the politics of deliberative democracy from the conduct of economic policy in general and fiscal policy in particular. Ironically, the rationale and justification for delinking politics from economic policy is derived from overlooking diverse political representations that characterise western democracies in Europe.

In Europe, three-quarters of the governments formed after the second world war were comprised of multiple political parties. With increased political diversity and wider representation in government, it is recognised that policymaking has become even more challenging than in single-party governments. The challenges of consensus building by democratic means in policymaking arise not only from the inevitable tension between the parties on compromising their ideals, but also reflect the reality that coalition partners must compete separately at election time. Hence, unlike authoritarian regimes or single-party democracies, compromise is at the heart of politics, particularly when it comes to diverse multi-party coalition governments (Martin and Vanberg 2012).

Two major problems have emerged in recent academic debates: the “principal-agent problem” and the “common-pool problem”. Research on the principal-agent problem has documented how politicians can extract rents from being in office, but voters might wish to limit these rents by subjecting politicians to stricter rules (see von Hagen 2005 for a detailed analysis). However, the uncertainty and complexity of economic and political developments induced by multiparty coalition governments, it is argued, prohibit the writing of complete contracts. Therefore, the principal-agent relation resembles an “incomplete contract”, leaving politicians with some undesirable discretionary powers (Kassim and Menon 2002).

Research on the so-called common pool problem has documented how problems arise when politicians can spend money from a general tax fund on targeted public policies (Hallerberg et al 2009). The fact that the group that pays for specific targeted policies (the general taxpayer) is larger than the group that benefits from them creates a divergence between the net benefits accruing to the targeted groups and the net benefits to society as a whole. This divergence, it is argued, induces the targeted groups and politicians representing them to demand excess spending which is sub-optimal for society as a whole. Thus, the common pool problem leads to excessive levels of public spending (Bawn and Rosenbluth 2006; Roubini and Sachs 1989). This excessive spending is the source of increased deficits and debt. Moreover, it is documented that ethnic divisions and/or ethno-linguistic and religious fractionalisation of society increase the asymmetry of the tax burden, making the common pool problem even more severe (Alesina et al 1997).

Unsurprisingly, academic research under the influence of monetarist orthodoxy analyses the shortcomings of the diversity and wider political representation in government. Its recommendations articulate a case for reshaping institutions that govern decisions over public finances.10 Three types of fiscal institutions are prescribed: (1) Ex ante rules, such as constitutional limits on deficits, spending or taxes, (2) electoral rules fostering political accountability and competition, and (3) procedural rules for the budget process. Research on these types of fiscal institutions has produced voluminous literature, which in turn has provided an intellectual basis for the argument of conducting rule-based fiscal policy for minimising the distortionary effects of discretionary policymaking by coalition governments in the west and developing countries alike (Haan et al 1999; von Hagen 2005; Fabrizio and Mody 2006).

While academic research under the influence of the monetarist orthodoxy has further intensified the orthodoxy’s intellectual dominance, the credit-rating agencies, drawing their rationale from the dominant intellectual paradigm, have become the “enforcers of discipline” against discretionary excesses by the multiparty democratic state. During the current crisis, the credit rating agencies have further consolidated their role as enforcers of discipline by severely restricting the state from implementing its duty of democratic accountability. The capacity of the state is undermined by the credit-rating agencies, through both overt and covert actions. The credit-rating agencies directly inhibit the state and its agencies from borrowing from the market by downgrading the state using the credit-rating mechanism. Covertly, the rating agencies have moved beyond the bond market and have entered the political realm by rating “democracies” and forcing the state to delink the politics of deliberative democracy from the conduct of its economic affairs. Such a covert coercion is visible in the eurozone, where the peripheral member states’ credit ratings also depend on the reform of their fiscal and budgetary institutions.

It is quite extraordinary that the logic of market sentiments that drove the western economies to the brink of disaster has become the economic rationale for the basis of economic recovery and for reforming the state. Furthermore, insulating policymaking of the state and its institutions from the so-called political pressures seems to be the emerging politics of this crisis and is being aggressively enforced through the veil of market sentiments by the apparently objective risk-rating mechanism of the credit rating agencies. Thus, it could result in delinking and disengaging the politics of deliberative democracy from the conduct of economic policies of the state and is tantamount to undermining the very foundations of democracy in that it seems that the state is more accountable to the invisible sentiments of the market and not to its own people.


1 Although Hick’s (1937) paper is hailed for its pedagogic impact for it helped in bringing Keynes’ General Theory to the classroom, it should be borne in mind that the paper in a subtle way restated Keynes’ theory, particularly in deriving the “Investment Savings” curve, using the theoretical foundations of the neoclassical economics.

2 For example, if one looks at the theory from the point of view of explaining unemployment in the real economy, starting from the pre-Keynesian era of explaining unemployment in terms of a voluntary decision of labourers to the Keynesian phase where unemployment was seen as involuntary due to the inability of markets for products to clear due to insufficiency of demand. In the monetarist counter-revolution phase, the pre-Keynesian notion of choice was resurrected in a different guise. It was indeed old wine in a new bottle, and perhaps not as good as vintage wine!

3 The effective marginal tax rate (economy-wide weighted by sector) on capital income during 1953-59 was 47.3%. It was gradually reduced to 35.3% in the 1980s and further reduced to 28.3% during 2000-03, amounting to an almost 40% reduction during the period 1953-2003 (cf Gravelle 2004).

4 “The use of a growing array of derivatives and the related application of more sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions … Derivatives have permitted the unbundling of financial risks” – Alan Greenspan (May 2003).

5 Three major players are Moody’s, Standard & Poor’s (S&P) and Fitch; however, Moody’s and S&P dominate the rating market. An interesting question arises as to who owns these rating agencies. Moody’s was sold as a separate corporation by Dun and Bradstreet in 1998 and is now quoted on NYSE; S&P is owned by publishers McGraw-Hill. There has been a massive growth in the number of rating firms in OECD countries (including Japan after 1985 and Germany during the late 1990s) and in the developing countries. See T J Sinclair (2010) for further analysis on the competitive nature of the rating market.

6 See Nagy (2009) for a detailed legal analysis of how the credit-rating agencies in the United States successfully defended lawsuits using the First Amendment shield in the case of Residential Mortgage-Backed Securities.

7 “Fiscal discipline is required for the smooth functioning of Monetary Union, as unsound fiscal policies may create expectations or lead to political pressures upon the central bank to accommodate higher inflation in order to alleviate the debt of the government sector or to keep interest rates low” (ECB 2008: 25) (Italics added).

8 While writing this article it has emerged that there was a letter from Jean Claude Trichet, the former chairman of ECB to the late Brian Lenihan, the former minister of finance of Ireland, dated 12 November 2010. The letter itself was not released to the public but it is believed to have threatened the withdrawal of Exceptional Liquidity Assistance (ELA) to Ireland if the then government refused to accept the bailout that included a ban on burning the bondholders (Cf: Irish Times, 1 September 2012. weblink: ireland/2012/0901/1224323462435.html).

9 Ministry of Finance, Ireland,

10 See Besley (2004) for an overview of the “New Political Economy” literature that analyses the issue of how the institutional structures affect policy outcomes.


Alesina, Alberto, Reza Baqir and William Easterley (1997): “Public Goods and Ethnic Divisions”, NBER Working Paper No 6009.

Bawn, Kathleen and Frances Rosenbluth (2006): “Short versus Long Coalitions: Electoral Accountability and the Size of the Public Sector”, American Journal of Political Science, 50(2): 251-65.

Besley, T (2004): “The New Political Economy”, keynes lecture delivered at the British Academy, 13 October.

Bhaduri, A and S Marglin (1990): “Unemployment and the Real Wage: The Economic Basis for Contesting Political Ideologies”, Cambridge Journal of Economics, 14(3): 375-93.

Epstein, G and J Schor (1990): “Macroeconomic Policy in the Rise and Fall of the Golden Age” in S Marglin and J Schor (ed.), The Golden Age of Capitalism (Oxford: Oxford University Press), pp 126-52.

European Central Bank (2008): “Monthly Bulletin: 10th Anniversary of the ECB”, Frankfurt, Germany.

Fabrizio, S and A Mody (2006): “Can Budget Institutions Counteract Political Indiscipline?”, IMF Working Paper, WP/06/123, International Monetary Fund.

Gravelle, J G (2004): “Historical Effective Marginal Tax Rates on Capital Income”, Congressional Research Service Report for Congress, order code: RS21706, The Library of Congress.

Greenspan, A (2003): “Corporate Governance”, Remarks by chairman Alan Greenspan at the 2003 Annual Conference on Bank Structure and Competition, Chicago, Illinois (8 May 2005).

Haan, J, W Moessen and B Volkerink (1999): “Budgetary Procedures – Aspects and Changes: New Evidence for Some European Countries” in James M Poterba et al (ed.), Fiscal Institutions and Fiscal Performance (Chicago: University of Chicago Press).

Hallerberg, Mark, Rolf Strauch and Jürgen von Hagen (2009): Fiscal Governance: Evidence from Europe, Cambridge University Press.

Hicks, J (1937): “Mr Keynes and the ‘Classics’: A Suggested Interpretation”, Econometrica, 5, (April): 147-59.

Kassim, H and A Menon (2002): “The Principal-Agent Approach and the Study of the European Union: A Provisional Assessment”, The European Research Institute Working Paper, University of Birmingham, UK.

Lucas, R (2003): “Macroeconomic Priorities”, American Economic Review, 93(1): 1-14.

Martin, L and G Vanberg (2012): “Multiparty Government, Fiscal Institutions, and Government Spending”, SSRN Working Paper,

Nagy, T (2009): “Credit Rating Agencies and the First Amendment: Applying Constitutional Journalistic Protections to Subprime Mortgage Litigation”, Minnesota Monthly Review, 142(2): 94-140.

Roubini, Nouriel and Jeffrey Sachs (1989): “Political and Economic Determinants of Budget Deficits in the Industrial Democracies”, European Economic Review, 33(5): 903-38.

Sinclair, Timothy J (2010): “Round Up the Usual Suspects: Blame and the Subprime Crisis”, New Political Economy, 15(1): 91-107.

von, Hagen Jürgen (2005): “Political Economy of Fiscal Institutions”, Discussion Paper No 149, Governance and the Efficiency of Economic Systems Institute (GESY), University of Mannheim, Germany.

Note 9.2.2013: Underwriting here is meant to indicate the indirect role the credit ratings of the agencies perform in terms of assessing the credibility of the financial entitites and the State seeking to raise money in the debt market.

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Eingeordnet unter Geld und Kredit, Uncategorized

Wissenschaft als Hingabe an Zwang

„Mir hilft der Geist! Auf einmal seh’ ich Rat
Und schreibe getrost: Im Anfang war die Tat!“
(Goethe, Faust)

Oder etwa nicht? Sollte man ernsthaft vermuten, dass die EU-Getreuen zunächst denken und dann handeln? Dass sie tatsächlich einem wie auch immer gearteten Plan folgen? Dass die Konsolidierung der Staatshaushalte aus einem Nachdenken geboren wurde? Um Gottes Willen, nein! Alles, was an Papierwerk geschaffen wurde, alles, was heute an Begründungen nachgeschoben wird, soll umgekehrt die Tat rechtfertigen, die im Affekt gesetzt wurde. Und diese Tat war eine schöne nicht.

Man muss festhalten: Die Staaten weltweit fühlen sich zum Sparen gezwungen. Die USA ringt genauso um ihre Finanzen wie Großbritannien oder Japan. Nirgends jedoch wird die Konsolidierung der Haushalte mit einem derartigen Eifer betrieben wie hier in Europa und nirgends sind die dadurch verursachten Schäden so gross wie hier. Es ist wie im Mittelalter als hätten sich Geblendete zur Hexenverbrennung zusammengefunden. Woher stammt der merkwürdige Glaube an die Gesund-Schrumpfung?

Wenn es kein Nachdenken ist, keine Wissenschaft, keine redliche Forschung, die die Europäer zu ihrer Tat veranlasst, dann ist es: Zwang. Und tatsächlich behaupten die Verantwortlichen, dass sie den Zwängen der Märkte folgen, die die Finanzierung der Staaten über die Anleihenmärkte gewährleisten sollen. Solange man diese Prämisse akzeptiert, dass der Staat durch privates Geld versorgt werden soll, und nicht durch neu von der EZB geschöpftes, solange erscheint einem das Staaten-Dasein als Zwang.

Doch aufgepasst! Auch hier gibt es kein Nachdenken, kein Sinnieren, weshalb die japanische und US-Notenbank in der Lage sind den Staat zu versorgen und die EZB nicht. Kein Mensch denkt darüber nach, wieso für die einen gilt, was für die anderen nicht gilt, wie man aus den tagtäglichen Kommentaren ersehen kann. Stattdessen wird in grossen Lettern das Fehlverhalten der FED kritisiert und der nahe Zusammenbruch des US-Geldsystems behauptet. Ja, so blind können Hexenverbrenner sein!

Es ist nunmal eine Tatsache, dass sich die EZB durch die einzelstaatliche Zergliederung selbst blockiert. Keine nationale Notenbank will für die andere Verantwortung übernehmen, alle Handlungen werden aus der Sicht der eigenen Bilanz betrachtet, jeder starrt auf sich. Im Ergebnis führt dies dazu, dass die EZB wie eine private Geschäftsbank auftritt immer mit einem Auge auf ihre Assets. Der „lender of last resort“ mutiert unter dem Zwang der nationalen Perspektive zu einem profitorientierten Bankhaus.

Was bleibt den europäischen Staaten, wenn ihnen die Finanzierung durch die Notenbank versperrt bleibt? Wenn sie, weil jeder für sich, den Willen oder die Macht nicht besitzen die Notenbank zu zwingen? Was tun, wenn es keine Option einer dauerhaften Finanzierung durch die Notenpresse gibt? Sparen! Konsolidieren! Gesund-Schrumpfen! Sich dem Zwang wie einer Lust hingeben, die Unabhängigkeit der EZB beteuern und Studien veröffentlichen um seine Fixierung zu rechtfertigen. Das ist der Stand der Wissenschaft!

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Eingeordnet unter Public Debt, Schuldenbremse, Sparen

KPI Meditation (2) – Der fiskalische Multiplikator als Grenzgänger zwischen Religion und Wissenschaft

Dies ist der zweite Teil einiger kleiner Meditationen über wirtschaftliche Key Performance Indicators (KPIs) – Kennzahlen, an denen sich Politik orientiert oder orientieren sollte. Teil 1 zur Arbeitseinkommensquote – eine Kennzahl, die mehr Beachtung verdient, findet sich hier.

Begriff und Entstehung

Der fiskalische Multiplikator gibt – vereinfacht gesprochen – an, wie sich eine veränderte Fiskalpolitik auf die Wirtschaftsleistung (GDP: Gross Domestic Product) auswirkt. Eingeführt von Richard F. Kahn und diskutiert von J0hn Maynard Keynes im 10. Kapitel seines einflussreichen Werkes ‚The General Theory of Employment, Interest and Money‘, ist der fiskalische Multiplikator seit dem Beginn der Finanz- und Wirtschaftskrise wieder ins Zentrum der Aufmerksamkeit gerückt.

John Maynard Keynes

John Maynard Keynes

Aktuelle Bedeutung

Für die Eurozone wird mit Hilfe des fiskalischen Multiplikators von internationalen und nationalen Institutionen vorausgesagt, wie sich Budgetkonsolidierungen auf das GDP auswirken.

An einem Beispiel:
Konsolidiert Spanien sein Budget durch Steuererhöhungen oder Reduktion von Staatsausgaben um 2% des GDP und beträgt der fiskalische Multiplikator 0.5, dann bewirkt dies eine Reduktion des GDP um 1%. Beträgt der fiskalische Multiplikator hingegen 1.5, dann reduziert sich das GDP um 3%. Auch negative Multiplikatoren sind denkbar: die Wirtschaftsleistung würde demnach dann steigen, wenn der Staat spart. Dieser Glaube wird vom Keynesianer Paul Krugman gerne als ‚Confidence Fairy‘ – die gute Fee der Zuversicht – bezeichnet.

Aus dem fiskalischen Multiplikator werden weitere wichtige Indikatoren abgeleitet: Prognosen zum Verhältnis von Staatsschuld zu Wirtschaftsleistung (Debt-to-GDP Ratio) sowie zur Zunahme oder Abnahme der Arbeitslosigkeit. Verschätzt man sich und ist der Multiplikator bei Konsolidierungen höher als gedacht, ergeben sich unangenehme Konsequenzen: das GDP sinkt stärker als geplant, die Debt-to-GDP Ratio könnte sich verschlechtern statt verbessern, und zahlreiche Menschen werden zusätzlich der Arbeitslosigkeit preisgegeben.

Eine fröhliche Wissenschaft

Die für die Eurozone wichtigsten Prophezeihungen stammen von den Sehern und Seherinnen des Internationalen Währungsfonds (IMF – International Monetary Fund)  und der EU-Kommission. Sie bedienen sich für ihre Orakel einer Glaskugel namens Makroökonomie. Allerdings behaupten sie, dass es sich nicht um eine Glaskugel, sondern um Wissenschaft handelt. Es hat jedoch den Anschein, als seien ihre Gedanken bisher nur die Schatten ihrer Empfindungen gewesen.

Nun, Physiker pflegen einigermaßen einig darüber zu sein, dass ein mit 70 km/h vorwärts fahrendes Auto in einer Stunde etwa 70 km in Fahrtrichtung zurückgelegt haben wird. Anders  jedoch Ökonomen, wenn sie ihre seltsamen Fachdiskussionen über den fiskalischen Multiplikator führen: sie wären in unserem Beispiel  nicht einmal darüber einig, in welche Richtung die Reise geht. Konservative Ökonomen meinten etwa zu Obamas expansivem Fiskalpaket Anfang 2009, dass kein positiver Einfluss auf GDP und Arbeitslosigkeit zu erwarten sei. Zusätzliche Staatsausgaben würden in der Hauptsache private Ausgaben verdrängen, und Haushalte würden in der Erwartung von Steuererhöhungen unverzüglich zu sparen beginnen, da sich ja der Staat das zusätzlich ausgegebene Geld umgehend zurückholen müsse.

Umso erstaunlicher liest sich daher die Selbst- und Fremdkritik des Internationalen Währungsfond (IMF) in seinem im Oktober erschienenen World Economic Outlook  ( Seite 41 ff):

„Are We Underestimating Short-Term Fiscal Multipliers?
… The main finding, based on data for 28 economies, is that the multipliers used in generating growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.“

Ist der Multiplikator größer als 1, dann handelt es sich bei restriktiver Budgetpolitik um einen Schuss, der nach hinten losgeht. Nun, was sagt die Empirie – wie war es denn tatsächlich, z.B. zwischen 2009 und 2011 in jenen Eurozone-Staaten, bei denen es zu einer nennenswerten fiskalischen Konsolidierung (mehr als 0.5% des GDP) kam? Da der IMF in seinem dicken Werk mit dünner, aber immerhin existenter Selbstkritik das Ausmaß der fiskalischen Konsolidierung nicht wirklich klar darstellt, verwenden wir als bestverfügbare Annäherung die Berechnungen von Jean-Michel Six und Sophie Tahiri von Standards & Poors.

Fiskalischer Multiplikator 2009-2011 für ausgewählte Eurozone-Staaten (Six & Tahiri, 25.9.2012)

Staaten Fiskalische
(% des GDP)
Reduktion der Wirtschaftsleistung
(% des GDP)
Griechenland 11.9 18.1 1.5
Portugal 7.3 4.8 0.7
Irland 4.1 13.5 3.3
Spanien 3.4 7.1 2.1
Frankreich 1.5 1.5 1.0
Italien 0.7 0.9 1.3
Durchschnitt 4.8 7.7 1.6

Für Eurozone-Staaten mit fiskalischem Konsolidierungsbedarf > 0.5 % lag also der durchschnittliche fiskalische Multiplikator bei etwa 1.6.

Wachstumsprognosen der Troika und Realität

Wir werfen noch einen kurzen Blick auf die bisherigen Wachstumsprognosen der Troika, mit anerkennender Erwähnung von Jesse Frederik von ‚Follow the Money‘. Die folgende von ihm erstellte Grafik zeigt übersichtlich die Troika-Prognosen zum griechischen Wirtschaftswachstum und vergleicht sie mit der tatsächlichen Entwicklung – ein Leckerbissen für alle Freunde der Visualisierung.

Troika GDP Prognose 2007-2012Quelle: Follow the Money, Datum: 13.11.2012

Troika GDP Prognose 2007-2012
Quelle: Follow the Money, Datum: 13.11.2012

Es fällt auf, dass bei aufeinanderfolgenden Voraussagen die Geschwindigkeit der wirtschaftlichen Erholung zunimmt. Je weniger sich also der alte Glaube erfüllte, desto stärker wurde an ihm festgehalten – dies nur als bescheidener Hinweis für Religions-Soziologen.

Schlussfolgerungen und Ausblick

  • Der desaströse Zustand der Mainstream-Makroökonomie führte zu einer gewaltigen Unterschätzung der fiskalischen Multiplikatoren für Eurozone-Staaten mit fiskalischem Konsolidierungsbedarf.
  • Daraus ergab sich eine wesentlich höhere reale Wirtschaftsschrumpfung (Priester der Ökonomen-Kaste ziehen den Begriff ’negatives Wachstum‘ vor) und Arbeitslosigkeit als angenommen. Auch die Debt-to-GDP Ratio konnte nicht wie vorgesehen verbessert werden.
  • Es entsteht ein erhöhter Finanzierungsbedarf für Eurozone-Problemstaaten.
  • Eine zuverlässige fiskalische Stabilisierungspolitik ist in weite Ferne gerückt, wie am ‚Frontrunner‘ Griechenland erkennbar. Die gegenwärtige Fiskalpolitik der Eurozone ist als erfolglos zu qualifizieren und dabei, jegliches Vertrauen zu verspielen.
  • Eine offene Diskussion alternativer Lösungsansätze ist dringend geboten.

Eine separate Aufgabenstellung wäre eine erkenntnistheoretisch orientierte Kritik der bisherigen ökonomischen Wissenschaft und ihrer Methoden, am Beispiel des fiskalischen Multiplikators. Ein guter Philosoph hätte seinen Spaß daran.

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Eingeordnet unter Eurozone Optionen, Public Debt, Schuldenbremse, Sparen, Wirtschaftswachstum

Mit der Reduzierung der Staatsschuld schrumpft auch das Vermögen !

Wenn man das Gemurkse, das tagtägliche Entstehen krauser Ideen in den Köpfen der europäischen Politik beobachtet, fällt einem ganz spontan Karl Marx ein: „Was beweist die Geschichte der Ideen anders, als daß die geistige Produktion sich mit der materiellen umgestaltet?“ Ja, es hat sich etwas geändert im institutionellen Rahmen der europäischen Geldproduktion, das so verrückten Ideen wie „Haushaltsdisziplin“ und „Schuldenbremse“ Tür und Tor öffnet. Wir müssen in einer Zeit der materiellen Verwirrung leben, die mit der Fehlkonstruktion des eigenen Geldsystems über die Köpfe der Verantwortlichen hinweg Wahnsinnstaten produziert.

Denn was besagt die Idee einer „Schuldenbremse“ anderes als dass die Zahl der Staatspapiere reduziert werden soll? Dass also das, was als Grundlage für sicheren Kredit im gesamten Geldsystem diente, direkt und indirekt gekürzt werden soll? Dass das geschöpfte Geld unmittelbar über die Reduzierung der Staatsschuld und mittelbar über die Reduzierung der kredittauglichen Papiere restringiert werden soll? Dass also der Vermehrung der Zahl, dem Wesen des ganzen Akkumulationsprozesses, eine Grenze gezogen werden soll? Es ist als ob man sich seinen eigenen Tod, die Reduzierung der weissen Blutkörperchen, wünscht.

Seit jeher arbeitet Kapitalismus über die schleichende Ausdehnung der Zahl, was die Vermögen der Menschen mehrt. Nichts anderes besagt Akkumulation als dass sich das Zahlengerüst wie ein Baum nach oben reckt bis es durch die Krise gestürzt wird. Das Auftürmen von Kreditgeld und seine nachfolgende Implosion ist das Wesen des gesamtes Prozesses, in dem sich Zivilisation, die Entwicklung von Technik und Wissen, vollzieht. Doch noch nie hat sich eine Gesellschaft ihr eigenes Ende gewünscht, stets hat sie Regeln und Verhalten produziert, das dem eigenen Gedeihen dienlich ist. Die eigene Existenz ist die Messlatte allen Tuns.

Muss man tatsächlich Marxist sein um das zu begreifen? Muss ein Marxist die Liberalen und Konservativen lehren, dass die Reduktion der Kreditgeldmenge Stockung der Akkumulation bedeutet? Dass mit der Reduzierung der Staatsschuld das Gesamtprodukt und auch das Vermögen der Menschen schrumpft? Müssen die Kritiker die Rolle wechseln und in das Gewand der Apologeten schlüpfen? Verkehrte Welt! Man könnte sich dem Genuss der Selbstzerfleischung hingeben und das Ende des Prozesses herbeisehnen. Doch der intellektuelle Gehalt, die mangelnde Tiefe der Argumente, spornt jeden Modernen, auch einen Kritiker an, dagegenzuhalten.

Schon lange hat die Vorstellung des „Gesundschrumpfens“, der Reduktion der ökonomischen Aktivität durch Schrumpfung der Geldmenge in den Köpfen der Liberalen Hochkonjunktur, aber erst unter dem Regime der gemeinsamen Währung wird es zu einer fanatischen Idee, der auch Konservative begeistert folgen. Denn nichts anderes bedeutet der Euro als dass sich jeder einzelne Staat dem Diktat der Notenbank unterwirft. Er darf sich nicht über die Notenbank finanzieren und jedes Vergehen wird als Regelverstoss geahndet. Nur unter diesem Regelwerk ist der Staat in der Pflicht sein Budget und sich selbst zu schrumpfen anstatt sich der Geldvermehrung zu bedienen.

Man muss dankbar sein, dass die Fanatiker an die Grenzen der Wirklichkeit stossen. Wann immer sie ihr Regelwerk verschärfen und den Staaten noch mehr Disziplin auferlegen, also die Schrumpfung der Zahl durch Sparen oder Schuldenschnitt verlangen, reagieren die Märkte mit Panik. Sie erzwingen eine Reaktion im gegenteiligen Sinne, eine Lockerung der Geldpolitik, eine versteckte oder offene Finanzierung der Staaten durch die EZB. Ja, meine Herren, die Kritiker stehen nun auf der Seite der Märkte, hören auf ihren Pulsschlag, während ihr die kranken Ideen pflegt! Noch erzwingt die ökonomische Wirklichkeit Vernunft.

Materie und Idee stehen in einem bemerkenswerten Verhältnis zueinander. Einerseits ist es das Eurosystem selbst, das die Idee der Schuldenbremse produziert, weil kein Staat für den anderen über die gemeinsame Notenbank haften, weil jeder für sich kalkulieren will. Das lässt die Notenbank in Inaktivität erstarren, zumindest in Bezug auf die Finanzierung der Staaten. Andererseits ist es die verrückte Idee selbst, die die ökonomische Aktivität nach unten schraubt und die Krise virulent werden lässt. Das Ergebnis ist, was wir tagtäglich erleben: Die Notenbank handelt, obwohl sie eigentlich gar nicht handeln will.

Man muss kein Prophet sein, um den Sieg der Vernunft, sprich: der Wirklichkeit, vorherzusagen. In letzter Instanz wird sich das Eurosystem zertrümmern oder den Weg der Integration beschreiten, sodass der Staat wieder über der Notenbank zu stehen kommt und ihm der Weg der Selbstfinanzierung nicht weiter versperrt bleibt. Aber bis dahin hat die Idee unendlich viel Leiden produziert, Vermögensverlust und Arbeitslosigkeit, und die Wirklichkeit vielleicht in einer Art verändert, die uns allen nicht angenehm sein wird. Den Fanatikern muss man vorwerfen, dass sie von dem Zusammenspiel der Kräfte nichts verstanden haben.

Längst haben wir den Punkt erreicht, wo die Märkte aufatmen, wenn sie in den Genuss pragmatischer Geldpolitik kommen und sich zu Tode erschrecken, wenn die radikalen Stimmen laut werden. Das hindert die Sparfanatiker jedoch nicht auch die Wirklichkeit noch uminterpretieren zu wollen, die Beruhigung der Märkte auf ihre Fahnen zu schreiben, wo doch jedes Kind begreift, dass die Dinge umgekehrt liegen. Zu lernen ist ein Verfahren, das Gläubigen fremd ist. Eher noch werden sie im Sinne der Notwendigkeit handeln und trotzdem das Gegenteil behaupten. Ich befürchte: damit werden wir leben müssen.

PS: Dem aufmerksamen Leser ist natürlich nicht entgangen, dass das Marxsche Zitat vollständig heißt: „Was beweist die Geschichte der Ideen anders, als daß die geistige Produktion sich mit der materiellen umgestaltet? Die herrschenden Ideen einer Zeit waren stets nur die Ideen der herrschenden Klasse.“ (Manifest der kommunistischen Partei, MEW 4, S. 480, 1848). So weit möchte ich nicht gehen. In keinem Hirn einer Klasse können die verrückten Ideen der Sparsamkeit geboren worden sein. Gerade wir Kritiker müssen mit gutem Beispiel voran gehen und: lernen.

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Eingeordnet unter Finanzvermögen, Institutionen, Kreditgeld, Krise des Kapitalismus, Markt für Staatsanleihen, Public Debt, Schuldenbremse, Sparen, Wirtschaftswachstum

Eine alternative Vision für die Krise der Eurozone

Wir freuen uns, den nachfolgenden Aufruf für eine andere Politik zur Überwindung der Krise in der Eurozone hier veröffentlichen zu können. Der ursprüngliche Text findet sich im empfehlenswerten Blog Naked Keynesianism – die Redaktion.

An Alternative Vision for the Eurozone Crisis

The Eurozone crisis has been reduced, according to the mainstream diagnosis, to a fiscal crisis caused by excessive public spending and a competitiveness gap between North and South. The mainstream solution is to close this gap by means of ‘expansionary fiscal austerity’ and wage reductions. This has been admitted even by the IMF to be a dead end.

In our opinion the root of the Euro crisis lies in both the inadequate institutional set up of the Eurozone, which lacks a genuine lender of last resort and sufficiently coordinated fiscal and wage policies, and on an over-liquid and under-regulated international financial market that was more than happy to finance any imbalance – no matter how unsustainable it was.

What we had in Continental Europe were mutually dependent models of growth. The mercantilist export-led growth of the North could not have been sustained without a (remarkably easy-to-finance) debt-driven model in the South, accumulating trade deficits and private and public debt. In the aftermath of the financial crisis, the private debt was turned into sovereign debt. The Irish case is an extreme example of this process. The ensuing austerity policies enforced upon the governments increased unemployment to a socially unacceptable level. If continued these policies will lead to a prolonged depression and even more social unrest.

European institutions were and still are not able to deal with such structural imbalances in an adequate way. Mass unemployment and social deprivation resulting from austerity policies is threatening the survival of democracy in the European Union.

Alternative perspectives
On the basis of our diagnosis we are convinced that Europe should reverse the current austerity policy regime. This would require profound institutional and policy change.

In terms of monetary policy, we believe that ECB should act as a credible lender of last resort to relieve the sovereign debt crisis. Strict regulation of financial markets is a further step, and it is necessary to separate investment banking from commercial banking.

In terms of fiscal policy, the link between the ECB and fiscal conditionality should be fundamentally changed. Monetary policy should support and accommodate progressive fiscal rules aiming at employment creation and growth. Budget deficits can only be consolidated in a growing economy.

These growth stimulating policies are consistent with the desired long run stabilization of debt-to-GDP ratios. In the present situation of mass unemployment, these policies do not carry a significant risk of inflation.

We also believe that the adjustment has to be supported by stimulation of consumption via higher wages starting from the core surplus countries (like Germany) where wage restraint policies have considerably contributed to the growing income inequalities and current account imbalances in the Eurozone.

If the German finance minister believes in what he said, that no country can live forever beyond its means, then it must also be clear that no country can live indefinitely below its means. This implies that the change in the wage policy in Germany has to be an important part of the solution.

Mutual prosperity of the Eurozone countries and their citizens through demand expansion, rather than demand contraction through fiscal consolidation for the benefit of high finance, must be recognized as the imperative for the political viability of the Euro project. We must have the intellectual honesty and courage to act accordingly.

Signed by


Amit Bhaduri
Jawaharlal Nehru University, New Delhi, India

Thomas Boylan
National University of Ireland, Galway, Ireland

Sergio Cesaratto
Università degli studi, Siena, Italy

Nadia Garbellini
Università degli Studi di Pavia, Italy

Torsten Niechoj
Rhine-Waal University of Applied Sciences, Kamp-Lintfort, Germany

Gabriel Palma
University of Cambridge, UK

Srinivas Raghavendra
National University of Ireland, Galway, Ireland

Rune Skarstein
Norwegian University of Science and Technology, Norway

Herbert Walther
Vienna University of Economics and Business, Austria

Ariel L. Wirkierman
Università Cattolica di Milano, Italy

Kazimierz Laski
University of Linz, Austria

Corresponding author: Srinivas Raghavendra (

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Eingeordnet unter Eurozone Optionen, Income Inequality, Institutionen, Jugendarbeitslosigkeit, Krise der Arbeit, Krise des Kapitalismus, Public Debt, Sparen, Wirtschaftswachstum


Es gehört zu den grossen Mysterien der Gegenwart, dass Geld nicht mehr als ein bilanzielles Verhältnis ist. Genauer: eine Forderung auf der Aktivseite des Gläubigers, der eine Verbindlichkeit auf der Passivseite des Schuldners gegenübersteht. Geld ist ein janusköpfiges Gebilde, bilanzielle Forderung und Verbindlichkeit zugleich, die sich gegenseitig aufheben. Wann immer man an Geld denkt, ist die Forderung des einen und die Verbindlichkeit des anderen bereits mitgedacht. Man nennt diese Art von Geld: Kreditgeld.

Der erste fundamentale Satz, der aus dem Geld als Kreditgeld folgt, lautet: dass die Öffnung eines Geldkontrakts das Entstehen eines Kreditverhältnisses ist. Und umgekehrt: das Schliessen des Kontrakts die Bedienung eben dieser Schuld. Kontrakteröffnung heisst Bilanzverlängerung und Kontraktschliessung Bilanzverkürzung. Der Gläubiger, die Geschäftsbank, bucht das Geld passiv (Buchgeld) und die Forderung aktiv. Und der Schuldner das Buchgeld aktiv und die Forderung passiv. Hokuspokus: es werde Geld!

Dass Geld aus dem Nichts, durch blosse Bilanzverlängerung der Geschäftsbanken und der Notenbank entsteht, ist heute ein Allgemeinplatz. Nicht aber der zweite grundlegende Satz, der aus dem Geld als Kreditgeld folgt: Dass sich alle Forderungen und Verbindlichkeiten im geschlossenen Raum auf Null summieren. Für ein Gemeinwesen nur aus Privaten und ohne Staat und Ausland heisst das, dass die Forderungen der einen den Verbindlichkeiten der anderen entsprechen und aufsummiert gleich Null sind.

Daraus folgt der dritte Satz: Dass ein Überhang an privaten Forderungen („Outside-Money“) nur möglich ist, wenn der Staat oder das Ausland einen Überhang an Verbindlichkeiten haben. Wer Geldakkumulation sagt, meint also immer: Vermehrung der Geldmenge, was heisst: simultane Vermehrung von Forderungen und Verbindlichkeiten. Wer aber von privatem Reichtum spricht, soll sagen: Verschuldung des Auslands oder des Staats. Eine Reichtumsbildung innerhalb des Privatsektors ist ein Widerspruch in sich.

Nun gut. Was lässt sich in einer ersten Annäherung sagen? Traue niemals jenen, die von Verschuldung sprechen und die Forderungen vergessen! Wenn einer von Staatsschuld spricht, sei Dir bewusst, dass er privaten Reichtum meint. Traue nie jemandem, der die Staatsschuld schrumpfen sehen will! Pass`auf bei dem Wort der „Verkleinerung der Bankbilanzen“, denn es besagt nichts anderes: als dass Deine Guthaben vernichtet werden sollen. Nur ein Schelm glaubt, dass mit „jenen“ heute nicht schon längst „alle“ gemeint sind.

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Eingeordnet unter Geld, Geld und Kredit, Kreditgeld