1 00:00:11,200 --> 00:00:14,720 Speaker 1: Hello, and welcome to another episode of the Odd Thoughts Podcast. 2 00:00:14,840 --> 00:00:19,439 Speaker 1: I'm Tracy Alloway and I'm Joe Wisenthal. So, Joe, we 3 00:00:19,600 --> 00:00:24,000 Speaker 1: like talking about money, don't we. We do the the 4 00:00:24,480 --> 00:00:28,360 Speaker 1: nature of money, the origin of money, where it comes from, 5 00:00:28,400 --> 00:00:31,440 Speaker 1: how we talk about the language of money. It's, uh, 6 00:00:31,480 --> 00:00:33,040 Speaker 1: it's I would say, for both of us, one of 7 00:00:33,040 --> 00:00:36,840 Speaker 1: our favorite topics. Yeah, although I think for you your 8 00:00:36,880 --> 00:00:39,919 Speaker 1: eyes sort of light up whenever we we say we're 9 00:00:39,920 --> 00:00:42,600 Speaker 1: going to do a money episode. But I have good 10 00:00:42,600 --> 00:00:46,800 Speaker 1: news for you. This is one of those episodes. Uh, 11 00:00:46,840 --> 00:00:49,239 Speaker 1: that's great news, because you're right, I do light up, 12 00:00:49,320 --> 00:00:52,879 Speaker 1: and I think that, um, you know, it's always sort 13 00:00:52,920 --> 00:00:55,560 Speaker 1: of interesting this topic, but there are times when it 14 00:00:55,600 --> 00:01:00,960 Speaker 1: could feel anthropological, where it's like, you know, oh, that's interesting, Okay, 15 00:01:01,000 --> 00:01:06,240 Speaker 1: But I actually think that it's particularly important now because 16 00:01:06,760 --> 00:01:09,440 Speaker 1: the sort of the nature of the policies that we choose, 17 00:01:09,520 --> 00:01:12,160 Speaker 1: if the governments choose around the world, well, I think 18 00:01:12,200 --> 00:01:17,400 Speaker 1: in many cases be informed so to speak, by very 19 00:01:17,440 --> 00:01:19,880 Speaker 1: real conceptions of like what money is and what you 20 00:01:19,880 --> 00:01:23,440 Speaker 1: can do with Oh. Absolutely, the way you think money 21 00:01:23,520 --> 00:01:26,560 Speaker 1: actually works and is in fact created is going to 22 00:01:26,640 --> 00:01:29,640 Speaker 1: inform a lot of what you do as a central bank. 23 00:01:29,760 --> 00:01:32,000 Speaker 1: So you know, for instance, right now, a lot of 24 00:01:32,040 --> 00:01:36,480 Speaker 1: central banks are trying to lend to various businesses and 25 00:01:36,520 --> 00:01:39,119 Speaker 1: parts of the economy to enable them to get through 26 00:01:39,160 --> 00:01:44,840 Speaker 1: the coronavirus containment efforts, and uh that usually entails some 27 00:01:45,040 --> 00:01:48,520 Speaker 1: form of money creation. So what we're going to talk 28 00:01:48,520 --> 00:01:51,360 Speaker 1: about today is exactly that. We're going to talk about 29 00:01:51,400 --> 00:01:56,480 Speaker 1: where money comes from from someone who has a very 30 00:01:56,640 --> 00:02:00,640 Speaker 1: very specific and particular theory about it, and someone who's 31 00:02:00,720 --> 00:02:04,920 Speaker 1: also credited at various times with actually coining the term 32 00:02:05,120 --> 00:02:08,720 Speaker 1: quantitative easing, which of course is something that we are 33 00:02:08,800 --> 00:02:12,520 Speaker 1: also talking a lot about in the current environment. I 34 00:02:12,560 --> 00:02:15,680 Speaker 1: can't wait. I mean, you know, quantitative easing, this idea 35 00:02:15,800 --> 00:02:20,880 Speaker 1: of central banks having purchased assets trying to uh strengthen 36 00:02:20,919 --> 00:02:25,640 Speaker 1: the economy, uh loosen monetary policy. It really sort of 37 00:02:25,680 --> 00:02:27,800 Speaker 1: became a big thing last time. Now you're seeing banks, 38 00:02:27,840 --> 00:02:30,560 Speaker 1: central banks all over the world use that as just 39 00:02:30,639 --> 00:02:33,519 Speaker 1: part of the playbook. So what it takes to get 40 00:02:33,960 --> 00:02:37,720 Speaker 1: actual money into people's hands who need it desperately is 41 00:02:37,760 --> 00:02:41,919 Speaker 1: a huge and important topic. Excellent, alright, Well, without further ado, 42 00:02:42,080 --> 00:02:45,200 Speaker 1: and I should mention, by popular request from quite a 43 00:02:45,200 --> 00:02:47,799 Speaker 1: few of our listeners. We're going to bring on Dr 44 00:02:48,040 --> 00:02:52,360 Speaker 1: Richard Vanna. He is a professor in banking and finance 45 00:02:52,400 --> 00:02:56,160 Speaker 1: at a whole bunch of universities and a long time 46 00:02:56,400 --> 00:02:59,920 Speaker 1: professor of economics. So Richard, it's so great to have 47 00:03:00,040 --> 00:03:02,160 Speaker 1: be on. Thank you very much. It's a pleasure to 48 00:03:02,200 --> 00:03:05,520 Speaker 1: be on. So maybe just to begin with you know, 49 00:03:05,560 --> 00:03:08,480 Speaker 1: I sort of shortened your title there, but you have 50 00:03:08,919 --> 00:03:13,240 Speaker 1: a very long and lengthy professional history. So maybe give 51 00:03:13,320 --> 00:03:17,400 Speaker 1: us an idea of how you got interested in money 52 00:03:17,520 --> 00:03:22,399 Speaker 1: creation in the first place. When did you start studying it? Exactly? Well, 53 00:03:22,440 --> 00:03:25,120 Speaker 1: that happened when I was in in Tokyo. Um I 54 00:03:25,200 --> 00:03:28,000 Speaker 1: was a graduate research student at the University of Tokyo, 55 00:03:28,040 --> 00:03:32,320 Speaker 1: having come over from Oxford on essentially a leave while 56 00:03:32,360 --> 00:03:36,200 Speaker 1: doing my doctorate in economics at Oxford University. But I 57 00:03:36,240 --> 00:03:39,440 Speaker 1: was in Japan on a government scholarship at the University 58 00:03:39,440 --> 00:03:44,560 Speaker 1: of Tokyo, and I had just applied to the Japan 59 00:03:44,600 --> 00:03:47,000 Speaker 1: Development Bank. It's one of the big actually now it's 60 00:03:47,040 --> 00:03:50,600 Speaker 1: called Development Bank of Japan in Central Tokyo or de MACCI, 61 00:03:51,600 --> 00:03:55,360 Speaker 1: which is what is the sort of um the bank 62 00:03:55,600 --> 00:03:58,800 Speaker 1: a government bank that's been helping the post war reconstruction 63 00:04:00,040 --> 00:04:03,200 Speaker 1: they had a research fellowship in their research institutent. My 64 00:04:03,320 --> 00:04:05,840 Speaker 1: professors had recommended me for that one, but you had 65 00:04:05,840 --> 00:04:08,520 Speaker 1: to fill in an application form with the research topic. 66 00:04:09,160 --> 00:04:14,160 Speaker 1: Because when I wrote this was in actually just before 67 00:04:14,200 --> 00:04:17,000 Speaker 1: because yeah, probably in advance at the end of eighty nine. 68 00:04:17,360 --> 00:04:21,640 Speaker 1: Early I wrote this, And of course these were dramatic 69 00:04:21,720 --> 00:04:23,880 Speaker 1: times for Japan. You know, I was. I was there 70 00:04:23,880 --> 00:04:27,760 Speaker 1: in the summer of eighty nine when the Nikkei peaked 71 00:04:27,800 --> 00:04:33,080 Speaker 1: at close to forty tho. We were still in a 72 00:04:33,360 --> 00:04:37,520 Speaker 1: um just barely half of that amount. Haven't really recovered 73 00:04:37,560 --> 00:04:41,920 Speaker 1: ever from this um from this peak, and a lot 74 00:04:41,920 --> 00:04:44,360 Speaker 1: of people are talking about capital flows. So my research 75 00:04:44,440 --> 00:04:47,479 Speaker 1: started with capital flows and the story that was and 76 00:04:47,520 --> 00:04:52,400 Speaker 1: felt our younger listeners, the big story in the second 77 00:04:52,400 --> 00:04:54,880 Speaker 1: half of the eighties and and a few years after 78 00:04:54,920 --> 00:04:59,760 Speaker 1: that was Japanese capital flows. They were everywhere there on Time, 79 00:04:59,760 --> 00:05:04,360 Speaker 1: bag magazine, on the cover newsweek. Japanese money was buying 80 00:05:04,480 --> 00:05:08,680 Speaker 1: up foreign companies left right in center, foreign land and 81 00:05:09,080 --> 00:05:12,280 Speaker 1: foreign investment, of course, bond market investment. It was just 82 00:05:12,440 --> 00:05:15,679 Speaker 1: all of the place. Columbia pictures, Pepple Beach golf, cause, 83 00:05:16,040 --> 00:05:20,240 Speaker 1: Australian Hawaiian real estate, do you name it? So this 84 00:05:20,400 --> 00:05:22,719 Speaker 1: flood of Japanese money, and I was, you know, I 85 00:05:22,760 --> 00:05:26,919 Speaker 1: was just doing my doctoral research and economics. But the 86 00:05:26,920 --> 00:05:31,160 Speaker 1: funny thing was that in economics nobody could explain these 87 00:05:31,200 --> 00:05:35,720 Speaker 1: capital flows where they you know, why so much And 88 00:05:35,880 --> 00:05:37,960 Speaker 1: there were there were a few studies two or three 89 00:05:38,440 --> 00:05:42,520 Speaker 1: by some known professors about while trying to explain this, 90 00:05:42,640 --> 00:05:46,880 Speaker 1: but they concluded intriguingly, oh, this is so much money. 91 00:05:47,080 --> 00:05:50,800 Speaker 1: We can't explain this. Our standard models don't work. And 92 00:05:50,839 --> 00:05:53,200 Speaker 1: so that was the puzzle. And you know, being a 93 00:05:53,240 --> 00:05:55,480 Speaker 1: young research and that was my first piece of research, 94 00:05:56,360 --> 00:05:58,640 Speaker 1: you think, hey, you know, that's a good challenge. I'll 95 00:05:58,640 --> 00:06:02,720 Speaker 1: solve that puzzle. So that the trouble was I had 96 00:06:02,760 --> 00:06:06,279 Speaker 1: now given myself the most difficult research question at the 97 00:06:06,320 --> 00:06:10,560 Speaker 1: time on the globe. And and the thing with that Japanese, 98 00:06:10,560 --> 00:06:14,839 Speaker 1: who are extremely friendly and welcoming to foreigners and you know, 99 00:06:14,920 --> 00:06:18,640 Speaker 1: treated me really well. But one thing is they do 100 00:06:18,839 --> 00:06:21,719 Speaker 1: like to stick to things, and you know, stick to rules, 101 00:06:21,760 --> 00:06:23,479 Speaker 1: and they're quite you know, there's lots of forms to 102 00:06:23,480 --> 00:06:27,039 Speaker 1: fill in. And that was my topic. And they've given 103 00:06:27,040 --> 00:06:29,719 Speaker 1: me a scholarship at the Japan Develbum Bank of Fellowship 104 00:06:29,760 --> 00:06:33,080 Speaker 1: even the first Shimamura Fellowship. Actually, if we have time, 105 00:06:33,080 --> 00:06:35,479 Speaker 1: we can briefly talk about Shimamura as an interesting angle. 106 00:06:35,520 --> 00:06:38,839 Speaker 1: But anyway, and and then certainly I couldn't change the topic. 107 00:06:39,120 --> 00:06:42,320 Speaker 1: So I was I was stuck with this because, um 108 00:06:42,360 --> 00:06:46,840 Speaker 1: what happened then was my my research advisors at the 109 00:06:46,920 --> 00:06:50,840 Speaker 1: university's in Tokyo and Oxford told me start with the data, 110 00:06:51,600 --> 00:06:54,680 Speaker 1: because just the data work, because my time here is 111 00:06:54,720 --> 00:06:57,400 Speaker 1: only six months, which is very short for research project, 112 00:06:58,360 --> 00:07:01,599 Speaker 1: from start to finish, and you can easily spend that 113 00:07:01,680 --> 00:07:05,520 Speaker 1: on data a launch, just some gathering data, sorting the data, 114 00:07:05,600 --> 00:07:10,160 Speaker 1: cleaning the data, doing your econometric careful analysis. I mean, 115 00:07:10,440 --> 00:07:12,720 Speaker 1: if you do that all within six months, and that's 116 00:07:12,880 --> 00:07:16,480 Speaker 1: you know, that's that's normal. And so they said, look 117 00:07:16,520 --> 00:07:20,480 Speaker 1: at the data. But I thought, well, hang on, what data, 118 00:07:20,800 --> 00:07:23,560 Speaker 1: what data? You know, we're looking at a puzzle here. 119 00:07:24,120 --> 00:07:28,000 Speaker 1: So first I wanted to get an angle on how 120 00:07:28,000 --> 00:07:32,240 Speaker 1: one could explain this. And my hypothesis was because the 121 00:07:32,280 --> 00:07:34,560 Speaker 1: capital flows were one puzzle, but there was another puzzle. 122 00:07:35,120 --> 00:07:36,560 Speaker 1: And at that time it was still a bit early, 123 00:07:36,600 --> 00:07:39,080 Speaker 1: so people weren't really talking about this. And with hindsight 124 00:07:39,360 --> 00:07:41,920 Speaker 1: it emerged that something strange is going on. But I 125 00:07:41,960 --> 00:07:43,840 Speaker 1: already thought at the time, and if you're in Tokyo, 126 00:07:43,880 --> 00:07:46,400 Speaker 1: you'd you'd think there's something strange. Certainly as a Western 127 00:07:46,440 --> 00:07:50,680 Speaker 1: company east ob you, Japanese land prices they were absolutely crazy. 128 00:07:51,720 --> 00:07:55,800 Speaker 1: So the property prices, and so the Imperial Palace garden 129 00:07:55,840 --> 00:07:57,560 Speaker 1: in Tokyo, which is you know, it's a nice little 130 00:07:57,600 --> 00:08:00,280 Speaker 1: park in central Tokyo. But if you value at that 131 00:08:00,440 --> 00:08:04,000 Speaker 1: at at the property prices of that location, you'd have 132 00:08:04,080 --> 00:08:07,720 Speaker 1: the same market value as the entire state of California, 133 00:08:07,840 --> 00:08:12,320 Speaker 1: including l A, San Francisco, everything, And that was just 134 00:08:12,400 --> 00:08:15,320 Speaker 1: completely mind boggling. So I thought, maybe there's a link, 135 00:08:15,520 --> 00:08:17,320 Speaker 1: and that was my apoloesis and so I went out 136 00:08:17,360 --> 00:08:20,000 Speaker 1: to try to explain this. But the trouble was there 137 00:08:20,040 --> 00:08:23,080 Speaker 1: was no paper, no model, no theory that would link 138 00:08:23,200 --> 00:08:26,200 Speaker 1: land prices to capital flows, and so I ran started 139 00:08:26,240 --> 00:08:28,880 Speaker 1: to run out of time and hadn't started the data yet. 140 00:08:29,280 --> 00:08:33,280 Speaker 1: This is the second time we've had an episode recently 141 00:08:33,520 --> 00:08:36,880 Speaker 1: where this factoid or this fact about the value of 142 00:08:36,920 --> 00:08:40,000 Speaker 1: the Imperial Palace relative to the size of California came up. 143 00:08:40,160 --> 00:08:44,640 Speaker 1: We actually spoke to Richard who as well recently, So 144 00:08:44,720 --> 00:08:47,520 Speaker 1: what is the answer, I mean not to you know, obviously, 145 00:08:47,640 --> 00:08:50,959 Speaker 1: I'm sure it's complicated. But as you examine this question 146 00:08:51,120 --> 00:08:55,200 Speaker 1: of where all of this money was coming from, what 147 00:08:55,320 --> 00:08:59,280 Speaker 1: did you find, yes exactly, And also why was so 148 00:08:59,360 --> 00:09:01,800 Speaker 1: much money for going abroad? Because they were losing money 149 00:09:01,800 --> 00:09:03,800 Speaker 1: on it? It using money on the exchange because the 150 00:09:03,920 --> 00:09:06,280 Speaker 1: end was rising and rising and rising the second half 151 00:09:06,320 --> 00:09:09,440 Speaker 1: the eighties, right, so your foreign investment was actually losing money. 152 00:09:09,920 --> 00:09:13,600 Speaker 1: It was also against the interest differentials, because that's the 153 00:09:13,640 --> 00:09:17,840 Speaker 1: standard you know, theory explanation interest differentials, and if there's 154 00:09:17,920 --> 00:09:20,679 Speaker 1: higher rates in New York, you know, in America, then 155 00:09:20,840 --> 00:09:23,520 Speaker 1: you invest abroad. But that also wasn't the case at 156 00:09:23,520 --> 00:09:26,600 Speaker 1: the time. So all these theories didn't work, and that 157 00:09:26,640 --> 00:09:29,080 Speaker 1: was the big puzzle. And by the way, I was 158 00:09:30,600 --> 00:09:34,440 Speaker 1: during um, this is just before I started this research. 159 00:09:34,559 --> 00:09:39,360 Speaker 1: I was an intern at the Nomura Research Institute, where 160 00:09:39,400 --> 00:09:42,120 Speaker 1: I talked a lot to Richard Coop so Um and 161 00:09:42,120 --> 00:09:45,000 Speaker 1: he did talk a lot about land prices, and so 162 00:09:45,240 --> 00:09:47,360 Speaker 1: I mean, it's once you look into it's clear that 163 00:09:47,400 --> 00:09:50,040 Speaker 1: this is such a big phenomenon that it had to 164 00:09:50,080 --> 00:09:53,400 Speaker 1: be connected to this. In my research, I couldn't find 165 00:09:53,400 --> 00:09:55,679 Speaker 1: a link. And then at one stage, somebody said, well, 166 00:09:55,679 --> 00:09:57,640 Speaker 1: hang on, because I was looking around in Tokyo and 167 00:09:57,679 --> 00:10:00,160 Speaker 1: talking to people. Go to meeting, you know, the him 168 00:10:00,160 --> 00:10:03,360 Speaker 1: AS Ministry of International Trade and Industry, famed for its 169 00:10:03,520 --> 00:10:07,920 Speaker 1: its role in post war economic success and the miracle system. 170 00:10:08,920 --> 00:10:12,000 Speaker 1: Go there because there were some foreign researchers there, maybe 171 00:10:12,200 --> 00:10:15,480 Speaker 1: somebody famous even from America, and they were looking exactly 172 00:10:15,480 --> 00:10:17,880 Speaker 1: at this question. And they looked at the question whether 173 00:10:17,920 --> 00:10:20,160 Speaker 1: there's a link to the high land price. It's a 174 00:10:20,200 --> 00:10:22,280 Speaker 1: high land price in the idea is very simple. If 175 00:10:22,280 --> 00:10:26,280 Speaker 1: you've such got such overpriced land prices, then it's you know, 176 00:10:26,320 --> 00:10:29,240 Speaker 1: you're just selling a tiny little plot. You can buy 177 00:10:29,280 --> 00:10:31,760 Speaker 1: half of California. Why wouldn't you do that? That makes 178 00:10:31,800 --> 00:10:35,040 Speaker 1: perfect sense, right, It's better for diversification. I mean, you know, 179 00:10:35,520 --> 00:10:37,760 Speaker 1: if something happens, why not diverse when you get so 180 00:10:37,840 --> 00:10:41,760 Speaker 1: much more abroad. So quite quite reasonable. Um, and I 181 00:10:41,800 --> 00:10:44,720 Speaker 1: went there and they said, oh yeah, Jeffrey Sachs from 182 00:10:44,840 --> 00:10:49,520 Speaker 1: from the US is now Columbia University. Uh, he was 183 00:10:49,600 --> 00:10:52,840 Speaker 1: here and his PhD student, um, Peter Boone, and they 184 00:10:52,880 --> 00:10:56,319 Speaker 1: wrote the paper exactly on this. Now. I was delighted 185 00:10:56,360 --> 00:10:58,000 Speaker 1: because you know, I was just starting out this is 186 00:10:58,040 --> 00:10:59,880 Speaker 1: my first paper, and nobody expected me to come up 187 00:10:59,880 --> 00:11:02,920 Speaker 1: with anything new. So it's fine to take the work 188 00:11:02,960 --> 00:11:05,760 Speaker 1: of famous scholars and you have just a slight different 189 00:11:05,800 --> 00:11:09,040 Speaker 1: angle would be sufficient. So I thought, this is great. This, 190 00:11:09,240 --> 00:11:10,920 Speaker 1: you know, this will really help me out here. I'm 191 00:11:10,960 --> 00:11:14,160 Speaker 1: running out of time. So and I looked at the 192 00:11:14,240 --> 00:11:18,680 Speaker 1: paper and there it was land prices, crazy capital flows, 193 00:11:18,800 --> 00:11:23,199 Speaker 1: mind boggling. Standard theories can't explain it. So should there 194 00:11:23,240 --> 00:11:24,920 Speaker 1: be a link? Yes, there should be a link. And 195 00:11:24,920 --> 00:11:27,800 Speaker 1: then it went through the analysis and conclusion is there 196 00:11:27,920 --> 00:11:32,760 Speaker 1: is no link. What there is no link? My jaw dropped. 197 00:11:33,200 --> 00:11:36,680 Speaker 1: Why not? And see their argument was, well, if the 198 00:11:36,760 --> 00:11:39,920 Speaker 1: Japanese want to do the sensible things, sell its tiny 199 00:11:39,960 --> 00:11:43,000 Speaker 1: bit of of the land in Tokyo and purchase a huge, 200 00:11:43,480 --> 00:11:46,840 Speaker 1: huge swathers of land, and saying the US or in England, 201 00:11:48,160 --> 00:11:50,720 Speaker 1: they have to the catches. They have to find a 202 00:11:50,880 --> 00:11:55,480 Speaker 1: buyer for their land in Japan and as long as 203 00:11:55,520 --> 00:11:59,880 Speaker 1: the buyer is is Japanese. And that's actually what we 204 00:12:00,080 --> 00:12:03,480 Speaker 1: had to assume because foreigners, we're not buying this Japanese 205 00:12:03,520 --> 00:12:07,800 Speaker 1: land because it's so ridiculously overpriced. So actually the only 206 00:12:07,840 --> 00:12:10,920 Speaker 1: buyers were other Japanese and then think about it. It 207 00:12:10,960 --> 00:12:14,920 Speaker 1: just means there's money shifting from Japanese investor A too 208 00:12:15,000 --> 00:12:18,360 Speaker 1: Japanese investor B. And so this is nothing to do 209 00:12:18,440 --> 00:12:20,640 Speaker 1: with the rest of the world. And that's why there's 210 00:12:20,760 --> 00:12:23,600 Speaker 1: no link to the rest of the world. Now, So 211 00:12:23,679 --> 00:12:27,480 Speaker 1: much for the analysis of Professor Jeffrey Sachs and Dr 212 00:12:27,520 --> 00:12:31,240 Speaker 1: Peter Boone. But I didn't give up. I thought, Okay, 213 00:12:31,760 --> 00:12:34,800 Speaker 1: so the famous experts say there is no link. I 214 00:12:34,880 --> 00:12:36,959 Speaker 1: asked Richard Ko At the time, of course, also, and 215 00:12:37,760 --> 00:12:40,680 Speaker 1: while he was a land price expert and also a 216 00:12:40,720 --> 00:12:43,040 Speaker 1: capital flag expert at that time, it wasn't yet into 217 00:12:43,120 --> 00:12:46,200 Speaker 1: sort of general economics, so he was an expert on 218 00:12:46,320 --> 00:12:49,280 Speaker 1: both topics that I was trying to link. He said 219 00:12:49,320 --> 00:12:53,200 Speaker 1: to me, Richard, forget that topic. Give up on that one. 220 00:12:53,520 --> 00:12:56,400 Speaker 1: You will not find a model of Japanese capital flows. 221 00:12:56,440 --> 00:13:00,240 Speaker 1: You can't do this in a model. Still I didn't 222 00:13:00,240 --> 00:13:02,440 Speaker 1: give up. Well, actually I had no choice. I could not. 223 00:13:02,760 --> 00:13:07,480 Speaker 1: I was allowed to chase the topic. So um I 224 00:13:07,520 --> 00:13:12,000 Speaker 1: needed a miracle. And well, to come to straight to 225 00:13:12,040 --> 00:13:15,520 Speaker 1: the point, I did get a miracle because I had 226 00:13:15,559 --> 00:13:17,640 Speaker 1: just in time, sort of one and a half months 227 00:13:17,679 --> 00:13:22,880 Speaker 1: before the deadline. The inspiration on one day about how 228 00:13:22,920 --> 00:13:25,160 Speaker 1: this works. Came to the office on a Monday morning. 229 00:13:25,160 --> 00:13:27,280 Speaker 1: It was very concerned because you know, I was running 230 00:13:27,280 --> 00:13:29,040 Speaker 1: out of time. They were treating me so well. They've 231 00:13:29,040 --> 00:13:32,559 Speaker 1: given me this huge five bedroom apartment in central Tokyo 232 00:13:32,800 --> 00:13:36,440 Speaker 1: at these real estate prices, well rental prices also being 233 00:13:36,480 --> 00:13:39,400 Speaker 1: equally high anyway, treating me really well like a v 234 00:13:39,480 --> 00:13:41,280 Speaker 1: I P. But I couldn't deliver. So that was pretty 235 00:13:41,320 --> 00:13:45,160 Speaker 1: much under under stress. And I prayed about it, and 236 00:13:45,240 --> 00:13:47,360 Speaker 1: I prayed for a miracle. And then I came to 237 00:13:47,400 --> 00:13:51,319 Speaker 1: the office on this Monday morning and I sat down, 238 00:13:51,520 --> 00:13:54,480 Speaker 1: and it's just it was in my head the answer, 239 00:13:54,520 --> 00:13:55,880 Speaker 1: and here's the answer if you want to hear it. 240 00:13:55,920 --> 00:14:01,560 Speaker 1: Does anyone want to hear it? Okay um, okay. Well, 241 00:14:01,640 --> 00:14:06,200 Speaker 1: this is where Jeffrey Saxon Peter Boone went wrong. They 242 00:14:06,400 --> 00:14:09,040 Speaker 1: made the wrong assumption that you have to sell your 243 00:14:09,160 --> 00:14:13,280 Speaker 1: land to get the money, and actually what what you 244 00:14:13,360 --> 00:14:17,240 Speaker 1: do is you use your land as collateral and you 245 00:14:17,400 --> 00:14:21,440 Speaker 1: borrow money from the banks. And the other thing that 246 00:14:21,560 --> 00:14:25,240 Speaker 1: was in my head suddenly was the realization what happens 247 00:14:25,240 --> 00:14:27,720 Speaker 1: then is not what the textbooks tell you, because they 248 00:14:27,760 --> 00:14:31,440 Speaker 1: say banks of financial intermediaries that gather deposits and they 249 00:14:31,560 --> 00:14:35,200 Speaker 1: lend out the existing money. No, I also realized this 250 00:14:35,360 --> 00:14:39,000 Speaker 1: is new money creation, because when a bank gives out 251 00:14:39,000 --> 00:14:42,840 Speaker 1: a loan, it's actually adding new money to the money 252 00:14:42,840 --> 00:14:47,760 Speaker 1: supply that didn't exist before. And as it later turned out, 253 00:14:47,760 --> 00:14:50,480 Speaker 1: that's how you look at the data, and when I 254 00:14:50,560 --> 00:14:54,160 Speaker 1: proved this later of the money supply is created in 255 00:14:54,160 --> 00:14:59,120 Speaker 1: this way is when banks lend. That's what creates our 256 00:14:59,120 --> 00:15:02,120 Speaker 1: money supply, adds to the money supplied. It's not existing 257 00:15:02,160 --> 00:15:04,480 Speaker 1: money they lent, but new money. And so then back 258 00:15:04,520 --> 00:15:09,600 Speaker 1: to the Japanese real estate story, so them the bank 259 00:15:09,840 --> 00:15:13,400 Speaker 1: lending with land as collateral, and for the property sector 260 00:15:13,400 --> 00:15:18,000 Speaker 1: and for property transactions, that is the key variable. I 261 00:15:18,040 --> 00:15:22,359 Speaker 1: was looking forward to explain capital flows now in the meantime, 262 00:15:23,080 --> 00:15:27,840 Speaker 1: so this is in the meantime, actually Japanese capital flows 263 00:15:27,880 --> 00:15:31,560 Speaker 1: had started to collapse, and there was such a dramatic 264 00:15:31,640 --> 00:15:34,640 Speaker 1: collapse that again all the experts were puzzled. They couldn't 265 00:15:34,640 --> 00:15:38,320 Speaker 1: explain the huge surge, and they certainly couldn't explain the 266 00:15:38,320 --> 00:15:42,600 Speaker 1: sudden collapse. Actually, by um the early ninety two, Japan 267 00:15:43,040 --> 00:15:47,320 Speaker 1: who was previously before the largest net long term capital 268 00:15:47,360 --> 00:15:52,960 Speaker 1: exporter in world history. Um superseding any other capital exporter 269 00:15:53,120 --> 00:15:58,400 Speaker 1: in history, had suddenly in early become a net importer 270 00:15:58,560 --> 00:16:02,320 Speaker 1: of capital. So not only were there no capital flows 271 00:16:02,800 --> 00:16:06,920 Speaker 1: outgoing anymore, it was actually borrowing money. So this was 272 00:16:07,520 --> 00:16:12,640 Speaker 1: another mind blowing puzzle. But my model worked brilliantly, and 273 00:16:12,720 --> 00:16:15,400 Speaker 1: it's still the only model that can explain is published 274 00:16:15,920 --> 00:16:21,040 Speaker 1: Review of International Economics. If you look it up, Japanese 275 00:16:21,040 --> 00:16:24,680 Speaker 1: capital flows and the role of land. So this bank 276 00:16:24,720 --> 00:16:29,920 Speaker 1: credit creation for real estate transactions created new money out 277 00:16:29,960 --> 00:16:32,920 Speaker 1: of nothing, which it goes into financial circulation, and some 278 00:16:33,000 --> 00:16:37,080 Speaker 1: of that spills over the borders abroad, which makes sense. 279 00:16:37,080 --> 00:16:42,200 Speaker 1: That's the diversification we talked about, and that explains capital flows. 280 00:16:42,200 --> 00:16:47,880 Speaker 1: And then of course from Japanese credit creation completely shrank, 281 00:16:48,040 --> 00:16:50,600 Speaker 1: collapse and the bubble burst. Of course, stock markets started 282 00:16:50,600 --> 00:16:57,560 Speaker 1: to collapse essentially from January just after the peak December peak, 283 00:16:57,640 --> 00:17:00,200 Speaker 1: and after that started to go down and down and out, 284 00:17:00,280 --> 00:17:03,840 Speaker 1: something we're perhaps reminded of in these days. UM and 285 00:17:04,359 --> 00:17:08,600 Speaker 1: has been going down well a lot in total collapse, 286 00:17:09,080 --> 00:17:12,359 Speaker 1: and capital flows also collapsed, and so the model stands up. 287 00:17:12,400 --> 00:17:15,480 Speaker 1: And I realized at that time the importance of bank 288 00:17:15,520 --> 00:17:18,280 Speaker 1: credit creation so essentially all my work afterwards has been 289 00:17:18,280 --> 00:17:21,280 Speaker 1: built on this, and so I could write I then 290 00:17:21,320 --> 00:17:25,080 Speaker 1: found out that the the division of bank credit creation 291 00:17:25,600 --> 00:17:29,359 Speaker 1: is important between credit bank credit for the real economy 292 00:17:29,480 --> 00:17:34,439 Speaker 1: for GDP transactions. The standard quantity theory m VEH equals 293 00:17:34,440 --> 00:17:37,679 Speaker 1: P y assumes that money is used always for GDP, 294 00:17:37,720 --> 00:17:40,480 Speaker 1: but it's not true. In many economies. Most of the 295 00:17:40,520 --> 00:17:44,000 Speaker 1: money doesn't go into GDP. It's used for ascid transactions, 296 00:17:44,000 --> 00:17:45,480 Speaker 1: and you have to split it up. And so that's 297 00:17:45,520 --> 00:17:48,720 Speaker 1: my quantity theory of disaggreated credit, on the basis of 298 00:17:48,720 --> 00:17:51,919 Speaker 1: which are then proposed quantitative easing when the Japanese banking 299 00:17:51,920 --> 00:18:15,560 Speaker 1: system collapsed. So, Richard, I want to ask you about 300 00:18:15,600 --> 00:18:19,480 Speaker 1: the policy response that we saw in Japan. But before 301 00:18:19,560 --> 00:18:21,520 Speaker 1: we get onto that, just talk to us a little 302 00:18:21,520 --> 00:18:25,680 Speaker 1: bit about how your credit creation theory actually stacked up 303 00:18:25,720 --> 00:18:30,639 Speaker 1: against dominant ideas of how money is created at the time. 304 00:18:31,000 --> 00:18:34,200 Speaker 1: I mean dominant ideas that are still dominant today, things 305 00:18:34,240 --> 00:18:38,240 Speaker 1: like fraction exact reserve blending, stuff like that exactly exactly, 306 00:18:38,240 --> 00:18:43,920 Speaker 1: and also the standard quantity equation monitorism and standard monetary 307 00:18:44,080 --> 00:18:47,480 Speaker 1: macro economics. Well, actually there was a big puzzle in 308 00:18:47,640 --> 00:18:51,119 Speaker 1: macro economics and monitory economics. And also the monitoris they 309 00:18:51,280 --> 00:18:54,520 Speaker 1: since the eighties, they've been in trouble why because the 310 00:18:54,600 --> 00:18:58,520 Speaker 1: link between the money supply and GDP had broken down. 311 00:18:59,640 --> 00:19:02,920 Speaker 1: What happened is that money supply had been rising much 312 00:19:02,960 --> 00:19:06,720 Speaker 1: faster than than GDP UM and so the so called 313 00:19:06,760 --> 00:19:10,080 Speaker 1: velocity was declining, but people didn't realize where the money 314 00:19:10,160 --> 00:19:13,280 Speaker 1: is going. And and and also it meant that because 315 00:19:13,359 --> 00:19:17,400 Speaker 1: velocity was unstable, policy maybers didn't have a link between 316 00:19:17,600 --> 00:19:20,560 Speaker 1: money and economy. So then the whole monitory policy concept, 317 00:19:20,720 --> 00:19:22,679 Speaker 1: and at the time in the early eighties was the 318 00:19:22,720 --> 00:19:27,800 Speaker 1: monitorist concept just money aggregates used to control the economy. 319 00:19:28,000 --> 00:19:31,640 Speaker 1: All that broke down. Now I could explain this with 320 00:19:31,840 --> 00:19:37,080 Speaker 1: my findings in Japan very easily because actually there's a 321 00:19:37,080 --> 00:19:41,000 Speaker 1: fundamental flaw in their theories. Two flaws. Actually, one is 322 00:19:41,080 --> 00:19:45,040 Speaker 1: their definition of money. And secondly they assumed wrongly that 323 00:19:45,119 --> 00:19:48,879 Speaker 1: all money is used for GDP transactions, which is ridiculous 324 00:19:48,880 --> 00:19:54,840 Speaker 1: because actually the majority of transactions is asset transactions. But 325 00:19:54,960 --> 00:19:58,720 Speaker 1: asset transactions are not part of GDP. They don't teach 326 00:19:59,119 --> 00:20:01,399 Speaker 1: national income account thing anymore. You used to get that 327 00:20:01,440 --> 00:20:04,199 Speaker 1: as a sort of economics one on one, but they 328 00:20:04,200 --> 00:20:08,080 Speaker 1: don't teach you anymore. So people don't realize that asset transactions, 329 00:20:08,119 --> 00:20:10,720 Speaker 1: real estate transactions, property transaction, they're not part of g 330 00:20:10,840 --> 00:20:15,760 Speaker 1: d P. And so what happened then, particularly there was 331 00:20:15,800 --> 00:20:18,119 Speaker 1: this big a bout in the eighties, is that in 332 00:20:18,160 --> 00:20:23,440 Speaker 1: many countries money supply was rising um but it wasn't 333 00:20:23,560 --> 00:20:26,560 Speaker 1: used to GDP transactions, used to asset transactions, so your 334 00:20:26,560 --> 00:20:30,120 Speaker 1: standard traditional models would give you the illusion of velocity decline. 335 00:20:30,560 --> 00:20:34,639 Speaker 1: It also meant that the policymakers didn't really didn't really 336 00:20:34,720 --> 00:20:37,080 Speaker 1: know what to do. The money supply is not linked 337 00:20:37,080 --> 00:20:40,480 Speaker 1: to GDP. But the true story is you have to 338 00:20:41,000 --> 00:20:45,760 Speaker 1: split money into money going into GDP for the real circulation, 339 00:20:45,800 --> 00:20:49,240 Speaker 1: for the real economy, and money going into asset transactions, 340 00:20:49,240 --> 00:20:52,919 Speaker 1: which which I do in my disaggregated quantity theory. However, 341 00:20:52,960 --> 00:20:55,080 Speaker 1: how can you split money by its use? Well you 342 00:20:55,119 --> 00:20:57,879 Speaker 1: can't if you use the traditional definition of money, which 343 00:20:57,960 --> 00:21:01,680 Speaker 1: is the monitory aggreg goods M one, M two, M three. 344 00:21:02,000 --> 00:21:04,440 Speaker 1: Around London we've got M twenty five, all these ms, 345 00:21:04,520 --> 00:21:08,200 Speaker 1: you know, these m aggregates. But actually that's the other 346 00:21:08,280 --> 00:21:10,959 Speaker 1: mistake they're making in the standard theories. That's not a 347 00:21:11,000 --> 00:21:14,920 Speaker 1: measure of the money supply. These are actually deposits, that's 348 00:21:15,000 --> 00:21:18,120 Speaker 1: money out of circulation, that's money not spend. These are 349 00:21:18,160 --> 00:21:21,560 Speaker 1: savings aggregates. We want to measure on Anyone who's interested 350 00:21:21,560 --> 00:21:24,720 Speaker 1: in the markets wants to measure money that is in circulation, 351 00:21:24,760 --> 00:21:27,960 Speaker 1: that's used for purchasing things, for transactions. So the real 352 00:21:28,080 --> 00:21:31,120 Speaker 1: liquidity the money they're doing stuff, not the money that's 353 00:21:31,160 --> 00:21:34,119 Speaker 1: being parked and its savings. And that's been the the 354 00:21:34,160 --> 00:21:37,320 Speaker 1: other problem in the traditional approaches. In my approach, I look, 355 00:21:37,520 --> 00:21:40,840 Speaker 1: I'm actually measure the money that is in circulation. How 356 00:21:40,880 --> 00:21:43,040 Speaker 1: can we do that? Well, you can do it if 357 00:21:43,040 --> 00:21:46,919 Speaker 1: you look at the money creation process. The money creation 358 00:21:46,960 --> 00:21:50,320 Speaker 1: process is this is this question, you know where does 359 00:21:50,400 --> 00:21:53,440 Speaker 1: money come from? Now, most people will answer this question 360 00:21:53,480 --> 00:21:56,480 Speaker 1: by saying, well, the central banks, they create money, they 361 00:21:56,480 --> 00:22:01,600 Speaker 1: inject money. Well, not really very much, because central bank money, 362 00:22:02,480 --> 00:22:05,080 Speaker 1: notes and coins and circulation is only three of the 363 00:22:05,080 --> 00:22:09,679 Speaker 1: money supply. The majority is created by banks through bank lending. 364 00:22:10,320 --> 00:22:13,960 Speaker 1: And that is the proper measure of the money supply. 365 00:22:14,119 --> 00:22:17,680 Speaker 1: Because if we measured by credit creation bank credit creation, 366 00:22:18,160 --> 00:22:21,760 Speaker 1: then we have the additional advantage that we can split 367 00:22:21,800 --> 00:22:25,239 Speaker 1: it up into bank credit used to GDP transactions and 368 00:22:25,240 --> 00:22:28,560 Speaker 1: bank credit used for asset transactions. That's what I did, 369 00:22:28,560 --> 00:22:31,159 Speaker 1: and that's why my models have been extremely stable, and 370 00:22:31,200 --> 00:22:35,520 Speaker 1: they've they've worked extremely well and stood up the test 371 00:22:35,600 --> 00:22:38,840 Speaker 1: of time really well. So, Richard, let's fast forward a 372 00:22:38,880 --> 00:22:43,080 Speaker 1: little bit, not to this crisis quite yet, but last uh, 373 00:22:43,119 --> 00:22:46,320 Speaker 1: you know, the central bank actions during the last crisis 374 00:22:47,080 --> 00:22:53,359 Speaker 1: two thousand nine, the Federal Reserve undertook h asset asset purchases, 375 00:22:53,640 --> 00:22:57,439 Speaker 1: quantitative easing, banking central banks all around the world head 376 00:22:57,480 --> 00:23:02,080 Speaker 1: done it. What does your what did your model anticipate 377 00:23:02,640 --> 00:23:06,080 Speaker 1: about the efficacy of these efforts, and what does it 378 00:23:06,119 --> 00:23:09,240 Speaker 1: reveal about the degree to which they were effective in 379 00:23:09,960 --> 00:23:14,239 Speaker 1: achieving achieving their goal and at what time period? Well, 380 00:23:14,280 --> 00:23:16,040 Speaker 1: in the post crisis, I mean there's you know, in 381 00:23:16,080 --> 00:23:19,879 Speaker 1: the sense that like so like two thousands nine and beyond, 382 00:23:19,960 --> 00:23:23,399 Speaker 1: because there has there was this extreme increase in the 383 00:23:23,440 --> 00:23:26,280 Speaker 1: sort of in the fence balance sheet. Um. And yet 384 00:23:26,600 --> 00:23:29,480 Speaker 1: most people would say, Okay, the post crisis, post two 385 00:23:29,480 --> 00:23:32,480 Speaker 1: thousand and eight, posted thousand nine crisis recovery was not 386 00:23:32,600 --> 00:23:37,800 Speaker 1: particularly impressive by any stretch, despite what, at least on paper, 387 00:23:38,560 --> 00:23:43,400 Speaker 1: looked like extraordinary action. Exactly well, there's also a link 388 00:23:43,480 --> 00:23:46,640 Speaker 1: to my time in Japan because, um, the next thing 389 00:23:46,640 --> 00:23:49,280 Speaker 1: I found out in Japan then in ninety one was 390 00:23:50,119 --> 00:23:53,520 Speaker 1: because there's been so much credit creation going to acid transactions, 391 00:23:53,880 --> 00:23:56,600 Speaker 1: this is totally unsustainable as an ascid bubble that must crash, 392 00:23:56,640 --> 00:23:58,960 Speaker 1: and this will take the banking system down. So here 393 00:23:59,040 --> 00:24:04,440 Speaker 1: I was a graduate student at Oxford when the top 394 00:24:04,480 --> 00:24:08,240 Speaker 1: twenty banks in the world were all Japanese, and I 395 00:24:08,280 --> 00:24:11,240 Speaker 1: put out the discussion paper back at Oxford having just 396 00:24:11,320 --> 00:24:15,000 Speaker 1: come back from Tokyo with the prediction that we unfortunately 397 00:24:15,040 --> 00:24:18,840 Speaker 1: have to expect that Japanese banks will go bankrupt and 398 00:24:18,920 --> 00:24:22,520 Speaker 1: Japan will go into the biggest recession since the Great Depression. 399 00:24:22,640 --> 00:24:26,000 Speaker 1: Why because of this asset bubble. So you have so 400 00:24:26,080 --> 00:24:30,760 Speaker 1: much bank credit, which is money creation used for asset transactions, 401 00:24:31,440 --> 00:24:34,280 Speaker 1: created the bubble, and when they bursts, you just from 402 00:24:34,320 --> 00:24:36,480 Speaker 1: the peak, you only need to go down by ten 403 00:24:36,520 --> 00:24:39,639 Speaker 1: percent because that's all capital banks have, right, And that's 404 00:24:39,680 --> 00:24:43,080 Speaker 1: why we have so many banking crises. They follow the 405 00:24:43,119 --> 00:24:46,560 Speaker 1: asset bubbles because the ascid bubbles are bank credit created. 406 00:24:46,760 --> 00:24:49,200 Speaker 1: So it's very very simple. Actually, it's always the same story, 407 00:24:49,200 --> 00:24:50,919 Speaker 1: and that's why it's so relevant. Two thousand and eight 408 00:24:50,960 --> 00:24:53,800 Speaker 1: two thousand nine. Now because of my predictions are then 409 00:24:53,840 --> 00:24:56,520 Speaker 1: actually quickly got a job as chief economists that various 410 00:24:56,520 --> 00:25:00,960 Speaker 1: offers Goldman Sachs Swiss Bank Corporation. I accepted the offer 411 00:25:01,000 --> 00:25:04,480 Speaker 1: from Jardine Fleming Securities because they gave me complete freehand 412 00:25:04,520 --> 00:25:07,240 Speaker 1: maybe chief economist, and I could use my my new 413 00:25:07,280 --> 00:25:11,560 Speaker 1: credit creation based models. And I then worked out that um, 414 00:25:11,640 --> 00:25:14,840 Speaker 1: well we're gonna move into this recession that's happening, but 415 00:25:14,920 --> 00:25:16,919 Speaker 1: of course one of the ways out, and I started 416 00:25:16,960 --> 00:25:20,360 Speaker 1: to publish papers and advice, you know, the policy making 417 00:25:20,400 --> 00:25:23,280 Speaker 1: in Japan how to get out. Fortunately, unfortunately they didn't listen. 418 00:25:23,840 --> 00:25:27,359 Speaker 1: But there was this UM landmark paper in the Nikki 419 00:25:27,400 --> 00:25:29,240 Speaker 1: published in the Nick Knee home case at Shimbo, in 420 00:25:29,280 --> 00:25:34,040 Speaker 1: the major Japanese newspaper UM in September, in which I 421 00:25:34,080 --> 00:25:38,800 Speaker 1: advised the Bank of Japan and policymakers to adopt a 422 00:25:38,840 --> 00:25:41,800 Speaker 1: new monitor policy because the traditional stuff is not going 423 00:25:41,840 --> 00:25:43,800 Speaker 1: to work. And in those days we still at five 424 00:25:43,840 --> 00:25:46,840 Speaker 1: percent on the j GB on the government bond yield 425 00:25:47,280 --> 00:25:50,399 Speaker 1: four point seven, and the central bank was, you know, 426 00:25:50,440 --> 00:25:53,280 Speaker 1: of course cutting interest rates, and I said, stopped cutting rates. 427 00:25:53,440 --> 00:25:55,080 Speaker 1: This is not going to help you can. In fact, 428 00:25:55,080 --> 00:25:57,640 Speaker 1: that even wrote you can cut rates to zero, which 429 00:25:57,840 --> 00:25:59,600 Speaker 1: you know is trying to be dramatic. It's not going 430 00:25:59,680 --> 00:26:02,760 Speaker 1: to help. I didn't really think that they would try 431 00:26:02,800 --> 00:26:05,560 Speaker 1: to definitely prove me right with that one, because it's 432 00:26:05,600 --> 00:26:07,280 Speaker 1: not the price of money that's the problem. It's the 433 00:26:07,359 --> 00:26:09,560 Speaker 1: quantity of bank credit. Once the banks have so many 434 00:26:09,640 --> 00:26:13,160 Speaker 1: non performing assets, they will not lend, and then you're stuck. 435 00:26:13,200 --> 00:26:15,280 Speaker 1: You won't have money creation because that's what you need 436 00:26:15,320 --> 00:26:18,520 Speaker 1: for growth, money creation, for GDP transaction. So what do 437 00:26:18,520 --> 00:26:21,680 Speaker 1: you do? Well, the monitors were saying, just print money, 438 00:26:21,840 --> 00:26:24,159 Speaker 1: some money supply, and they also said, no, that's not 439 00:26:24,160 --> 00:26:27,800 Speaker 1: gonna work. So I was suggesting a monitory policy that's 440 00:26:27,800 --> 00:26:31,800 Speaker 1: stimulatary but expands credit creation usually and initially had credit 441 00:26:31,840 --> 00:26:34,000 Speaker 1: creation and the title of this article the nikki, but 442 00:26:34,040 --> 00:26:36,879 Speaker 1: the editors told me, look, can you make this title simpler? 443 00:26:36,880 --> 00:26:40,240 Speaker 1: People want to understand what what is credit creation? What 444 00:26:40,320 --> 00:26:42,919 Speaker 1: do you call your monity policy? Is it? Is it 445 00:26:43,160 --> 00:26:45,200 Speaker 1: that you know? Is it? If you if it's an 446 00:26:45,200 --> 00:26:49,280 Speaker 1: expansionary monitor policy. So expanding the money supply, No, that's 447 00:26:49,320 --> 00:26:51,640 Speaker 1: that's not it. It's not the traditional M one, M two, 448 00:26:51,720 --> 00:26:55,320 Speaker 1: M three, monitorist policy. So is it lowering rate to No, 449 00:26:55,480 --> 00:26:57,800 Speaker 1: that's not it either. So what is it then? Well, 450 00:26:57,840 --> 00:27:01,760 Speaker 1: it is a quantitative policy and the Japanese traditional word 451 00:27:01,800 --> 00:27:06,360 Speaker 1: for an expansionary policies easing, so I called it quantitative 452 00:27:06,480 --> 00:27:10,040 Speaker 1: easing to distinguish it from all the previous and monitorists 453 00:27:10,080 --> 00:27:14,000 Speaker 1: approaches to stimulate economy through monitor policy. And it's defined 454 00:27:14,000 --> 00:27:17,240 Speaker 1: in this article as an expansion in bank credit creation 455 00:27:17,320 --> 00:27:21,760 Speaker 1: and credit creation for GDP transactions. How can you achieve that, Well, 456 00:27:21,840 --> 00:27:24,440 Speaker 1: there's there's a package mainly three things you should do. 457 00:27:25,240 --> 00:27:28,000 Speaker 1: Number one, the central bank should step in and help 458 00:27:28,040 --> 00:27:31,320 Speaker 1: the banks to make sure that the banks become strong 459 00:27:31,440 --> 00:27:35,119 Speaker 1: enough to lend again. And there's there's various measures you 460 00:27:35,119 --> 00:27:38,520 Speaker 1: can you can do to accelerate that and and and 461 00:27:38,600 --> 00:27:42,400 Speaker 1: in fact the fastest is that the central bank purchases 462 00:27:42,440 --> 00:27:45,800 Speaker 1: the non performing assets from the banks at face value, 463 00:27:45,920 --> 00:27:48,680 Speaker 1: so you shift them to the central bank. Um and 464 00:27:48,760 --> 00:27:52,359 Speaker 1: of course, clearly immediately you've completely cleaned up the balance 465 00:27:52,359 --> 00:27:55,200 Speaker 1: sheet of the banks, more liquid and stronger than ever before, 466 00:27:55,600 --> 00:27:58,000 Speaker 1: so they can lend again. But you still want to 467 00:27:58,119 --> 00:28:01,359 Speaker 1: stimulate things, so you um also get the government to 468 00:28:01,400 --> 00:28:05,399 Speaker 1: stop the issuance of government bonds and instead fund the 469 00:28:05,400 --> 00:28:09,400 Speaker 1: public sector borrowing requirement by borrowing through loan contracts which 470 00:28:09,440 --> 00:28:12,560 Speaker 1: are not tradeable, dead from the banks, and that stimulates 471 00:28:12,560 --> 00:28:16,080 Speaker 1: bank credit creation. With these two measures, you will kick 472 00:28:16,119 --> 00:28:19,320 Speaker 1: start the economy so dramatically. Won't believe it now. Sadly, 473 00:28:19,359 --> 00:28:21,639 Speaker 1: the Japanese wouldn't have any of this. They were advised 474 00:28:21,640 --> 00:28:24,840 Speaker 1: by Richard kop who they listened to for twenty years, 475 00:28:25,240 --> 00:28:27,760 Speaker 1: and so they stayt in recession for twenty years because 476 00:28:27,760 --> 00:28:29,640 Speaker 1: he said, no, no, no no, what Richard said is wrong. 477 00:28:29,760 --> 00:28:32,439 Speaker 1: There's nothing to do a credit creation. That doesn't matter. 478 00:28:32,760 --> 00:28:35,760 Speaker 1: We just need more fiscal spending. But the trouble was 479 00:28:35,960 --> 00:28:39,280 Speaker 1: they were funding the fiscal spending by government bond issuance 480 00:28:39,560 --> 00:28:44,000 Speaker 1: and boring from the non bank private sector through bonds. 481 00:28:44,040 --> 00:28:48,920 Speaker 1: So they increased physical spending dramatically, world record peacetime fiscal 482 00:28:48,960 --> 00:28:51,680 Speaker 1: expansion because now we're going to beat those records. But 483 00:28:51,760 --> 00:28:55,000 Speaker 1: that's another story. And it didn't help. It didn't have 484 00:28:55,080 --> 00:28:58,160 Speaker 1: any positive impact because the same money they were putting 485 00:28:58,200 --> 00:29:01,160 Speaker 1: in the economy through the right hand to fiscal spending, 486 00:29:01,320 --> 00:29:04,040 Speaker 1: they took out of the economy through the bond issuance. 487 00:29:04,400 --> 00:29:06,520 Speaker 1: And I proved that actually in empirical paper, one by 488 00:29:06,560 --> 00:29:10,080 Speaker 1: one yen one end by one end crowding out. But 489 00:29:10,560 --> 00:29:12,520 Speaker 1: you can change that if you stop the asus of 490 00:29:12,560 --> 00:29:16,120 Speaker 1: government bonds and get the government to borrow from banks 491 00:29:16,120 --> 00:29:18,880 Speaker 1: through loan contracts, then you kick stop bank critic creation. 492 00:29:19,200 --> 00:29:21,080 Speaker 1: I like that we're getting into this now. I wish 493 00:29:21,080 --> 00:29:23,520 Speaker 1: we had had you had Richard on at the same time, 494 00:29:23,560 --> 00:29:25,320 Speaker 1: because then we could have had a real fight, or 495 00:29:25,320 --> 00:29:28,640 Speaker 1: at least a debate. But something I'm curious about. You know, 496 00:29:28,720 --> 00:29:32,240 Speaker 1: in in the beginning of our conversation, you were talking 497 00:29:32,280 --> 00:29:38,200 Speaker 1: about the analytical error that economists made thinking talking about 498 00:29:38,200 --> 00:29:41,680 Speaker 1: the zero sumness of real estate transactions, and so you said, well, 499 00:29:41,960 --> 00:29:43,640 Speaker 1: the real estate couldn't have been the driver of these 500 00:29:43,720 --> 00:29:46,960 Speaker 1: capital outflows, they thought, because someone had to buy, someone 501 00:29:47,000 --> 00:29:49,080 Speaker 1: had to sell. But obviously the real estate could be 502 00:29:49,080 --> 00:29:53,560 Speaker 1: posted as collateral to create new money. The argument, or 503 00:29:53,560 --> 00:29:58,400 Speaker 1: one argument for why bond issuance doesn't crowd out private 504 00:29:58,400 --> 00:30:02,400 Speaker 1: sectors borrowing, borrowing, and and is that um safe haven 505 00:30:02,440 --> 00:30:07,480 Speaker 1: government bond can be posted also as collateral for new money. 506 00:30:07,560 --> 00:30:10,880 Speaker 1: So why is it that bond issuance, in your view, 507 00:30:11,400 --> 00:30:16,720 Speaker 1: has a dampening effect on private sector activity? If like 508 00:30:16,880 --> 00:30:20,320 Speaker 1: real estate. They could theoretically be posted as collateral for credit, 509 00:30:20,400 --> 00:30:23,800 Speaker 1: and it should be very good, very good, high quality collateral, right, 510 00:30:23,800 --> 00:30:25,320 Speaker 1: but then you still need to borrow it, so it 511 00:30:25,360 --> 00:30:29,920 Speaker 1: becomes a derivative process, you know. And um, whereas if 512 00:30:29,920 --> 00:30:32,280 Speaker 1: you get the government to borrow direct from banks, you 513 00:30:32,360 --> 00:30:34,680 Speaker 1: cut through all these intermediaries which may or may not 514 00:30:34,720 --> 00:30:36,840 Speaker 1: be willing to borrow. When you're in the recession, you know, 515 00:30:36,920 --> 00:30:39,520 Speaker 1: and bank balance sheets are hurt by non performing assets, 516 00:30:40,000 --> 00:30:44,120 Speaker 1: they're reluctant to lent. So um, that's why. But of course, 517 00:30:44,280 --> 00:30:49,440 Speaker 1: also the Japanese did not follow my first advice, which 518 00:30:49,880 --> 00:30:52,720 Speaker 1: for the central bank to take off the non performing 519 00:30:52,720 --> 00:30:55,000 Speaker 1: assets of the bank balance sheets. They didn't do that either. 520 00:30:55,720 --> 00:30:59,000 Speaker 1: And so if you don't do either of these methods, 521 00:30:59,040 --> 00:31:02,640 Speaker 1: you can't expect the recovery. They just continued to implement 522 00:31:02,720 --> 00:31:05,600 Speaker 1: this advice from Richard Coop Morphis coal spending, morphisco spending, 523 00:31:05,680 --> 00:31:09,000 Speaker 1: and yes, rates to zero, rates to zero, they would 524 00:31:09,040 --> 00:31:12,000 Speaker 1: just stay in recession. And it's extraordinary because I mean 525 00:31:12,120 --> 00:31:15,400 Speaker 1: essentially after fift sort of fifteen years, I gave up. 526 00:31:15,440 --> 00:31:18,520 Speaker 1: I thought because I was well known, my book had 527 00:31:18,560 --> 00:31:20,440 Speaker 1: become a number one best seller in Japan. As the 528 00:31:20,480 --> 00:31:23,040 Speaker 1: book Princess of the Yen about the Bank of Japan, 529 00:31:23,120 --> 00:31:25,120 Speaker 1: with all the analysis, all the solutions in there, I 530 00:31:25,160 --> 00:31:29,040 Speaker 1: was invited to Parliament as advising leading politicians, people who 531 00:31:29,040 --> 00:31:31,160 Speaker 1: were then Finance Minister and so on, so I had 532 00:31:31,200 --> 00:31:34,920 Speaker 1: the ear of the of the decision makers, but they 533 00:31:35,040 --> 00:31:37,520 Speaker 1: just wouldn't do it. That The main thing was the 534 00:31:37,560 --> 00:31:40,160 Speaker 1: Bank of Japan leadership was unwilling to do this, and 535 00:31:40,200 --> 00:31:44,280 Speaker 1: as a reveal in my book, they had very different goals. 536 00:31:44,520 --> 00:31:47,120 Speaker 1: They understood this, and that was the shocking thing. Like 537 00:31:47,280 --> 00:31:50,000 Speaker 1: several key Bank of Japan people had told me that 538 00:31:50,440 --> 00:31:55,680 Speaker 1: they did not want a recovery. Why because the recession 539 00:31:55,800 --> 00:32:00,400 Speaker 1: was serving a political purpose. They were engineering structural reform 540 00:32:00,440 --> 00:32:02,440 Speaker 1: and as a result they were totally unwilling to do 541 00:32:02,520 --> 00:32:06,280 Speaker 1: this um But it was clearly possible and it could 542 00:32:06,320 --> 00:32:08,400 Speaker 1: have been done now in these debates at the time 543 00:32:08,480 --> 00:32:11,600 Speaker 1: in the nineties in Japan, there was one American scholar 544 00:32:11,600 --> 00:32:15,320 Speaker 1: who joined these debates, and that was Ben Bonanci. Now 545 00:32:15,360 --> 00:32:18,880 Speaker 1: when he then became chairman of the Board of Governors 546 00:32:18,880 --> 00:32:22,320 Speaker 1: of the Federal Reserve System. Soon after, of course, we 547 00:32:22,360 --> 00:32:25,760 Speaker 1: had the two thousand eight crisis, and then it looks 548 00:32:25,840 --> 00:32:29,080 Speaker 1: like he very much remembered what I was saying, because 549 00:32:29,120 --> 00:32:32,680 Speaker 1: he was the only central bank leader at the time 550 00:32:33,160 --> 00:32:36,200 Speaker 1: who implemented at least my first advice of this what 551 00:32:36,240 --> 00:32:38,840 Speaker 1: I called quantitative easy. You know, that's this, This is 552 00:32:38,880 --> 00:32:43,400 Speaker 1: the original definition of quantitative easing, expanding credit creation by 553 00:32:43,480 --> 00:32:46,320 Speaker 1: first taking the non performing assets of the bank balance 554 00:32:46,400 --> 00:32:49,920 Speaker 1: sheets and also kick starting bank credit to the real economy, 555 00:32:50,160 --> 00:32:53,400 Speaker 1: such as by shifting government funding from the bond markets 556 00:32:53,480 --> 00:32:55,880 Speaker 1: direct borrowing from banks. Anyway, he took the first one, 557 00:32:56,320 --> 00:33:00,640 Speaker 1: and the fellow reserve took huge amounts of add assets 558 00:33:00,760 --> 00:33:04,200 Speaker 1: of financial institutions balance sheets, and as a result, bank 559 00:33:04,320 --> 00:33:08,720 Speaker 1: lending recovered first in the US, and GDP growth recovered 560 00:33:08,760 --> 00:33:10,600 Speaker 1: first and was the strongest in the US in the 561 00:33:10,680 --> 00:33:14,520 Speaker 1: in the post a crisis period, way ahead of the Eurozone, 562 00:33:14,520 --> 00:33:18,640 Speaker 1: way ahead of other countries, whether it's the UK or Japan, 563 00:33:19,360 --> 00:33:21,520 Speaker 1: because he took that policy. Of course, it would have 564 00:33:21,560 --> 00:33:24,440 Speaker 1: been even better had he ensured that this bank credit 565 00:33:24,440 --> 00:33:26,400 Speaker 1: creation goes mainly into the real economy. And that's why 566 00:33:26,400 --> 00:33:28,440 Speaker 1: your other point is correct. You know, it's sort of 567 00:33:28,440 --> 00:33:31,040 Speaker 1: a weak recovery because still too much was going to 568 00:33:31,120 --> 00:33:33,280 Speaker 1: asset markets, which is the other point I was trying 569 00:33:33,280 --> 00:33:37,560 Speaker 1: to make. So if we fast forward to today, I'm curious, 570 00:33:37,600 --> 00:33:40,640 Speaker 1: what is your your credit creation theory and your definition 571 00:33:40,640 --> 00:33:44,400 Speaker 1: of quantitative easing tell you about the current crisis and 572 00:33:44,560 --> 00:33:47,960 Speaker 1: the policy response that we've seen. Um, let's say, let's 573 00:33:48,000 --> 00:33:50,400 Speaker 1: keep it to the US for now. Uh, that we've 574 00:33:50,440 --> 00:33:53,280 Speaker 1: seen there because we do have um q E or 575 00:33:53,400 --> 00:33:56,160 Speaker 1: an expansion of the balance sheet happening again. But we 576 00:33:56,200 --> 00:34:01,000 Speaker 1: do also have a sort of interaction between the government 577 00:34:01,240 --> 00:34:06,080 Speaker 1: and the banks through the p p P program, which 578 00:34:06,120 --> 00:34:11,520 Speaker 1: is something slightly new. So what do you think about that? Yes, 579 00:34:11,600 --> 00:34:16,279 Speaker 1: the responses have been even more dramatic now then in 580 00:34:16,400 --> 00:34:19,640 Speaker 1: two thousand and eight, and I think there is a 581 00:34:20,840 --> 00:34:26,160 Speaker 1: So there is a quantitative and there's a qualitative difference. Essentially, 582 00:34:26,239 --> 00:34:30,040 Speaker 1: the Fed's response already started September last year. This is 583 00:34:30,080 --> 00:34:33,560 Speaker 1: the solution to the puzzle that we already saw September 584 00:34:33,760 --> 00:34:35,840 Speaker 1: last year. And people are saying, something big is going 585 00:34:35,920 --> 00:34:37,759 Speaker 1: to happen, something's big gonna happen. What is it going 586 00:34:37,800 --> 00:34:41,000 Speaker 1: to be? Um? In many ways, you could say that 587 00:34:41,040 --> 00:34:45,040 Speaker 1: already pressure was building in the US financial system, as 588 00:34:45,239 --> 00:34:49,560 Speaker 1: the same in other countries financial systems. UM and so 589 00:34:49,800 --> 00:34:55,000 Speaker 1: there was already a problem liquidity. For some reason, big 590 00:34:55,040 --> 00:34:58,680 Speaker 1: banks were getting reluctant to lend to each other again UM, 591 00:34:58,680 --> 00:35:04,319 Speaker 1: and the FED stepped in, became very very active, very aggressively. UM. 592 00:35:04,360 --> 00:35:08,280 Speaker 1: But then of course from from March this year, things 593 00:35:08,320 --> 00:35:10,600 Speaker 1: were accelerated further. And here this is where we see 594 00:35:10,600 --> 00:35:14,080 Speaker 1: I think a difference to two thousand eight responses. I 595 00:35:14,120 --> 00:35:18,320 Speaker 1: think more is done now then in two thousand and 596 00:35:18,360 --> 00:35:22,200 Speaker 1: eight to ensure that money goes into the real economy, 597 00:35:22,360 --> 00:35:26,200 Speaker 1: and at least in theory, should also reach ordinary people. 598 00:35:26,440 --> 00:35:29,160 Speaker 1: I mean, you've you've heard all these proposals about and 599 00:35:29,160 --> 00:35:32,520 Speaker 1: and and policies to try to put money into people's pockets, 600 00:35:32,560 --> 00:35:35,799 Speaker 1: because the reality is a different story now that we're 601 00:35:35,880 --> 00:35:40,600 Speaker 1: bankrupting thousands and thousands of small firms and salt traders, 602 00:35:41,120 --> 00:35:48,040 Speaker 1: business people. Essentially, it's a government imposed um truncation of 603 00:35:48,120 --> 00:35:51,840 Speaker 1: the economy. It's like an amputation of the small business sector. 604 00:35:52,080 --> 00:35:55,200 Speaker 1: Not of course all industries, because those that can work online, 605 00:35:55,440 --> 00:35:58,480 Speaker 1: you know, they will survive. But there's all these industries 606 00:35:58,520 --> 00:36:02,960 Speaker 1: and activities that uh, they need human contact and that 607 00:36:03,040 --> 00:36:05,960 Speaker 1: are not privileged. They're dying now. And of course in 608 00:36:06,000 --> 00:36:08,520 Speaker 1: the US this means immediately unemployment and just to figures 609 00:36:08,520 --> 00:36:11,480 Speaker 1: out today is quite extraordinary, isn't it. Really We're up 610 00:36:11,480 --> 00:36:19,080 Speaker 1: to thirty three million UM that claiming jobless benefits. This 611 00:36:19,239 --> 00:36:24,719 Speaker 1: is nties great depression sort of levels, and so that 612 00:36:24,800 --> 00:36:28,520 Speaker 1: means we need a response that helps people ornerary people 613 00:36:28,960 --> 00:36:32,600 Speaker 1: affected by this, and there has been a greater attempt 614 00:36:32,600 --> 00:36:34,640 Speaker 1: now than two thousand and eight to help with that. 615 00:36:34,719 --> 00:36:36,759 Speaker 1: I'm not saying this is the best they can do, 616 00:36:37,400 --> 00:36:39,920 Speaker 1: because we know that there's still not so much money 617 00:36:40,080 --> 00:36:45,880 Speaker 1: getting through to you know, small entrepreneurs, business people in catering, hotel, 618 00:36:45,960 --> 00:36:52,040 Speaker 1: all these industries, restaurants affected and all the you know, 619 00:36:52,120 --> 00:36:55,080 Speaker 1: the casual jobs and zero other jobs and all these 620 00:36:55,920 --> 00:36:58,799 Speaker 1: so they're not you know, they should probably still be 621 00:36:58,880 --> 00:37:01,799 Speaker 1: looked after better. But at least there has been a 622 00:37:01,800 --> 00:37:04,000 Speaker 1: shift to get more money to them. So what does 623 00:37:04,000 --> 00:37:07,640 Speaker 1: that mean specifically though, because again, you know, going back 624 00:37:07,680 --> 00:37:11,080 Speaker 1: to post two thousand nine, there was this general view 625 00:37:11,080 --> 00:37:16,680 Speaker 1: that the activities did a very good job reinflating financial markets, 626 00:37:17,120 --> 00:37:19,480 Speaker 1: but there were but the real economy side was never 627 00:37:19,520 --> 00:37:22,480 Speaker 1: particularly impressive, even though we had this incredible ball market. 628 00:37:22,920 --> 00:37:26,080 Speaker 1: So what how do you make policies that tilt the 629 00:37:26,120 --> 00:37:29,520 Speaker 1: new money creation more towards real activity as opposed to 630 00:37:29,600 --> 00:37:35,359 Speaker 1: money going into speculative asset. Yes, exactly. Well, the main 631 00:37:35,400 --> 00:37:39,759 Speaker 1: thing is to ensure that there are many small banks, 632 00:37:39,760 --> 00:37:43,200 Speaker 1: because small banks lent to small firms. The US used 633 00:37:43,200 --> 00:37:46,719 Speaker 1: to be uniquely well endowed on this front and the 634 00:37:46,760 --> 00:37:51,480 Speaker 1: whole world, because only ten fifteen years back America had 635 00:37:51,560 --> 00:37:56,000 Speaker 1: twelve thousand banks um and a bit earlier America had 636 00:37:56,000 --> 00:38:01,000 Speaker 1: twenty thousand banks. But the US, like other countries, is 637 00:38:01,040 --> 00:38:03,960 Speaker 1: that this policy where central banks want to concentrate the 638 00:38:04,000 --> 00:38:06,799 Speaker 1: banking system. So the number of banks has been declining, 639 00:38:07,239 --> 00:38:10,239 Speaker 1: and in the last decade they've fallen to, you know, 640 00:38:10,320 --> 00:38:15,120 Speaker 1: from twelve thousand to only barely five thousand banks, so 641 00:38:15,160 --> 00:38:19,680 Speaker 1: that's bad. But still it's been so many that five 642 00:38:19,680 --> 00:38:22,040 Speaker 1: thousand are still left, and that is much better than 643 00:38:22,040 --> 00:38:26,080 Speaker 1: other countries. So the US is next to China, you know, 644 00:38:26,120 --> 00:38:29,040 Speaker 1: these are the two countries with most banks. The next 645 00:38:29,080 --> 00:38:32,640 Speaker 1: one in this ranking is Germany, which has one thousand, 646 00:38:32,640 --> 00:38:35,560 Speaker 1: five hundred banks, which by far the largest number of 647 00:38:35,600 --> 00:38:39,120 Speaker 1: any country in the EU, and so Germany is also 648 00:38:39,160 --> 00:38:42,319 Speaker 1: likely to to do better because America still has these 649 00:38:42,480 --> 00:38:46,080 Speaker 1: five five thousand banks, many of which are small local 650 00:38:46,080 --> 00:38:50,960 Speaker 1: community banks. It can get the money too, small companies 651 00:38:51,600 --> 00:38:53,440 Speaker 1: that needs to be strengthened. And these banks need to 652 00:38:53,440 --> 00:38:55,480 Speaker 1: be helped, and the best way to help them is 653 00:38:55,840 --> 00:38:59,120 Speaker 1: to end this ridiculous policy of zero interest rates or 654 00:38:59,160 --> 00:39:02,799 Speaker 1: in Europe, negative of interest rates, because that's actually a 655 00:39:02,880 --> 00:39:06,440 Speaker 1: key factor in forcing the banks to merge and getting 656 00:39:06,480 --> 00:39:09,120 Speaker 1: rid of small banks and getting concentration in the banking system. 657 00:39:09,160 --> 00:39:12,879 Speaker 1: So instead we should end that the FED should, as 658 00:39:12,920 --> 00:39:16,640 Speaker 1: a part of this policy package, raise interest rates in 659 00:39:16,760 --> 00:39:20,359 Speaker 1: order to push up long rates, steepen the yield curve, 660 00:39:20,440 --> 00:39:22,680 Speaker 1: and give banks the perspective that they can actually earn 661 00:39:22,760 --> 00:39:25,680 Speaker 1: some money by lending, because they at the moment they're 662 00:39:25,719 --> 00:39:28,440 Speaker 1: still barely surviving and they know this is an opportunity. 663 00:39:28,440 --> 00:39:31,640 Speaker 1: Now they're getting government supports. Of course they're aggressively trying 664 00:39:31,640 --> 00:39:35,840 Speaker 1: to write loans, but it's not sustainable. You need a 665 00:39:35,880 --> 00:39:37,839 Speaker 1: positive yield curve for that, which is why the yield 666 00:39:37,840 --> 00:39:42,480 Speaker 1: curve is a great business cycle indicator. Um And sadly 667 00:39:42,560 --> 00:39:45,160 Speaker 1: that's still pointing down to the FED needs to work 668 00:39:45,160 --> 00:39:47,080 Speaker 1: on that one. They've been working in the wrong direction 669 00:39:47,200 --> 00:40:00,680 Speaker 1: when it comes to interest rate policy. So your point 670 00:40:00,760 --> 00:40:03,839 Speaker 1: about small banks in the US is a really interesting one, 671 00:40:03,920 --> 00:40:07,640 Speaker 1: and I remember writing stories after the financial crisis about 672 00:40:08,239 --> 00:40:11,399 Speaker 1: how there were no new banks created for I think 673 00:40:11,440 --> 00:40:13,759 Speaker 1: it was three or four years after that, and then 674 00:40:14,320 --> 00:40:18,120 Speaker 1: the one that was created was UM. The first one 675 00:40:18,280 --> 00:40:21,919 Speaker 1: post financial crisis was an Amish bank in Pennsylvania called 676 00:40:21,960 --> 00:40:24,920 Speaker 1: Bank of Bird in Hand, with a very specific business model. 677 00:40:25,239 --> 00:40:28,400 Speaker 1: So definitely an issue in the States. What are you 678 00:40:28,440 --> 00:40:32,200 Speaker 1: seeing in terms of other countries and specifically Germany where 679 00:40:32,200 --> 00:40:35,279 Speaker 1: you've been doing some work. Yes, it's I mean, it's 680 00:40:35,320 --> 00:40:38,080 Speaker 1: it's sad that we don't get many new banks being 681 00:40:38,080 --> 00:40:40,879 Speaker 1: set up, particularly these local community banks which we need. 682 00:40:41,360 --> 00:40:44,080 Speaker 1: They've been driven out of business, so we need to 683 00:40:44,080 --> 00:40:46,840 Speaker 1: do to work in the opposite direction. I'm working to 684 00:40:46,920 --> 00:40:50,560 Speaker 1: set up not for profit community banks leading the project 685 00:40:50,560 --> 00:40:53,239 Speaker 1: in the UK. We've got the Hampshire Community Bank coming 686 00:40:53,320 --> 00:40:57,520 Speaker 1: up and other community banks UM and I mean think 687 00:40:57,560 --> 00:41:00,520 Speaker 1: about this his his Germany, which has been a successful 688 00:41:00,520 --> 00:41:03,120 Speaker 1: economy for the last two hundred years, despite wars and 689 00:41:03,160 --> 00:41:07,080 Speaker 1: disasters in between UM and this at the core of 690 00:41:07,120 --> 00:41:10,759 Speaker 1: the success has been the small and medium sized enterprises 691 00:41:11,520 --> 00:41:14,959 Speaker 1: UM that are disproportionately strong and German exports and German 692 00:41:14,960 --> 00:41:17,759 Speaker 1: exports are still as large as Chinese exports, you know, 693 00:41:17,800 --> 00:41:20,879 Speaker 1: the biggest in the world um and many are from 694 00:41:20,880 --> 00:41:23,040 Speaker 1: small firms. So how can the small firms be so strong. 695 00:41:23,080 --> 00:41:27,840 Speaker 1: It's because of the banking sector. It consists mainly of 696 00:41:28,040 --> 00:41:32,160 Speaker 1: not for profit community banks. Of German banks are not 697 00:41:32,280 --> 00:41:35,880 Speaker 1: for profit local community banks. It's like local public savings 698 00:41:35,880 --> 00:41:41,960 Speaker 1: banks and also cooperative banks UM. And because they're small, 699 00:41:42,680 --> 00:41:45,680 Speaker 1: they they want to lend to small companies. There's a 700 00:41:45,760 --> 00:41:48,040 Speaker 1: very simple principle in banking. Big banks want to do 701 00:41:48,080 --> 00:41:51,120 Speaker 1: big deals, you know, and that's that's truth. Who wants 702 00:41:51,160 --> 00:41:53,760 Speaker 1: to lend to small firms? It is only small banks 703 00:41:53,800 --> 00:41:56,280 Speaker 1: only for them? Does it make sense? But small firms 704 00:41:56,280 --> 00:41:59,719 Speaker 1: are the biggest employer in the U S sevent employment 705 00:42:00,239 --> 00:42:03,400 Speaker 1: and and the same is true for Germany Japan a 706 00:42:03,640 --> 00:42:05,920 Speaker 1: percent of employment is small firms. So if you have 707 00:42:06,000 --> 00:42:09,760 Speaker 1: many small banks Japan also has a lot of them, 708 00:42:09,920 --> 00:42:11,920 Speaker 1: then your economy is going to be strong and resilient 709 00:42:12,040 --> 00:42:14,480 Speaker 1: also under crisis. So we need to set them up, 710 00:42:14,520 --> 00:42:17,839 Speaker 1: and that's what policy makers should focus on. So they 711 00:42:17,840 --> 00:42:21,480 Speaker 1: should help the movement to set up new banks. Delighted 712 00:42:21,560 --> 00:42:23,200 Speaker 1: do you that there were there were a few in 713 00:42:23,239 --> 00:42:26,080 Speaker 1: the US, like the Amish bank, but we need much 714 00:42:26,120 --> 00:42:30,640 Speaker 1: more than that. I wanna just before we wrap up, 715 00:42:30,680 --> 00:42:33,600 Speaker 1: sort of get back at some of the core principles here, 716 00:42:33,600 --> 00:42:36,560 Speaker 1: because I keep going back to this idea and I 717 00:42:36,640 --> 00:42:39,320 Speaker 1: think it's really important one, and probably not a fully 718 00:42:39,840 --> 00:42:43,600 Speaker 1: appreciated one, This idea that you know, banks aren't intermediary. 719 00:42:43,800 --> 00:42:46,279 Speaker 1: They create money. They can create money in part by 720 00:42:46,280 --> 00:42:50,239 Speaker 1: when you post collateral in a boom where collateral is 721 00:42:50,320 --> 00:42:53,719 Speaker 1: strong and expected to rise like land prices, that can 722 00:42:53,760 --> 00:42:57,040 Speaker 1: really accelerate credit creation, create new money. Why is it 723 00:42:57,120 --> 00:43:00,520 Speaker 1: then there is particularly important for the central bank to 724 00:43:00,719 --> 00:43:04,920 Speaker 1: get non performing loans or weekly performing loans off of 725 00:43:05,000 --> 00:43:10,160 Speaker 1: bank balance sheets. When there's no like hard limit on 726 00:43:10,800 --> 00:43:13,560 Speaker 1: the amount of new money that banks can create. How 727 00:43:13,600 --> 00:43:16,200 Speaker 1: does that How does that create space? I guess another 728 00:43:16,239 --> 00:43:21,319 Speaker 1: word for the creation of new money? Well, you could 729 00:43:21,480 --> 00:43:25,759 Speaker 1: structure banks in such a way and also regulative in 730 00:43:25,800 --> 00:43:29,359 Speaker 1: such a way that um that that it wouldn't become 731 00:43:29,360 --> 00:43:33,600 Speaker 1: a problem. But the regulations we do have and the 732 00:43:33,640 --> 00:43:36,640 Speaker 1: accounting rules we do have mean that well, banks have 733 00:43:36,719 --> 00:43:38,719 Speaker 1: to stick to the rules. And therefore, when you have 734 00:43:38,760 --> 00:43:45,040 Speaker 1: non performing assets, you essentially um disabled, You can't do 735 00:43:45,120 --> 00:43:49,799 Speaker 1: your job well. You can't lend because I mean, think 736 00:43:49,800 --> 00:43:51,399 Speaker 1: about it this way. So let's say a bank has 737 00:43:51,440 --> 00:43:53,360 Speaker 1: lots of non performing assets, which means that on the 738 00:43:53,400 --> 00:43:56,279 Speaker 1: asset side of the balance sheet, the loans is given 739 00:43:56,280 --> 00:43:59,680 Speaker 1: out there on the assets side, Um, let's say you 740 00:43:59,760 --> 00:44:03,040 Speaker 1: had a hundred before. Now it turns out hoops, um, 741 00:44:03,120 --> 00:44:05,600 Speaker 1: they're non performing. They're not worth a hundred anymore, they're 742 00:44:05,600 --> 00:44:09,799 Speaker 1: worth twenty. So you've got a gap there, and of 743 00:44:09,800 --> 00:44:12,600 Speaker 1: course your liability side is still there on the balance sheet. 744 00:44:12,680 --> 00:44:15,840 Speaker 1: That means, I mean, how do you fund this gap? 745 00:44:15,960 --> 00:44:17,440 Speaker 1: Where does the money come from? You want to get 746 00:44:17,520 --> 00:44:19,600 Speaker 1: rid of this gap. The only place it can come 747 00:44:19,640 --> 00:44:22,840 Speaker 1: from is equity and equity and this is you know, 748 00:44:22,920 --> 00:44:26,880 Speaker 1: standard double entry accounting. The equity is very small in banks, 749 00:44:27,000 --> 00:44:29,960 Speaker 1: it's less than ten percent. Usually the smaller banks have 750 00:44:30,040 --> 00:44:33,560 Speaker 1: stronger equity. Actually, the international banks when two eight the 751 00:44:33,560 --> 00:44:37,640 Speaker 1: crisis hit, they only had two to three percent equity um, 752 00:44:37,760 --> 00:44:40,719 Speaker 1: and that means they're they're insolvent. So banks are very 753 00:44:40,800 --> 00:44:43,839 Speaker 1: quickly insolvent. Then, of course, when you're insolvent, you don't 754 00:44:43,840 --> 00:44:46,480 Speaker 1: want to add new risk. You become super risk averse 755 00:44:46,560 --> 00:44:48,920 Speaker 1: and you're not lending. And that's the connection but of 756 00:44:48,920 --> 00:44:51,280 Speaker 1: course there's ways regulators could help. They could just suspend 757 00:44:51,320 --> 00:44:55,399 Speaker 1: certain rules, certain capital adequacy rules. The Barsel regime could 758 00:44:55,400 --> 00:44:58,680 Speaker 1: be suspended. The Bartel regime has been very counterproductive because 759 00:44:58,680 --> 00:45:04,000 Speaker 1: it's encouraged the acid lending since it was introduced Bostel 760 00:45:04,120 --> 00:45:06,960 Speaker 1: one bottle to bottle three, and they don't want to 761 00:45:07,040 --> 00:45:12,160 Speaker 1: learn from the lessons of history, so that definitely needs reforming. 762 00:45:12,200 --> 00:45:14,759 Speaker 1: So actually, your question is a is a good way 763 00:45:14,920 --> 00:45:17,719 Speaker 1: to point to this problem, because really we don't need 764 00:45:17,800 --> 00:45:20,399 Speaker 1: to have this problem. It's an artificial problem, which is 765 00:45:20,440 --> 00:45:24,759 Speaker 1: why I guess you have this question. Well, Richard, we're 766 00:45:24,800 --> 00:45:26,279 Speaker 1: gonna have to leave it there. I'm sure we could 767 00:45:26,280 --> 00:45:29,279 Speaker 1: go on for much, much longer, but we'll have to 768 00:45:29,320 --> 00:45:31,960 Speaker 1: have you back on with We'll get you together with 769 00:45:32,040 --> 00:45:35,560 Speaker 1: Richard Coup and you guys can sort of m passion out. Yeah, 770 00:45:35,600 --> 00:45:40,920 Speaker 1: I'd love to do that, Okay, uh Dr Richard Donna, 771 00:45:41,040 --> 00:45:43,400 Speaker 1: thank you so much for being on A Thank you 772 00:45:43,480 --> 00:45:52,560 Speaker 1: very much. It's a pleasure. So Joe, I found that 773 00:45:52,600 --> 00:45:57,160 Speaker 1: absolutely fascinating, a bit iconic clastic, but you and I 774 00:45:57,200 --> 00:46:01,040 Speaker 1: have discussed this before, and it does feel like the 775 00:46:01,160 --> 00:46:05,200 Speaker 1: idea of how the banking system actually works is something 776 00:46:05,680 --> 00:46:09,400 Speaker 1: that occasionally is missing from a lot of macroeconomic theory, 777 00:46:09,600 --> 00:46:12,759 Speaker 1: and I do think also this is probably the most 778 00:46:12,760 --> 00:46:16,000 Speaker 1: controversial of everything that Richard was talking about, But I 779 00:46:16,000 --> 00:46:18,840 Speaker 1: do think also there might be something to his argument 780 00:46:19,000 --> 00:46:22,880 Speaker 1: about low interest rates being more damaging than helpful for 781 00:46:22,960 --> 00:46:26,920 Speaker 1: the global economy at this point. Yeah, I don't disagree 782 00:46:26,920 --> 00:46:29,239 Speaker 1: with that, you know. I find what's interesting about his 783 00:46:29,360 --> 00:46:34,000 Speaker 1: views is it seems to be a blend of um 784 00:46:34,040 --> 00:46:36,960 Speaker 1: and I guess is why he's distinct a few different 785 00:46:37,080 --> 00:46:40,120 Speaker 1: schools of thought, because obviously he is critical of the 786 00:46:40,200 --> 00:46:43,120 Speaker 1: sort of like aggressive fiscal approach, which is the Richard 787 00:46:43,160 --> 00:46:45,919 Speaker 1: Who approach and also the preferred approach of many people 788 00:46:45,960 --> 00:46:49,640 Speaker 1: we've talked to. But also his views on banking and 789 00:46:49,680 --> 00:46:52,480 Speaker 1: where money comes from is clearly a break from this 790 00:46:52,560 --> 00:46:56,480 Speaker 1: sort of like classical orthodox view, which is uh that 791 00:46:56,600 --> 00:47:00,960 Speaker 1: banks are just um yeah, financial intermediate areas. And so 792 00:47:01,040 --> 00:47:03,920 Speaker 1: he's sort of a very interesting blend of sort of 793 00:47:05,000 --> 00:47:09,520 Speaker 1: heterodox but also sort of monitory monitorist views, which I 794 00:47:09,600 --> 00:47:13,480 Speaker 1: think then culminates in his idea that the answer is 795 00:47:13,760 --> 00:47:17,080 Speaker 1: a structurally different banking system banks that serve the real 796 00:47:17,120 --> 00:47:21,319 Speaker 1: economy more as opposed to the financial economy. Yeah, but 797 00:47:21,400 --> 00:47:24,640 Speaker 1: it's an interesting thought, and it's one that you know, 798 00:47:24,800 --> 00:47:28,800 Speaker 1: in the whole massive toolkit that we've seen central banks 799 00:47:28,800 --> 00:47:32,480 Speaker 1: reached for in the multiple crises that we've had over 800 00:47:32,520 --> 00:47:34,839 Speaker 1: the past couple of decades, we've never really seen them 801 00:47:34,960 --> 00:47:39,120 Speaker 1: attempt to fix the problem in that way through either 802 00:47:39,320 --> 00:47:45,040 Speaker 1: encouraging banks to sort of well in, encouraging new banks 803 00:47:45,080 --> 00:47:48,000 Speaker 1: to spring up, or figuring out some way of supporting 804 00:47:48,040 --> 00:47:50,600 Speaker 1: the banking system. And again to that low interest rate point. 805 00:47:50,719 --> 00:47:54,800 Speaker 1: If anything, we've seen lower interest rates and other policies 806 00:47:54,800 --> 00:47:57,600 Speaker 1: from the central banks actually hurt the banking model time 807 00:47:57,600 --> 00:48:00,839 Speaker 1: and time again, especially in Japan. Yeah, totally. It's also 808 00:48:00,920 --> 00:48:03,239 Speaker 1: interesting too, and the and he talked about this a 809 00:48:03,280 --> 00:48:06,960 Speaker 1: little bit, is that you know, we've seen the Central 810 00:48:06,960 --> 00:48:10,279 Speaker 1: Bank of the US move more into just cutting out 811 00:48:10,280 --> 00:48:13,719 Speaker 1: the banks entirely in this crisis because somebody their operation. 812 00:48:14,160 --> 00:48:17,080 Speaker 1: I think technically the banks still in some cases have 813 00:48:17,239 --> 00:48:20,120 Speaker 1: an operational role in some of these things, but less 814 00:48:20,120 --> 00:48:23,640 Speaker 1: of a credit creation role. In more this central bank 815 00:48:23,920 --> 00:48:28,319 Speaker 1: directly getting involved in credit markets, which is interesting and 816 00:48:28,360 --> 00:48:30,360 Speaker 1: make some people uncomfortable. It was like, well, why do 817 00:48:30,400 --> 00:48:33,960 Speaker 1: we have banks and is this really capitalism or whatever, 818 00:48:34,320 --> 00:48:36,799 Speaker 1: But you can also see how that model could in 819 00:48:36,920 --> 00:48:40,400 Speaker 1: theory mean more money getting into the real economy, supporting employment. 820 00:48:40,600 --> 00:48:44,920 Speaker 1: If we're effective, then then you know, sort of the 821 00:48:44,920 --> 00:48:49,480 Speaker 1: traditional models of balance sheet expansion of buying treasury bonds 822 00:48:49,560 --> 00:48:53,440 Speaker 1: or buying mortgage backed securities. Yeah, yeah, it's true. I mean, 823 00:48:53,480 --> 00:48:57,279 Speaker 1: if the intermediaries won't len, then why not bypass them completely? 824 00:48:57,960 --> 00:49:00,719 Speaker 1: This is one of those sort of like big thought episodes. 825 00:49:00,880 --> 00:49:03,640 Speaker 1: I think I'm going to be thinking about for a while, 826 00:49:04,360 --> 00:49:07,640 Speaker 1: So okay, why don't we leave it there? This has 827 00:49:07,640 --> 00:49:11,480 Speaker 1: been another episode of the All Thoughts podcast. I'm Tracy Alloway. 828 00:49:11,719 --> 00:49:15,440 Speaker 1: You can find me on Twitter at Tracy Alloway and 829 00:49:15,480 --> 00:49:17,600 Speaker 1: I'm Joe Why Isn't All? You can follow me on 830 00:49:17,600 --> 00:49:20,760 Speaker 1: Twitter at the Stalwart, and you should follow our producer 831 00:49:20,880 --> 00:49:24,600 Speaker 1: on Twitter, Laura Carlson. She's at Laura M. Carlson. Followed 832 00:49:24,640 --> 00:49:28,280 Speaker 1: the Bloomberg head of podcast, Francesca Levi at Francesca Today, 833 00:49:28,640 --> 00:49:31,560 Speaker 1: and check out all of our podcasts at Bloomberg under 834 00:49:31,600 --> 00:49:34,240 Speaker 1: the handle at podcasts. Thanks for listening.