MR Transcript: Modern Money Theory and Private Banks

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GUNS AND BUTTER — “MMT advocates a wide range of programmes.  The most important is probably the Job Guarantee.  Very briefly, the Job Guarantee is a programme, that would allow the government to achieve what’s never been achieved before in any market economy—true full employment.



“Stephanie Kelton is associate professor of economics at the University of Missouri, Kansas City, research scholar at the Levy Economics Institute, and director of graduate student research at the Center for Full Employment and Price Stability.”  

Dr. Stephanie Kelton (c. 1:37):  “The next thing I want to do is talk to you about functional finance It’s not a very interesting sounding topic.  In English, the opposite of functional finance is dysfunctional finance.  And that’s what, I would argue, most countries in the world deal with today.  And I think the reason is because none of us, that have sovereign currencies understand exactly what that means.  And we act as if we face the same kinds of constraints—governments act that way—that households and businesses face.  We’re told all the time that a government should have sound fiscal finances, should live within its means, should exercise fiscal discipline just the way a household must.  But, hopefully, by now you understand that a country, that operates with its own fiat currency, that is a non-convertible currency—government does not pledge to convert the currency into gold or into some other country’s currency—doesn’t have to behave like a household.  It can use its powers differently.  And that’s what functional finance is all about.

(c. 3:02) “I mentioned this morning the name Abba Lerner.  Abba Lerner wrote many important articles and books, that influence the work, that MMT economists do today.  Most of Lerner’s early and important works were written as the world was fighting and battling the effects of the Great Depression.  Lerner understood, as Keynes did, that unemployment was a normal feature of any money-using capitalist economy.  For Lerner, unemployment wasn’t just something that countries needed to deal with when there was a Great Depression or serious recession, but in normal times as well because the economy always operates with some level of unemployment.

(c. 4:03)  “Lerner, as an economist, viewed the workings of the economic system very differently from the conventional classical economist, who believes:  Supply creates its own demand. Markets, naturally, tend to full employment. Governments just get in the way; intervention by government is unnecessary and destabilising. When something bad happens in the economy, the best course for government is to keep its hands off—laissez-faire, let it be. Markets will fix themselves. They are self-correcting.


(c. 5:17) “Lerner did not believe there was a mechanism, that would coordinate the spending decisions of all of us with the production decisions of the business sector in a way, that kept the economy operating in a healthy manner, in a way, that would provide full employment for everyone.  Businesses have to produce, today, without knowing what the future demand for their products will be.  Maybe they produced too little and demand was higher than they expected.  In that case, they see their inventories fall.  And it’s a good sign to them; people want more output.  They respond by producing more.  But if businesses produce output and find that the demand is not there; their inventories begin to rise.  The signal to them is:  You’ve produced too much.  What do they do?  

(c. 6:24) “Conventional economic theory tells us:  This is not a problem.  If inventories build up, prices fall until there’s demand for everything, that’s produced.  But in the real world we know better.  We know how businesses respond when demand for their goods is falling.  They respond by cutting back their production and laying off a part of the work force.  It gives rise to unemployment.  It’s natural; that’s the way market economies all operate.  There isn’t a single capitalist economy anywhere in the world, that achieves full employment and sustains it.  Every market economy goes through a business cycle, an upswing where times are good and unemployment is low, and a downswing, where times are not good and unemployment is rising.  Lerner recognised that; and he called on the government to respond in a particular way.

(c. 7:26) “The conventional view is that if there’s unemployment, it simply means employers don’t want to hire the workers at such a high price. The solution to unemployment for most of the academic economists in the world is, therefore, lower wages.  Right?  Too much supply of labour—unemploymentmust mean the price of labour is too high. So, the solution is to cut wages. If something goes wrong in markets, you let markets fix things. Keep government out!

(c. 8:07) “Sometimes, economists talk about structural problems in the labour market.  Well, unemployment exists because the jobs, that are available require certain skills, that the unemployed don’t have.  Therefore, they propose things like training programmes for the unemployed.  All we need to do is get the unemployed together, train them, give them better skills, and they will go out and find jobs. The problems are almost always with the worker.


“If you took 100 dogs and you buried 95 bones in a field and you told the dogs their job was to go out and find a bone, what’s the very best case scenario?  The best you can possibly hope for is that 95 dogs come back with bones.  Five dogs can’t get bones.  More likely, some dogs will get lucky; they’ll stumble across a few extras.  Some may have better skills; they’ll find three or four.  So, the number of dogs, that come back without bones may be ten or fifteen.


(c. 10:20)  “Economists actually believe that unemployment is, not just unavoidable, but, actually, beneficialThey think that unemployment helps to discipline the worker because if you’re afraid of becoming unemployed, you’re more likely to work harder, do a better job for fear that you may lose your job.  Economists believe in a trade off:  We could have lower unemployment, but that would lead to inflation; and that’s the worst possible evil in the world. So, we better keep some people unemployed, so the economy doesn’t operate at too high a level, so that we can keep prices from rising too rapidly.  So, they actually define full employment, as the level of unemployment, that helps you keep prices from rising.  We define unemployment into our models.  We accept it.  It provides an excuse for not striving for more.  We enshrine in it in our policies.  



“Unemployment is every bit as damaging to a society as inflation.  The costs are tremendous.  We know, and we talked this morning, about what some of those costs are.  The direct costs are obvious.  Anyone who’s not working, not producing something, represents an economic waste, a loss of output for the whole of society, an income, that’s not produced.  But there are other costs, maybe even more important, indirect costs.  We talked this morning about some of these.

(c. 13:27)  “What happens when you’re unemployed?  You feel excluded from society?  Your skills degrade.  The longer you’re unemployed, the longer your skills break down.  The longer you’re unemployed, the less employable you are.  Businesses don’t wanna hire people who’ve been unemployed for months or, in the case of the US, years.  Unemployment creates psychological harm, depression, anxiety, suicide rates increase.  It may be great for the pharmaceutical companies, who sell anti-depressant drugs and make billions.  But it’s very, very damaging for society.  People lose their motivation.  Family relations, divorce, spousal abuse, all become problems when unemployment is high.  



Dr. Stephanie Kelton (c. 15:34):  “Now the direct costs, the loss of output and income from having someone sit on the sidelines, producing nothing, as opposed to being in a job producing a good or service in the economy.  If you see the light grey line at the top it shows you what the path was for the US GDP before the financial crisis and recession.  If that had never happened, the estimate is we would’ve been up on that light grey line.  But, because of the financial crisis and the economic recession, our GDP fell sharply.  The difference between the blue line and the grey line is our GDP gap.  It represents the lost income, the lost production from all of the additional unemployment.  How much is that?

(c. 16:33)  “Bill Mitchell, who is a major MMT figure has run the numbers.  What he did was estimate the daily costs of unemployment in the US, the difference between the blue line and the grey line on a daily basis.  And he concludes that the US is sacrificing the equivalent of between $6 and $11 billion dollars every single day that we permit our unemployment level to remain elevated.  So, Bill says—and he doesn’t mince words—he says, ‘Just say to yourself, every day the US government is allowing $9.7 billion dollars to go down the drain in lost income just because they’re too stupid to create sensible job creation.  What is sensible job creation?

(c. 17:38)  “If you ask a technocrat or a member of the conservative party in the US, they’ll tell you that the key to job creation is creating a better environment for businesses.  Okay.  I agree.  But what does creating a ‘better environment’ mean?  For them, it means lower taxes; it means less regulation.  Those are the things, that are really holding the employer back.  That’s why they won’t hire and invest.  It’s why the economy is not growing.

But ask an employer what’s holding them back.  Survey after survey, in the US, tells us that it’s not high taxes or burdensome regulation, that’s primarily keeping them from adding to their workforce and increasing their investment spending, it’s poor sales.  They don’t have customers.  And the reason they don’t have customers is that we had a financial crisis, that was fuelled by a huge debt bubble, that crashed and left major portions of the U.S. population without the income to go shopping. 




(c. 21:11)  “You have to have a sovereign currency in order to run functional finance.  You cannot do it on a gold standard or with fixed exchange rates.  You can’t do it with the euro.  The US has a sovereign currency, but its finances are dysfunctional.  Just because we can doesn’t mean we do.  So, it’s not enough just to create the correct monetary system; you also have to create the correct macro policy.

“Abba Lerner wrote a very colourful article called ‘The Economics of the Steering Wheel.’  And in the beginning of the article he talks about this imaginary planet where the Martians drive around on this complicated interplanetary highway system.  The cars don’t have steering wheels.  The roadways have high curbs.  The cars bounce from left to right, meandering around the path.  Lerner says, ‘If someone from Earth visited this planet, they would look at this highway system and call it crazy. Wow, aren’t we clever on Earth? We put steering wheels in our cars. We don’t bounce around from curb to curb. We control our destiny.’











(c. 31:00)  “So, the idea was that all of this increased production had to increase consumption.  So, the idea was, as a variant of functional finance, that production creates its own market for consumption by paying workers, who’d then buy the products they produce.  So, the question is:  Why hasn’t this occurred?  With all of this productivity since the end of World War II and, especially, since 1980, why aren’t you all rich and enjoying a leisure economy?






(c. 35:17) “So, when you understand this, you have to understand how to answer the questions, that were raised before lunch today.  The key is to look at how today’s economy is different from what occurred in 1945.  And you’ll see that we are at the end of a long cycle.  Back in 1945, in every country, the private sector was relatively free of debt.  There was very little for consumers to buy in the War.  And companies had little reason to invest, except for the government.  So, most families had very little debt, but they had a lot of savings.  And today, the economy is the reverse.  The savings have been run down.  And the economy is in debt.  




(c. 39:42)  “So, the banks have become part and parcel of this Finance, Insurance, and Real Estate sector, that I spoke about.  We have what is called pension fund capitalism in America where the employees are supposed to become capitalists in miniature by employee stock ownership programmes.  In America, one half of employee stock ownership programmes have gone bankrupt by being grabbed by the corporate employers, like I described Sam Zell of the Chicago Tribune today.  Banks lend money to corporate raiders and to management buyouts to buy the company, to pledge all of the earnings as interest, to steal the employee pension plans, and, essentially, become a process of looting.  So, you have the way to get fortunes today to be essentially by looting.  They’ve given a Nobel Prize for the writer who described this, but it basically is what I talked about earlier today, what Balzac said, ‘Behind every great fortune is a great theft.’




(c. 42:54)  “Now, I’ve spoken in generalities and principles so far.  But it’s good to give an example of the country, that is held out to you, as how you want to be.  If Italy succeeds, what country should you be?  You’re told:  Latvia.  Latvia is where the neoliberals had a completely free hand, as they did in Russia, as to what kind of an economy they were going to create.  And they created a neoliberal paradise.  Angela Merkel, SarkozyThis is what we want for Europe.  What they did in Latvia is have an employment tax of 59% for labour.  They have a real estate tax of 1%.  When I went there I asked how they got the 1%.  They based it on the most recent real estate appraisal they had, which is in 1917 before the Russian Revolution.  So, you can imagine that what happened was that, with real estate taxed so low and labour taxed so high, there was almost no employment.  But there was a real estate bubble.  People have blamed the real estate interests for making a ton of money and getting rich off absentee ownershipsBut the principle of real estate speculation in America is that rent is for paying interest.  Whatever the tax collector gives up and relinquishes in taxes, is available to be paid to the banks as interest.  So, the banks end up with all the rent, that used to accrue to the landed aristocracies of Europe.  So, bankers have become the new aristocracy.  And it is as hard, as if there is feudalism.


(c. 46:00)  “Now, in Latvia, a year ago, I met with bank insurance agencies; and they saw that this was a problem.  And they told the banks, you cannot collect from the value of real estate, that you’re lending against.  Their solution was not to have the government tax real estate more, so that there’s less available to pay the creditor.  Their solution was to go to the banks and say, when somebody comes to borrow a mortgage you have to have their parents sign, their children sign, their aunts and their uncles sign, so that when we foreclose, we can not only foreclose on you, we can foreclose on the whole family. And we can make the whole family emigrate or be reduced to poverty.

The same thing has happened to Iceland.  Iceland’s debt, which is much worse, people have spoken to Iceland, as if it were a model of what should be.  It was only a model of how the populations should vote against the banks.  But Iceland, even more than Latvia, is a banker’s paradise and such a hell for workers that, as I said, 10% of the population30,000 Icelandershave emigrated to Norway and other countries.  Icelanders have moved elsewhere.  What Iceland has is what is planned as a model for you.  The index that they owe to the bank of the debt is linked to the foreign exchange and the consumer price index.  So, since the Credit Crash of 2008 from the crooked Icelandic banks, that were looted, if you took out a €1,000 euro debt, you now owe €180 euros on it against property, that has fallen from the equivalent of €100 euros down to €40 euros.  So, you’re in negative equity.  You’re personally liable.  You’re family is liable.  And the debt has gone up.

(c. 48:13)  “Now, Paolo [Barnard] asked me earlier to talk about the vulture banks.  When the crooked banks of Iceland went under—and they’ve just in the last few weeks begun to arrest the crooks—when the banks went under, the government took them over and, at European advice, saying, No matter what, you have to pay the bankers, you have to punish labour; but you have to sell the banks to vulture investorsThe vulture investors bought the banks at ten cents on the dollar.  Under the Constitution of Iceland, they were not allowed to increase the debts by indexing, but they did.  Under the bank agreement, their promise was if you write down, if you buy a bank at ten cents on the dollar, you have to write down its debts by 90%.  The banks promised to do this; they have not done it.  The Icelandic people and economists have demanded that the government apply this.  The social democratic government says:  We don’t have to do what the people said. The people voted to send the power. And we work for the banks, not for the people. Social democracy means rule by the bankers. It means rule by a small number of families in England, in Holland, in Germany.  The social democratic government says:  We’re part of Europe. We are not part of Iceland. We are not your democracy. We are the democracy of the European and German and French bankers and English bankers who’ve supported and put us in power. [Applause]

(c. 50:04)  “So, when many of you asked, before lunch, What do we do in this situation? We want to do something about it. We want to be active. What can you do when the political system on both ends of the spectrum are so corrupt?  To me, what is so amazing is how the social democratic parties, that were supposed to begin on the Left side of the political spectrum have moved to the Right wing of the political spectrum.


(c. 52:38) “So, the result is that the Social Democratic parties of Iceland, of Latvia, of Scandinavia, and of other European countries, now believe the way to employ labour is by austerity.  If you can only lower your wages by 30%, stop having children, and emigrate there will be an equilibrium.  This is the exact opposite of what industrial capitalism proposed.  And, yet, it’s the dynamic, that you have today. 

“The alternatives—and I’m just hint them for what I will be talking about in the next—not all taxes are bad.  Taxes on labour add to the cost of labour.  Of course, you want to untax labour, untax consumers, get rid of the value added tax.  But there’s one kind of tax that’s good.  And that’s the tax on unearned income, on land rent, and monopoly rent.  The more you tax—you shift the tax system onto the land and property—the lower housing prices are; and the less you have to tax labour by income tax, the less there is for the banks to collect in interest.  The bankers are against government because they want all of the taxes, that are now paid to the government, to be paid to themselves as interest.  I’ll expand that in the later versions tomorrow morning.  Thank you.”




“Dr. Hudson is president of The Institute for the Study of Long Term Economic Trend, a Wall Street financial analyst, and Distinguished Research Professor of Economics at the University of Missouri, Kansas City.  His 1972 book, Super Imperialism: The Economic Strategy of American Empire is a critique of how the United States exploited foreign economies through the IMF and World Bank.  



Transcript by Felipe Messina for Media Roots and Guns and Butter

fm: Updated 27 MAR 2013 13:32 CST


Photo by Flickr user xshamethestrongx

Guns and Butter – March 28, 2012 at 1:00pm

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7 thoughts on “MR Transcript: Modern Money Theory and Private Banks

  1. This, of course, also does not speak at all to the unemmdeployrent situation in which many of those formerly-fully employed now find themselves. Typically (and this has been true, until 2009, for roughly 25 years at least), I would be working full-time, on average, at least 9 10 months of each year, with periodic one- or two-month intervals of unemployment as I complete a long-term contract job and have to spend time finding another similar contract position. During the last 2-1/2 years, though, I have been averaging only about 6 8 months working per calendar year, as the intervals between contracts have greatly lengthened.In addition, rates of pay for contract work have been going down, generally, for almost 4 years now my current contract only pays about what I was getting per hour roughly 10 12 years ago, even though both my skills and work experience levels have both gone up. That is about a 20 to 25 percent cut in rates and, based upon what recruiters have been telling me, that is quite typical and, of course, with no allowance being made for over a decade of inflation. Effectively, I am making about 50 to 60 percent (in real, spendable terms) per year what I was earning about 10 years ago, and my marginal tax rates have not decreased from where they were 5 or 6 years ago.I have to believe that this is pretty typical, and not just in my own field of contract engineering work. Therefore, even a lot of the employed aren’t making enough to even maintain life-style they’re slowly sliding closer and closer to that working poor/poverty line.I’m better off than most, since I have enough qualifications and experience to be well above-average in rate of pay even now but the number of younger, less-experienced workers, coupled with those who have had to change over to doing something else altogether, must, I think, be a pretty sizeable part of those who are slowly sliding backwards like that.

  2. Great stuff, enjoyed it so much , Michael Hudson pulls no punches and sees it as it is, a take-over of Democracy and debt peonage of the citizen.

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