Professor Keen is the only economist on the world stage that makes sense to me right now. He maintains that the explosion of private debt worldwide is far beyond what the economies can pay back in any timely manner. His position is that the trillions of dollars of loans made out to individuals by banks constitute a fraud and abuse of the money creation powers of the financial system. He quotes that currently, the USA has three times the amount of personal debt as our yearly GNP. This type of massive personal debt if honored puts every single borrower in the position of being enslaved to honoring that debt or face debt clearing measures such as bankruptcy. His point is that the incomes of the ordinary individual cannot grow fast enough when the overall economy carries this much debt service relative to incomes. The standard means by which we clear debt obligations is through bankruptcy. This type of remedy is a slow process that is death by a thousand cuts. One by one, debt holders will decide that they can no longer honor contracts made and default. As this process winds down over a decade or more, the economy shrinks due to the requirement for individuals to pay down past borrowing before spending more or borrowing more to fuel the expansion of the economy again. This is what happened in Japan in the 1990s. There is no way out of this downward spiral especially when this is a global phenomenon. One remedy for this was to export your way out of this trap. But who do you export goods to if your trading partners are facing the exact same trap?
The first step according to Keen is to acknowledge that we are in a depression not a temporary recession. By admitting the truth, the answer comes naturally to him. Forgive private debt and force the lenders to take losses on loans they made in reckless abandon. What this does is free up the economy to use income generated by economic growth to once again restart the economy. But by itself, this does not fix the structural problem of out of control money expansion. We must force banks to become smaller and for finance and lending to be separate. In addition, we must stop fueling asset appreciation and speculation by changing the way we view investing and income. As I have stated before, the stock market serves a useful role for a business only when it serves as a financing vehicle for true wealth creation not stock appreciation. Investors in private companies should go public to help finance growth in the company as the primary goal of the IPO. Once the company has recieved funds from an IPO, all stock transactions from then on are pure speculation and not tied to the underlying asset value of that same company. The investor who buys into the IPO should be considered an investor in the company long term, not short term. Stock speculators who jump in after the IPO are gamblers not funding sources for increasing wealth or the success of the business.
In terms of future lending practices, we must once again tie lending to asset values and force the lender to hold the loan until maturity or face liability for that loan regardless of who they sold the loan to in the securitized debt markets. This will force banks to make good loans for the sake of gaining interest and repayment not loan origination fees and commissions. This will slow down the economy to what it can sustain based upon its wealth creation abililties not its speculative strategies for short term profit or gains. A company like Bain makes it's money not by creating a business but by selling it or disposing of it. This type of wealth creation is a skimming process, it is like the local hood taking 10% of your gross no matter what you do.
By forgiving debts, we follow the advice of thousands of years of human history going back to Babylon. Jubilee is the term used in ancient times for debt forgiveness. It is time once again for a Jubilee and a new economy based upon boring banking, realistic lifestyles and a return to an economy whose main profits come from true wealth creation not some form of currency manipulation or risky debt expansion. Money is created every single day by every bank in the world. Its called a loan. That loan is supposed to be backed by reserves. But if I put 1 million dollars into bank A who then loans out 10 million based upon that deposit I made, the 10 million created will then be put into another bank that considers it a reserve. That bank then loans out 100 million against that 10 million. It goes on and on until you get to a point where we are today. We owe upwards of 50 trillion dollars in personal debt against an economy that produces about 15 trillion a year. It cannot grow indefinitely without a day of reckoning.