2015 I like to introduce our special guest Martin wolf Martin wolf is a British journalist widely considered to be one of the world's most influential writers on economics he is the associate editor in chief economics commentator the Financial Times of London and Martin wolves column in the Financial Times has been called required reading for the international financial elite wolf is the recipient of many of many words for financial journalism for which it was also made commander of the Order of the British Empire his previous books include the fixing global finance and why globalisation works and another thing important Martin wolf was former world World Bank economist and it is also an honorary professor the University University of Nottingham and also it has been a firm fellow the annual meeting of the World Economic Forum in the in Davos ok the last book that I wrote is the shifts and the shocks what we are learning and what I have still to learn from the financial crisis it is the book that we are going to discuss this afternoon there are the having many books which have sold to explain the causes and courses of the financial and economic crisis which began began in 2007-8 the shifts and the shocks is not another detailed history of the crisis but we think the most persuasive and complete account yet publish of what requisite should teach us about modern economies and economics Martin woods also scrutinizes what has been done to reform the financial and monetary systems since the worst of the crisis past and you will listen both criticize the policies that cause it has well the responses to it it calls for abandon the Orthodox thinking allowed policy makers to completely miss the sense of the uncoming meltdown so in in the book and the conference now Martin wall who I think will demonstrate that eurozone crisis was due to the interaction between powerful global economic and financial forces and the inadequacies of its economy and political structure and and also demonstrates that the eurozone has not eliminated this weaknesses so the crisis is not yet over so if we ask are we now on a sustainable course both answer no so we have understood you have a radically provocative and ambitious porous shake people so what happened really with this bigger global crisis why losses were so large what was the role of a politics in Europe also with the Europe European Union and what are the solution the solutions and you crisis this is the last question and you will going to answer the night the new crisis is likely to come again so yes Martin wolf I hope it will work if I stand up if not the translators can come and scream and I will sit down but I find talking for 40 minutes sitting down really very burdensome there are three places at the front if somebody is desperate Wolfgang you can come and sit at the front okay I feel that the least I can do is give my colleague place at the front so I am immensely honored to be here and very privileged I am very impressed that I have such a large audience given that I have been competing with the Prime Minister of Italy and the Prime Minister of France and far more seductive Thomas Piketty so I assume you're all here because you couldn't get into Thomas's lecture I hope you also realize you are not with a superstar okay that's fine that would be much better with you're not with a superstar like Thomas now the theme I must say one other introductory thing which I like to do when I my proudest honor as a journalist of course since I'm in Italy is that I received the Ischia prize for international journalism which was admitted and surely must be mentioned and was certainly one of the most interesting and indeed extraordinary experiences of my life since it evolved a TV show with an extraordinary number of very very beautiful half-dressed young women which is not a normal part of the life of an economics pundit and that made it a truly unforgettable experience and the other thing I know my wife is not here and you know and I went I went to that I should mention this since my wife was not interested with my daughter so she has already been well informed about this event Italy really is different from all other countries and the second thing of course I should say as I always do when somebody points out that I am a commander of the British Empire is that it shows that whatever else the British have lost and are losing they haven't yet lost their sense of humor since they are still making people commanders of an empire which has long since disappeared and most of you probably have forgotten ever even existed it will be almost like being made a commander of the Roman Empire wouldn't it maybe there are commanders that the Roman Empire now obviously I am NOT talking about social mobility and I would like to make at least one link which to me actually is important the social mobility is not a subject I've written about much but it's subject I thought about quite a bit and I would argue that a necessary condition for a successfully socially mobile society is that it generates over time an increasing proportion of good jobs in its society that is what made social mobility in many Western countries in the post-war period so successful because the number of good jobs was expanding very rapidly that allowed many new entrants into the middle and upper middle classes to have success without displacing a vast number of the children of those already there in a society which is not generating a large number of new good jobs what happens of course is that the parents with the resources will devote all of them to ensuring that their children get what's going and that makes social mobility in my view almost impossible these links in my view with the cry is for the following reasons as you will see the crisis represents a huge break in the growth process of the Western world and this is now nearly a decade long in fact for Europe it is clear this crisis will be 10 wasted years 10 Lost years rather like the Latin American crisis in that context in my view social mobility is impossible so there is a link and I think a very powerful link between what I'm talking about though it seems rather remote to what the dominant concern of this conference is now what I'm going to try and do ya know I'm not gonna do it that way let's go to the direct technology I'm gonna cover some of the major themes of my book in the but focusing on what we should learn from this crisis and then I hope we will have plenty of time for discussion I expect to get through what I have to say in about 35 minutes 40 minutes and then as I understand it we've got till 6:30 because it's too late for mr. Piketty so you can then ask whatever you want I'm going to divide my my talk like Caesars goal into three sections by first why this is an important topic it should be obvious but I think it really is very important to to bring this out why I think this crisis is such an important event the second thing I'm going to talk about is my story about what happened and particularly important part of this is how the macroeconomic system the system of the world economy as a whole in terms of income and spending external balances savings and all the in investment linked with what went on within the financial sector the interaction between the two because I think the reciprocal relationship between the two is the core way of thinking about this and that will follow in a way from what I say about why this matters with the failure of economics and finally I hope to cover at least some aspects what is to be done I should say that of course what I'm going to say is in no way a substitute for reading my book unfortunately the book is not going to be published it appears in Italian though it's been published in many other languages you can ask Italian publishers why they think Italians aren't interested but I hope that those of you who can and I imagine that will be many of you will be able to read it in one of the other languages in which it's published which apart from Italian includes Spanish now why the Spanish is so much more interest in the Italians is very interesting so let me start with why I think this matters obviously the crisis in its aftermath was a failure of institutions that's obvious the institutions that were supposed to generate stability in our economies indeed prided themselves on achieving stability in our economies I've come to this in a moment failed to deliver that that's self-evident but I also think it should be seen as a failure of understanding of what might be called the establishment view of policy you will remember at least many of you who followed the debates before the crisis that there was a pretty strong orthodoxy in the Finance Ministry's central banks and to a large extent economic establishment less true of the economic establishment but a lot of the economic policymaking and theoretical establishment it was in the macroeconomic terms that if you had inflation targeting we finally stabilized inflation that was the objective of central bank's we had financial deregulation down in supposedly the right way which basically was the American Way that this would gently I suppose the British way to that this would generate stable prosperity indeed there was a word a phrase that was generated at that time to describe what not only would happen but what in the view of many of the policymakers was happening was called the Great Moderation and I quote a very distinguished central bank and economists Ben Bernanke no less in a speech he delivered and I think 2005 in which he claimed that central bankers and their wisdom had played an extraordinary role in delivering this Great Moderation and that was Ben he's a very intelligent man it's clear to just two years before the whole system flew apart so it's pretty clear that people didn't know what they were talking about about pretty obvious that's pretty fundamental the people in whom the world had put their trust didn't understand what was going on that's pretty important and I think they're the reason they did they make this mistakes they could ruled out the the problems of this interaction between inflation targeting and financial the financial system they ruled out the problems created by this by assumption by assumption and they did not in particular understand of a concept which I think had been with to which I oh and I have to say I got to this the writing of this man rather late so I'm part of the guilty view i guilty number I'm clear about that and that was a a phrase of a man called Hyman Minsky who was considered very much an outcast in academic economics quite an important one young enormous influence on somebody called Charles Kindleberger who groped a classic economic history of manias panics and crises but Hyman Minsky interesting at Chicago economists but very much in the post-keynesian tradition rejected this orthodoxy and in particular the the the phrase that I think is so valuable is the phrase that stability destabilizes the inner period of stability which is believed entrusted in people ordinary people but quite particularly people in the financial sector will want to take more risk because it looks as though it's safe and it looks very rewarding and as Minsky pointed out very clearly the easiest way to you know there's a difficult way to take risk which is to start a genuinely entrepreneurial innovative business and there's an easy way to take risk which is to increase the leverage of yourself your institutions and the economy and what they did as I will show you very dramatically is they largely took the latter route creating in an immense increase in indebtedness and in the leverage the debt relative to equity of all the core financial institutions of the global system just as Minsky warned the writ the failure to realize this was general and pervasive in the Orthodox system in the policy system it was a huge failure of imagination not to realize what was happening and it was completely general and I think that even after the crisis it is stunning to me how few economists and I put my hand up I'm one of those people who've learnt from this I think have recognized how wrong their prior views were and how much they needed to change the way they thought about how the economy really worked with real people as opposed to completely theoretical abstract people who are not Minsky but in fact we are we are just that for a whole host of reasons I don't have reason to reason to explain and I think the this failure to do to recognize this and to adjust the way we think deserves the contempt and scorn of the public so that's the first if you like the theoretical point but an incredibly real theoretical point beyond this I'd like to bring out the fact that this has been an immensely costly crisis I think that if I'm right yeah I am NOT putting up I'm just putting up a chart about the eurozone and I will discuss very briefly what's happened to the US and UK so what I do in this chart is to give you some idea of what's happened is I have a very simple I have eurozone aggregate GDP since 95 up to 2000 and and it's actually 2014 but that's the last period at the end of 2014 the red line shows actual GDP of the eurozone the blue line shows what would have happened if the really already miserable growth trend was about one and a half percent a year of eurozone GDP from 95 to 2007 had continued and the green line which you can read on the right side shows the deviation of actual GDP below potential GDP as a proportion of potential GDP and what it shows is that by the end of 2014 GDP was roughly 14% below trend and as you can see from the slope of the green line it continued to fall quarter by quarter in the first quarter of this year it's probably close to flat but no real recovery and if you look at the red line you will see very clearly the most important point which is that eurozone GDP has experienced two recessions two recessions the first one after 2008 another one after 2010 and GDP is still at the end of last year about two to two and a half percent below the pre-crisis level nevermind the trend so these are the enormous losses by the way just to to relate this to what happened in the US and UK their growth trends had been more dramatic faster than the eurozone by the first quarter of this year the US GDP and the UK's GDP are both roughly sixteen to seventeen percent below the pre-crisis trend so these are enormous losses relative to expectations everybody assumed these trends will continue and these economies have experienced losses which cumulatively if they are not recouped and there is no sign that they will be recouped on the country there's every sign that they will continue to accumulate these will accumulate over time to many many times GDP and by the a crisis of this scale which had such a long-run consequence not recouped is more or less unprecedented in these major economies it's a by the way even the Great Depression was recouped by the end of the 50s maybe this will be so then that question that rise and let me moved to my second theme is well why did this happen so my argue meant is that there were too closely into woven causes I don't have the time to go through all of them but essentially very big macroeconomic shifts which interacted with the financial system to allow the financial sector in the policy environments I've discussed to go essentially crazy so the the macroeconomic trigger was sometimes been called a savings glut it could be called an investment dearth in any case a set of changes in the late 1990s and early 2000s which reduced the real interest rate on safe assets worldwide dramatically and I will show you that in a few minutes these changes were associated with a big rise in global imbalances a huge rise in net capital flows across the world and huge credit expansions in the capital importing countries of which the most important in macroeconomic terms with the US UK and Spain crucial country in the European context I believe this shifts were driven by both external and internal changes the external change that matters was the decision and I think it was a policy decision by most of the emerging world that mattered to start running very large current account surpluses because they learnt from the Asian and other financial crises they could not take the risk of large net debt inflows from the developed world the financial system was too unstable for them to manage since they didn't produce a reserve currency they couldn't really manage the consequences of very large capital inflows denominated in foreign currencies and in addition to that and this is links with the theme and I discussed this at length shifts in income distribution in our societies towards savers a big rise in corporate profits as a share of GDP big rise in income towards the top of our societies not all of them many many of our societies which had the net effect of shifting income to savers and away from people who would naturally spend and for a short time we made up for this by promoting and this was particularly true in the u.s. an enormous credit expansion and credit bubble which blew up so that's the macro story but already in what I've said this fits in with the financial sector I've talked about this credit bubble so there was a this was an environment very low real interest rates which triggered large rises in long in the value of long term assets of which the most important were houses these are the classic long term assets declining real interest rates easy credit environment encourage to expand and in the context of a rapid financial innovation rapid financial liberalisation in extraordinary credit boom and these two things were broadly speaking how things fitted together this chart looks a bit complicated I think sort of summarizes this very simple story the red line is my proxy for global real interest rates on safe assets it just so happens I think there's a lot of evidence to support this proposition that the UK my country has been offering index-linked government bonds which had been triple-a or close to triple-a for the last 30 years and it so happens the US has been doing it for less time but the u.s. so-called Treasury inflation-protected securities track the UK data very well and you will see that they since the mid-1990s the real interest rate has gone through three periods prior to 97 the real interest rate was close to 4% you can read this on the right hand side from 99 till about 2007 it was too so it halved very very suddenly and after the crisis hit it fell down to zero these are the three stages to catastrophe now obviously the zero real rates which we're now familiar with have become normal our depression numbers they indicate we are in a structural slum this is about as clear as you can possibly be if a real interest rate is zero year after year you're in a structural slum between what happened between 97 and 99 they'd shift from 4 to 2 my view is the most important thing that happened then was the biggest financial crisis before the last one the Asian financial crisis which led to an enormous shift to walk away from winning nough Stube ro as I've indicated in the emerging world above all in Asia and an extreme determination to build up foreign assets so there was a huge decline you will notice in addition three other lines these are us real house prices UK real house buys and Spanish real house prices and you will see just about 97 to 99 they started to rise very very rapidly and in fact they doubled in the case of US and Spain they tripled in the case of the UK and after the crisis hit they all went back down again and basically I think that the collapse of real interest rates which was linked with this credit expansion that followed created the ideal conditions for a rise in house prices these rises in house prices improved the value of the collateral dents which people borrow and this fuelled what was simply the biggest house lending spree we know of in the Western in Western history and an enormous expansion in the balance sheets of the banks that lent obviously the liabilities of banks and of course of the debt of the households that incurred this these borrowings just to indicate a few of the other things that happened I have already talked about the global imbalances these are the net capital flows across the world relative to global GDP from the IMF so back in 96 net capital flows were very small after 97 98 they started to explode upwards and by 2006 which was the peak they were roughly eight times as big as they'd been before the crisis at that point Oh sorry at that point at that point roughly speaking three regions were generating surpluses the oil exporters the Asians those are the yellow ones and the old industrial countries particularly Germany in Japan and there were two regions and only two regions generate borrowing all this money and they were the countries with these credit bubbles the big blue area is the u.s. itself which is far and away the biggest importer of capital at that time and the and the purplish one is what I call peripheral Europe what was peripheral Europe it was Western Europe Island in the UK southern Europe Spain Portugal Greece to a lesser extent Italy and Central and Eastern Europe and after the Christ these were the countries with significant current account deficits Italy's was not so big it's a slightly different story the others some of the others went to 10% of GDP or even bigger and that was what ended when the crisis hit it led to a huge contraction in these deficits you can see them contracting and as they contracted a very large amount of demand was taken out of the world economy so a macro level you can see the picture here I think very clearly now this the next couple of charts will indicate what happened within economies as this happened so I'm going to focus on two economies that I know well and aren't yours and have a very remarkable story so the first one is what happened to the private sector gross debt relative to GDP in the most important economy in the world the US and you can see I just focus on the period between ninety four five six and 2008 that it roughly doubled relative to GDP in just ten years and that has never happened before in the u.s. that's an extraordinary development by the way this explosion of gross debt occurred in just essentially two sectors the household sector which is at the bottom you can see the very rapid expansion of household debt with the kink about 98 which is when you will remember the house prices started to rise and the green one at the top is the financial sector which if you look at the whole green one you can see simply exploded in scale both by its borrowing and lending Vasavi the rest of the economy and internally in the financial sector in fact gross liabilities of the financial sector grew six times faster than GDP over the twenty years prior to the crisis just a staggering expansion of the gross debt of the financial sector now obviously if this is going on in the financial sector something must be going on as it were with about in the leverage of the financial sector now I don't have these a comparable chart to this for the US so I don't know what it would look like this is the UK the UK banking sector is incredibly large because it has a very large global position in fact to people's astonishment when I tell them this back in 2008 the gross assets of the UK banks were more or less as big as the gross assets of US banks and the main reason for the difference is that a lot of the US banking system is the so-called shadow banking system which is off which are banking activities which don't occur within banks and the UK banking system had huge global assets and liabilities it was very global exposed I want you to focus just on the black line of this chart and what that chart shows the black line shows you was that up to the 2000 the ratio of debt to equity in the UK banking system was reasonably stable at about 20 to 1 it's a very highly leveraged business banking there's lots of debt and rather little equity banks are in general very fragile institutions because they have so little equity relative to their liabilities that's what makes them prone to runs that's what makes banks and has always made banks risky you in Italy should know that because you invented it this system is your invention for better or worse but the but me what you were if you look at what happens we've seen 2000 2008 there was an absolute explosion of leverage in the UK from 20 to 1 to 50 to 1 at this point at this point it took a 2% decline in the value of the assets of the British banking system for it to become insolvent and that's perfectly what happened in 2008 and why we had to pump in an enormous amount of public money so as the leverage of the banking of the financial sector as a whole grew in terms of its total debt just its total debt equity didn't keep up it wasn't encouraged to keep up no regulator cared about this and it became unbelievably fragile in this way so as we I've said the crisis was a consequence of this huge policy and institutional failure which allowed these things to happen without cheque and without awareness of the risk I'm I'm arguing that it was ultimately due to changes in the world economy which appeared to the practitioners in the central banks to justify easy monetary policy and rapid credit expansion inflation was well under control exchange rates were very strong because it was all this capital flowing into countries like the US and the UK the the the main macro targets were being achieved the financial sector seemed to be very profitable and prosperous they were completely relaxed but of course as I've already indicated credit expansions like this work via the financial sector it exploded in size in absolute size and it became far more fragile of course it's always fragile it makes promises it might be enabled unable to keep without support that as I've already said is the characteristic of a system which has huge debt relative to equity but it became far more fragile and far bigger than ever before and we still live with the legacy of this because despite some reduction if I may go back to my earlier chart in the US case you can see there's been deleveraging but it only brings the u.s. that's up to 2013-2014 doesn't change him out it brings the u.s. roughly back to where it was in 2003 for and the same is roughly true as I will show you in a minute for other economies so when the crisis hit we then adopted the most expansion airy monetary policies in the history of the world so this shows what central bank's did when the crisis finally hit and people realized that they had been living in cloud cuckoo-land in with extreme speed the central bank's cut their their lending rates down from their more normal levels in the five six percent click to down to zero the u.s. did it fastest the Bank of England followed almost as quickly the ECB in what I regard as one of the most comic moments in monastry history tried very hard in 2011 he got to 1% it found out utterly horrifying so it started raising rates you can see this little blip up in 2011 to one and a half percent it said oops it realized that it made a terrible mistake and it's plummeted down and not because it wanted to - essentially to zero so we're now in the very amusing situation that the highest interest rate afforded by any of the four major developed countries central banks is half a percent that's tight money nowadays and that's the Bank of England just to give you a disc a an indication of the scale of this crisis that they're dealing with the leverage overhang and the difficulty of generating growth I'd like to point out that in the case of the UK we have roughly three hundred and twenty years of monetary history and the lowest rate that the central bank the Bank of England has ever granted to the banks in support of them prior to this crisis and this is through two world wars the Napoleonic Wars and the Great Depression the lowest rate he ever used was two percent and now we've been at half percent for five or six years just as indicate that this might be no way exceptional as I put in I've gone in this chart back to 94 and I show you that in the case of the Japanese they've been here since 94 so for 20 years in addition to this there has been an absolutely dramatic expansion in the balance sheets of the central banks as they've bought assets to lower the price the lower the yields and raise the prices of other assets so this shows an enormous expansion in the Federal Reserve and the Bank of England both of which have reached about 25 percent of GDP the ECB hit 30 plus in 2012 after that it allowed the central bank to shrink its assets relative to GDP and the best way of thinking about what Mario Draghi is doing right now through GUI is it wants to bring it back up again to where it started in 2012 and the Bank of Japan after 20 years of zero rates is so unhappy about what's happened it's now pursuing a policy which is completely on its own you can see the blue line shooting up into the stratosphere as it essentially monetizes an ever increasing part of the debt of the Japanese public a major purpose of these very low rates is to get some demand growth in our economies after the crisis but another purpose is to facilitate deleveraging allow people to pay down debt and I just want to bring out what's happened here the you can see Italy here as well to have in fact been three economies which were my most important cases of the major country Spain the UK and us where you have quite significant declines in private sector debt relative to GDP very small in Germany mmm effectively no decline at all in France Japan Italy or Canada and of course universally very very large rises in public sector debt relative to GDP and that of course was the other part of the response to the crisis which was to allow fiscal deficits to expand I think was absolutely the right thing to do and of course the indication is that one part of why the private sector could delete courage is that the public sector leveraged there's a lot more public sector day than before that was absolutely the right thing to do but it was an inevitable part of this it became very unpopular and that's because it's become so unpopular that austerity has become the dominant theme of public finance now for many years for three or four years across that the developed world one of the most important things I want to point out here before I go on it's incredibly important is this underlines the extent to which thinking about the public sectors debt without thinking about what the private sector is doing before the crisis and after makes it impossible to have sensible fiscal policy it's the persistent failure of the thinking about the public finances in relationship to our economies is the failure to think about what the private sector is doing and how it will drive the public sector finally I'd like to cover briefly what's going on in the eurozone and my story on the eurozone is in a way a microcosm of what I've told you about the world so this is a chart for the imbalances in the eurozone which is very much like my global chart you will see the red line that I have here shows very lovely the aggregate current account of the eurozone and you can see that up to the crisis to 2010 9 or 10 it was pretty close to balance this is relative to eurozone GDP but within it huge imbalances emerged as Germany and to a lesser degree the Netherlands and a few other countries generated gigantic surpluses demand grew much more slowly than potential output and other countries generated enormous deficits which offset them and I argue in my book they're very closely related because the monetary policy the ECB worked at that time to offset the contraction in demand in particular in Germany in the Netherlands by encouraging demand and encouraged and credit expansions elsewhere the crisis hit the capital flows stopped flowing and you can see them ceasing as all the current account deficits disappeared in the eurozone and the IMF now forecasts that by 2016 or 2017 every eurozone member country will be in surplus the eurozone will be the largest surplus region in the world Mario Draghi's recent policies driven down the euro and will help it but of course what this means is that the euro zone is becoming a great big Germany it's becoming a huge region trying to generate demand which it can't generate internally through the external account it is now the biggest surface region by far in the world it's one of the reasons by the way the euros there the emerging countries are now in trouble quite a lot of though it's one of the reasons because they run the counterpart deficits I believe that in the long run this is not a viable solution for a continental sized economy it must generate internal demand but the the policies of the central bank has achieved one very important thing and particularly in 2012 and that is you can see these very high 30-year bond yields for Italy in Spain at the top and you can see that as a result of this commitment to do whatever it takes the and it's the actions of the central bank it is cut down yields very very dramatically towards those in other countries so the yields are generally very very low and that's a tremendous success it's it's a real achievement and it was something that I very much strongly supported but to use the central bank but the other point I would like to bring out here is that if you look at these yields these are now nominal yields you can see that the highest is 3 percent Germany is down there at 1 percent Japan is at 1 and a half percent a world in which major countries and these are the major developed countries can borrow for 30 years at 3% nominal is a slump world that's a world in which people are basically say that the real interest rate is 1% or less and this astonishingly is a world in which the major concern of public policy making is that fiscal deficit should contract the government can borrow essentially for zero to one percent real and yet the most terrifying idea is public debt I think this is a very very profound policy mistake the eurozone story the u.s. story is bad the eurozone story is I'm afraid really grim and that the recent recovery should not fool people about this so what I'm showing here is what has happened to real GDP and real demand in the eurozone in the US since the crisis the two major Western economies so you can see though a huge recession from the first quarter of 2008 it's very very clear in both demand and GDP then the US started a recovery and actually since the first quarter of 2009 the US real GDP is been growing at about 2% a year that seems to be pretty close to the weakest recovery on record in the u.s. it's very poor very very poor but it is a recovery and it's steady the eurozone unfortunately after an comparable recovery to 2010-2011 then had a second round of crisis and that was the crisis that hit of course Ireland and Portugal and Greece and then and I've already shown you this Spain and Italy and that generated a whole new round of collapses in demand and GDP there is now evidence of a very weak recovery in the eurozone GDP that's the light blue line but just to bring out how bad this has been aggregate real demand in the eurozone as a whole in the last quarter of last year was still 5% less than it had been before the crisis hit 5% less than it had been nearly seven years earlier and this shows what happened to the GDP of individual countries which what yep that's right I just thought I'd remind you of what's happened to your country no you truly know it so I put in the eurozone as a whole Germany Italy Spain Greece Ireland Portugal and for Paris in the UK so Germany in the UK if I both had miserable recoveries but they have their economies are at least somewhat bigger than they were before the crisis there the green and red line the eurozone I've already showed you not the eurozone I've already showed you that that's the light blue line I just like to focus on what's happened to the crisis hit countries first you can see why Greece is a unique case green the Greek collapse which is the brown line is unique unbelievably severe GDP is still more than a quarter below the pre-crisis period and after the recent experience with this government it's falling again in the case of Italy it's about 10% below the pre-crisis peak there's a very weak signs of recovery it's going to take if you have a reason if you assume that Italy were to grow one-and-a-half percent a year it's going to take six years before Italy gets back roughly six years before Italy gets back to the pre-crisis level which will be 2021 in which case it'll be 13 last years that's a pretty big mess that's a pretty big mess if Spain continues to grow as it is done and everybody is very pleased with Spain Italy it'll just be 10 or 11 last year's Ireland it's slightly better it really had a relatively strong recovery but it's clear the crises for the countries that we I've described is a very very deep and profound event and finally I think it's the final charts on what's happened it has been a massively disinflationary event and in the very worse way since German inflation is only 1% that's the red line you can the the brightest red line German inflation is core inflation is only 1% which is way below the euro zone's target so here is the country that should have strong demand and strong inflationary pressures but its inflation is 1% all the countries that have weak economies and are trying to regain competitiveness against Germany tend to have lower inflation of that and indeed that is the case they all have inflation now close to zero which means that the inflation is doing nothing to erode their private and public debt on the contrary it's leaving it constant in real terms and that's making it very very hard to manage the public finances and the private sector debt overhangs and it's one reason and there are many others I don't have time to go through why we really haven't sold the crisis now why have we got into this terrible mess which I've now described very clearly as a long-run consequence apparently of the crisis and some of the difficulties before which one economists Larry Summers calls a secular stagnation I think you can argue that to some in degree the pre-crisis trends were unsustainable I think it's often exaggerated but to some degree that what was going on pre-crisis was an illusion because of the credit expansion we didn't have solidly grounded growth I think that's true the second reason we got into this terrible mess is the crisis between the huge private and public sector debt overhang which I've already described and discuss the third reason is the crisis damaged the financial sector and the functioning of the financial sector and so the economy in the short and the long run and finally policymakers adopted very bad post crisis policies and I think that's particularly true in the eurozone with far too little fiscal support and far little tip attention paid to aggregate demand and support for the economies so that seems to me where we are now let me then with that talk about what we need to do to fix this incredible mess that we are in and the first thing we have to do is to recognize we're in a big mess and recognize how big the failures were the first thing is to restore growth and to do that to my mind a necessary condition is stronger demand it's clearly inadequate demand in most of our economies and the best way to deal with demands which is all seems to be a long term weakness in demand when real interest rates are as incredibly low as they are now is to go for much higher public investment pretty well everywhere it seems to me an obvious thing to do I've argued for this in the US I've argued for this in the UK and I've argued for this in the eurozone of course I got absolutely nowhere but I'm convinced I'm right and the second thing I think we need to do is better comp correlation between monetary fiscal policy and even what I Milton Friedman once called helicopter money which merely means using the monetary system to support fiscal policy as I've already showed you we've had huge expansions of the balance sheets at the central banks but that was just gone done in order to substitute monetary assets for government bonds predominantly which are assets very similar to government bonds jump money you have to buy an awful lot of government bonds when yields already so low to make much difference to an economy much more effective in my you view is to use the monetary system directly in support of public spending and I see no reason the current situation when the private financial sector is not generating credit and money why the government shouldn't do it directly the second thing that clearly needs to be done in fact I attended a very interesting discussion of this in the eurozone is there needs to be debt restructuring both private and public there needs to be more capital put in banks which then allow debt write-offs and writedowns that capital could come from governments it could come through other means but it seems to me pretty clear we should be accelerating and encouraging the restructuring of debt this over has to be limited to be to be eliminated and I think in some cases in Greece is the most obvious this of course includes substantial rewrite writing down a clearly an unpayable government debt we had a discussion about this morning I think there's not more much more to be said we need also to encourage supply there's a lot of evidence that the supply potential of our economy is growing slowly productivity growth is very slow we need pro-growth structural reforms which the most important I think our product sector liberalisation financial sector reforms which make the financial sector more pro-growth and direct support for innovation through the through the universities and research activities of government linked with the private sector we need financial reform which is pro-growth that is to say we need financial institutions that are not just about financing as they are predominantly now property transactions it's amazing how much of our financial sector is devoted to that but actually supports growth and we need to look at our tax system with a view to what will actually promote growth in the euro zone as I've already indicated I think this Greater Germany strategy is impossible it is impossible for the eurozone as a whole to to expect enough demand to come from abroad to sustain really buoyant demand in the eurozone as a whole I think it's crucial that the euro zone becomes what I call an adjustment Union that means higher spending and private or public it doesn't really matter in the core countries to allow the adjustment elsewhere and in fact I've made this point very often and I have incredibly unpopular given that the inflation target of the euro zone is 2% a set that given that there should be large changes in relative competitiveness then inflation in Germany and the Netherlands other such countries should be 3 or 4 percent that would tell you that you are succeeding that's not happening at all and that's one of the reasons this growth is so weak and debts restructuring is particularly important in the eurozone because the debt overhangs in the public sector particularly so large none of this is going to be at all easy and particularly if the eurozone and Japan continue to choose policies of weak exchange rates exponet exports rising which are I think beggar my neighbor policies other countries have to accept external imbalances and there really are no countries in the world able to bear this we need to stabilize finance and this is just the other side of what I've already talked about we need far more capital in our banks we need radical deleveraging of economies with the elimination of excessively favourable treatment of dange that I think in the longer term we should be thinking of more radically still I think a lot of the loans which we are used to making as loans should be equity sharing contracts that's pretty only true for house purchase and we should actually think about direct use of stay created money and I know that is unbelievably unpopular finally I think we have to think very seriously about getting better balance of the world economy my view is it makes no sense at all to have huge net flows of capital from the poorer countries in the world to the richer countries in the world which can't use them as we see they can't use them at all merely because we can't generate successful financial systems to support emerging countries borrowing and one way out of that is to have much better insurance for developing country deficits which I think means a much larger IMF and that is of course exactly what Keynes was arguing for at Bretton Woods we need much more cross-border equity flows rather than bond flows and linked with this very substantial global monetary form and then notice that Joe Stiglitz in the audience and he's talked a lot about this in other words we need a lot of change of course we're not going to have these major changed and that's why we're going to continue to live in a short-term mess and a long-term s so my conclusion I apologize have gone on a little bit longer we have to get away from the complacent view that what's happened is a perfectly reasonable crisis all everything is going rather well I think it's pretty clear from the figures I've given you and that's why gave you so many figures that's it's been a disaster and it remains one it was caused I think if we think about it by the interaction between the macro economy and financial fragility and the economists tendency to separate macroeconomics with a very simplistic idealized model of macro economy with no finance in it and the financial sector is if the macro economy doesn't exist and that is really how economics used to work with a few very distinguished exceptions that's just an intellectual failure of the huge kind we need to make the global economy much better balanced and that needs a lot of front from that fund reform and we need to make finance far less fragile and we haven't achieved these things so we haven't got out of the crisis that's obvious self-evident I'd given you figures of that and we haven't fixed the system enough to be confident we won't have another one on the contrary I think we can be pretty confident we will have another one so apart from that how did you enjoy the play thank you very much thank you Martin thank you a couple of questions first one mm it was a big disaster but in the global crisis we suffer we in Europe the lack of an adequate political European political power because the plight of the eurozone is a special case in the big global crisis the question which should be the role of the European Union what Germany should do and then another question you said that we need a higher public investment in a the eurozone especially so but how it is possible for example in Italy or if we have especially here so a huge public depth well it's very very difficult to feel optimistic about fixing these problems in the eurozone and I have a very large part of my book is about the eurozone and I've only touched on it indeed I would claim that one of the contributions at this book is that is the amount of time I pay spent on Europe because nearly all the books on the crisis have been written by American economists and Americans and most of them there are few distinguished exceptions actually think that this is a purely American crisis and nothing happened anywhere else and they are not aware fully of that what has happened in Europe let me give you a broad answer which and then a more narrower answer personally I was always against the euro so everybody knows this yeah well I not all British economists were against the euro and not all British economists were against joining the euro but I was one of them and the reason was that I have tended to the view that a necessary condition for a currency union in the modern world that is a modern world with fairly large welfare states and large expectations of the public from the public of government and government policy that this requires fairly substantial mutual insurance mechanisms we can discuss the nature of those insurance mechanisms but they need fairly substantial mutual insurance mechanisms and all existing currency unions which are of course States have over the last hundred years and that's true of course of Italy is a currency union as it was with the lira and the UK and obviously the u.s. Australia to develop large regional and personal insurance mechanisms these are mechanisms that ensure this is an example that poor groopman is often used in sure this took a hundred years to achieve that when you have a crisis in the in the say in California's public finances that the Californian financial system will continue to function anyway because this is backed by the Treasury of the whole now it took the 30s to achieve that and it didn't happen easily and in different ways most all currency unions have substantial risk sharing mechanisms the eurozone went into was created without those mechanisms without the political union that would have supported those mechanisms other than the European Central Bank itself which is in not unimportant insurance mechanism and to be quite clear mr. Draghi in particular has used this mechanism with incredible energy and activity but it really is not enough to require to provide this mutual insurance so I think it was bound to be a huge problem now there are two solutions to that problem when you hit the christ when you hit took threat to it three to one solution will be too sure that the countries you have in the currency union are so similar that they're almost always going to be subject to similar shocks or behave in similar ways that would have been possible if a different group of countries are joined but it didn't happen so that's gone that that is disappeared unless it breaks up which are not recommending so this doesn't seem to me good idea this second possibility is to create the instruments of a pooled insurance mechanisms of various kinds which means some sort of fiscals joint fiscal system you can discuss I won't have the time to go into details in the crisis and a very limited amount of that happened with the European Stability Mechanism and its precursors but it's relatively small half a trillion euros not big enough to insure major states against these risks but that would be the second thing to do and the third thing you can do is combine the support from the central bank which has happened with policies which are conducive to rapid adjustment and the only mechanism you really have once you lose the monetary mechanism which is essentially eurozone why the only mechanism you really have is fiscal and that's gone so because the rules have eliminated the new rules fiscal two compact is rule so it's that leaves you with essentially with absolutely brutal pure gold standard mechanisms so what what that means is that we are back to the 19th century with the slight qualification that the central bank is there and that's important which is adjustment occurs through wages and prices and ie through deflation and long periods of deflation and that unfortunately makes the debt problems works as we are seeing now none of this was a surprise because it was baked in the cake I don't know how you solve that problem I really don't know how you solve that problem this is what frightens me but the the least bad thing you could do it seems to me the most obvious thing to do would be to propose well let's distinguish which is actually part used to be part of German budgetary rules current from from investment budgets let's accept that investment from borrowing for investment is legitimate which always using the golden rule and that this is an obvious thing to do at the European euro zone wide level and also in those countries which have big needs for investment and can borrow Germany can borrow minus two percent real for 30 years if you can borrow up minus two percent real for 30 years - one two - - it's really cried hard to argue who can't invest I mean it's rather peculiar to put it mildly so that would be one possible making I don't expect to happen but that would be one possible way of getting at this problem I don't think the risk sharing mechanism seemed at all plausible other than that at the moment though I have some ideas about the longer term about how that might I think my equity sharing contracts are particularly important in the eurozone because that way when something goes wrong risk will be shared by the people providing the funds and and by the people who receive the funds that seems to me appropriate but I don't have any simple solution because all the sensible solutions seem to be blocked by the nature of this currency union which remains a currency which is a currency union alright but it is among states which in all other respects remain essentially sovereign and that's a very very peculiar structure I don't believe that it one that can survive like that indefinitely and at some point major reform has to occur and that probably will mean the head-on clash but it's got to happen here today in Italy banks are really unpopular Italians think that banks are really worse so what should be done to make banks full with the societal role that they should be playing how can we Vande fraudulent behavior lack of transparency predatory discriminatory lending so anti-competitive practices european about that well i'm again rather like the fit the mechanism to it i wouldn't start from here but this is where we do the this is really is a very difficult problem so there are a couple of things that i think we can think about first we in britain i was a member of our independent commission on banking and we recommended in the UK something which is rather similar to what the u.s. used to have with glass-steagall which is the pretty close to complete not complete separation of retail from investment banking and this is very unpopular in europe there was an investigation of this by so-called licked lickin on committee they put forward not dissimilar ideas and it's pretty clear they have been rejected but i do think that if we forced banks to focus on retail lending and forced investment banking to stand on its own feet a lot of investment banking would disappear because it wouldn't be adequately profitable because it's cross subsidized because the state backs retail banking and retail banks will be forced back onto their bread-and-butter activity and we would know that that's what their activity is and they would judge be judged by how well they do it I also think that we there will be much better institutions you're better capitalized as I've already indicated I think their transparency is a very big issue that's a very complicated one but I think it it is very important that as much information is published about the nature of the banks balance sheets as possible but I actually think the biggest single issue is that in most countries the banks are a very increasingly narrow oligopoly and the they they are in a near monopoly position in Britain now there we have six banks to do all banking essentially the u.s. is vastly more concentrated than it used to be I don't know how many big banks there on Italy but the only two or three I think yes and it's inevitable as I can see it the very large institutions of this kind will tend to be somewhat exploitative so I think the solution to that and I argued this in my last column is to increase capital requirements most for big banks partly because they have the biggest risk in terms of aggregate consequence for society and partly because it will encourage them to break up finally I've become very tempted by the idea that the government should consider probably through public-private partnerships or some other means actually trying to create new specialized banks forces or financial institutions new technology might make this easier which actually perform functions like supporting new businesses supporting innovative new businesses Europe has almost no venture capital for example we should be asking ourselves why that is the case what can be done to promote this that is sort of round the periphery I don't think all this would fix this but I think moving thinking about this and getting away from sort of just trying to survive with these huge balance sheets the Europe as eurozone has incredibly huge balance sheets as the UK does I think thinking in these ways in these long term structural form ways is part of where we want to go okay there was the question like there the microphone is coming can you hear Thank You mr. wolf and thank you for making economic so clear to those of us economists I wanted to ask two questions connected with politics and they're both connected together the first one was connected to the answer in the sense you've already given and it will be this if banks are so enormous ly influential on politics on everyday life and if in effect ordinary citizens who pay their taxes are in effect the lenders of last resort to keep the banks afloat I think you could also make an argument following on from what you've just been saying that the citizens ought to have a seat of the board of the major banks and I shot myself in saying that was it's not the kind of point of view I've ever advocated in the past but that mean I think it was very clutch very clear from your presentation that the mass of the people are paying the consequences of decisions that went very wrong by people who thought they knew what they were doing but didn't so that's the first point and the second one follows on from that and it's a question about governance one of the things that really struck me about your presentation was just the if we can be making decisions now in Europe to go for an export-led recovery which might lead to catastrophic disasters in the emerging economies and if the savings glut in the emerging economies led to credit glutes which have led to disastrous consequences for us it seems to me and I'd be interested to have your opinions on this that we need to have some sort of discussion about global governance of economic issues do we need you mentioned Keynes do we need some some new kind of Bretton Woods in which people sit down round a table and try to come up with structures which everybody understands which can control at least attempt to control these enormous economic fluxes that you've been talking about thank you okay these are two giant questions and I let me try and answer them as briefly as I can I actually floated flirted with the idea that the taxpayer Quay ultimate guarantor of the financial sector should actually be represented on the board and the argument is as you put it so III think that's pretty clear the argument against is that it creates potentially quite a damaging confusion of roles and I mean this in the following respect the way we think we are dealing with this problem is through regulation so this is a very very highly regulated industry and we have always had and since the crisis we have much more a very complex regulatory structure that oversees the banks I think it's pretty easy to see that if you had the regulator's regulating the banks from outside and the government was represented or possibly the regulator its most likely to be the regulator because they're the people who know most is actually on the board of the institutions they're regulating you have a potentially quite serious conflict of interest in particular if anything goes wrong the bankers will say well you can't blame us you were on the board it can't be our fault it's your fault you are therefore implicated in it and so I've come to the view that unless the government actually buys the banks and I'm not discussing that at the moment though there are situations in which I would either during the crisis I thought so in the case of RBS free crimes I take the British bank RBS the British taxpayer is the majority shell owns about 86 percent of the bank well they might as well have people on the board which but they're not really using that leverage but my instinct at the moment has been that as long as we have this sort of external regulatory and supervisory structure having the government representatives on the board itself is just going to create tremendous confusion and it's an unsatisfactory way of going about it anyway I would rather that we had institutions we thought we could fail safely and to do that or be managed safely to do that we have to do I think more structural things much more equity and the breakups I've discussed and new banks on the global governance that is an important part of my books discussion now to be fair to be fair to them the major governments are aware of the problem and they have got a process actually underway which it's probably the least known into the governmental process of all it's called maps as a mutual assessment program which is run by the IMF for the g20 okay and the fact you haven't heard it about it tells you how effective it is and the reason is quite clear what the program tries to do is to integrate the plans of all the major countries so they say what are you intending to do where do you think your economy is going to go and then they say it's a perfectly reasonable well let's see what you're all doing together does it add up and they they go through the process and they find not to their surprise that it doesn't add up and then they say well what are you going to do about it and the answer that answer to that came there none and the fundamental problem and I want to be very very clear about this is of course there is no governmental I mean we've already discussed there is no eurozone mechanism to make the eurozone economy add up it hopes that the rest of the world will allow the eurozone to add up by putting the results of its crazy policies into the rest of the world in form of its huge surpluses the world as a whole can't do that obviously because if we're not trading much with Mars these days but the but the of course each government hopes that the gather governments will find some way of adjusting and that is a practice what happens there's no mechanism now there are actually there is a mechanism and I'll come to this in a moment is a very important point Keynes of course thought which why he failed utterly completely totally that an intergovernmental mechanism could be created that would force the most powerful surplus country in the world to make the adjustments which would make everybody else's life easier and the most powerful surplus country in the world and I'm sure you all know what that was the US said nuts to that we're gonna have this round the way we wanted and that worked perfectly well until they discovered actually didn't work and the u.s. then made the sensible decision they would start financing all the deficits and that's what the Marshall Plan was the u.s. from the US got there much quicker than Germany has in this crisis to this very simple point if you're the surplus country you have to finance the deficits and then the US deficit went away since then at the world level we've had another policy and the policies work pretty well and it's the policy the eurozone and the Japanese and the Chinese of effectively all following now and the policy is the US will fix it and the and the reason it's not stupid the reason is the US produces the dollar either therefore has essentially unlimited international purchasing power as she scared the extang complained so if it runs large deficits and we all wanted to run large deficits print more dollars I the Fed will run an even easier monetary policy and it will keep on expanding monetary policy to expand demand and therefore balance the world economy and in brief that's the whole argument of my book of how we got into this mess and that is what the world is trying to do again okay but and that's not as crazy the problem is that the US consumer is pretty well hopelessly over leveraged the US relative to the world economy is much smaller than before and in order to do this now the u.s. instead of having expansionary credit needs interest rates which are significantly negative in real terms which is really hard to do so we're sort of reaching the limit of that policy but nobody has any other alternatives and there are no global systems making that possible and it's one of the reasons well I'm really pessimistic about the long-run consequences but those are my best answers to why we are where we are and why it's so difficult to fix but at the moment right now everybody hopes the US will fix it we have a question right here here please and then over here everybody's running away so I think thank you very much also from my side for the excellent presentation I have a question about your argument about global imbalances which has very much focused on the current account of course which is kind of the Ben Bernanke savings cloud argument and of course there's an alternative to this one which has been put forward by the BAS especially and also some people like Ellen Rea at the London Business School which is that instead of the current account which are net capital flows really have to look at gross capital flows to understand what has been going on and of course this is because for investments savings may not be as important as what Claudio boria's called financing or you have called this credit creation here so I was just wondering what your view is on the importance of cross capital flows versus the current accounts about the macro macroeconomic analysis the central bank funded investment programs not the closest we've come to this in the world when the eurozone isn't going to be the place where we will experiment with this given the legal political ideological objections to this but there are other places in the world where you could probably start this and I think the country where where it has where we become the closest is probably Japan and and my question to you is how you know we've seen a massive expansion in the central bank balance sheet there's a you know AB anomic a an investment program going on so we you know this is sort of a you know an experimental setting for this how do you see that going over there and then here most of the accounts of world events over the last 20 or 30 years have put much more emphasis on technology than you have today and I was wondering you did talk a bit about possible technological innovation in terms of addressing some particular problems with distribution but I'm wondering if I'm correct in saying that you don't think technology has been a particular technological change has been a particularly important factor in the phenomena you've been talking about thank you over there so you mentioned that the that many people think that many people are very pleased with the case of Spain and my question is whether we have some positive growth data in during the last semesters in Spain but we have like a huge unemployment rate a huge amount of private and public debt we have a scary deflation so what do you think about the Spain would think you do we have other questions ok I'm going to start with the easy ones and go to the end with the last one that the beauty the diffic difficult because time might cut me off which will be great help ok I think the answer is I am NOT it seems to me clear that technology has played a role in the normal way that technology is part of what generates rising prosperity but since all the evidence we have is that we've had a particularly particularly low period of particularly low rises in prosperity then the question is not is sort of a negative one which is wise technology doing so little for us and I think it is plausible that it's that part of the reason we are constantly getting so close just if you like stall speed in our economies is that the underlying trend growth has already indicated one point has been falling and it's been falling because in for the Western world our rate of productivity growth has been falling now that's a very controversial view I feel very passionately this is true and so there is a negative question about technology why isn't doing more for us and my view is it's not doing more for us because with the one exception of the Internet which is a very important technological inventive aid inverter innovation with quite significant effect actually the technological in banette in revolution quote-unquote we're going through at the moment that is to say over the last three decades in particular over the last decade with exception in the internet which clearly affected the US economy for about seven or eight years we are in actually in a period of extraordinary technical stagnation and the idea that we're in a period of extraordinary technical innovation he's a bit of height that he's floats from Silicon Valley now it did however play quite an important role in financial innovation there's no doubt about that because a lot of the stuff that you can do in the financial sector particularly creating structured financial products and a whole slew of other products which nobody could understand would have been impossible without the computer revolution but that's it was an old revolution which has been going through the financial markets now for well over a generation and it's clearly an important factor which I do discuss in the book I so I would agree that part of the reason that the financial sector went so became so impossible to manage is that the financial sector was able to do things in innovating products and in trading them which was previously impossible and technology was very important there finally technology was clearly important though I don't think was the dominant factor but it was an important fact and I do discuss that in shifting the distribution of income and that's part of the demand story there is one other respect I should have mentioned that which I do discuss which is technology has become a pretense of particular part of the investment by firms in the Western world and the prices of the technological investments they've made have been falling rapidly so they have rising real investment with falling nominal investment and that's one reason that nominal demand is weak and demand is nominal so that's what I think about technology I think your description of Spain is correct I understand that it's much better to grow that the the first difference is positive rather than negative it's much nicer if the first difference is positive rather negative but the least Spain has is 10 Lost years in practice I think it'll be much more than 10 Lost years I have no idea what unemployment will go back to where it was pre crisis if ever and of course as you rightly say there's been a gigantic increase in public and private debt which is long-standing which will be long lasting now in 2006-7 I wrote some columns which were unbelievably unpopular in Spain in fact I have felt at one point I could hardly visit the country because I said it was headed for the most monstrous crisis which would last for a very very long time and that is in fact the case why did this happen partly because the eurozone relied on this boom to keep going and nobody paid much attention to the instabilities and particularly the creditors didn't worry about it and Spain to an extraordinary degree was seduced by this bubble the the result that quite simply will be something that whose shadow it seems to me will be cast across the economy for a generation there's just no way out of that the more quickly it can grow the more successful in grow the quicker you can get out of this there just as long as it stays in the euro and the eurozone has more or less its present policies there doesn't seem to be much alternative to what they're doing now nobody I was asked I think I failed to answer that he wants this what could Italy do on its own well it's rather like Spain on its own if Spain acts on its own for instance enormous ly to increase its fiscal deficit the ECB will not back it everybody knows the ECB will not back it and it spreads I think will explode upwards again so I think that the problem would being in the euro zone and that's the obvious point of being in the euro zone is the even though you're quite a large country you have lost an enormous chunk of your sovereignty and you just have to accept that that's just the story Wolfgang well Japan unfortunately hasn't done this in fact they've wasted it you know this is a very interesting questions about monetary policy and fiscal policy so the Japanese central bank has purchased a very large part of the outstanding gross debt stock of the Japanese government you could have imagined an alternative in which the Japanese central bank would simply a finance larger fiscal deficits the actual expansion of the balance sheet of the Japanese central bank in that situation could have been significantly smaller than it was but the the injection of spending power in the economy would have been significantly bigger it would have been I think a much better targeted way of doing it then pretending that the central bank policy can and should be completely independent of the fiscal decision and operates through purely through the balance sheets of the private sector that's essentially how it works the balance sheets of the private sector when you're near zero of very low levels of government bond yields really don't give you much bang for the buck in as you rightly say in the eurozone nothing else is there's nothing else to work on but I think the the the the crucial thing is that the the crucial thing is that the government that the crucial thing is to actually get spending in the in the economy up and since I don't think the balance sheet adjustment of the central bank has a big effect on the private sector spending and you can see that in Japan not much the best way to get spending up is to get the government spending up in other words to use the central bank for that purpose I know that for all sorts of ideological reasons expanding the balance sheet of the central bank in order to purchase vast quantities of private assets is seen by many as a perfectly safe reasonable and planned you and effective thing to do and using the same balance sheet to expand spending by the public sector is seen as insanely responsible and leading to hyperinflation I just don't understand the logic finally gross net I try to cover this in the book I'm not saying that I have succeeded I am I think Claudia is an incredibly intelligent man and I have to say I've always failed fully to understand what he's talking about and that's probably my stupidity but the but broadly speaking this is what I think as I've tried to explain it in in the book central banks are interested in levels of spending relative to potential output in their economies in order to sustain what I would call full employment and they would call hitting inflation making sure that inflation its target and if and a number of fairly plausible assumptions that is that is what they that is what they are Morris they are the same thing and that's more or less what they're trying to do if you're running the monetary policy of a country that is receiving very large net capital inflows and we can discuss I'll come to in the moment is linked with closed what that means is that you have a structural deficiency of structural bleeding if you like of demand abroad so the central bank has to pursue a policy whose net effect is to get important sectors of your economy to spend much more than their income consistently and that's what the US central bank did you've got to date the US most obviously it pursued a monetary policy whose effect was precisely that to get demand in the u.s. to write to operate at a much higher level than income in the United States year after year after year the only way to do that was to create a huge asset bubble and credit gross capital gross credit flows that supported that credit bubble and supported the prices of the assets against which people were borrowing which were houses so I see these things as all fitting together now this led to a huge expansion of the gross balance sheets of the the US private sector in order to generate those net spending and a great deal of that expansion of the gross balance sheets of course was acquired by foreigners so I see that as a consequence or not a causal factor it's a necessary consequence of the set of policies that I've described so in my view net which by which I mean income and expenditure drives gross cuz net income and expenditures what the central bank is actually trying to target I have no real problem since it's a general equilibrium situation in which if you you tell this story slightly differently as long as you understand that's what the central bank is trying to do it is trying essentially a Keynesian policy though it not doesn't admit it and the and the the the credit flows and all the rest of it are a consequence of this of this sort of sort of story so if you want to stock that happening now their answer would be as I understand Claudio bill white is to me a little more easy to understand Bill's answer will be well the thing to do then is just not to have allowed these gap credit flows to have occurred and the gross capital flows and the gross balance sheet expansion or this is perfectly true but then of course and then I understand this the central bank of the United States would definitively have said that because of the consequences of these policies we are going to pursue a policy that will allow deflation in the u.s. that's our objective and how long do you think the Federal Reserve would have been allowed to continue that policy a year two years it's not a it's not a policy objective the Federal Reserve is allowed to have therefore for the BIS the BIS isn't responsible for anything you can ask for any damn full bit of nonsense it once and it does consistently but the they're not elected or responsible to any elected official I will go through the discussions that I know have occurred in the BIS between B ice officials and the major central bankers everybody knows what the central bankers are supposed to do because they've been told by Parliament's or the Congress what they're supposed to do what they're supposed to do is generate enough inflation to get and enough spending to keep their economy in quote unquote something that looks like aggregate balance the problem is that when they do this the whole economy blows up theses are really big problem this is the really big problem which in my view Claudio and Bill know not bill actually Claudio assumes away because cloudy assumes that for some strange reason if you didn't do this everything will be fine why so I think that the problem that the the policymakers are face is much deeper and more worrying than the one they described the in analytical part is not the core of this the key part of this was that without the policies that had these dire consequences they would not have been fulfilling their mandate which is why Mario Draghi has finally got to where he is now and in my view he's gonna go on doing sort of stop because that's the sort of economy he's dealing with and that's the really frightening dilemma we are way out of equilibrium why we're way out of Italy bream is I think the great challenge for economists to understand I could go on for much longer but I've already gone dr. Leonard thanks for the question because it's incredibly important and and I think the BIS critique is incredibly valuable and I discuss it I just fundamentally disagree with where with their view of what a plausible alternative would have been so time is over thank you so much dear Martin I think that you haven't given us to match hope in the future but we thank you anyway for this refreshing book and analysis of tonight thank you so much and we hope that you wrong sorry you you you you you you you you you you wolf Martin wolf is a British journalist widely considered to be one of the world's most influential writers on economics he is the associate editor in chief economics commentator the Financial Times of London and Martin wolves column in the Financial Times has been called required reading for the international financial elite wolf is