Chat: Professor Steve Keen

Interviewer: Now we will go to the questions from our guests.

Paris asks: What is the main difference between how we think about money and how our parents or grandparents thought about money?

Steve Keen: Parents and in particular grandparents had experienced the Great Depression and the War which was a consequence of the Depression. That made them incredibly conservative about getting into debt. When I was growing up people were turning up at schools from banks with tin savings boxes for us to put our money in. Now they turn up with pretend credit cards to encourage you to take out credit debt. A complete change in the philosophy of money. There are two sides to credit, one is the money, the other is the debt. The Grandparents focused on the debt side of the equation and the Gen Y focuses on the money side.

.Ruby. asks: Is there a specific reason that has lead to such attitudes to money now?

Steve Keen: Effectively the only thing that matters is time as it's been a common pattern of humanity to experience a crisis, work out how to solve it, then forget there was crisis and end up in the same situation again. There is a theory of economics that is based on this idea it's called the Financial Instability Hypothesis and was developed by an economist in the 1950s long before anyone in Gen Y was born.

RiVeRs asks: I just want to say as a mother of 2 kids over 20 yrs of age, they get letters from the bank all the time saying they are approved for 25K credit card already it is wrong and only encourages them to get into debt?

Steve Keen: It does encourage them and it is wrong and it indicates it's the lending side that is doing this. Kids wouldn't be irresponsible if it wasn't for the lending side giving them the capacity to be irresponsible.

jamret88 asks: Can the debt companies eat into my current and future super contributions if I default on a loan? Is that the main difference between here and the USA?

Steve Keen: Yes they can, if you go bankrupt courtesy of credit card debt then the organisation has the right to pursue you for your debts depending on your assets. In America the same thing generally applies but there are some states that have what we call non-recourse loans. Those loans mean that they can pursue you for the particular asset you may have secured on a debt but once they have that asset they can't pursue for anything else.

Michelle_26 asks: Hi! I am 26, 3 yrs out of uni and have saved 90k. I have no credit card and want to buy a house... is this a good time?

Steve Keen: No, it's not a good time, houses in Australia are at the highest they have been so stick with renting for the meantime. Wait until prices have fallen substantially from now. When they fall to being within 3 times income (not 7 as they are now) would be a good time. Now just isn't sensible.

Matt asks: The US is the main consumer of China's goods, if the US goes down won't that take us with as the demand for our commodities drops off?

Steve Keen: That is quite possible. We are dependent upon our export trade to China and I don't think China will do will with the American downturn. There is talk of China taking over the growth role but I think this is not accurate and there will be a flowthrough to China from an American downturn.

goldbug asks: Steve, what role will gold play in the coming depression?

Steve Keen: Gold is the ultimate safety hedge when you no longer trust the system. The dilemma is that if this gets worse people will go to gold. That's what happened to some extent during the Great Depression. We have hopefully learnt not to let bank deposits fail which will mean bank deposits remain viable so you won't need gold as a hedge. That is a hope, not a guarantee.

Steve1 asks: What a superficial approach to life these people have. Their selfishness and lack of responsibility astounds me.. Words like being gullible and not to blame for being in debt is a ‘cop-out’ to responsibility?

Steve Keen: Only partially. We learn responsibility through crisis and these kids have been lulled into a false sense of security. I don't blame them for the timing of their birth. GenY are kids who are about to become the 1930s generation of their time and they will be drastically changed by what they go through and will have the attitudes to debt, money and security that their grandparents had.

homer asks: Hi, do you think the $700 billion bail out plan is a good thing for Australia?

Steve Keen: No, it's not a good thing. It's a temporarily useful thing. But it will only be a short term salve and there will be more effective ways to repair the financial system than the bailout. The bailout tries to continue business as usual when it's obvious the system they are trying to prop up has failed and should be replaced.

James_mac asks: what is the average age for debt from credit cards? and can it lead to bankruptcy?

Steve Keen: It tends to be the early 20s and when they are starting out and then their 40s when they are in financial difficulties and use credit cards to pay ordinary expenses. Most bankruptcy results from credit card debt rather than mortgages, although that is changing a bit with the mortgage problems, but it did start from credit card debt initially.

julian asks: If the US dollar collapses do you believe the gold standard may be revisited.

Steve Keen: I think any lunatic scheme is likely to be considered if the US Dollar collapses including going back to gold. The lack of the gold standard isn't the problem from my point of view, nor going back on the gold standard a solution. I imagine when you have a crash like this people in authority will suggest something like a gold standard return. I think there are a lot of lunatic theories about money out there an dI think the gold standard may be included. All these schemes are trying to stop asset losses and debt going out of control. There is no certainty the gold standard would actually work.

clancy57 asks: As a 52 year old. Do I need to be worried about my superannuation?

Steve Keen: If your super is in growth assets then yes there is a reason to worry. Because that means you are exposed to movements in stock exchange and property prices and as we have seen in the last year they are vulnerable to serious downturn. You do have the option now to specify your funds are put in a different class of assets which can include cash instruments or government bonds. They are inherently safer because they are more liquid. At the moment liquidity is King.

dannyhC asks: Hi Steve, Can you please tell me what will happen if my bank goes under and I still owe a mortgage? Am I still obligated to pay back the funds I owe?

Steve Keen: Unfortunately yes, if the bank goes bankrupt the debts become an asset for the liquidator. When that happens liquidators tend to be ruthless about getting their principal back.

mark asks: Has the requirement for many people to incur a HECS debt encouraged people to take debt in other areas?

Steve Keen: I think that's quite possible. It's something my generation didn't need to consider so we didn't think in terms of debt. HECS was brought in to make people pay for their futures but may have encouraged a debt in your mindset to develop.

curious asks: Should there not be financial education in our school syllabus?

Steve Keen: That would depend on what the financial education actually taught and if it was what students at uni learn it would not be good as they learn that debt is ok and systemically naive about the nature of finance in the economy. If we were going to have teaching in schools it would need to be very different to that of people doing economics in universities.

wisha526 asks: Can the banks call your mortgage in like margin loans? Or are you safe with your loan so long as you make your minimum repayments?

Steve Keen: As long as you make the repayments you are ok, but if you breach any of the terms of the mortgage document the bank has the right to call the loan in. There are some limitations which don't apply to margin loans so there is some legal control as to where the banks can do that on a widespread scale. You are safe if you make minimum payments.

nickt asks: Do you think that the current interest rate mechanisms are an effective way of rationing credit? Do you think in a democracy any government will let borrowers or lenders truly bare the risks of their financing decisions?

Steve Keen: Good questions, first interest rates are not an efficient way to control the volume of credit. When you have people believing they can make money from leverage speculation. In that case the expected returns can be as much as 60% in a year and interest rates have never exceeded 20%.

You can't limit borrowing levels with the interest rate when people can anticipate a 60% return with borrowed money they are paying 20% to get. You can't ration credit with it's price alone you must use other mechanisms to control the willingness of lenders to provide credit and the desire of borrowers to incur debt and to my mind the way to do that is to put the risk of irresponsible lending on the lender rather than the borrower.

One way to do that is to enforce Caveat Enttor on credit contracts because strictly speaking the buyer is actually the lender cause the buyer is paying cash up front for the promise to provide a stream of money over time which are the repayments. Clearly lenders are buying a promise from the borrower that the borrower clearly isn't able to make. And if you said Buyer Beware, the lender would lose their security which might make them think twice about giving a 25K credit card to a 17 year old kid.

Qwerty12345 asks: You have mentioned that this is not a good time to buy a property. What do you suggest is best investment at this time?

Steve Keen: Investment as Australians' use it translates as speculation. In the current climate I don't think there is any asset who's price will rise faster than income, so the best investment is to pay down your debt. In the current circumstances what matters most is liquidity not capital gain.

doug_2233 asks: Should the organisation extending the credit be taking a greater responsibility. Is there no recourse to call the banks to account for this practice.

Steve Keen: There certainly should be more responsibility and the legal system limits the extent to which they can be called to account. We have to institutionalise the need to be responsible in lending and that can only be if the risk of irresponsible lending falls on the lender rather than the borrower.

rulehayl asks: Is debt a necessary thing? As in for the economy to survive?

Steve Keen: Debt is necessary to finance genuine investment by businesses and houses for residences b y ordinary income earners. Anything above that is unnecessary and on the history of the `950s and 1960s the responsible lending ceiling is something about 25% to at most 50% of the GDP. We are currently at 165% GDP and therefore about 60-70% of the debt generated has been used to finance speculation on asset prices and that is a debt we should not have.

killla2h asks: Is my young family in a load of trouble with this stock market shambles??

Steve Keen: If they are in there with margin loans then yes they are. If they are in there with their own cash then it's still a risky proposition to be in the stock market. At the moment people have fallen that the stock market rises faster than income and bonds over the medium term. That ignores that between 1966 and 1982 the American market went nowhere. this means if you had a balanced portfolio in 1966 you went backwards compared to the rate of inflation for 16 years. There are a lot of myths perpetrated by financial commentators about the value of the buy and hold strategy in stock markets.

tcnnn asks: What do Australian consumers and investors need to do in the near future to minimalise the damage that will be caused by these sub-prime mortgages?

Steve Keen: Basically deliver your financial situation is the best thing to do. At a collective level we have to do a lot more to try and control the financial system in the future and provide liquidity now for businesses who are the ones who most need debt financing.

georgek: I have money invested in a portfolio. Investment advisers say to leave it, things will turn around. Do you think I should switch it to cash and save what I have left.

Steve Keen: I'm not a financial advisor this is my economic opinion. That is typical simplistic belief that is pumped out by financial advisors. There are periods when that would have been bad advice imagine if you followed that advice in 1967 you would have had 15 years of negative returns so I think the advice is simplistic. If you want to see what this data looks like check up the long term data for the American stock market and see how many myths are put out. The best most accessible website is finance.yahoo.com click on the Dow or the SNP index and click for historical data and get the longest chart you can and you will see the extended periods where the market when sideways or down. That should cast some realism that the strategy is buy and hold, it's not. jeff23224 asks: Do you have any sense of melancholy over this, having studied this area intensely? Should people be afraid, or simply be prepared?

Steve Keen: I do have a sense of melancholy I'm by nature cheerful and optimistic but I am cursed with realism. Economic theory is full of bulldust that's why I've been accurate at predicting what is happening, given the scale of debt we are in where the debt to GDP ration is more than twice what it was at the Great Depression then I think there is reason to be afraid.

adamsmith asks: With all the Super/Pension fund money continuing to build up wont this liquidity eventually have to find its way into the market. What will that change?

Steve Keen: yes it's possible that super money could keep the bubble blasting along. There is a difference between providing money that bids up the price of shares and money that actually helps build new factories. If the super money goes into pushing up the price of shares then we are fooling ourselves that is investment. Even if it did cause a share market bubble to restart, it would be illusory paper wealth not real wealth and we would still be living in a fools paradise rather than a productive economy.

Kylie asks: What advice would you give someone who is struggling to pay off their debt?

Steve Keen: Struggle harder. There's very little you can do other than careful planning of your budget and a concerted effort to minimise your costs and pay it down.

Interviewer: Unfortunately we are out of time, do you have anything else you would like to share before we finish tonight?

Steve Keen: One quick thing, people often think education is a solution, education has to be based on sound theory and one reason we are in the problem is because the education of economists was based on unsound theory and has encouraged this debt bubble to build. So an important part of building a good financial society is to get away from the mythical views of the economy that have become commonplace. The theory that has led us astray is called Neo Classical Economics we need to develop realistic theories otherwise education will continue to lead us astray.

Interviewer: Once again thank you and goodnight.

This concludes our chat with Professor Steve Keen, Sunday October 5, 2008.