Yanis Varoufakis on why we should 'let the banks burn' | UpFront

are we in the midst of a new banking crisis the collapse of the Silicon Valley Bank in early March threatened to destabilize major banks in Switzerland and in Germany triggering fears of a wider downturn like the one that led to the Great Recession of 2007-2008. while at this point the crisis seems to have been somewhat contained is this a sign of a broader structural problem and what lessons if any have been learned since the Great Recession our last The world-renowned Economist and former Greek Finance Minister this week's headliner Giannis varafakis thank you so much for joining us on up front it's my pleasure the abrupt collapse of the tech lending firm Silicon Valley Bank has had a knock-on effect that was felt really around the world Switzerland's credit Swiss bank had to be rescued by government intervention in Germany's biggest lender Deutsche Bank appeared to be teetering on the edge last week people are saying that we're in the middle of a banking crisis you wrote a piece last week it was entitled let the banks burn why do you think we should do that reason number one is because um it is absolutely impossible to stabilize a banking system which has been built it's been designed almost in order to be unstable these Mega Banks and the smaller Banks which live parasitically on other Mega Banks are constructed on unsound foundations and no amount of tightening regulations we saw the Dodd-Frank Act after 2008 2009 can actually stabilize them now Once Upon a Time 10 years ago five years ago even we didn't have an alternative but to try to stabilize the banking system today however we have new digital Technologies which allow a decoupling of payment systems from credit intermediation what do I mean by that Apple till this very moment if you want to pay for a coffee at your nearest Starbucks or whichever Outlet you like using a plastic card debit card you need to have a an account in which you put your savings in or your payroll your pay packet into a private bank well that is no longer the case we can have a digital wallet that is provided by our Central Bank which in any case is monitoring all our payments and it is called upon to save the private Banks when they Teeter and fall like in Switzerland with the Swiss National Bank the Central Bank Saving Credit Suisse now why can't we have a digital wallet with the FED if you're an American resident or with the Swiss National Bank if you're a Swiss resident or with a European Central Bank if you live in the Eurozone where your savings are completely safe it's just a utility money when you pay for your coffee you know a few dollars or Euros or whatever go from the row on The Ledger of the central bank that correspond to you to the role that corresponds to the coffee shop savings can be absolutely safe no question of uh even ensuring them because they will be sitting on the Ledger of the center and then let me ask you a question about that though because you know Banks serve other functions as well in addition to holding cash uh they serve from from lending to various forms of investment uh is it possible to resolve this destabilization problem purely by relocating our funds into these sort of centralized spaces that you're talking about yes absolutely because if if your savings if the savings of a corporation of a startup um of a a Cooperative if those savings are sitting on The Ledger of the central bank then they are absolutely safe and then a private Banker can come in and offer you or me or our audience um intermediation Services they can offer us a higher interest rate than that of the overnight rate of the Central Bank in order to get our savings and to lend them to someone else and you know that is a private sector initiative that should then be ruled by the rules of the market and if that company goes under because they have taken on silly risks they have not done their homework properly then you can let them fall without there being a systemic problem the reason why we are all of us are watching what's happening to the svb bank in California with baited breath is because of this conflation we have put our payment system our payment system which is so essential to the preservation of the economic order of things we have and trusted it in the same hands as the price of the private Bankers who take risks and who then hold Society to Ransom because they're too big to fail absolutely in the same article you say that the banking crisis this time around is actually worse than the one from 2007 2008. now that one was considered by many the worst economic crisis since the Great Depression of 1929 it wiped uh trillions of dollars off of the global economy and it resulted in millions of lost jobs uh why do you say this one is worse you're absolutely right 2008 2009 was a gigantic crisis that is comparable to 1929 unlike today but when it comes to actual Banks failing huh it is I think absolutely right to say that this time we should be more worried about our banks because in 2007 2008 2009 when regulators and authorities looked into the books of the banks that were failing back then First turns Lehman Brothers Bank of America Barclays Royal Bank of Scotland and so on they discovered gigantic amounts of fraud remember the predatory lending all the subprime mortgages that were given to people who could never repay them and that was done unknowingly that's what I mean by predatory lending uh the derivative that is that were falsely labeled as AAA rated by credit rating there was a lot of Fraud and a lot of Quasi criminal criminal Behavior also the regulation mechanism was very weakened by the Clinton Administration today when we look at the account books of um you know the Silicon Valley Bank or even Credit Suisse we find much higher capitalization next to no fraud some silly decisions regarding risk taking but nothing resembling the shenanigans that that that were the cause of the House of Cards falling one after the other in 2007 2008. that should make us worried because the rules were more or less respected by the banks that are failing today look at Deutsche Bank Deutsche Bank is far better behaved today than it was in 2007 2008. that is leading me to the conclusion that this domino effect which is causing our central banks to lose sleep and to come in with the heavy Weaponry of bailouts this crisis should make us more worried because this is much more of a systemic crisis and less the result of Serial fraud you wrote about uh svb's bankruptcy and fears around Rising inflation and you said something that was very interesting to me you said International capitalism has never been able to get back on its feet after 2008. can you explain what you mean by that and and what role exactly inflation is playing in this crisis the major difference between 1929 which you mentioned I think helpfully before and 2008. was that in 2008 2009 the central banks and the governments of the G7 coordinated their actions primarily their monetary policy they printed up to 35 trillion American dollars and injected them into the financial system to refloat it they had not done that in 1929 that's why you had the Great Depression which was far worse than the gate recession after 2008. uh however at the very same time that the G7 were coordinating their monetary policy um which refloated Finance they were not coordinating when it came to investment policy and to fiscal policy and while we had largesse lavished upon the bankers 35 trillion dollars being given to them effectively after 2009 between 2009 and 2021 2022 the height of the pandemic while we had that largest for the banking system the financial circuits we had coordinated or uncoordinated at least synchronized austerity in North Atlantic economies we had the worst bout of austerity here in Greece but then that spread over to the rest of the Eurozone to the United Kingdom and under George Osborne and David Cameron in the United States even though you had a small fiscal stimulus after Obama the state governments were indulging huge austerity Cuts so overall the United States economy was uh subjected to net austerity now when you have austerity in the economy of the United Kingdom of the European Union of the United States that depresses aggregate demand that depresses investment at the time when you had gigantic injections of money what then happens is instead of industrialists investors looking at the falling price of money and saying oh this is great money is becoming cheaper I'm going to invest more in productive capacity they do the opposite they say oh my God for the FED to be pushing interest rates to zero for the European Central Bank to be pushing United States to minus 0.7 percent things are Bleak I'm never going to invest so they take the money that is provided by the central banks and instead of investing in productive capacity and green energy in good quality jobs what they did was they took it to the stock exchange and they bought their own shares back which boosted the share prices boosted financial markets boosted their bonuses but did nothing to boost Supply and investment that was the situation between 2009 and the height of the pandemic during the pandemic that's the first time when some of the monetary power of central banks is being used in order to boost the incomes of little people out there I want to ask you about that because as we think about the pandemic uh you know a lot of economists who are saying uh particularly with regard to this inflation question that it was the relief packages that were generated and produced out of uh the pandemic as well as support from governments that helped lead to this skyrocketing cost of living that we're witnessing right now uh they talk about the so-called great resignation and the subsequent rise in wage inflation are brought on by a post lockdown labor shortfall now in March of 2022 you ought to not bet for the guardian where you argue that wage inflation should be welcomed not treated like Public Enemy Number One but wage inflation really is being treated as the biggest threat versus for example asset price inflation can you explain why that's the case rich people don't do not like to see wages going up and they do not like it's that simple it's very simple and they don't want to see interest rates going up when they have taken on so much debt uh wage inflation was never the problem I think that look from a scale of zero to a hundred wage inflation accounts for five percent of the problem with inflation we have it's minuscule it's negligible it's not worth speaking of uh the real reason why we had a bout of inflation why we went from this inflation from deflation to inflation uh in 2021 2022 during the pandemic is the long-term decline in Supply in aggregate supply 13 years of under investment lead American econ markets American sectors and European sectors to reduce their capacity to produce stuff and then during the lockdown you have a gigantic uh disruption of Supply chains suddenly you know the ships stopped sailing the lorries stopped driving the trains stopped moving so you had at the time when some people had a little bit of money furlough wages and so on you had 90 of Supply disappearing that's what caused prices to start increasing once they started increasing after 13 years of negative inflation then it was a free-for-all suppliers used the short-term supply chain disruption as an opportunity to do something they had not managed to do for 13 years that is to increase their prices prices started skyrocketing and if you compare the rate of increase in prices with a rate of increase in wages and the rate of increase in profits profits skyrocketed during that time so it's not that wages were pushing up I mean for example let me give you an example let me pass you for a moment though because that's fascinating what you're saying and yet we're getting a very different pushback in the UK which is experiencing its worst cost of living crisis in decades Andrew Bailey the governor of the bank of England asked workers to place their wage demands under quote quite clear restraint and we're hearing that same sort of language here in the United States meanwhile the media is full of experts uh who are talking about how the only way to curb inflation is by doing what cutting jobs so it seems like no matter what even based on your analysis workers are are bearing the brunt even when they shouldn't I want to ask you to give me a solution to this how do we change that well I think the Bailey statement was actually shameful he had lost the plot in the Bank of England he had a lot to answer for and he blamed the workers whose pay Rises look at the beta Isis in Britain they've been minuscule compared to their rate of price inflation and the rate of accident as in inflation under Mr Bale is what uh blaming the workers is always the past time of those whose wages are paid for by the ones who actually increase their profit margins during a period of inflation when wages are almost ignorant uh so back to your question which I think is the pertinent one what should have been done instead well a number of things firstly uh look at Energy prices when you have in the United Kingdom you mentioned the United Kingdom but also in the united the European Union when you have um something like you know 40 percent of electricity being generated by natural gas whose price did Spike because of the war in Ukraine because of the disruption in Supply chains and so on but even kilowatt hours that were produced at zero marginal cost go up by the same amount as kilowatt hours that produced by natural gas then you know there is a racket going on there the energy companies are breaking it in taking advantage of the energy crisis pushing up the rate of inflation because when energy goes up much higher than it should do let me put it this way two-thirds of the increase in the energy price was not due to the increase in the inputs of producing electricity it goes pure price gouging of consumers by the oligopolies that control our energy markets so what should we do if we really care about inflation we should put on slap a huge windfall tax on those companies in some cases windfall taxes were applied to energy companies but follow the money what did they do with this money they didn't give it to Consumers they didn't use it in order to keep Energy prices down they actually subsidized energy providers whose shareholders were the same ones as the energy producers and this is a complete racket it's a inflation was being utilized by very few oligopolistic firms relative to the plethora of small businesses that were suffering at the time of the energy cost crisis in order to maximize their economic grants from society and then they have the audacity to blame the workers and to demand wage restraint from nurses from nurses my goodness do you think a period of you know a covet crisis when nurses kept our populations alive who you know can't pay their energy bills this seems to be part of a larger Trend where every time there's a crisis governments intervene and ultimately it is the public that ends up paying the price more often than not through austerity measures a recent example of this is in France where the government is forcing through a pension reform that includes raising the age of retirement however there has been a strong social reaction in France with protests taking place around the country that have now been going on for weeks your party has supported these protests but in your view what can they achieve well they've given president macron a very difficult time he hardly sleeps at night that's not to be scared but but let me make the point The crucial point I think because many commentators say come on hang on what's the big deal he pushed up the age of retirement from 62 to 64. well that's not such a radical change but maybe it doesn't sound very radical until you come across a startling statistic demographic statistic did you know that a poor French worker male French word lives on average 10 years fewer than a rich salary receiver in living in Paris in one of the fancy I don't this month of the beautiful capital of France 10 years difference so essentially when you're pushing up the uh pension age limit from 62 to 64. for a very large proportion of poorer workers that means that I won't receive attention for very much of their post-work life you see these austerity measures which are essentially a kind of class war against the poor uh they come as a very long list I remember when I was negotiating with the international monetary fund with the European Central Bank with the European Union and they were imposing austerity measures upon my people here in Greece that list began with some signature policy like pensional reform they call it and then once they managed to push through that then a whole list of other again in inverted Commerce reforms follows so you have to understand that what the majority of the French public recognize realize is that it is the thin edge of the wedge if you if they let this seemingly knock use increase in the age limit go through then a whole host of other policies are going to be implemented that will continue to redistribute income from those who are struggling to those who are very affluent I want to close on a broader point you made in one of your recent talks you said that paradoxically capital is doing so well that it is killing off capitalism uh and that this is due to a new form of capital uh that is triumphing and undermining capitalism can you explain what you mean by that well thank you for this because um my new book is coming out in September in London it's called techno feudalism what has happened in the last 15-20 years is a new form of capital has emerged within the internet within the cloud that's why I call it Cloud Capital if you look at the Amazon algorithm the algorithm behind Facebook the algorithms that are running e-commerce they are doing two things at once they are replacing markets because the moment you move to you visit amazon.com you've exited a capitalist market and you have moved into a realm that belongs entirely to an algorithm that belongs to one person's one person Mrs Mr Jeff Bezos now that is kind of capital but it is more than just a machine it is a replacement of a market it is a kind of produced means of modifying our Behavior because it tells us what we want to hear sometimes what we don't want to hear and we're convinced by that I don't know about you but Amazon gives me very good advice and I usually follow it because whenever I followed it I ended up buying something that wasn't bad you know a book that I wanted to read or Netflix gives you a suggestion that in the end um you know you like so you have a behavior modification machine which is also a replacement for the market which is also a kind of capital that for the first time in capitalist history you and I are replenishing reproducing for no pay every time you post a review on Amazon every time you upload a video on Tick Tock you're adding to the capital base of a conglomerate without being a worker but remember capitalism has two pillar pillars capitalism has two pillars one is markets and the other is profit not rent profit entrepreneurial profit both these pillars are being demolished as I said amazon.com is not a market it's a market replacement in a market you have consumers you know you and I can walk around wherever you might be in London Doha Athens and we can go to markets we can look around we see the same things if you and I enter amazon.com and place and put in the search engine the same keywords you will get different things from me the algorithm is going to divert to direct a completely different suppliers that the algorithm determines and the algorithm gets a cut of 30 35 from them so basis is not making a profit he's making a rent which is equivalent of what a few the Lord used to make under feudalism so the market has been replaced by an algorithmic variant of the land which is owned by a feudal King called Jeff Bezos this is just an example of course right and profit has been replaced by rent that's no Capital not capitalism anymore so this is a nightmare for any liberal for anyone who used to celebrate capitalism as a place that generates competition of ideas of products and of methods of production thank you so much for joining us on up front it's pleasure as always but thank you all right everyone that is our show up front we'll be back next week

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Length: 25min 0sec (1500 seconds)

Published: Fri Mar 31 2023