Washington, DC -- (ReleaseWire) -- 09/24/2015 --BENNETT: Lord Meghnad Desai is a British economist and politician whose new book is called Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One. We'll be talking about that and this past Saturday's change in leadership in the UK Labour Party.
DESAI: Thank you. Thank you for having me, Dawn.
BENNETT: Lord Desai, I feel obliged to take advantage of your expertise, being both a member of the House of the Lords and a member of the Labour Party. On Saturday, your party chose a new leader named Jeremy Corbyn. About the best way to describe this gentleman is that he's much like the UK's Bernie Sanders.
DESAI: Exactly, exactly.
BENNETT: Do you think a socialist is the right person to guide Labour into the future?
DESAI: I think what's going on here is that we've gone past the happy days of globalization. We turned the corner in the recession, in the aftermath of 2008, and now all the unhappiness with the neoliberal experiment, as it were, is coming out. You've got Bernie Sanders; there is Syriza in Greece, and Podemos in Spain. And Labour Party, which has for a long time moved to the center and enjoyed the prosperity of the boom under Tony Blair, now everybody feels that they've been cheated, they want a change, and so on. I don't think that we will win the election. I don't think Jeremy Corbyn can win the election, except under very, very small probability. But it will change the debate about inequality and how to deal with it. That is what Bernie Sanders will do as well.
BENNETT: Lord Desai, I understand you're slightly left of center, but the popularity of outright socialism has become something of a thing of the past, both here in the United States and in the UK.
DESAI: Absolutely, absolutely.
BENNETT: Do you think Labour is trying to reflect its base, or do you actually think Corbyn will resonate with the majority of British voters? You just said that you don't think he's going to be elected, do you think he's going to resonate at all?
DESAI: He will resonate with some parts of the country, but the majority will not go with him. The majority has, in my view, decided that they have got to go through the long rally of despondency, as it were, go through austerity and restore prosperity through hard work, that there are no easy solutions. And I think the left still believes that there are easy solutions, and Jeremy Corbyn is part of that tendency. So I think while he will have some enthusiasm, I do not believe that he could become prime minister in 2020. What he will do, he'll probably make the Conservative Party be more careful about what they propose in their manifesto the next time around.
BENNETT: With the Greeks installing Syriza under Tsipras and the Spaniards voting in Podemos under leader Iglesias, and now Corbyn in Britain, all of which of course ran anti-austerity campaigns, I'm reminded of the old adage about democracy being two wolves and a sheep, voting on what to have for dinner. Do you think EU countries can ever balance their books, so long as they can be overruled by these angry voters?
DESAI: Well, you know, I think Syriza did not succeed in escaping austerity. They tried their best, they jumped up and down, and they did all kinds of interesting things, but eventually the European Union and the Eurozone countries made them sign a pretty tough agreement; they'll have to pay back the debt. Maybe a bit of relief, but Syriza didn't actually succeed in cracking the austerity. Nor did Podemos. Podemos hasn't come to power so far. What I'm saying is that we're going through this rather long downward cycle, as I explain in my book; there are long cycles, and we're in a cycle or sort of trough of downturn. And in that, these sorts of left-wing parties are going to get a little bit of traction. Remember, in American history, the progressives were very popular in the late 19th Century, when America had been through a long sort of deflation, gold standard, long cycle of falling agriculture prices, and progressives got powerful. So I'm saying this happens and whether these guys come to power or not, they change the debate in the country and bring forward policies which otherwise would not have been adopted. So they may change the policy.
BENNETT: Your book is premised on the collective failure of economists to predict the 2007 and 2008 recession, and you argue that economists need to admit their models might be wrong and begin incorporating ideas that come from beyond mathematics. However, not everyone missed the crisis. The Austrian School of Economics predicted it, just as they predicted the 1929 crash and many others. Do you think these crises can be useful in sorting the flawed theories from ones that seem viable?
DESAI: Well, you see, I include in my list of underground economists Hayek, as well as Marx and Ritzel. I'm one of the very few economists who's happy with both Marx and Hayek. So I think Austrians and Marxists and people who saw capitalism as an equilibrium sort of phenomenon, they could spot this. But economists, mainstream economists, they are surprised by these kinds of shocks. And what's more, they did not imagine that the shock would last so long that even after seven years, we are still struggling with whether we are back into the pre-crisis normal or not. So I mean, there's a lot in the Austrians which we need to bring into the mainstream, because they have a better understanding of how the world works.
BENNETT: You've underscored the contribution of hubris to many economists' lack of foresight. Would you illuminate on that point, and do you have any ideas on how to redeem the discipline of economics?
DESAI: Well, I think the main thing about hubris is really that they expect the present to last forever, they ignore history, and they believe that their own mutual agreement about their mathematical models is all that means anything and all previous knowledge is obsolete. You know, they don't have to read any of the older books, they don't have to think about history; all they need to know is that their models are correct, and within the recent sample that they are fitting their models to, everything is fine, so everything will be fine. So as Alan Greenspan said in his testimony, after he realized the truth, the people who are fitting their models to 10 years of boom data and thought the boom will last forever and the sub-prime mortgages will sell forever. It's this kind of arrogance that what they have experienced in life is all there is to experience; there is no knowledge elsewhere. And what I'm saying is no, there's a lot of knowledge in history, there's a lot of knowledge in other theories, which they have discarded. They ought to look at them and be slightly more humble about the limits of the theorizing they practice.
BENNETT: It seems our modern financial system is repeating every single mistake of the past century, except for this time the stakes are so high not even the planet Mars could bail out the world. Do you believe you can safely say that we got here through the combined hubris of central planning and mainstream economists?
DESAI: I wouldn't call it central planning, because it's more modest than that, but a desire to regulate what is a constantly changing industry, the financial industry. And then because you can't regulate it, you spread it to international regulation, and then kind of try and find coordinators and staff. The whole system of trying to globally regulate a changing industry is bound to fail. I mean, in a sense, one really has to say people ought to self-insure. People who get in financial markets ought to know that they will lose money. I would say that next time we have this crisis, let us stop bailing banks out. Let the equity holders who set up those banks and the bond holders, let them take the hit, and let the tax payer not take the hit. Because these are grown up people. When they make profit, they don't apologize; when they make losses, they should take the losses on the chin and just pay up.
BENNETT: I agree.
DESAI: And if banks go bust, we should have ready things to patch up, so that the system keeps running. We shouldn't say, 'Oh my God, one bank has failed, so the whole system will seize up, so we have to save the bank.' One good lesson out of Lehman Brothers is yes, it failed; a lot of damage was caused. But, you know, in a sense, at least we didn't bail them out. I think fewer people should've been bailed out, and we should just have told the financial system to reform itself, because it costs money to misbehave. We haven't told them that it costs money to misbehave. They should have been punished much more thoroughly.
BENNETT: Many of us here in America are increasingly coming to terms with the obvious failures in what's going on worldwide, and along with that is the possible failure of fiat currency. So the inevitable question I have for you is, 'What's next?'
DESAI: Well, you know, the problem about fiat currency-- look at the Eurozone. The Eurozone is sort of a fiat currency, but it is also like the gold standard, because no individual country within the Eurozone can print its own currency, and no state can sell its debt directly to the central bank. So what we have is like a gold standard, in which only private credit creation expands money supply. Now, the contracts with our system is yes, we have inflation, we have depreciation and so on, but eventually serious deflation is avoided. I think we have to choose; if we want to go to the gold standard, it will be very deflationary. I think we like a little bit of inflation, right?
DESAI: Now central bankers want even more inflation than there is. I never believed it would be possible in my lifetime to have central bankers worried about not enough inflation in a system. I think we have to get used to the market, and what the market gives, we ought to get used to it. We ought to be, as I was saying before, in self-insurance. Tell the people that their economic system is not always a bunch of roses. You have to pay the price of what you do, and we have to stop protecting people from the consequences of their own actions. That I think is very important. And I think the sooner the politicians told the citizens the truth, that if you do foolish things, you will pay for it, I think the better.
BENNETT: Lord Desai, that backs me into this; India started a gold-backed bond program, and I'm wondering, is this the start of India's gold confiscation plan, just like it was for us back in 1933 when FDR signed Executive Order 6102?
DESAI: Well, I think they are trying to get the stocks of gold with people slightly more liquid, they're trying to get them into the banking system. That's all they're doing. They're not doing it very well, because I don't think it's a very efficient government, but I think they're trying to make people deposit their gold and exchange it for some sort of fixed deposit, something like that, so that the government can deploy the gold if it needs to for its defensive currency.
BENNETT: Thank you, Lord Desai. Lord Meghnad Desai's new book is called Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One. You should definitely read it.
All data sourced through Bloomberg
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About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
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