Updated Version of The Debt Bomb.

1. Defusing the Debt Bomb:
Lessons from the Global
Financial Crisis
By Raf Manji

2. Outline
• Global Financial Crisis
• New Zealand’s own GFC
• Lessons
• Debt Addiction
• Debt Withdrawal
• Moving Forward

3. Global Financial Crisis - Overview
• Collapse in House Prices
• Credit Markets Freeze
• Banks collapse in US, UK and Europe
• Collapse in Global Stock Prices
• Global contagion
• Global Recession
• European Sovereign Debt Crisis

4. Mania Takes Hold - Iceland
• Population 320,000, GDP $13 billion, Bank losses $100 billion

5. Ground Zero – The US Housing Bubble

6. Irrational Exuberance? Prices vs. Rent

7. Driven by the Debtmobile

8. Financialisation of the Economy

9. Causes – The End of History?
• Excessive Credit
• Speculation
• Predatory Lending
• Deregulation
• Fraud
• Risk Modeling
• Complexity
• Hubris

10. The Smartest Guys in the Room – Exhibit A
• Long Term Capital Management
• Nobel Prize Winners
• Finest Finance Faculty in the World
• $4b loss
• Not so smart after all

11. The Smartest Guys in the Room – Exhibit B
• Enron
• Fortune’s “America’s Most Innovative Company” 1996-2001
• Innovative and complex accounting fraud
• One of the biggest Corporate bankruptcy cases in history
• Shareholder loss of $11b
• Not so smart after all

12. The Smartest Guys in the Room – Exhibit C
• The Famous Five
• Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman
Brothers, Bear Stearns.
• 2004: Self-regulation please
• 2008: System Meltdown
• 2008: $700b taxpayer bailout
• Not so smart after all

13. European Drama and Greek Tragedy
• The Great Fudge
• The Big Payoff
• The Debt Binge
• The Euro Straightjacket
• The Hangover
• In Between a Rock and a Hard Place

14. Nu Ziland – Too Small to Fail?
• “Well managed and regulated financial system” – Yeah Right!
• Finance Company Collapse: $8.5b funds affected
• External debt $147b (71% of GDP) set to grow
• Net Public debt $41b (20% of GDP)
• Gross Public debt $71b (34% of GDP)

15. Nu Ziland – Too Small to Fail?

16. Spending more than we earn - since 1973

20. Nu Ziland – Too Small to Fail?
• Living Beyond Means
• Cowboy Capitalism
• Sub Prime NZ style
• SCF Bailout
• Addicted to Debt

21. Lessons for NZ
• Excessive Credit
• Speculation in Housing
• Poor regulation
• No capital taxes
• Complacent Governance
• Overseas Ownership
• Debt Addiction

22. The Debt Based Money System
• Nearly all money is created as Interest bearing debt
• Created by the private banking system
• Exposed by the GFC
• Profits privatized, losses socialized
• New debt needed to keep the system going
• Boom, Bust built in
• New approach needed

23. Why should Government pay interest?
• Government can create its own money
• “In the colonies we issue our own money. It is called colonial
scrip...we control its purchasing power and we have no
interest to pay to no one”
Benjamin Franklin, 1764

24. Why can’t Government Create Money?
• Banks don’t like it
• “To repeal the act creating bank notes, or to restore to
circulation the government issue of money, will be to provide
the people with money and will therefore seriously affect our
individual profits as bankers and lenders”
James Buel, Secretary, American Bankers Association, 1877

25. Who should issue Currency?
• Creating currency is a sovereign right
• “The issue of currency is a function of the government, a
sovereign right which ought not to be delegated to
corporations”
Professor Davis Rich Dewey, 1902

26. NZ Money Supply – 98% Debt

27. Monetary Dialysis
• Replacing “bad money” (interest bearing debt) with “good money”
(notes and coin)
• Retiring government debt as it matures
• Financing new infrastructure with “good money”
• Managing overall growth in money supply
• Setting limits on new bank credit (SNB)
• Eliminating public debt by 2020

28. NZ – Monetary Dialysis Begins

29. NZ – Reducing Debt as % of Money Supply

30. NZ – No Public Debt by 2020

33. Dealing with the Overseas Debt
• Foreign Transactions Surcharge (FTS)
• Surcharge on all imports
• Pay down overseas debt
• Lowers exchange rate
• Improves Current account
• Lowers Interest rates
• Lowers foreign ownership

34. Moving Forward
• Reforming money system
• National and Local Money
• Rebalancing the Current Account – less Global Money
• Living within our limits – Balancing our Budgets
• Definancialising our Economy – Value Shift
• Reducing housing costs (supply)
• Ultimately Reclaiming Sovereignty!

35. Mea Culpa
“With the benefit of hindsight, we should
have shouted from the rooftops that a
system had been built in which banks
were too important to fail, that banks had
grown too quickly and borrowed too
much, and that so-called light regulation
hadn’t prevented any of this”
Governor, Bank of England, Mervyn King, May 2012

36. Final Word
“Whoever controls the volume of money
in any country is absolute master of all
industry and commerce...and when you
realise that the entire system is very
easily controlled, one way or another, by
a few powerful men at the top, you will
not have to be told how periods of
inflation and depression originate”
US President James Garfield, 1881