More Power To The Princes
    
    
      
    
  

  
    
        >> Here we are. I am Hugh Hendry.
        I have the great honor of interviewing and
        spending some quality time
        with Richard Werner,
        author of the Princes of the Yen.
        Richard, thank you very much
        for joining us, and of course,
        thank you to Real Vision,
        to Raoul and to
        the team for making this happen.
        As background,
        Richard your book, the Princes of the Yen,
        had a profound impact on me back in 2012.
        I don't find reading it before or afterwards,
        but something profoundly interesting
        and rare had happened
        in the financial markets
        with the re-emergence of Epstein as
        Prime Minister and his
        Three Arrow Strategy to start a revolution.
        Where is Robinhood now?
        But the initial excitement
        at the end of 2012,
        it was 2012, yeah?
        Yeah.
        The equity market surged higher
        and with it volatility surged higher.
        So I was trying to construct
        an overly complicated trade and I
        became very fascinated on Japan.
        For me it was completing a loop,
        because when I began my career in 1990,
        I was assigned to
        the Japanese Equity Department for
        an investment house in Edinburgh,
        and I had to
        present on Japan for a year or so,
        it's been worth to me.
        >> Did we ever meet? Because I did
        go to Edinburgh quite a lot when
        I was Chief Economist
        at Jardine Fleming Securities.
        >> Yeah, I guess we must have.
        >> I was doing that particularly
        from '94, '95,
        '96, '97, and I would
        always go to Edinburgh
        and have sessions there.
        >> Yeah, that would have happened,
        because the motto which was wonderful was,
        yearly rotation of the analysts.
        It's a bit like the Zhuan down
        Murray Hill and bars.
        They come from the mainland,
        they're not answerable to
        the local politicians,
        and in six months they get kicked off just in
        case they become contaminated.
        So I had new dawn at that point,
        but your book was
        then sacrificial burned by my wife.
        Then, I was reading,
        I want to say a month ago,
        the comments page to an FT article,
        written by Governor Davis,
        and there was reference
        to the YouTube video, and I was like,
        "What, really, " were
        you the author of the video or was that-
        >> I was very much involved,
        but it was two
        young video documentary producers
        who came across Princes of the Yen,
        and they thought this should
        be done as a documentary.
        Now, I had been approached quite a few
        times by documentary producers also in Japan,
        because Princes of the Yen was
        a number one bestseller in Japan actually.
        Originally, that's how it all
        started in 2001.
        So there were two attempts in
        Japan to produce documentaries on it,
        but as the Japanese journalists
        or editors explained to me,
        they got 'killed',
        so it wasn't allowed to happen.
        So with these two young guys,
        and I told them,
        "Look, there will be some pressure on you,
        and there'll be
        some people approaching you and
        advising you not to go ahead." 'Don't worry.
        We're used to that, nobody can stop us.'
        I've heard this so many
        times from other people from,
        'nobody can stop us', and then
        'sorry, we have to stop this'.
        Various things,
        including the English publication.
        I had an author from
        a major English language publisher,
        and it was the Chief Executive
        who read the book.
        We had a lunch meeting in
        New York in the four seasons,
        and the first thing he said is, "Richard,
        I read the book," because I sent it to
        him before coming out from Tokyo.
        "Of course, we are going to publish it."
        So I spent the whole talk
        about warning him, 'Look,
        there'll be some people
        putting pressure on you,
        and so ' "Don't worry, nobody
        can stop me, we'll publish this."
        I go back to Tokyo,
        three weeks later, brief email,
        "Dear Richard great to see you,
        I love your book, but
        I'm sorry we can't do to it."
        So I've experienced this
        quite a lot with this Princes of the Yen.
        But these two guys, they pulled it through.
        We worked together, I gave them lots of
        footage from my television
        interviews in Japan,
        which demonstrated the situation
        and the things I was saying,
        and the story of Princes of the Yen,
        the Central Bank, and the shenanigans.
        It's essentially in all the inside story
        of how central banking really works,
        what the Central Banks do,
        how much power they have,
        and how they manipulate the economy.
        Of course, it blew the cover on one of
        the biggest secrets in economics,
        money creation.
        Because as you know,
        the textbooks in Economics,
        they say, banks are financial intermediaries,
        and who creates money?
        It's the Central Bank,
        isn't it the government?
        No, Central Banks only
        create three percent of the money,
        Supply Governments don't create any money,
        97 percent is created
        by the banking system through bank lending.
        That puts
        a completely different spin on things.
        If you realize how
        important banks are, and of course,
        how important the structure of
        the banking system is for the whole economy.
        So with Princes of the Yen,
        that cover was blown, and I think
        people were not happy about it.
        Also, the other thing, a
        city in America that didn't like is,
        that the original edition, 2001,
        I don't think you've read this,
        because it came out first in Japanese, 2001,
        and it had a chapter
        about my meeting with Alan Greenspan.
        When I met Alan Greenspan and we discussed
        my paper that he had read four years earlier,
        which he remembered extremely well.
        From the somewhat
        surprising things he's said,
        I concluded certain things,
        and it's written up in this chapter.
        The conclusion was,
        the Federal Reserve is going to do
        the same thing as the Bank
        of Japan, which is,
        intentionally create a
        massive asset market bubble
        driven by bank credit creation,
        which is going to create, when it blows,
        the biggest financial crisis,
        a global financial crisis.
        That's of course, the 2008 crisis,
        which Alan Greenspan did create,
        but I think it was too early
        to warn people of that.
        That wasn't supposed to happen,
        so all the American publishers said,
        'No, can't publish this'.
        In the end, I had a visit from
        a particular American agency,
        and all attempts to stop this,
        and I had to take out that chapter,
        then the next American publisher took it.
        So the version you read
        doesn't actually have that chapter,
        but there is a second version
        of Princes of the Yen.
        It came out recently,
        which has the long lost last chapter,
        which was originally published in Japanese
        about my meeting with Greenspan,
        what he said, and of course the conclusion,
        how Greenspan is going
        to create this huge asset bubble,
        do the same thing as the Bank of Japan,
        and blow up the system.
        Which they like to do in
        order to do something else,
        because the question is, why
        are Central Banks doing this?
        Well, if you want to talk about that.
        >> Absolutely. I love
        this shameless plugging of
        the new edition of the book.
        In the same vein, don't
        forget hughhenryofficial on Instagram,
        I know you don't like Instagram,
        but anyway can I
        ask how many copies
        does a book like that sell?
        >> In Japan it was 150,000,
        which made it a best seller.
        In the English language,
        not yet as much,
        because there have been lots of
        attempts to suppress it,
        but it's selling well.
        >> So let's back up a bit then.
        I think if I was
        to come back at
        you with my understanding of what
        you said, is that,
        there's this notion of what you
        believe to be true that
        others think of us as a conspiracy,
        if you will, like, reality
        versus these kind of the suppression.
        So the reality as you understand it,
        and I'm with you on this,
        is that central banks,
        first of all, they're not
        truly the agents of creating money,
        there are very small factor in that,
        in terms of the pure mechanics of the thing.
        >> The volume.
        >> Yes, the volume.
        >> Of course they have
        people who said leave us,
        they have to leave us but-
        >> They can make it happen.
        >> Yes.
        >> However, I think the
        important point is, you're saying that,
        from time to time spread out
        through the course of history, and therefore,
        it requires typically the kind
        of average age of a human being on earth,
        like to adult life,
        40-50 years for the
        memory to subside and then for
        another Central Bank to perhaps
        take on the folly of these actions.
        But in pursuing an ideology,
        they use their powers
        to inflate asset prices,
        and when that process begins,
        when this alchemy begins,
        it always ends in
        a bubble and a subsequent bust. Yes?
        >> Yes.
        >> Is there anything on top of that,
        that you believe to be true that
        others would dismiss as a conspiracy?
        >> Of course, people in order
        to suppress this discussion,
        they'd like to use
        adjectives like that or
        whatever, or descriptions like that.
        But tell me, if that was
        just a vague theory or some kind of
        conspiracy theory, how could I?
        Even in the book that you read,
        there's one chapter on the ECB in there.
        So it's a new version,
        the older version, I think it's the
        last but one chapter.
        When this came out in 2003,
        the ECB was fairly new.
        It's just being created in
        2000 and this came out in 2003.
        I analyzed the ECB
        because already what they were
        saying reminded me so much
        of what the Japanese Central Bank was saying.
        Just the words, the
        language, the particular words,
        the overall drift and how they
        described their actions
        and their justifications,
        it just reminded me so much of that.
        So then I analyzed, let's
        have a closer look at this ECB.
        Because the official story was, well,
        this is going to be like the Bundesbank,
        which was a good central bank, solid,
        no inflation and so on,
        conservative, that's what we want.
        We base it in Frankfurt and
        the Bundesbank was independent,
        therefore, the ECB will
        be independent and everything will be fine.
        That's the official story.
        But as soon as you scratch the surface,
        you realize it's absolutely not true.
        In fact, shockingly, it's
        the opposite. How could that be?
        Well, the Bundesbank,
        I think was a good central bank.
        As a major central bank, probably the best.
        Because during its existence,
        it never created a boom bust cycle.
        There was never during its existence
        a significant asset bubble
        followed by a banking crisis.
        So they did not do that and they
        delivered decent growth and
        they delivered low inflation.
        It's like almost the optimal scenario.
        >> But Richard also,
        because I agree with all of that.
        I feel this urge to say that,
        I think we should
        sail away from the notion
        of conspiracy and stuff.
        Because I think everything in life
        begins with good intentions
        and then life just
        gets in the way and it gets
        complicated and we end up cheating.
        Like Interpol, I think it's interesting,
        but the second ECB president
        was Trichet and he was after Deutche Bank.
        Trichet, well, the verb
        Trichet in French is to cheat.
        So it started getting
        complicated and they brought in
        a cheat from the French central bank
        but anyway, besides that point.
        I agree with you the magnificent performance
        of the German Bundesbank.
        But again, I would say
        that they were allowed to pursue
        their good intentions longer than
        most because their path was
        less challenging because of
        the reconstruction of Germany.
        They had such a favorable wind
        arguably until now.
        >> The path of central bankers is
        full of temptations though
        and they resisted these temptations.
        Then I analyzed why is this?
        Of course to understand the
        success of the Bundesbank,
        you've got to compare it to its predecessor.
        The predecessor of the Bundesbank was
        the Reichsbank until 1945.
        Of course headquartered in Berlin,
        the capital of the Deutsches Reich.
        Now this central bank,
        the Reichsbank, was
        the worst central bank in history.
        I really put it to you, it
        was the worst central bank.
        >> You don't think it was circumstances?
        >> Oh, just listen.
        What they did was, they did everything
        that a central bank could do wrong namely.
        As soon as they were created in 1876,
        they went straight for
        the asset bubble. Straight on.
        Massive encouragement of
        bank credit creation for asset purchases.
        In my quantity theory
        of disaggregated credit,
        it's clear when the money
        creation takes place,
        it can only go into the GDP,
        with this growth, normal growth,
        or it can go into non-GDP assets
        and then you get to your asset bubbles,
        you have to look at the data.
        You can analyze this.
        I mean, you see what's happening.
        >> But Richard you said 1878?
        >> In the 1870s,
        there was this asset bubble,
        stock-market bubble.
        Then they tightened, then of course,
        the bubble crashed as you'd expect,
        and then there was a crisis, banking crisis,
        financial crisis, and then they
        tightened a lot and it became a deflation.
        The 1880s was a deflation.
        Is very much like what
        I've just experienced in Japan.
        So like in Japan,
        asset bubble, then banking
        crisis crash and deflation.
        Now that's not the end of it.
        So the Reichsbank continued.
        It then, after the First World War,
        created hyper-inflation.
        The Weimar hyper-inflation
        was the Reichsbank.
        >> No. Wow.
        >> It was absolutely Reichsbank.
        I'll tell you how.
        >> For sure they enabled it,
        but it was the economic consequences
        of the Dam peace treaty. Yeah?
        >> Well, of course,
        the Versailles Treaty
        was the external factor,
        but as a central bank,
        they didn't have to go for
        hyper-inflation, but they went for it.
        In fact, the guy very much involved in this,
        Hjalmar Schacht, in fact, well,
        before I come to this,
        when you look at this, why
        was the Reichsbank so bad?
        So they created hyper-inflation and then
        the Hjalmar Schacht
        became the president then.
        He essentially took the policies
        that got Hitler into power.
        That's another long story
        but just take it for now.
        >> But that's the laws of finances,
        a good economy needs lots of finances.
        >> If you add this up, I mean,
        Hitler then reappointed him in the '30s.
        He was his money wizard.
        So how's the Reichsbank?
        So this central bank did
        almost everything wrong you could do
        wrong and got Hitler into power.
        I mean, hey, can you
        do anything worse than that?
        Now, why did it do that?
        Why could it do that and
        what changed with the Bundesbank?
        Because clearly the Bundesbank
        seemed to be opposite.
        They did almost everything right
        a central bank could do right.
        So I did an institutional analysis
        of the incentive structure of
        the central bankers and here's
        the very simple summary conclusion.
        The Reichsbank did all
        this because they could,
        because they were independent
        from the government.
        They were independent from parliament.
        They were not accountable
        at all for their actions.
        There was no punishment mechanism.
        Then what you get is,
        you get what I call regulatory moral hazard.
        When the regulator,
        central bank is also
        at the same time a regulator,
        the regulator essentially gets rewarded for
        disasters because the crisis
        made the regulator more powerful.
        It gets even more independent.
        The same happened with Reichsbank.
        Well, actually before the hyper inflation,
        after it created the asset bubble of
        the '70s and deflation of the '80s,
        it was then rewarded and made
        more powerful in 1922
        by making it independent from
        the government and that was before already,
        but now also independent from parliament.
        It was turned into international organization,
        accountable only to external forces,
        the reparations committee, JP Morgan.
        As soon as the parliamentary
        Reichsbank law was signed,
        before the ink had dried,
        they started to switch
        on the printing presses to
        create the Weimar hyper-inflation.
        Now the people who designed
        the Bundesbank law and
        its structure seemed to have studied this.
        Because what they've done
        is actually they've reduced
        the independence of the central bank
        drastically as compared to the Reichsbank
        and they made it accountable to Parliament.
        So the Bundesbank was
        not as independent as people think.
        It was actually accountable to
        parliament and the Bundesbank,
        the Parliament could set
        laws and tell it what to do and it did.
        It told it, look, your job
        is not just low inflation,
        you also have to deliver
        good economic growth, and it did.
        >> We see that. We see that today.
        They know what the judgment from
        the German court is to
        the Bundesbank not to the ECB.
        >> Yes, exactly. You're right. You're right.
        Of course the Bundesbank, I mean,
        since the creation of the ECB,
        it's been a shadow of its former self.
        But you see the remnant
        is still in this judgment.
        The remnants of the system.
        Now therefore, what has actually happened
        is when the ECB was created,
        it was sold to the public as,
        oh, it's going to be like the Bundesbank.
        But actually, if you
        compare the Reichsbank and the Bundesbank,
        the conclusion is, the ECB is
        designed not on the Bundesbank structure.
        The Bundesbank was accountable to Parliament.
        It was part of the democratic system
        and they even had
        a council where
        the different states in Germany,
        regional states are represented,
        the unions are represented on
        the board of the Bundesbank in the Council.
        The ECB doesn't have that,
        the ECB is the revived Basebank,
        independent from government,
        independent from any parliament
        democratic assembly in Europe,
        not accountable to anyone,
        it's a supranational organizations just
        like the Basebank was
        after the First World War.
        Of course, when you do that,
        when you give so much power to these people,
        we've seen it in the [inaudible] bank.
        Power corrupt, absolute
        power corrupt, absolutely.
        They maximize their power by
        having boom and bust cycles.
        So my warning was the ECB is going to
        create a huge
        bank credit-driven asset bubble.
        As soon as the book was published in 2003,
        they started from 2004,
        bank credit growth in Ireland,
        Portugal, Spain, and Greece under the-.
        >> Twenty percent?
        >> Twenty percent, 30 percent,
        40 percent growth even in Spain.
        >> When there's 15 in Japan
        from '86 to '89 if I quote you?
        >> Yes, exactly, that's right.
        Of course, where was the money going?
        Not into GDP.
        It's going into asset markets.
        So property bubbles and
        of course that then created the crisis,
        bust banking system and
        large-scale recessions and vast unemployment,
        50 percent youth unemployment.
        Now, that was all the ECB is doing,
        and nobody can say the ECB had
        no responsibility or didn't have the power,
        it is the most
        powerful central bank in the world.
        It can have any tool it wants,
        it can do anything it wants.
        >> I agreed, but I'm
        more a believer in the clock up theory.
        For sure, I definitely,
        the engaging narrative that
        you had with Japan
        was a central bank
        pursuing an ideological [inaudible].
        So I think again,
        so tell me if I'm wrong here,
        it's my understanding of what you wrote,
        that owing to Japan's success,
        legitimate or otherwise, in
        overseas markets in terms of exports.
        It reached a tipping point where
        the American economy was really feeling it.
        There was the shuttering,
        there were replacement of
        inefficient capacity in the states
        and it was being replaced by the Japanese.
        It had reached the political level
        and it became a global problem,
        but it was Japan's problem.
        So the solution was they let pump
        our domestic economy to make it
        grow much faster and in the process,
        we will automatically be bringing
        in more American imports,
        and that will take
        the heat and the pressure off.
        So number 1 objective is,
        let's use the power of
        the central bank to dictate
        superior economic growth to bring
        down the imbalance in the overseas sector.
        >> Yes. Although, they actually went further,
        because they specifically thought
        about how to shock
        the old system and
        essentially convinced people that
        the old system doesn't work anymore.
        If you look at the my cover plan,
        my cover being Bank of Japan governor.
        He's one of the princess,
        and then his successor Mieno,
        he actually wrote the report.
        It reads like the American list,
        the negotiation with Japan in the
        '70s and '80s,
        structural impediments initiative.
        Essentially, well, the true story
        is Japan was too successful.
        So one US industry
        after another got wiped out by
        the Japanese and the
        Americans decided it's got to stop.
        So of course you
        can't tell the Japanese people,
        "Your economy economycreat is too successful,
        please make it less successful,"
        but that's the real story.
        So because we had
        the hard job of telling them,
        "We want to help you improve
        your economy," not really,
        because they'd be more successful.
        But you need structural reform,
        you need to deregulate,
        liberalize and privatize,
        and you need to have more imports,
        and people worked too hard,
        had more quality of
        live and more consumption, that's the idea.
        Of course, if you do all that, yes,
        you'd get an economy that's much
        weaker than the high-powered,
        high-growth East Asian
        miracle model that Japan
        pioneered because essentially it's
        about abolishing this high-growth system.
        The Americans tried to cajole
        and negotiations.
        They got some results but not
        really very deep, not enough.
        Japan continued to be successful.
        Now that's when the central bank has wrote
        this plan in the '80s, the my cover plan.
        Then it said that, and
        it's quite intriguing because it says,
        "Japan will change its economic structure.
        It will shift to domestic demand expansion.
        It will be less focused on exports.
        It will have more imports."
        It was listing all these American demands,
        but it said that will happen, and then how?
        The only thing this report says is,
        in order for
        the structural transformation to take place,
        monetary policy will have
        to be used flexibly.
        Now, the people who ran this program of
        getting this asset bubble going in the '80s,
        because this is then what happens.
        After the my cover plan was announced,
        stock prices started to rise,
        land prices started to rise.
        If you look into the mechanics behind it,
        it was bank credit creation for
        asset transactions for property lending,
        pushing our property prices
        famously, in Tokyo, Marunouchi,
        Central Tokyo, the Imperial Palace,
        Garden, not that large,
        but decent-sized park.
        If you calculate in '89,
        the value famously of that
        using Marunouchi property values,
        it was the same market value as
        the entire state of California,
        including Los Angeles, San Francisco.
        So the mechanism to get
        this asset bubble was bank credit,
        and I studied why did the banks lend
        so much money for
        asset transactions for
        real estate purchase and so on.
        It turned out that, I interviewed
        branch managers of banks,
        that in the '80s were branch managers.
        They told me, "Well, it was crazy,
        we were really cold calling companies,
        telling them we've got some property here.
        We've done all the calculations,
        you just sign here,
        we'll lend you the money, you buy this,
        it'll go up, you make money.
        So we were creating a bubble."
        Wow. So if you thought this
        is crazy, why did you do it?
        "Well, the branch manager gave us a quota,
        we had to increase lending.
        So I spoke to branch managers
        of the Japanese banks and ask them,
        so what happened in the '80s?
        "Oh, '80s, crazy times.
        We were going out
        and lending left, right, and center.
        I was telling my staff
        to increase lending for property,
        and it was risky,
        we're creating a bubble here."
        So why did you do that?
        "Well, I was just doing what
        headquarters told me."
        Strategic planning department of the bank,
        they've got plans, each branch
        has to increase lending by this much.
        So then they interviewed the people in
        the strategic lending department at
        the banks and what I found was same story,
        "Oh, '80s is crazy.
        We were telling our branches to increase
        lending by this much for property,
        and we're creating a bubble, it was risky."
        So why did you do it? "Well, I was just
        telling my staff what
        the Bank of Japan told us.
        I had a quota from
        the Bank of Japan to increase lending."
        >> This is the window guidance, yeah.
        >> That's the window guidance. I went to
        the Bank of Japan and same story,
        and they told me, "Oh, yeah,
        we told the banks to increase
        lending by this much,
        property lending and so on.
        It's crazy, we're creating a bubble here."
        So why did you do it? "Oh, I was
        told to do so by the head of
        the lending department at
        the Bank of Japan, the Banking Department.
        Mr. Fukui, Toshihiko Fukui."
        Now, he run this window
        guidance in the bubble era.
        Now then what happened in the '90s?
        Because when you have this bubble,
        you just need the game of musical chairs,
        the music is the money creation
        of the banking system.
        You stop that, bubble collapses,
        the whole thing goes into reverse,
        bankruptcies, and then
        of course credit tightening.
        Now once the recession starts,
        then you get a credit crunch.
        Then it depends on what
        the central bank does,
        because if you leave this alone,
        the banks will just
        continue to tighten and creates
        more downward reverse spiral,
        more bad debts, less credit,
        therefore more asset price falls,
        more bankruptcies, the whole thing
        can go on for 20 years as it did.
        >> And the highs, yeah.
        >> But the central bank can step in.
        Now, you then moved up,
        how did Mr. Fukui and his boss Mr. Mieno do?
        Mr. Mieno was deputy governor during
        the bubble period prince.
        >> Yeah.
        >> Fukui was known as
        a prince, one of these princes.
        In the '90s, these guys they moved up.
        Mieno then became governor and Fukui
        became the first director
        and then deputy governor.
        >> Now remarkably, Mieno became
        a superstar because he
        was the architect of bursting the bubble.
        >> Exactly, when actually
        he had created it together with Fukui.
        >> Well, he created it and he destroyed it,
        and he got the benefit going
        up and coming back like I just won.
        >> What did they say in the '90s?
        They said, "We don't want the recovery,
        because if we have an economic recovery,
        then there won't be structural change."
        They even said this on the record.
        >> I know.
        >> Along the recession to get
        the structural change that they
        had planned in the '80s.
        >> So this is where it's fascinating.
        So one of the great takeaways from
        your book for me was that,
        I had been programmed to believe that,
        again there's cultural almost
        ratios of discrimination in our heads,
        like the Asian savings model,
        they're very prudent,
        they work incredibly hard.
        They were really struggling because
        property prices became so elevated,
        and you haven't take a 120-year loan,
        etc, and all of that was taught.
        As you said, the banks
        which is very powerful,
        dictate that you had to,
        each quarter, expand
        your credit book by x percent,
        and x being a big number versus GDP growth.
        If you didn't do that,
        you'd lose your banking license,
        you would lose your livelihood.
        So threat success, and
        these ordinary Japanese folk
        ended up with 2-3 mortgages,
        it was this subprime that
        we saw in America many years later.
        >> Exactly. Same exact problem.
        >> So Say's law,
        supply creates its own demand.
        >> Exactly. The credit supply
        creates its own demand.
        >> Exactly.
        >> Banks can always push money
        into the economy.
        >> Exactly.
        >> Because there's always excess demand.
        People always will take money,
        and therefore banks determine this market.
        >> This is really what I want
        to tap into that brain of yours.
        This is what if,
        so the bubble burst
        deliberately under a change
        in the ideology of the central bank.
        It woke up yesterday with this uber plan
        for reforming the Japanese economy,
        and boosting economic growth,
        and bringing in these imports,
        and living more in
        a harmonious manner with his US partner.
        Then the next day,
        it woke up and it rejected
        everything with regard to that ideology,
        and it wants to pursue a new path.
        Because of ideology, not
        because of the absurdity of the valuation.
        You lost the bid,
        you lost the marginal bid,
        and therefore risk prices collapse.
        My point that I want to
        labor and make to you now is,
        what if the ideology had not changed?
        Where would we be today?
        Because that's like the US is pursuing this.
        We'll come back to that but there's
        an ideology to inflate risk assets and
        there's a reason which is to do
        less harm than the alternative, they believe.
        So what if, and as I said,
        I can see a goat coming into my house,
        but anyway, what if [inaudible] sign
        had not started raising rates
        to purged the access from the system?
        Take me to 1990.
        >> Well, before we do that
        thought experiment,
        I would say actually
        the ideology did not change.
        The the ideology of
        the Central Bank was always the same.
        You see, they didn't like the system
        that was in place in Japan before.
        Because in that high growth system,
        the Central Bank played a lower level row.
        It was receiving orders
        from the Ministry of Finance.
        At law, the Central Bank was not independent,
        it had to work do
        what the government told it,
        what the Ministry of Finance
        and practice told it,
        and it didn't like it.
        That was a big issue,
        and therefore it's saw the chance
        with the American demands coming in,
        that essentially it used
        the Americans as its ally,
        and essentially, what they did is,
        okay, we'll do what the Americans want.
        They will back us, America will back us,
        Japan is still occupied.
        I mean, there's American troops there.
        So then Bank of Japan has strong support,
        and ultimately we want to get
        rid of the Finance Ministry control,
        we want to be independent and we want to be
        the top cheese here in this economy.
        So it's really the power play off
        the bureaucrats at the Bank of Japan.
        >> This is the Bank of Japan taking
        out the Ministry of Finance.
        >> Yes, and they did successfully,
        totally sadly,
        but at what cost to the whole economy and
        the high growth system at 30-year recession.
        So what they found is, I mean,
        [inaudible] wrote this in the [inaudible] to
        use monetary policy flexibly to
        get a transformation of
        the economic structure that included
        political changes,
        deregulation, liberalization,
        privatization, and even changed laws.
        How can you use monetary policy for that?
        There's only one way, and that is
        to create an asset bubble,
        which you then burst.
        The good thing about this
        from a Central Bank's viewpoint
        is that people won't stop you,
        because they love it while you do it.
        They will take the money,
        you're putting more money into the system.
        Everyone loves it, the politicians love it,
        there's more money coming around here.
        Finance Ministry, tax revenues going up.
        Everyone thinks it's great,
        but actually that's how you blow
        up the system, and that's what they did,.
        >> Sure, but they weren't anarchists.
        But anyway, so it
        looks like I'm looking right.
        >> They didn't tighten.
        >> FDA did not change ideology.
        So typically what would have happened?
        Typically people like me
        and that people, our listeners here.
        I keep quoting always
        as we see things differently,
        you and me, we're going to live forever.
        We are the people they call and
        say, are you crazy?
        15 percent bank credit
        growth year after year,
        like you say in
        Ireland and I think it was 20,
        and Spain in the late '80s,
        it was like 40 percent,
        we see that being unsustainable,
        and we head to the exit,
        we make sure we don't have
        assets denominated in that currency
        because it's very vulnerable,
        and then we might put short positions
        because we anticipate the inevitable burst.
        No one in our community
        could take on the Bank of Japan because
        its external balance sheet was
        almost the same as the IMF
        in terms of dollars held.
        So no one was going to take them
        on or maybe it will take
        another 10 years of access and hybrid Japan,
        look, if it had another 10 years.
        So again, it's just, I'm
        trying to deal with this premise of what?
        Because, I think you've got 100.
        If you want a lot of
        economic growth which is
        the number one objective today
        in western economies which have
        this generation of unskilled labor.
        In fact, more than unskilled,
        is stretched way up into their labor pool,
        where they're being displaced
        by the billions of Asian hardworking.
        So there is a prosperity
        but they haven't felt it.
        The whole Trump population
        says Make America Great.
        Make America Great means make
        the American GDP grow at three,
        three and a half, four percent.
        Do you describe perfectly how we can do that?
        >> Oh, yes.
        >> There are consequences.
        >> The East Asian high-growth system,
        can be introduced in
        any country in the world,
        which means we can have
        high and stable non inflation growth
        without crises, it is possible.
        >> So how do we get it without crisis,
        is it because there's no power for
        speculators like me to
        challenge and to take it down?
        >> Not at all. In fact,
        the speculators don't do anything bad,
        you let them do what they do, but.
        >> We reinforce.
        We're the reflexivity
        because it's part of stock.
        >> Yeah, when speculators
        see a weakness, they seize it.
        So you must ensure weakness from
        a policymakers perspective,
        and that's possible.
        It is possible, they can speculate.
        But you see the main thing is this,
        bank credit creation can be
        used for growth or
        for not for GDP transactions
        when it goes into investment,
        business investment.
        But if bank credit creation
        goes into the purchase of assets,
        because it's money creation.
        It's like creating new money and
        pumping into purchasing assets,
        of course, asset prices will rise.
        That is it unstable, it's unsustainable.
        Because, how can you stably manage this?
        Bank credit needs to be serviced and repaid,
        and that can only be done
        sustainably if it is for business investment
        because that delivers the returns
        to service and repay the loan.
        Anything else is unsustainable
        because the asset bubble,
        while it happens, that may
        be 5 years, 10 years, 15 years,
        it looks as if there's lots
        of money being made,
        but they're capital gains,
        that's very different, and it's
        a musical chair game.
        >> But Richard, I'm confused
        because you started off saying that
        this model of generating
        GDP growth to blockades and
        to subdue and to
        make happy your population at large is very,
        very feasible via the mechanism
        of buying credit growth.
        >> Yeah.
        >> Then I think what
        you're taking on it, see it?
        >> Yeah.
        >> With the caveat that it
        has to support business investment.
        >> Exactly. So yeah, in fact,
        the punchline is that
        you use the window guidance.
        The simplest form of window
        guide is just a rule,
        so you don't actually
        have to intervene regularly.
        You just have a rule that
        bank credit creation can
        only be used if it contributes to GDP,
        and that means it must be
        used to purchase assets.
        Then you'll say immediately here, well,
        what about people that want a mortgage and
        buy a house that's already existing there.
        Of course if you build a house,
        it's a different story.
        But if it's ready, want
        to buy a house or an apartment,
        they should not get money from
        banks because that's new money creation,
        and new money creation is only
        justified if there's also
        new goods and services being created,
        then you don't get inflation.
        Then you have income streams to service,
        then you have a stable system
        and you can have very high growth,
        five percent, even 10 percent,
        or as East Asian countries showed,
        20 percent growth is possible for years.
        But if you don't do that,
        and if money creation is used for
        asset purchases, you create instability.
        Now what do people do that want to mortgage,
        and it has been done in East Asian countries,
        you set up non-bank financial institutions,
        mortgage lenders that don't
        have the power to create credit,
        they're not banks, they don't create credit.
        They're specialists, they lend the money.
        Of course the banks mustn't
        purchase their bonds either,
        and if you do that, you then ensure that
        asset purchase are
        funded with existing money.
        If you want do to asset speculation
        as an investor or speculator,
        fine, but raise existing money,
        don't use bank credit.
        Now look at the hedge fund industry.
        We all know particularly
        the old-style global macro before the crisis,
        they used leverage to
        make most of their money.
        You just show what you do
        as every month tiny return growth,
        but no draw-down,
        and then you multiply it by 10 times,
        20 times through leverage,
        that is bank credit.
        The trouble is, that's a public privilege,
        that's money creation,
        and that has to be stopped.
        If you don't do that,
        the hedge fund investors,
        they should get their money from
        existing sources.
        Let them get it from existing sources.
        Why not? But it can't be money creation,
        then you're creating an asset bubbles.
        >> You suddenly like the Bundesbank and very
        puritanical and very correct.
        Like that hedge fund model you described,
        really it was a hedge fund model
        which is the LTCM model.
        Yeah, where after 20 years
        of the Dow Jones Industrial Average
        compounding at close to 15 percent,
        dividends reinvested in real terms,
        the greatest investment returns ever,
        like over a 20-year stretch.
        Clearly, prospective returns moving
        forward had shrunk to like nothing,
        and we should have
        stopped speculation at that point,
        but of course our Nobel
        laureate friends said ''Hey,
        but what if we, rather than like 1x,
        2x, we can 100x.
        Of course, the idiocy
        of that was shown in stock relief
        in the crisis of 1998,
        was it? It should have failed.
        >> Year '89.
        >> Eighty nine?
        >> Russia LTCM? Yes.
        Yeah. Just Asian Crisis 97 and then 1998.
        >> 89 and 90s is Japan.
        >> Japan, exactly. You got it.
        >> It's ten years before. The Feds
        had a chance to say
        that Hedge Fund module
        is nonsense, but they bailed it out.
        >> Exactly. They bailed it out.
        [OVERLAPPING] Remember in that famous meeting
        in the Federal Reserve Bank of New York.
        There were two players that decided,
        "No, we're not going to join in."
        Who were they? Bear Stearns
        and Lehman Brothers?
        So ten years later, they were punished.
        >> I lied about
        [inaudible] Stop its the conspiracy.
        [OVERLAPPING]
        Do you need a thought experiment?
        What if Mieno Sand(phon)
        had not being promoted to
        head the bank and
        they'd kept with the same ideology,
        and ten years later, unchecked,
        the Garden Palace of the Emperor
        was worth not the value of California,
        but the value of the US real estate sector.
        What would have stopped that happening?
        Should that have happened, if left unchecked?
        >> It probably could have
        continued for quite a bit.
        In fact, that's what most people,
        of course at the time were predicting,
        because they couldn't see under
        their surface that actually.
        >> They couldn't see the circuit breaker.
        No circuit breaker.
        >> The Bank of Japan actually was a traitor.
        You know, they were playing
        the game in the eighties,
        but only two burst system.
        People didn't realize, and even today I
        think most people are not aware of that.
        But let's assume they weren't doing that.
        Let's assume that we're playing ball.
        >> Sorry, in the 1980s,
        to my mind, they were very,
        very pro-growth and like
        economic heroes, if you will,
        and they were saving Japan
        the cost of having to
        retreat from the international market
        where it was dominating.
        So they were protecting the beachhead.
        So I think that's all kind of
        pro, pro-Japan, pro-nationalistic, whatever,
        you're preserving its advantages
        in the face of political,
        but in the face of
        a tactical insurgency from the US,
        and they pushed that back successfully.
        The destruction and the anarchy
        came with Mieno and
        the rejection of everything that had gone
        before in terms of the previous 10 years.
        >> Of course, as you said earlier, you know,
        as hedge fund manager,
        when you look at a country and you see
        the unsustainable bank credit growth.
        You know what's going to happen next?
        [OVERLAPPING] But it was
        Japan and it's like the IMF.
        I'm never going to take the IMF on,
        like only the foolish
        really we're shorting the yen at that point.
        So I still say to you that,
        I guess i'm saying that maybe[OVERLAPPING].
        >> Well, the currency is slightly different,
        perhaps just briefly on the FX,
        and I've got my FX model,
        did really well when I was Chief Economist at
        Jardine Fleming in Tokyo.
        First, I was predicting
        yen strength and the yen had just
        shot up to the highest on record.
        Was it 94.79 or something?
        No, Actually, no, sorry, was not at all.
        This was in 1994.
        It shot to, what was that 79.75.
        But what [OVERLAPPING], you right.
        Then I was predicting it's going to go
        to on average by 1996,
        fiscal year 113, on average, therefore,
        it's going to go to 140 in
        absolute terms and nobody believed me.
        [OVERLAPPING] Because, and this
        is where you see when
        you study credit creation,
        there's a difference between
        domestic credit creation and
        the factors that influence the exchange rate.
        It's quite an intriguing story,
        is perhaps slightly technical but,
        you see the bank credit creation is
        something that affects the domestic economy
        and domestic factors,
        but it doesn't actually
        affect the exchange rate.
        If you try to run an FX model
        by using data on bank credit creation,
        its not going to work and I don't
        know any that does work.
        It's intriguing because haven't
        we just said that bank credit creation is
        money creation and surely
        money creation should affect
        relative exchange rates, right?
        But it doesn't work and the reason is this,
        it has to do with the nature
        of international money.
        We talk about capital flows
        and we have this image.
        It's like money flows
        from one country to another.
        But of course, the truth is,
        that was accurate when
        we had a gold standard and
        the Bank of England had ships to
        ship gold in and out.
        We don't have a gold standard,
        and so the truth is, we
        don't have capital flows.
        Capital doesn't flow anymore.
        There's a rule in international banking.
        I've been 14 years
        Professor of international banking.
        Fundamental rule of international banking
        is: There are no capital flows.
        Money doesn't flow.
        So the money created by
        Japanese banks is in
        yen and it stays in Japan.
        The money created by British banks is in
        pound sterling and it
        stays within the British banks.
        So there are no capital flows.
        Of course that raises
        a few other questions in there,
        maybe if we have time,
        we can talk about this.
        For example, one intriguing
        aspect coming from this,
        before we come back to the exchange rate is,
        what about all these developing countries?
        They've been told by
        the IMF and the World Bank,
        you don't have enough savings,
        that's what the economics models say.
        So you can't have growth,
        we need savings, we
        need investment for growth.
        You don't have savings,
        you can't have the investment,
        you can't grow, we'll lend you the money.
        So foreign investors lend
        the money, foreign investment,
        FDI lend in debt,
        and we had the
        third world debt crisis one after another.
        But none of this money
        actually came into these countries.
        None of it came into these countries
        because they lend in foreign currency,
        it stayed abroad,
        which got interesting stories.
        >> [OVERLAPPING] The fact module
        really is that you can fill
        everyone all the time like that.
        If Japanese asset prices
        are going up 15-20 percent per annum,
        the overseas speculator wants to participate,
        never buys yen assets.
        They don't look at the unsustainable nature.
        They just want to join the party.
        So you can fill everyone,
        all the time, so to speak.
        >> That is a very strong incentive
        and exactly.
        >> There's so many questions
        that come from that,
        but I'm going to push against that
        because for the time I really want,
        I can again narrow down on
        this agenda of taking Japan's and
        your knowledge of Japan's
        experience with bubble
        and with monetary policy at
        the forefront and take it to try and find
        answers or knowledge regarding today.
        So if I may put to you that,
        I think is as if The Fed,
        like you said,
        Greenspan was very knowledgeable
        about your output, your thinking.
        I want to say to you that the Fed
        has pursued, I think,
        90 percent of everything you've said and
        then ignored the crucial 10 prcent caveat.
        They've done so without the dictating
        of "you must" like window guidance and
        say "you must expand credit as
        bank XYZ for the calendar year 2020,
        you must do 12 percent. "
        But they haven't done that,
        but they're filling
        all the people all the time via
        the mechanism of rising
        asset prices has done it
        for them in that sense.
        So if we look at since the burst of 2008,
        broad money supply, and I say broad,
        it pains me to say it
        because they've mess around with
        these money supply statistics so much.
        But the M2 statistic,
        which is the dirty one that's available.
        As a central bank, is a reasonable score card
        that says "These guys have not been
        asleep like their European compatriots"
        because I want to say
        M2 growth has averaged over the period.
        High 7667 percent per annum,
        like that's a GDP, nominal GDP.
        Compare that to, if I was looking at data
        for France and its compounding at 2 percent.
        You have Gee Lee John(phon),
        you have demonstrations, 
        you have people who reject your system
        because you're not giving
        them the oxygen of prosperity.
        >> The US is very good, very well put.
        >> Yes, the US has been there,
        and it has used on whispers
        and the recognition that you need
        bank credit expansion in
        order to suppress revolutions, if you will.
        Job done, you've had
        three curies or just the fourth iteration?
        You're the inventor of the term.
        Each one was criticized,
        but after the annualized rate of
        expansion goes crazy on the initial exercise.
        Then it gets swallowed up.
        Again, it comes through in a steady manner,
        which allows you to expand.
        This is the longest economic expansion
        in the US has enjoyed.
        So a lot of gold stars and yet, here we are,
        and we do have Trump and we do have
        an economy teetering
        and searching for evolution.
        Again, we have this,
        what feels like a coup d'état of the virus,
        but a very febrile
        environment and it feels as
        if the system could break.
        >> Let's say this hadn't happened.
        This COVID-19 hadn't happened.
        Then, presumably,
        that's why I asked the question,
        the Fed is doing what
        the Bank of Japan has been
        doing: the bubble part,
        but it has not
        done the tightening bit, right?
        >> Yeah, it hasn't rejected his ideology.
        The ideology that had embarked on with
        Bernanke in October 2002 or three,
        when he said, "Let me apologize for
        the sins of my forefather
        and the strong money."
        It was an ideology where we
        sacrifice the great American worker
        on the cross of gold.
        That wound, I'm sorry, I've got your back.
        Okay. That's the ideology
        that they are pursuing today.
        Unless they change,
        then we're in Japan with
        the NICI at 40,000 in December 1989.
        Again, it's that premise.
        >> I think there will be a reckoning.
        Let's just pursue this further.
        We've had now this COVID crisis
        where people say there's
        this dangerous virus killing a lot of people.
        Although as you know,
        it's hard to actually show in the data.
        Also, there's different views about
        "Are these really COVID deaths?" So on.
        Also strange things happen, but never mind.
        We have this crisis and as a result,
        the amounts of money; just astonishing.
        A few trillion here,
        a few trillion yet injected by the Fed.
        Where's this money going?
        It doesn't seem all that
        transparent, but we know-
        >> Can I stop you one second, Richard,
        because just for the audience,
        and I'm sure they know this, but with all of
        the other QE1, QE2,
        QE, etc., the money supply bumped like 14,
        20 percent annualized growth
        before what they've done.
        This year, we're running
        at a hundred percent,
        so we're 5X the interventions
        of previously. Back to your point.
        >> Yes, exactly. Thank you.
        Completely unprecedented monetary blow out.
        It seems that this is being used by
        some big players to make them whole.
        Because at the same time, we had a crash
        then driven by the virus.
        It seems that a lot
        of big players are being made whole.
        Whereas ordinary people, small shops, SMEs,
        small medium-sized enterprises,
        they are being crushed,
        and they have vast,
        large-scale unemployment now.
        It really seems to be under
        this cover of COVID.
        What we have is a dramatic acceleration
        of this redistribution and
        further concentration of money in
        the hands of ever fewer players
        while only people are benefiting,
        and then won't we then,
        ultimately, get this scenario?
        As you mentioned, like in
        France, ordinary people demonstrating.
        Maybe not if we have a new law which says,
        "You can't be in public.
        You can't demonstrate," and so on.
        It looks like the underlying tension
        has increased,
        but what we now have is laws and strong rules
        that we would not have believed are possible
        in a country like the United States
        to prevent this from erupting.
        Maybe this is going to work, but maybe not.
        >> This is very hard
        to have public a discourse.
        It's a very emotional conversation.
        I think our audience,
        we are analytical people.
        Three months ago, this was
        a very scary phenomenon because we
        like data in terms of the virus.
        Today, the one thing that we do have is data.
        When we look at it, it
        seems to be very hard to,
        to construe an understanding as
        to the severity of the reaction by the state.
        They seem to have bred. The greatest fear
        is not the virus is fear itself,
        to play with [inaudible]
        But then you could think about it.
        There was a propaganda, and indeed,
        99 percent of people
        listening to this think I'm a jerk,
        I wouldn't argue with that.
        I've come out and I've said, "I
        think you got to give these guys
        a break," in terms of
        the Fed and the quantitative easing.
        I can see its place and its justification,
        but maybe you could say that
        we were reaching a point where people say,
        "This funny money,
        quantitative easing is making me poorer and
        poorer as a regular guy and
        it's making
        the rich one percent richer and richer."
        Like every revolution, what you have to
        do if you're the proponent of the revolution,
        is that those who were very against you,
        those that hated you,
        you have to convert into
        your most loyal lieutenants.
        How do you create that transformation?
        You do so via some mechanism,
        which was for man's immense fear.
        Now, I imagine with 20 percent unemployment,
        with a GDP heading to being
        down 20 percent year over year,
        people will be demanding,
        pleading for you to give them
        more of what they were rejecting previously,
        which is the funny money.
        Again, I'm now sounding
        like you and your conspiracy theories.
        Tell me what the Fed is doing
        wrong today and how you would change it.
        >> By the way,
        I don't have any conspiracy theories.
        I am a scientific empirical researcher,
        but sometimes when the conclusions
        tell you to conclude
        something based on facts,
        you have to be bold and state
        it even if some people don't like it.
        >> You're a crusader. You're brave.
        I respect you I'm just playing with you.
        >> Okay. What should the Fed do?
        Ideally, the Fed should have followed
        the rule of my quantity theory of
        disaggregated credit
        and ensure that bank credit
        is used only for productive purposes,
        and then we wouldn't have had this
        asset bubble, but never mind.
        >> I think that's a cop out, Richard.
        I think that's a cop out,
        but it's a very important cop
        out because all of
        your wisdom from your book
        hinges on the one caveat,
        which is what you've just said,
        that all of the money,
        so the Central Bank
        can create a tiny part of the money,
        but it can influence the totality.
        Okay. Through either cohesion.
        >> That can be easily done.
        >> It's just been a rule, connected
        to the banking license. Okay.
        >> You're saying that
        is the panacea with one condition,
        that all of that money has
        to fund productive investment.
        Of course, the retort to that is what if
        the productive investment opportunity is
        pea-sized and we need something which is
        the size of a basketball
        to stop the revolution.
        >> That is problem because we have humans,
        and humans are creative and they
        create ideas, they create technology.
        There's so much great technology
        that hasn't been implemented
        because there hasn't been money,
        because the incentives have been
        wrong and the wrong things are being funded.
        But leaving that aside,
        even if they don't follow
        this rule and they haven't followed the rule,
        what I give is advice on what to do.
        My other book,
        New Paradigm in macroeconomics,
        it predicted we get this banking crisis,
        2008 banking crisis,
        and I even wrote what they're
        going to do after the bank crisis,
        all the wrong things.
        But I told them, actually,
        you don't have to do these wrong things,
        you can do this and what is it?
        First of all, when you have a banking crisis,
        you don't need this to turn into a recession.
        Because you can take away
        the bad debts in the banking system
        at zero cost to the taxpayer.
        How? That's where the Central Bank can do.
        If a central bank purchase
        them at face value,
        that wiped off the banks balance
        sheets and the Central Bank,
        it doesn't feel the pain, so end of story.
        Then you've solved the problem and
        banks can create credit, of course,
        you should ask for strings,
        you should attach strings when
        you bail them out in this way,
        which usually they don't do for
        some reason but you should,
        and you should say from now on,
        create credit for productive purposes
        then you'll follow this procedure,
        so it could be done very easily.
        >> Now being the banking sector
        has to be nationalized,
        this doesn't have to be then an
        extensive adjunct to the government.
        >> No, I'm actually quite against that,
        but I'm glad you mentioned this
        because what we're now witnessing is,
        and particularly with this crisis
        is really accelerating this.
        What we're witnessing is a trend towards
        sovietization of big chunks
        of so many economies.
        It is shocking, even the US essentially de
        facto nationalizations and centralizations.
        Now the overarching trend
        of the 20th century was,
        the trend towards centralization,
        evermore power in the hands of fewer people,
        particularly central bankers
        have been beneficiaries
        of this and
        each crisis gives them more power,
        which is why we have this moral hazard,
        regulatory moral hazard
        they benefit from crisis.
        But this is now
        accelerating because what they're saying
        now is that central banks
        have been saying sure,
        you must have heard this
        many times "cash is bad,
        and once the COVID crisis get on.
        Now, cash is bad,
        the virus could be on it.
        We want to abolish cash."
        Banks are bad or banks create money.
        Once I lifted the lid and blew the cover,
        they switched to Plan B.
        We now have to abolish bank credit creation.
        Why? Well, what if
        Joe Public realizes banks create money?
        They could actually go out and create
        local not-for-profit banks for
        the benefit of the ordinary people,
        that must be prevented.
        So now we want to prevent
        bank credit creation
        and this is happening now.
        This is a historic moment not
        witnessed in 300 years that
        there's concord that this agreement between
        the central bank and the banks
        has been ripped up.
        What is the agreement? The agreement
        is the banks create the bulk of the money.
        They have accounts,
        that's where retail
        and businesses have their accounts,
        they deal with that
        and they create the money.
        But the central bank is the top dog.
        But the Central Bank,
        in exchange for being top dog,
        and having coordinating power,
        it keeps out of that business.
        Retail doesn't have accounts with
        the central bank businesses
        don't have accounts with the central bank.
        That is the agreement and that's
        been a balance in place worldwide.
        Of course, central bank issues paper money,
        but it's only a small amount.
        Banks don't issue paper money anymore,
        and so that was the balance.
        This is being ripped up
        because now the Central Banks,
        who are regulators of the banks announcing,
        heard they've announced it,
        that they will now
        compete with their own regulated.
        The central banks will now
        begin to compete with the banks.
        How? Well, this digital central bank currency
        is nothing but a current
        account and the central bank.
        So everyone will get an
        account with a central bank.
        This is going to be the
        essentially the thin edge
        of a wedge and the end of
        this is going to be no more banks.
        Because if the regulator
        moves against the regulator,
        I mean talking about conflict of interest .
        The regulator has an incentive to get rid of
        banks and they've started it,
        they've, declared war against other banks.
        >> Yeah, so it's a hidden nationalization.
        You have to do it because
        in America you are the whole language of
        socialism is wrapped up in
        Communism and so you have
        to therefore make attempt it could change
        in order to achieve a nationalization.
        >> We could end up with
        the central bank being the only bank,
        that's what we had in the Soviet
        Union and that's not it.
        >> So again, Richard, you're,
        my mind's like fireworks
        going off as I listen.
        Sovietization, that centralization model.
        When you said that,
        and when I considered
        our starting point, which was Japan.
        We said that actually Japan post-war.
        Japan post-war, adopted
        its' very successful
        economic strategy pre-warrior.
        It was a very, very strong economic model.
        As your book depicts,
        all of the architects of it,
        we're slowly and surely and invisibly
        put into positions of power again,
        and they recreated it and Japan
        became an economic powerhouse.
        Then that was brought down
        by the anarchy or
        otherwise the Bank of Japan.
        What if it's the rise of the phantom,
        what if we're actually going
        back and it's the takeover.
        Let's be positive.
        What if it's not sovietization?
        But it's actually returning to
        the thing which was phenomenal,
        which was that Japanese
        centralized economic growth machine.
        >> Okay we will be able to tell which one it
        is by the number of banks.
        Japan did extremely well
        because it had many, many banks.
        In order to ensure that bank credit
        is used for productive purposes,
        you need a lot of banks with many branches,
        where they are actually experienced bankers,
        that know how to read a balance sheet,
        that know how to kick the tires
        and actual companies,
        small companies that's hard work
        and make the right decision.
        That's when it works when you have
        this multifaceted banking system.
        Japan has many types of
        banks and many, many banks.
        So that works really well.
        Now, let's compare
        the Soviet Union and China.
        China's very similar to
        the Soviet Union, in many ways.
        The Mao communism was
        like the Soviet Union's
        Stalinist type of system.
        That did not work very well.
        How many banks did the Soviet Union have?
        It had one bank, one bank only.
        That bank had branches, but it was
        one bank. That doesn't work.
        Why? Because you don't have
        this detailed decentralized
        analysis of people on
        the ground in
        the many geographically remote areas
        analyzing on the ground
        all these small firms.
        It's the same the world over,
        most employment is with small firms.
        In the UK 66 percent
        is employment of all employment is SMEs.
        In Germany in 70 percent,
        in Japan is 80 percent
        of employment is with SMEs.
        That's where the jobs are,
        which is why we're now in trouble
        because that's what
        they've been shutting down.
        This is a direct assault on
        the majority of people's employment.
        Now, China, when the Chinese saw this,
        and particularly when Deng
        Xiaoping came to power,
        he realized, the Soviet Union
        soon after in the next decade,
        essentially went bust,
        the system didn't work.
        Deng Xiaoping realize this,
        this is not going to work, we
        have to bail out.
        Of course, he wasn't going
        to give up communism
        but he wanted to reject the system.
        What he did is he switched
        from centralization to decentralization.
        As soon as he started,
        of course he visited Japan.
        He copied the Japanese model and he realized,
        "we need banks, many banks."
        He established thousands of banks.
        China created thousands of banks,
        and that delivered this high-growth,
        and of course then window
        guidance did the rest.
        Now look at the US.
        The US overall has performed
        very well as an economy
        over the last 200 years.
        I think that's fair to say,
        because they did higher growth in the past,
        and the growth rate has come down.
        That is proportional to the number of banks.
        Before the Great Depression,
        America had close to 30 thousand banks.
        The Federal Reserve closed 10 thousand banks
        during the recession unnecessarily so,
        and the system became more concentrated.
        Also in every industry
        became more concentrated,
        the farmers that used
        to own the land, family on files,
        the whole country in
        the 1930s they were expropriated.
        The banks took their land from them,
        it became mega agribusiness centralization,
        almost Soviet style in
        a huge cocos type of agro-businesses.
        Now, what about just the recent period?
        If we go back only 15 years,
        America had 15,000 banks,
        which is the largest number of
        banks in any country in the world.
        Okay, America is big, so they need more,
        but still, that's
        the largest number of banks.
        But today, how many do we have?
        We only have barely 5,000.
        Why? The Federal Reserve has continued
        this policy of whittling
        down the number of banks,
        and one way to do this is to have
        lower and lower interest rates,
        and a flat yield curve,
        and a negative yield curve,
        you are driving banks out of business,
        you're forcing them out of business,
        the same is happening with eurozone.
        Under the ECB's watch,
        hundreds of hundreds of
        banks have disappeared.
        In Europe, the country with
        the largest number of banks is Germany.
        The secret of German economic success,
        which also has had
        a very good economic performance
        last 200 years,
        has been the decentralized banking system.
        Eighty percent of German banks still today,
        are not for-profit local community banks,
        so you've got many small banks.
        The High Street big banks,
        they're only 12 percent,
        measured by deposits.
        So it's these small banks,
        why do you need small banks?
        Because small banks lend to small firms,
        big banks have
        no business lending to small firms,
        their only interest is to get out of this.
        >> I get that. The number of
        banks is going to be the determining factor,
        unconscious of our time and whatever.
        So I want to leap from there,
        because you're suggesting perhaps "an
        agenda," a takeover agenda
        by the centrist, central bank.
        >> There's something we can do.
        We can set up, not
        for profit community banks,
        I'm doing this in England by the way.
        So any investor who is interested,
        we're setting up community banks,
        they are not for profit,
        but there's going to be a dividend.
        We're starting with
        the Hampshire Community Bank,
        we're doing it all across England now.
        We can do something,
        we can work against this,
        and we can help SME's now,
        and it's needed more than
        ever with this crisis.
        We're setting up these banks across the UK.
        You don't need much money to create a bank.
        So if you ask me, "Richard,
        what are you doing these days?"
        Well, I'm creating banks,
        and we're very close
        to giving out out first [inaudible].
        >> You're setting up hedge funds.
        That's what the hedge funds are doing,
        listening to mediation of the banking sector,
        review an analysis of the credit risk,
        underwriting the credit risk,
        and making the capital allocation.
        But what I want you to say to you
        that I think your idea
        would be legitimized if
        we saw a step forward.
        So again, with our patron Raoul,
        listening in, I'm sure
        he wants to kick me and say,
        "Ian, wind this **** thing up."
        But he wants to kick me and say,
        "Mention negative interest rates."
        So before I hit you with that introduction,
        I think the negative interest
        rate, Raoul, forgive me,
        but I think what it neglects
        is the no-brainer first point,
        which is you take away the central buying.
        Correct me if I'm wrong, but I
        believe the Fed pays
        10 basis points to the commercial banks for
        them parking reserves on the central bank.
        I think in Europe,
        is something like 50 basis points,
        and that is an incentive for statuses,
        that isn't incentive to do nothing.
        If I was running the Fed or the ECB,
        the first thing I do, I go to zero,
        and in fact, I would probably charge rent.
        I say if you put your money
        on my balance sheet,
        you're going have to pay 50 basis points.
        >> It is negative. In Europe, it is negative.
        >> It is negative. So they're doing that?
        The US?
        >> No, but for some reason,
        Trump is saying, "Oh, Europe,
        they're doing it, that seems to work,
        not, let's do it in America."
        Because the Fed is heading in this direction,
        and I agree with Raoul.
        I've been saying bond yields
        are going down, and they're going to be zero,
        and maybe even going to be negative,
        but also Fed rates,
        we're heading towards negative tariffs.
        But what does this mean?
        This is actually bad, and
        ECB has been doing this as part of
        its goal to destroy
        the community banks because
        they want the Sovietization.
        They want to drive our banks,
        then introduce central bank digital currency,
        Lagarde has announced it,
        we need to do this,
        and then they're the monopoly,
        and they're even more powerful.
        Can you believe it?
        The ECB is really so powerful,
        but it's still going for the last power grab.
        They want to be the only bank around by
        bankrupting the rest of the banking system.
        Now, this crisis has the risk of
        accelerating this trend if
        we don't work against this.
        So we need to act now and create more banks.
        >> I wanted to ask if there
        are any accentuating circumstances,
        where you can legitimize
        a central bank fostering
        a strategy onto its commercial banks,
        to generate asset price growth to
        create that magic feel-good module,
        which then would expand
        the legitimate pool of productive investment,
        which would ultimately take the economy on.
        So Machiavellian inflate, because I got
        money supply and I got to determine how much
        I fund speculatively to productive,
        and presently, the productive feels small.
        So why not push the gas speculatively,
        GDP growth cluster in
        the States was really good,
        and keep that on,
        and then that will inflate.
        Yes, it will inflate asset prices,
        but it will inflate
        productive investment projects,
        and then I just take the gas
        off one side and I start pushing
        into productive investment opportunities.
        >> You've described this really well.
        I think this is the temptation that
        central banks probably always feel,
        and certainly in the last two decades,
        and certainly very much after 2008.
        It's probably the underlying
        justification of what they are doing.
        Well, we need to somehow kick-start this,
        so we need to get the juices
        flowing, and of course,
        economics textbooks do the rest because they
        don't recognize bank credit creation,
        they think banks are
        just financial intermediaries,
        and the stock market is key, and so on.
        But actually, fundraising for
        companies in the stock market is limited,
        is mostly secondary trading
        of ready issued stocks,
        so there's bit of a misunderstanding there.
        But the official story is,
        all these markets and the asset transactions,
        somehow that is fueling
        investment, real investment.
        Even though really these asset
        transactions and changes in ownership rights,
        which are not even part of GDP,
        that's the reality, because
        they don't add value, so that's why.
        >> Well, here's a contentious point too.
        We created Google, Facebook,
        all these new companies,
        all came out of
        part of the process of the bubble,
        and the technology,
        at the turn of the century.
        So was that bubble worth it,
        given the legacy seems
        to be in these platforms,
        which then went on to impose
        an enormous economic rent
        on the rest of the world?
        >> Yes. There is
        this story behind it that certainly,
        Greenspan seemed to have
        felt it's all worth it,
        and by injecting all this money,
        you can fuel the right type of things.
        The trouble is, it will not
        just support the productive investments,
        and it's very hard to then taper off at
        the right time and ensure that it just
        doesn't become an overblown asset bubble,
        and that's almost impossible, I would say.
        Which is why that's the trouble,
        that central bank is
        therefore always feel tempted
        and almost always fall for this temptation.
        >> I think it's wise to say impossible,
        but 2008, some of us profited from it,
        because we could, and you could see it, etc.
        But it wasn't just the credit mechanism
        being fully on like
        put the pedal to the floor.
        It was the fact that the asset price
        that had become inflated was
        the US housing stock,
        which was like 10x GDP or whatever,
        a very high x GDP.
        Therefore, if you got
        a contraction in the asset price,
        it would wipe out the economy,
        GDP would just go down hard.
        Prior to the virus coupe d'etat,
        once we've had this new all-time highs
        in financial markets
        and asset price inflation,
        there was no existential real threat
        to GDP because there was
        no explicit asset market
        which was so big that if it had a reversal,
        it would not cross over.
        Do you agree with them?
        >> Yeah, I think so.
        Certainly, the temptation was there,
        and risks were taken in creating
        this asset bubble because
        there was this argument to justify it.
        But in reality, it was clear,
        we certainly, by the end of last year,
        it looked like such an asset bubble.
        If we didn't have the COVID crisis,
        I think it would eventually
        also would have to crash.
        >> But why? That's the point,
        I don't understand that.
        I wanted to push back.
        Why was it such an asset?
        >> You can continue it,
        but only if you
        continue to play this game of ever
        increasing credit creation for
        asset transactions, evermore.
        >> My question, why not until
        you reach a tipping point where you say,
        "Well, this asset, like student loans,
        or car loans,
        or mortgages to households,
        it's reached a point of x times
        GDP that I can't push it anymore,
        because unintended consequences
        that if it comes against me,
        I wipe out all my gain."
        So you say unsustainable asset bubble,
        I didn't see the
        Achilles' heel, and therefore,
        it wasn't unsustainable
        at the end of last year.
        >> Well, certainly as you mentioned,
        when the yields,
        and the returns, and the earnings,
        become so small and
        the gains are all in the capital gains,
        then there becomes a point
        when it doesn't make sense.
        So you push beyond that,
        it doesn't make sense,
        but it's a game, it's going up,
        everyone is investing, it continues.
        I think the risk there is,
        particularly for insiders and
        central bank and central planners,
        is that something else that
        they don't control could
        trigger the collapse,
        and maybe they don't like that.
        So they'd rather, and maybe this is what
        happened in February/March, but sometimes,
        maybe they'd rather trigger
        it themselves so then they can have
        somewhat control over the collapse
        and benefit from it,
        because it's a very good timing.
        My point is, if I'm running the thing,
        I've got to be the chief,
        I've got to be Tony Soprano,
        and you'll never dare take me on.
        That's the role of a central bank,
        you should always be Tony Soprano.
        You pump, you pump, but you can never allow
        an asset price to become
        such a large component of GDP,
        like a factor of GDP such that it pimps you,
        you've got to pimp everything else.
        Forgive me for my colorful language.
        Again, I don't
        see in the absence
        of the coup d'etat, I don't see,
        and I didn't see the vulnerability
        to the omnipresent Fed,
        so which I definitely
        picked up a lot of flack over the years
        because I developed an ideology.
        I won in 2008 and I lost 2009,
        '10, '11, '12, I became curmudgeonly.
        I started seeing morally The Fed was wrong,
        and I started quoting Andrew Mellon,
        and we should be purging
        the rottenness from the system,
        felt very cavernous thing,
        I was very comfortable.
        But it wasn't my room,
        and then when I resaid it,
        I thought to myself,
        if we pursue the hard money agenda,
        the US post 2008
        would have gone down potentially 10 percent.
        We divide bank closures,
        we divide unemployment of 20 percent.
        I said to myself, "You know what,
        anything is better than not,"
        and these guys are
        no hedge fund superstars that they're not
        paid millions and millions of dollars,
        and they're judged by history.
        So they're cautious and yet they took
        brave decisions which could have
        backfired and maybe all backfiring.
        But they were willing to put their head above
        and to be knocked down
        and they've been the architects,
        I think of the longest US expansion.
        So I want to say what the Fed has done.
        I want to say that I think you were
        the first person to coin
        this term, quantitative easing.
        I want to say it's been
        a source of good and I know
        that's going to **** off
        everyone listening to this.
        Do you agree or disagree?
        >> I have to agree with you,
        but there's some caveats as you might expect.
        The QE I proposed originally in 1995,
        published in the Nikkei, was literally
        credit creation for GDP transactions.
        That was the definition of QE,
        and I call it quantitative easing.
        The editor at the Nikkei said,
        "I can't have credit creation in the title.
        I must think of another name which gives
        the idea that it's different
        from standard monetary policy."
        Of course what I'm proposing is
        about the quantity,
        so I use quantitative and
        then easing is the Japanese way
        of having expansionary policy expressed.
        Anyway, with that definition in mind,
        the Bank of Japan wanted to disprove QE.
        For years they said it's nonsense,
        then in 2001, they
        announced, "We're adopting QE."
        But they went for
        the straight traditional
        monetarist high-powered money expansion,
        which even in my original article
        I said this is not going to work
        because if you increase bank's reserves
        by how many times,
        that's not going to do the economy any good.
        You need credit creation.
        So they tried this from 2001-2006,
        high-powered money expansion, it didn't work.
        So they said, "Now, we've shown you,
        as we told you it doesn't work so
        we stop it," and they stopped it.
        But then when the 2008 crisis hit,
        from 2009, the Bank of England said,
        "We're going to do QE now,"
        and they followed more
        or less in the Japanese footsteps.
        Now in America, Bernanke came out and said,
        "We're going to do something
        that may look similar to QE."
        But Bernanke said,
        "I want to call this something else.
        I don't want to call it QE because
        that QE didn't really work."
        I mean, he was polite
        about it when he said this.
        There was a speech at the LSE 2009,
        January, and he almost
        said what I've been saying.
        Namely, they did this wrongly because
        just high powered money expansion,
        that doesn't do any good.
        We need to expand credit.
        He said that, and therefore he said,
        "I'd really like to call
        this some credit easing."
        Well, that's exactly
        the quantitative easing I meant.
        Of course, Bernanke, remember in the '90s,
        he was very much interested
        in Japan and he was part of
        these debates we had about Japan and
        the policies and what needs
        to be doing with the crisis.
        So he's very much familiar,
        and I think he knows my work and
        the credit creation
        expansion definition of QE.
        He was the only central banker who
        did at least half of what I recommended.
        The one half being,
        you got to help the banks and you can do this
        best by purchasing
        their non-performing assets,
        take it off their balance sheets,
        move it to the central bank,
        where they can't do any harm,
        and then the banks can create credit again.
        That's what he did,
        and that's why the Fed balance sheet
        quadrupled in a month,
        and bank credit was the
        first in America to recover,
        already one and a half years later,
        4-5 percent bank credit growth,
        and as you mentioned, then of
        course you get the economic growth.
        Of course it wasn't perfect.
        It was still biased towards big players,
        and Main Street didn't do
        so well as it could have.
        If they had not at the same time
        had this policy of
        reducing the number of banks you see,
        which I mentioned earlier.
        So they should have
        abandoned that policy and actually said, "No,
        let's create more community banks
        and let's help them to push the money,
        and then it would have been even better."
        But I agree with you.
        Given circumstances, the Fed,
        actually with the central bank that did best,
        and because it did the best proper definition
        of QE it followed.
        It was closest to my definition of
        QE by expanding
        bank credit creation, helping banks.
        >> I'm glad that's at the end,
        because if we had that at the beginning,
        everyone would be switching off in disgust,
        as the two of us agree
        that the Fed's scorecard
        is really is a heck a
        lot better than the alternative.
        Again, the legitimate point
        to all of you haters out there is,
        despite all of that,
        what seems like you say again,
        this illusion of
        money supply growth they have,
        the reality is quite different.
        Again, let me just reiterate,
        we don't have a specific asset bubble
        within the US economy,
        which is of such a magnitude that
        if it reversed, it would take us down.
        I think that's why we've had to adopt,
        invent whatever this crazy
        virus scenario that we
        find ourselves in, but okay.
        Now, negative interest rates.
        I have two points.
        When you're doing contentious,
        controversial things and you're a bureaucrat,
        it's better to hide
        your tracks and I'm making a sublime,
        again, may make an *** of myself.
        But is it not better simply to make
        that technical change
        where you were saying the ECB,
        I think is minus 10 or what does
        the negative rate that they charge
        for commercial banks depositing?
        I don't know.
        It's something very small,
        but why not make it?
        [inaudible]
        Why not make it? Why not?
        The first step is, why is the Fed not there?
        The Fed should be negative, right?
        Because no one have, if
        you do the explicit negative rates,
        then savers are up in arms,
        but if you're actually coming
        through and hitting banks,
        everyone loves you as a populist measure.
        >> Sure, but it's nonsense. It is nonsense.
        Because based on this idea
        that the reserves that
        banks have at the central
        bank is the same money
        that the banks can take from
        the central bank and lend out.
        But that's not true.
        Reserves at the central bank
        cannot be lent out.
        [inaudible] No, it did, and
        that's why it has to be punished.
        You have to say it, "Listen, my number one."
        >> But, no. There is a misunderstanding.
        The reserves that banks
        have in the central bank is
        100 percent determined by the central bank.
        >> Because I was thinking.
        >> Because it's special money,
        it's not real money.
        It's a different type of money supply,
        which is completely isolated
        from the rest of the system.
        It's in a circuit
        between the central bank and the banks,
        and it's credits that the central bank gives
        the banks on its balance sheet.
        But that money can never leave.
        So that never helps the economy.
        Therefore, and this tells
        you that the central banks as
        you noticed jolly well,
        they are misrepresenting this to the public.
        The public doesn't know this and you can't
        expect the public to understand this.
        But the central bank, also
        ECB in particular, they've been saying,
        "We do this negative and strict policy
        to punish the banks, as you say,
        and encourage and force them to
        lend this money out,"
        but this money cannot be lent out.
        So instead of encouraging
        the banks to lend more,
        it simply attacks on banks,
        and if the banks are already squeezed by the
        interest rates scenario that
        created short rates being very low,
        long rates being pushed down
        by the QE purchases,
        and they have a flat yield
        curve or negative yield curve.
        The banks are not earning money,
        you're actually really hurting them,
        then you put a tax on them.
        You aren't driving them out of business,
        that's why hundreds and
        hundreds of banks in
        the Eurozone have given up.
        They are forced to merge,
        they disappear. That's very quiet.
        People don't talk about it, but you get
        a more concentrated banking system,
        and that is what's
        happening and this is now going
        to accelerate our fear under this crisis.
        Therefore, we'll end up with
        the Sovietization of the banking system.
        Ultimately, the central bank
        is going to survive only.
        At this moment where
        the banks are so much being
        squeezed from all sides
        of the regulatory layer.
        There are Basel III, Basel IV now coming up,
        which increases costs for banks again,
        and at this moment
        where the banks are being squeezed from
        all sides and they
        really can't make money much,
        and they don't know what to
        do they're forced to merge,
        that's when the central banks announce,
        "We're going to actually now
        compete with the banks."
        The banks, it's
        the regulators saying this and doing this,
        they can't complain about this.
        It's unfair competition.
        They have no chance if the regulator
        suddenly competes with a regulated,
        and this is what we are facing.
        So that tells you that really
        because the central banks
        know this very well,
        it cannot be by accident,
        that is their intention.
        Hugh, when you say earlier,
        that sounds a bit like a conspiracy theory.
        Well, I'm just very much,
        with Paul Samuelson on this one,
        he proposed in 1937, I think,
        one of his first pieces in economics,
        The Theory of Revealed Preference.
        It says that you shouldn't just
        believe what people tell you
        because maybe that confused themselves,
        or they may tell you what they like to do,
        but actually that's not
        really what they're doing.
        So cut through that
        and actually watch what they do.
        That's become, when I started
        to monitor central banks and I'm
        monitoring 38 central banks now
        looking at their liquidity with
        my liquidity watch report.
        As I do that, Mike, my fundamental motto
        is don't listen to what they say,
        watch what they're doing.
        That reveals their true intention,
        because they're in control,
        in most countries,
        very independent, they can do what they want,
        and if they do that,
        we have to assume that's what they want.
        So the Central Bank seem to
        want to put banks under pressure,
        and make it worse
        through negative interest rates,
        and then even out-compete
        them on their own home turf by opening
        accounts for the public with
        the Central Bank. That's the reality.
        >> So I seem to
        be out of my depth a little bit,
        in terms of how big are
        those commercial bank reserves
        at the Central Bank,
        in terms of how has it been
        a structural shift, like pre-2008,
        post-2008, is it a lot more money parked on
        the Central Bank's balance sheet by diktat?
        >> Yes, absolutely. We saw
        this in Japan first.
        So in Japan, also then
        these reserves increased tremendously.
        Now, let's look at currently the Fed,
        and it's actually quite
        relevant because the Fed
        has just announced
        that they're going to reduce,
        well, they have reduced now
        the reserve requirement to zero.
        Again, it tells you
        they're just playing with us,
        because this is misinformation.
        >> What does that mean,
        the reserve requirement is
        zero for those [inaudible]?
        >> It's now zero.
        >> What does that mean? If you know
        nothing about banking, what does that mean?
        >> Well, in the old days we had
        the fraction reserve theory of banking,
        which in my empirical papers I disproved.
        It's a the wrong description.
        Actually, Samuelson,
        that's one of the things I
        disagree with him, did that wrong.
        The money multiplier model,
        it's actually not true,
        but it uses the inverse
        of the reserve requirements,
        the money multiplier.
        Essentially, it's a requirement for the banks
        to hold certain amount of
        money as reserve with the Central Bank.
        >> But the truth it got to zero,
        does not mean you've gone to
        an infinite money multiplier?
        >> Yes, but the money multiplier is
        nonsense, because in reality,
        the Central Bank controls
        how much money it
        has from the banks in reserves,
        it creates for the bank.
        Therefore, in practice,
        reserve requirements were never
        used for monetary policy, only in textbooks.
        But especially, look at
        the current situation when
        the reserves are so large,
        we have huge excess reserves,
        and then they say, Oh,
        the reserve requirement was
        never a restriction anyway,
        is fairly low, and
        the actual excess reserves are much larger.
        They're now saying we abolish
        the reserve requirement.
        It's misleading because
        it's irrelevant anyway.
        But I don't understand [inaudible]
        >> Are you telling me that the Central Bank
        sponsored the buildup
        of commercial bank reserves at the center,
        because my feeling was it was
        the risk aversion of
        the commercial banks that
        parked the money with the Central Bank?
        >> But the bank's
        reserves at the Central Bank,
        they cannot be lent out.
        They will always stay on
        the balance sheet of the Central Bank.
        So it's not as if
        the bank takes the money and then
        gives you a loan.
        >> I am JP Morgan,
        and I've got a trillion dollars of
        loans outstanding in America, let say.
        Is there a requirement
        of that showing I've got to
        post $100 billion with the Central Bank?
        >> Not anymore, because
        it's now gone to zero.
        But before there was a tiny amount.
        Usually in the last 30 years,
        it's been around one percent
        needs to be in reserves.
        In those countries that
        still had reserve requirements.
        The UK, Sweden, they already gave up
        reserve requirements over 10 years ago.
        >> But there's no bureaucratic mandate
        imposing the need to
        post results for the Central Bank,
        and yet the banks had got
        record amounts of reserves
        at the Central Bank.
        Surely, that's got nothing to do
        with an ideology of the Central Bank,
        and it's got everything to do with
        the risk aversion of the private sector.
        >> So you have to ask the question, how
        do these reserves get
        onto the Central Bank balance sheet?
        >> Tell me.
        >> Because of actions by the Central Bank.
        The Central Bank can control them.
        It can increase them and reduce them,
        and the banks essentially
        can't do anything about it.
        In aggregate, what banks can do,
        and perhaps I should point this out
        so that there's no misunderstanding,
        banks can shift reserves from bank A to
        bank B because they
        all have accounts with the Central Bank,
        so the distribution of
        these reserves can change.
        But I've been talking
        about the aggregate number,
        the aggregate of bank
        reserves with the Central Bank.
        That one, the banks in aggregate
        can do nothing about it.
        It's entirely up to the Federal Reserve.
        >> It's up to the Federal Reserve.
        The Federal Reserve has pushed it to zero.
        It has said, "Take your money.
        We don't want your money. Take it."
        >> A positive interpretation,
        benevolent interpretation might be
        the Fed is trying to give
        strong hints to the banks.
        Please lend more, create more credit.
        When banks lend, they create
        credit out of nothing,
        and they don't need reserves for
        that because they don't lend reserves.
        So it's like a hint,
        why don't you create more money?
        But they don't even
        need the reserves for that,
        and the Fed can just tell them.
        >> So then finally.
        >> But actually, sorry, one more thing.
        If the Fed really wanted
        to encourage the lending,
        what it needs to do is something else.
        What would help the banks?
        A positive yield curve,
        not a flat or negative yield curve,
        because you need the long-term
        interest rates to be higher.
        You need to earn money. The banks
        live on the margin.
        That's how banking works,
        and that explains why
        the standard interest rate
        policy doesn't actually work.
        I did the first empirical study of
        the one thing that all economists agree on,
        whether the classical economist
        David Ricardo 200 years ago,
        or new classical economists,
        or even radical economists,
        Austrian economists, they
        all agree on one thing.
        Keynesian economists,
        post-Keynesian, they all agree on one thing.
        If you lower interest rates,
        then you get higher economic growth,
        and if you raise interest rates,
        you get lower economic growth.
        This has been repeated in economics,
        in fact, we should say equilibrium economics,
        because they all believe in equilibrium,
        for the last 200 years,
        and I've tested this.
        Of course, Central Banks
        use this for their policy.
        We lower rates even to zero,
        even to negative territory
        because it's going to create more growth.
        Well, what's the empirical evidence for this?
        There's never been a study.
        Can you believe it?
        For 200 years, they've all been saying this,
        and they've all avoided
        doing an empirical study. I did the first.
        It's published in 2018.
        Took me years to find a journal because
        they all hated this empirical study,
        very carefully done
        with a great econometrician.
        There's a second paper coming
        up on this with more countries.
        We've got in this one, the US,
        the UK, Germany, and
        Japan for half a century.
        The conclusion is, interest rates,
        the official story is it should be
        negatively correlated with growth, low rates,
        high growth, high rates, low growth,
        and the statistical causation
        should be from interest rates to growth.
        There needs to be
        some impact that rates have been grown.
        The conclusion of the research is
        interest rates and economic growth
        are positively correlated,
        and the causation runs,
        if anything, then from
        growth to interest rates.
        That's why interest rate policy is useless.
        It's not the price of money that matters,
        it's the quantity of money,
        quantity of credit creation,
        and that's why lowering rates into
        negative territory is only going
        to hurt the banks and do the opposite.
        So if you want to help the banks,
        what you need to do is
        steep the yield curves,
        and for that you need to raise rates.
        Higher rates are
        consistent with higher growth.
        >> We have empirical evidence
        with regard to negative interest rates,
        and at best, it is mixed.
        At very best, it is mixed.
        >> That must be very generous. Exactly.
        >> Very generous. But then you could say
        it's fairly mixed because it's deemed to be,
        in terms of social democracies,
        a very contentious thing that could
        really rip apart
        the debtor-creditor thing win,
        because the fear is you
        unraveled the banking sector,
        because your depositors are
        being charged the rent, and they pool money.
        You'd rather have the money declared
        than under the bed.
        So my point is perhaps
        against a bad drop owing to
        the lack of ambition by those who
        pursued it, and really,
        if we stepped not negative 0.25,
        but we went negative three percent,
        you would then have your statements in
        the yield curve. Is that feasible?
        >> Yes, you can steepen the yield curve
        by pushing the shorter end
        into hugely negative territory.
        But I think that's not
        really helpful for the banks.
        So we need the yield curve to be in
        positive territory, and positively shaped.
        That's what the banks need.
        They need a positive margin.
        Therefore, I don't think
        negative interest rates will work.
        >> Listen, I'm going to end there.
        For me, this has been fabulous.
        I sit there and normally
        I only have Google to ask questions.
        I am asking questions all the time,
        and now I have you, and it's like
        you're the font of all knowledge.
        So thank you for your time, Richard.
        I hope this happens again.
        >> Thank you very much.
        It was great to speak with you.
        Thanks so much and I hope we can
        do this again and continue our conversation.
        >> Welcome to the end of the video.
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