TORONTO -- By now, we all know that the last global financial crisis was caused by too much leverage in financial assets. The crisis produced a pile of interlocking debts that threatened to bring the global economy down.
So how did governments respond? They stepped in and bailed out the world banking system.
To every financial crisis -- remember the dot-com stock market crash of 2000, the "savings and loan" crisis of the '80s and '90s? -- governments have responded by pumping more credit (i.e. adding debt) into the economy to get it moving.
Unfortunately, the more credit we pump into the system the more growth we need -- and too much debt kills growth.
University of Western Sydney (Australia) economist Steve Keen has come up with a different answer, one that would kill the debt in an intelligent manner. Keen says people should come ahead of banks, companies even governments.
He is calling for one massive new round of quantitative easing, but this time aimed at citizens and not banks. He wants every citizen or family to receive serious money -- $500,000 is a number he's been quoted as saying -- which you would use to pay off your credit cards, lines of credit, mortgages. Any money left over after paying your debts is yours to keep.
Of course, governments would still have to restructure themselves. After all, the promises they have made can't financially be kept. But individuals would be pretty much debt-free, maybe even with money to spare. That would relieve the pressure on government programs and pensions, giving them room to make changes.
Keen is even in favour of governments defaulting on their debts at that point, just to clear the books. Yes, they'd have to live within their taxes after that -- but the pressure would be off.
Fair enough. But Keen needs to take a look at an idea from Canadian Sen. Hugh Segal to really make it work.
For years, Segal has been proposing a negative income tax that would cover basic welfare. A negative income tax would do away with the need for welfare, disability pensions, Employment Insurance and the Canada Pension Plan as we know them.
Instead, everyone would be entitled to a basic annual income. Numbers on the order of $30,000 per year have been floated.
Any earnings above that would be taxable, but wouldn't eat into the basics: if you earn more it ends up being whittled away through the tax system.
That would mean the end for the need for armies of people judging claims for support, doing investigations for fraud... all while guaranteeing basic needs.
Set the limit higher, and we could do away with all the programs for innovation and small business support, too. It would be easy enough to feed your family while being an entrepreneur.
Bailing out the world's banking system hasn't worked. It simply pushed governments into the too-much-debt category, even while interest rates dropped to near zero levels. Add in the ineffective economic action plans and stimulus programs governments initiated in a futile attempt to spur growth and the result has only been a further increase in national debts levels soaring even further.
Now more and more countries are borrowing just to pay interest or keep making payments.
We should be paying attention to people like Keen and Segal. After all, Canadian governments are also slipping past the same points-of-no-return as the Greeks, the Spaniards, the Americans and others are experiencing. Taxes can't go up enough to pay off their debts, austerity can't tighten enough, and their economies drift.
We need better ideas than "stimulus" and "cuts." Maybe it's time to start a national conversation.
Troy Media columnist Bruce A. Stewart is a Toronto-based management consultant