This article is part of the series: Interview series Albert Spits
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Albert Spits: A crisis of 2 years instead of 10 through reorganizing fiancial sector

by Daan de Wit
Translated by Ben Kearney

The crisis is unfolding with full force. But what can we expect from the future? If you take a look around you, you won't see all that much out of the ordinary. If you read the newspaper, you'll learn that the financial system is teetering on the brink, but you'll also learn that a lot is being done to preserve the current system. The solutions to the crisis though sound an awful lot like the things that caused it in the first place. With regard to the intervention by central banks, for instance, the news reports this evening: 'This move must make it easier to loan money.' Problem: too much debt. Solution: more debt.

Advisor to pension funds Albert Spits reads between the lines, takes account of the various economic schools of thought (more to come on this soon in this interview series) and examines past developments to see what they might have to teach us about the future. With the facts in tow, Spits sorts through the fluctuations and takes note of where things are headed, though he also points out how things could turn out should we choose to deal with these problems differently.

Listen to the interview with Albert Spits. (Dutch spoken). 
Transcript: Henk van der Griendt

'Today is November 24, 2011. My name is Daan de Wit, and joining me today for another conversation is Albert Spits.

Albert Spits: I see a slow contraction. By 'contraction' I mean that money ceases to flow into the system, and that people have less money to spend as a result. For example, because they owe more on their home than it's worth, they are furiously at work trying to bring down that debt.

De Wit: Do you see this continuing?

Spits: This is going to continue.

De Wit: Tell us more about what the future has in store.

Spits: Well, this is also why we are experiencing a collapse in the housing market. Since we last spoke, it has fallen another 15% and has a long way to go before it stops. I suspect - and I believe - that it will have to drop another 40%.

De Wit: Another 40% compared to now?

Spits: Compared to now, absolutely! Previously I outlined a time period stretching to 2015, and I'm sticking with that. Why? Because people are no longer borrowing money to buy houses. The housing market has collapsed completely, it has come to a complete standstill. At the same time we are seeing food and energy prices rise. Why? For most people, these are the most critical life necessities. And who ends up bearing the brunt of this? People living on the margins and retirees, who don't have as much income. So what's happening is that all of the monetary inflation created by the central bank and the banking sector is flowing straight to consumers. But instead of spending that money on new houses, expensive cars or what have you, they are increasingly spending it on the most critical life necessities - food and energy.

De Wit: And paying off their debt.

Spits: And paying off their debt, yes. A large part of it is spent on that.

De Wit: Right, but that's been going on for some time already.

Spits: That's going to continue.

De Wit: Is this going to have any other implications?

Spits: Yes. This means the collapse of the housing market. There are going to be fewer and fewer people acquiring property. And if you do, you're going to end up broke because you know that within a couple of years you are going to owe more on it than it is worth.

De Wit: You're buying into the market when it's too high.

02'10

Spits: Right, you're buying in when it's too expensive.

De Wit: So what else does this mean?

Spits: It means that cars aren't being sold - well, they're being sold, but far less of them are being sold, and only to those who really need them. We are seeing this with vacations as well. People are staying close to home instead of taking vacations to far-off destinations. We're seeing this with hotels and restaurants - actually we've been seeing this for a few years now.

De Wit: Is there anything else that the future has in store for us?

Spits: Yes, we are looking at higher unemployment. Right now unemployment is rising fast on the periphery - in Greece, Spain, Ireland. We're going to see that here in the Netherlands too. We are also going to see our unemployment rate double in the coming years. So I think that by 2014 you can figure on 10% unemployment. At the same time we are going to see a lot of companies that are no longer able to stay afloat go out of business, especially small to midsize businesses. And this is the crux of the issue, because that's where the greatest percentage of the population is actually employed - that's where 80% of the jobs are.

De Wit: So we are heading into a very wrong direction.

Spits: Right. That's not our intention, but that's what is happening. The more public debt that is created, the higher the rate of inflation, and the faster the whole process goes. And we are not going to escape a crisis. All those bad investments that we made over the course of the last 20 or 30 years need to be cleaned up. Just think about the whole Dot-com craze. But we've seen this in real estate as well. That has also been a bad investment, because housing prices should actually be half of what they are now, yet we've managed to drive them way up due to the credit expansion that was initiated by the central bank.

04'10

De Wit: What would happen if we took the other approach - the Austrian School approach, of which you are a proponent.

Spits: The first thing that you would need to recognize is that a decline in production is an impetus for economic growth, and that you would put everything into that. You stop trying to stimulate consumption. This would mean no more tinkering with the interest rate. You would simply let it be, and hopefully it would rise somewhat. Banks that are under water would have to be allowed to fail; you wouldn't be able to rescue them anymore.

De Wit: Greece...

Spits: Yes, Greece has to default, providing that they do what they did in Argentina in 2002: declare a moratorium on debt and interest payments.

De Wit: What does that mean?

Spits: A moratorium means that they stop paying off the debt and they stop paying interest. That means they go into default - they go bankrupt. At that point they can begin the process of getting their affairs in order.

De Wit: Does this also apply to Spain, Portugal...

Spits: Exactly the same applies.

De Wit: Italy perhaps?

Spits: The same with Italy, though they might not see as much depreciation there.

De Wit: If we were to take this approach, then what?

Spits: Well, what would happen then is that the people who took the risk of buying those countries' bonds would also have to assume those risks - not the taxpayer. So they would also have to experience a depreciation of their portfolio. This would mean that they would not get a 100% return on the debt. It would be 50%, or in the case of Greece, 70%.

At the same time, because so many banks are in trouble, you could for example say: well, you can rescue your depositors. Then you are definitely going to have to print money, but only for those depositors, which would be roughly 10 to 15% of the capital that the bank represents. That is a lot less than what is happening now, what with so many Greek, Italian and Spanish government bonds being bought up willy-nilly by the European Central Bank. For that is an extremely expensive proposition. So what would happen is, you would guarantee the depositors. And then you would let the banks fail. What would happen then? Other banks - banks that are solvent - would take over what's left of the failed banks such that they would move forward while assuming only the profitable activities of those banks. And this is a point that I have always made, because what you get is a shortage of credit, or a contraction. In a reaction to that the government could set up a provisional finance company. This way, all the credit that is extended to business and industry could continue to be extended at a normal interest rate of, let's say, 5%.

De Wit: If we were to do all this, do you really think that...

Spits: The crisis would last two years. No longer than that. Then everything would have to go through a complete revaluation. This means that the banks would fail, which would mean an assault on the financial sector. But we're just going to have to be prepared to put up with that, because the financial sector has to be restructured one way or another. If we don't, then we are looking at a crisis lasting 10, 11 years.

De Wit: Albert, thank you for talking with me today.'

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