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Vesa Kanniainen: Monetary policy has been very loose. Private debt has been allowed to grow relative to GDP, and that's shown up in the housing market and, well, the stock market — and then there's been a hard, hard crash. The Bank of Finland examines everything except itself and its own monetary policy, and in a way, since this is a politically incorrect book, that's the kind of home truth being thrown around here. Now, I normally have that tenor

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voice, the high-pitched one. Yeah. And now that it's paired with a bad night's sleep, it's even more so — but you'll still get it across just fine.

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That's right. Let's put the explanation up front. So this is a bit of a [unclear] wool-sweater-economist thing, and it's also a bit of an in-joke among us market economists and economists. Vesa Kanniainen, a triple doctor — of which I'll pick out the doctorate in economics for now — but isn't that pretty serious currency, that back in Upinniemi, where I watched your dissertation defense, you'd also delved into matters of war economics and the related

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questions. Yes, that became important to me, and it led to me having to write a dissertation, to move into the field and do research work as well. Yeah. And I read your dissertation collection with great interest — believe it or not, people — and in there you'd gone through, for example, the capability of F-18 air-to-ground systems to turn St. Petersburg to shit, and you'd clearly put in

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an enormous amount of effort, and I respect that. And the other thing that stuck with me was this correlation between conscript military service and regional aggressiveness — Finland and Israel were right up there at the top of that, and our conscripts, and the women in Israel, live this too.

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Well, there's all sorts of things in it, but mostly it's equations. It's mathematical game theory. There are probably 500 equations in it. Yes. And well-earned, well-earned. But it was great, by the way, to go march around there on the military base.

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But today you've got this politically incorrect Magnum Opus, and I have to say — of what we've done together, the one I'm proudest of myself is our legendary joint work, "The Future of the Euro." Your name is right here on the cover, but if you look on the inside page you'll find Sami Miettinen too, among the twelve disciples of the Euro Think Tank, proudly credited especially for this ECU2 model, which is still pure diamond even now. Absolutely. That's right, that's right.

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Yeah. But it was a nice moment, maybe, for a few little reminiscences there. One of the heroes in your book was this genius who'd actually been a candidate for our own crew. Now you name one economics-researcher friend of yours as a hero. Who was that?

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That was Urho Lempinen. Urho was the only one who, before Finland's era of recession, understood that currencies need to float. Mm.

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And he put that view forward at the Bank of Finland, but apparently the rest of the whole economist community at the time was in favor of a fixed exchange rate. Yeah. And, well, this is — as we were chatting about before we started — my understanding was actually that Pentti Kouri, in the Kouri-Dornbusch research, in a way observed the overshooting property of floating currencies, perhaps somewhat critically,

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but mathematically. I had this mistaken picture of him — that he'd been this great academic champion of floating exchange rates — but apparently he wasn't a prophet on that level after all. Yes he was — he was in fact the creator of the theory of flexible exchange rates, and his article, which was published in the Scandinavian Journal of Economics

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in 1976 or so, is a very beautiful, beautiful scientific contribution — but Pentti, when he was actually in Finland, didn't really talk much about the role and significance of floating exchange rates at the time.

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He was more in favor, as I recall, of revaluing the Finnish markka — a revaluation. A friend of Erkki Liikanen's, I believe, from the '80s. Am I going too far here? Might be going — might be going a little too far. No, no, no, not really a friend of Erkki Liikanen's.

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Right, yeah — a free-market man, but he's connected in that way to Erkki Liikanen and to our Bank of Finland — I'll dare say that now. And another really interesting quote, or observation, thrown out loosely perhaps, is that the Bank of Finland examines everything except itself and its own monetary policy — and in a way, since this is a politically incorrect book, that's the kind of home truth being thrown around here —

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so tell us about this home truth. Why is this such an important observation? This piece of wisdom actually comes from Pekka Korpinen. Pekka worked at the Bank of Finland as an economist, and afterward he wrote a book in which he set this claim down in writing, and, well, I picked up on it and

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I've recorded it in this book of mine. It holds true. The Bank of Finland has never assessed the role and background of the euro system analytically or empirically, and, well, that's a huge, huge gap. I do assume that during Erkki Liikanen's time there was strict policing of what one was allowed to say about the euro inside the Bank of Finland, and more broadly

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in Finland as well. Yeah. That kind of self-censorship.

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So now, if I go back to this wool-sweater-economist joke — and I do appreciate, by the way, your gentle jabbing — the first one, by the way, Aki Kangasharju, came on as our first economist guest wearing a wool sweater, so I wouldn't actually classify you, in the spirit of that term, as a wool-sweater economist — I'd like it understood that this is just your kind of good-natured humor — this, this, this is specifically humor, and I love good humor, and it was

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perfectly clear that when I come on to be interviewed by you, I have to be wearing a wool sweater — and I've now added this scarf on top to round it off. Clothes aren't ideology, or however that saying goes — but this, in a way, I think, ties in — you can't say the Bank of Finland is a left-wing organization, but the Finnish economist community has become a wool-sweater-economist-ified institution, and there's something in that, in my

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view — there's something in left-wing ideology that tends toward proclaiming a single truth and, in a way, an inability to examine itself. So I think that's the thing here — that the Bank of Finland analyzes everything except its own monetary policy and its failures — I think that's simply a glaring gap. But that's actually been analyzed here in your book too. So, so, one

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central thesis here is that monetary policy nearly always fails, and the institution in a way betrays both itself and the people. So, in a way, bubbles get caused, and they then wreck the economy. If I can add to that — there's been an unspoken piece of wisdom among economists, I think, for a long time now, that capitalism as an economic system is

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somehow unstable. Mm. And now, having followed monetary policy for a long time and having written quite a bit about it over the years, I've noticed that these economic crises we've lived through, which the capitalist financial system has gone through,

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well, behind them there really is loose monetary policy, which has then led to stock-market bubbles, housing-market bubbles, and after that a crash and a crisis have followed. Just quickly, here are the examples I go through fairly closely in the book. In the 1920s, the US central bank let the

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money supply, M2, grow by 65%, and, well, right up to the 1929 crash it was one long party — and in fact the star economist Irving Fisher even said, nine days before the crash, that stock prices were now roughly at just the right level. That was "the truth" coming from there. And, well, that's how it drifted into a crash and then into

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huge, huge difficulties. Industrial production fell by more than 40% in the United States. Almost 50%. GDP fell 33%.

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Huge losses. Then, moving forward in time, there was Finland's recession — Finland's depression, where policy was run on loose money with the exchange rate pegged, heading into a major depression in 1991. GDP fell 12%.

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It wasn't long before the Asian crisis followed, in which many Asian countries went through the same thing — there was a lot of money in circulation.

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German and Japanese banks did the financing. Credit expansion in the Asian countries ran as high as 20%. I looked into that at the time together with one of my students. And then we came to the United States and subprime, which, well, was a real catastrophe.

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The entire capitalist financial system was on the verge of collapse. So these are the kind of events that follow a certain pattern, and the pattern is that monetary policy has been very loose. Private debt has been allowed to grow relative to GDP, and that's shown up in the housing market and, well, the stock market. And then there's been a hard, hard crash. Yeah. And then again, this world-policeman

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role — well, we see it often enough in these places, and at least in my view their playbook has been: cut the currency peg, hand out hard money, the IMF's SDR — the Special Drawing Right — a bit like my own ECU2, this kind of basket currency, if I can just slip in an editor's note here — and then, after that, break up those left-leaning structures and force the wrecked, centrally planned

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economy, wrecked by the central-bank bubble, into some kind of market economy, and then, with a floating exchange rate and a market economy and a bit less socialism, it usually rises from the ashes like a phoenix — until good times come around again, weak men and women get elected, and they switch that same institutional destruction mechanism back on. Yeah, the same wheel spins around again.

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What tends to happen is that the rescue operation then usually needs, well, public finances, politics — in other words, taxpayers' money. Right, and that's something we've debated ourselves too, in a way. But you do have to remember here — banks, the commercial banks, are a kind of villain who then, in this IMF-style operation, usually get rescued with that distasteful bail-out — even though bail-in mechanisms have been developed, they're still not very, very

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fashionable. So that's what you're criticizing — that on top of this institutional, misguided central-bank complex driving everyone into the wall with the wrong monetary policy, the accomplices — meaning the commercial banks that also created the money — still get bailed out regardless. Yeah. So there are, in a way, two places where the finger points here. Central banks, with these mistakes, are one target, but

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they've also then allowed this private, profit-seeking, greedy banking system to bring about the credit expansion.

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So in the 1920s, in the 1920s, the volume of private credit relative to GDP rose to 140%.

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Mm. And in the year before the subprime crisis it rose to 170%. These figures were published by a Marxist economist, Steve Keen, from Australia, and I've — I've gotten to know his work. Isn't he one of those balance-sheet-recession types? Yes, indeed, and I — I read his book on the crisis carefully, and

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and there's this — this very telling chart in it.

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Yeah, yes, yes. So now that this wool-sweater-economist term M2 has come up — if I can translate a little — the equation is made up of M1, meaning the central bank's monetary base, and then that's extended into M2, where the commercial banks also get pulled into the money supply — and together these two form this ugly bubble, and then, when it's pumped from both sides, bad things happen.

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Then bad things happen, and, well, this is the — this is the tragedy of it — you'd expect banks to be striving for solvency. Our banking theory in economics in the 1980s suggested that banks' — this profit function of banks — takes such a form that banks don't, don't, don't then go chasing

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such large risks — but since banks are protected in so many ways — well, the deposit insurance system protects them as things currently stand, and, well, then of course there's also the fact that bank shareholders are protected by the principle of limited liability, which is an extremely important principle, but banks are able to exploit it — and, well, then there's also the fact that banks

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are important for the whole system. They're too big to fail. And all of this seems to create a kind of incentive mechanism inside banks — inside their own lending policy — such that, well, risks get taken.

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Yeah, that's how it is. Now, I myself have been on the investment-banking side of things — specifically as a nasty investment banker, no less — so I'm this friend of free-market economies and capital movements, and I'm innocent of whatever happens on the balance-sheet side, for most of my career.

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Sure — right now I'm drinking out of this mug from Royal Bank of Scotland, which is one of the biggest blow-ups in British history, but I joined there afterwards, headhunted. Actually, I brought in Elina Valtonen. This, by the way, is a wonderful piece of pre-woke-era humor. Elina challenged Stubb and Vapaavuori inside the National Coalition Party as a young woman, and the caption here reads: "Elina — man put in his place." So that kind of anti-woke humor can indeed be found from Elina — but anyway, Elina

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Valtonen, and myself, and then, well, another person, not a public figure, got recruited to RBS as well — and nothing much came of it, of course.

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This Stephen Hester was the head of investment banking at my best bank in London, [unclear] — and from that leadership role at RBS, since he'd cleaned up after Sir Goodwin's era and whatever mistakes had been made there, well, he's now chairman of Nordea's board — and I have to say, full disclosure, I'm a small shareholder in Nordea myself, and I have indeed reaped some of those capitalist profits, so

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it's actually good to bear in mind here — at least I think about it from this angle too — that it's nice riding up along with Nordea in the good times, but if bad things were to happen and Nordea took a dive too, I'd take that loss on the chin like a man. But that's usually not how it goes. That was a bit of a rambling non-question, more of a statement — but it is important to remember that this banking system isn't perfect even now, and the EU's attempt to regulate it more tightly

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ties in with the euro, perhaps. So, should we get into the euro's destructiveness and the mistakes made over the years, or should we take a few more words first on the proposed fixes for the banking system?

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Um, either one works for me, either one works — if we're going to keep recalling the euro story a bit more, then — the background here is that when the Bretton Woods system collapsed in the United States and the world moved to freely floating exchange rates, and, well,

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there was still a willingness in Europe to create this ERM system, where currencies wouldn't fluctuate against one another — and that did indeed collapse, in the sense that the fluctuation band had to be widened out to 10%.

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It even happened that, while the British pound was part of that ERM, Soros spotted his moment, knocked the pound down, and made billions, billions in profit from it.

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That's the background here — and yet, still, in the euro, or in Europe, there was this dream of tying exchange rates to one another. And so, even though Finland too had gone through that depression and lost 12% of its GDP, it went in among the very first wave

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into the euro, into the euro — and for 10 years there was celebration, until the truth finally came out, and the markets pushed Greek bond yields sky-high. Greece had a budget deficit of 15%, and these statistics had been falsified, and

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well, that's how it went here — and, well, no, the worst problem here was that people in Europe genuinely believed that a growth and stability pact like this could prevent this kind of excessive debt and reckless fiscal policy, and, well, this was deceptive,

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because, because every country seemed happy to make use of the chance to take out loans and, well, run up debt, and spend that money on public, public expenditure, and this, this then

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led, led to Europe being extremely indebted even today — the member states of Europe's monetary union.

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It was to such an extent that, just two or three years ago even, seven member states of the monetary union had a debt ratio over 100%, and this was never successfully resolved.

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This, this problem actually traces back to a certain kind of thinking — that these collectives, the monetary union, the European Union, NATO, function in a way, in a way, on shared thinking, shared agreements — but each member then has

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a national incentive to pull things back home. Mm. In all of these communities — and in Europe, in the monetary union, that led to more debt being taken on than had been agreed in that deceptive growth and stability pact of 1997 — and things have carried on down that road, still being patched up to this day, and, well, Greece was never allowed to leave

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the union afterward — it was kept in and handled with joint liability. That joint-liability bailout was exactly what the banks had been expecting, and they got it too. So French and German commercial banks were the first ones bailed out there, so that costs wouldn't fall on French and German taxpayers in particular — instead they were collectivized within that system. But there — that pulled in a whole lot of threads, maybe. I'll start with a compliment — I remember you were

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really good at grasping some kind of, well, basic theoretical level for how it's worth thinking through various problems. I remember you were really excited to find, in this Future of the Euro book, that fiscal federalism was quite a good way of thinking to start unpacking a lot of that complexity. And then in there you threw out this thing — was it collectivism, the collective — and I thought this sounded

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a bit similar, in a way, to a fundamental framework for how it's worth thinking about the dynamics of these state unions and monetary unions. Let me mention here the big name that even many economists don't know. Mancur Olson, the American economist, wrote — already years and years before these crises, he wrote. He wrote three books, I've read them all. He wrote articles, I've read them all, in which the idea is essentially that

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in these loose coalitions and collectives, national self-interest overrides the collective interest. Mm, and this is what brings down — this is what brings down the euro, this is what brings down the architecture of the European Union, which we can all see functioning so poorly. There's this unanimity principle and all of that, and, well, then in NATO we've seen this

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under-investment incentive too — we'd agreed that 2% would go to defense, and yet there were only three or four countries that actually met it. Well, now there's a crisis under way in Europe, as global developments come crashing down on Europe. So, well, Mancur Olson's theory helps explain, helps explain these problems.

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And I've taken this even further myself, to the next stage. I've asked, well, not only what the costs of the euro are — the empirical costs, whose assessment is important, and the Bank of Finland has never done that — but I've also asked what Europe's alternative is. And I've tried to think about what would happen if Europe were developed into a federal state along the Swiss model, with genuine parliamentarism,

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with the Commission's power reined in and a return to subsidiarity — meaning power and decision-making handed back to the nation states,

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away from the Commission, in everything except foreign policy and these kinds of large-scale projects, which are a certain kind of collective good. Foreign policy, competition policy, and that type of thing. Yeah. And I have to say, well, these things can actually be calculated mathematically — thanks to wool-sweater economists and the rest of us too. So, well, from this Future of the Euro

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book you'll find this stochastic difference equation, where minds sharper than mine in this Euro Think Tank calculated out this deviation between the euro and, in particular, the dollar area — and it made for pretty grim reading, that this destructive effect of the euro can, with a certain probability, be calculated mathematically — and you certainly won't find any particularly noteworthy research on that difference equation from the Bank of Finland, or from any other ECB branch office either,

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no, no, no, doesn't seem like it. What it looks like is that before the euro, the countries of the European Union were 10% further ahead in income formation than the United States.

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Mm, and then, in the wake of the euro crisis, they're 21% behind the United States — so you can draw your own conclusions from that. Our difference equation gave an estimate at the time that we could talk about roughly half a percent — of losses, ladies and gentlemen — no, the euro doesn't add anything, it actually reduces welfare. Welfare, welfare losses

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calculated in lost output. Well, in Greece that loss was 25%, so the losses are, are large. If you calculate cumulatively what a half-percent loss means over 25 years, that's, that's a pretty sizeable, pretty sizeable amount. What happened here was that not everyone joined in on this. Um

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Sweden, wisely, kept its own currency — and, well, according to the Swedish economist Björn Wulson, in two articles in the journal Ekonomisk Debatt, eight years ago there was an estimate that Sweden had benefited from its floating currency to the tune of one year's worth of GDP

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— roughly. Yeah. In euros, that would be maybe, maybe around 400, 450 billion.

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Wonderful. And, well, another thing — if you don't believe this and want to play that tired Denmark card, then look at Poland. Poland is genuinely doing quite well, and their defense is in good shape, and they've never downplayed the threats from the eastern border. In my view they've had sensible, sensible politicians there, both in monetary policy and a bit in realpolitik too.

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I could add one more thing here, related to that — that without the creation of the euro, the euro crisis would never have arisen.

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This kind of over-indebtedness would never have happened, because we have data on the interest rates — on how the markets priced euro-country government bonds before the euro was created — and in those, in those interest rates, you could clearly see this risk tied to the state of public finances in all of these countries,

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the countries that then, directly, directly, ended up as targets of the crisis — and, well, it's credible that that kind of market pricing would have produced market discipline. This wouldn't have happened — the markets wouldn't have allowed this incentive toward over-indebtedness that then led to the euro's, the euro's ruin. The European Central Bank bought up these

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bonds from the markets, to the point that at their worst there were as much as 4,700 billion euros' worth sitting on the European Central Bank's balance sheet.

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Yeah. Looking at the most recent figures I've seen, it's still 3,500 billion euros. A big, big sum in itself, but it's been tucked away there on the European Central Bank's balance sheet now, and nobody really knows what's going to be done with it. Yeah, one option is digitizing it into a digital euro, but let's maybe not go there just yet — that's where I get to shine again with this ECU2 model, which is the solution — namely,

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decentralizing it out into the member states' own digital wallets.

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But I can't just skip past this good observation of yours about the Swiss model — and I have to say, on a small tangent here, our founding fathers — I went to see the Hamilton musical over in London, and, on this little detour, I hadn't actually realized that back when we were writing this Future of the Euro book, there was already this idea that people wanted a Hamilton moment for the euro — a Hamilton moment — that now, in a way, through crisis

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to victory, and now we're building the finest embodiment of fiscal federalism — this kind of federal state, and, well, this sacred, sacred totem of a central bank. And even though Hamilton was a genius and a tough character, he was also, in a way, a friend of that kind of centralized central-bank institution. And now, here, in our own founding-fathers scenario in the EU, monetary policy has been a bit

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botched through the euro, and I don't know who's supposed to be blamed for that.

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But then we've got, in the political structures, this kind of "coalition of the willing." This sounds a bit like it's the only reason we give Ukraine money — so that Orbán can't, in a way, water it down through the joint structure. Now we've got Stubb shuttling around, quite competently in my view, multilaterally, among the allies — even calling up Trump together with the Danish prime minister, for instance. So, so, might that be the flexibility here — that we've

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used this small — well, you can't quite call it a market mechanism, but this kind of coalition option — this "coalition of the willing" alliance within the EU. This has now been created as a kind of emergency fix, and quite, quite, quite rightly so — Europe really is under threat from this imperialist Russia via Ukraine, and, well, it needs to be stopped.

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The United States is no longer willing to do that. My estimate is that, out of the United States' 900-billion-dollar defense budget, around 5% goes toward Europe. This is a very rough estimate, but — US garrisons, troops, nuclear weapons in five European countries. It has

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sea transport and all the rest of it. That might be an underestimate, but it still means it's, it's maybe 40, 50 billion that the United States spends on defending Europe. Today Trump apparently wants to cut back even on that. As for supporting Ukraine, the United States has totally abandoned it, according to the Kiel Institute's latest figures, figures

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— so, yes, Europe has certainly had to come up with solutions now, um, given that Trump has pressured Europe into raising its defense spending. That's a big plus on Trump's record of achievements.

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Europeans ought to be grateful for that. There's still Spain, of course, free-riding as ever, but, but this has moved, moved in the right direction.

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Now, though, this coalition of the willing still carries within it that same problem that's in Olson's — in Olson's theory of collectives. This, this is a certain kind of emergency fix. You gather together and hunt for shared positions, whereas that idea of mine about a Swiss-model-style arrangement goes, goes, goes

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further. There, collective goods are produced only — meaning supranational collective goods are only produced by this central body, central body, just as in Switzerland too. Foreign policy, some larger projects, and, as already said, security policy would be part of it; climate policy could be part of it; energy policy is national — but then legally, in a way,

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competition policy — and these can be things handled jointly. But the number of ministers in the Swiss government is seven, and, well, they get along just fine with that. Decision-making power is delegated to the cantons and local government bodies, and they decide on matters.

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That's the subsidiarity principle that was agreed when the European Union was created, but which has since been abandoned, with the Commission taking that power for itself.

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Yeah. And it goes on to decide, decide, on matters that really, really don't belong to it. A coalition of the willing, from this angle, from this angle, can't be the kind of architecture that's, that's permanent — instead, well, this European architecture ought of course to be rethought, even though that's difficult, and, well, rethought, rethought

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again. Today, European citizens don't want to identify as members and citizens of the European Union. They're members of their nation states — but under a Swiss-model-style arrangement like this, they'd also gladly be members of that collective, one that would handle those shared matters in a completely different way than the European Union is able to today.

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Yeah, good, good point. And I had a guest on from Switzerland, Markus Holmen, and while describing exactly that, he said that local young communists there had proposed a direct referendum on introducing an inheritance tax on the portion of estates exceeding 50 million francs.

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Here in Finland, that threshold has now actually been raised by this so-called right-wing government — to 20,000, 30,000 — and then the public, well, sensibly decided: no, read my lips, no — and voted it down. So that Swiss model is fascinating — the overall tax rate there is markedly lower than in Europe generally, and in Finland especially. Here we're running at around 42, 43% of GDP, whereas over there they're roughly where Finland was back in the 1980s —

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some nice figure starting with a low three. So it's really efficient for the citizens. So yes, I do warm to this. So — don't let too much bloat pile up in that central organization; push subsidiarity down to the next level, which for us would be the nation-state level — and then maybe, yes, I'd tighten up democracy a little too. I'm a bit wary of direct democracy — are we, Vesa, too stupid to vote directly, meaning do we need representative

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representative democracy — but have you thought about that?

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Yeah, yes, yes, yes. I — I don't believe in direct democracy. I believe in representative democracy, and the reason, the reason is that in direct democracy, single-issue zealots and that kind of agitator can end up producing decisions that

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are unwise, that haven't been publicly, publicly analyzed.

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And I believe that in representative democracy this, this gets handled better. There, these, these phenomena get processed more carefully, more carefully, and more, more thoroughly, and the resulting decisions are better justified. The risk here, well, the risk here is that people are so easily brainwashed,

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that in representative — no, in direct democracy, this, this, this is possible. That's why, in Finland too, I could never really support this Harkimo party, the one built on that kind of direct democracy. So they've got that down to a single MP now, Harkimo, and there — yeah, yeah — and at least not in that particular implementation, meaning it still, in a way, runs through representative democracy after all, meaning its

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route through Harkimo — that's where it goes wrong. But actually, I probably should have listened a bit more closely to that Holmen episode — but then I asked him whether this has actually happened, whether these young left-wing communists have gotten anything like that through, and he said nothing comes to mind — that the public is sensible, and in that case too they voted down some foolish law like that. And he said that sometimes it came down to the wording — that there was a good immigration law there, this kind of fairly tight-border-controls thing, but the wording was so unclear that the politicians

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hijacked it and turned it into more or less the opposite, ending up getting a bit woke about immigration instead. And now, by the way, I really have to go into your previous book. You had a really good conversation there — for example, with Leevi Leivo, on this internal threat. So here we've got, in a way, a monetary-policy threat, institutions, a foreign-policy threat, then, in a way, this kind of EU-directive, or administrative-type threat — but then we've still got this

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border-security angle, and, well, the domestic-policy threat from immigration — so we really have to rant about this a bit now, because you apparently found, once again, plenty of economic data showing that immigration, on many levels, even under favorable assumptions, is a net-present-value-destroying activity.

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I have studies from seven countries available to me there, led by professors in the field, officials acting under official responsibility in several countries, and researchers in some others. Mm, and the answer is completely unambiguous.

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If you look at life-cycle costs using the Auerbach-Kotlikoff method, the life-cycle costs of immigration are so, so substantial in these studied European countries that they outweigh all of the benefit that comes from labor-based immigration —

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through people getting employed and paying taxes. So the net cost exists, and it's, it's remarkably large. And I've dealt with this data, this data, in that book, and presented these findings, these findings — and I have to say, in the middle of this, I think something similar happened to our Future of the Euro book, that somehow the media just weren't interested. The media isn't interested. There was, there was

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a radio interview, something in the tabloids, but nothing much beyond that, still, still, in terms of a podcast where I actually presented it — well, us, of course, we don't count. We're interested in everything, we're the good guys, right, yeah. Well, that one did get, if I recall, 137,000 downloads, actually. Yeah. But anyway, that's just to say, there's this — there's this thing in institutions, this kind of

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bit of a problem, where some group has decided that a certain topic now has to be praised in a certain way, and then no plurality of voices gets brought into it — and personally I find that distasteful. In my view, it should be fine to be wrong too, and you should be able to write that down — that this is a bit of fringe thinking. In my view, purely in economic-theory terms, a lot of models — especially the wool-sweater economist's — tend to use this kind of Gaussian curve, and real life often has these fat tails, and a bit

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of those unorthodox distributions actually reflect reality better than this central-distribution modeling that fits so nicely into the equations, which is why it gets used. So, well, the same thing shows up a bit in public debate too, and the classic term for it is the Overton window — meaning, once it's been decided that a given thing is just so, say that Keynesian economic policy is sensible and must always be pursued, and

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taxes must keep being raised and public spending kept high — then if there were some fringe finding, an observation that this actually isn't sensible after all, that we should run this kind of Swiss-style economic policy and subsidiarity instead, or look at immigration critically, for example — then there's simply no discussion of it whatsoever. That's my little rant to slip in here.

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I think it's good, good, good, what you're raising there — and, well, that's right, in this country there are subjects you're not really, not really allowed to write about. But the title of this second book of mine points to exactly that — that I have a habit of thinking and dealing with things in a politically incorrect way — though always grounded in research, that's how it is — and I think that's exactly what's great about it, that you actually look at the data

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and — and then, in my view, you always have, as I said, this kind of really, really fresh economic edge to you. Since I'm a bit of an economics enthusiast myself, I think it's kind of great that these new theories exist, which are, of course, still ultimately just generalizations about the world — meaning they can't literally be true, because they're just fitting some dataset to a certain framework — but there are a lot of them out there that some smart people have really thought through, and you get to pick a good

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framework — either always that left-leaning wool-sweater-economist framework, or a framework that genuinely investigates the problem instead. I think it's great that you have these on hand. Do you have some kind of method, or a network of these people? Are these your friends, or where do they come from? No, no — they really come from the fact that I'm, well, a decathlete in economics myself. Everything has interested me.

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I have a long research career behind me. Mm. And I've published a great deal in scholarly journals abroad, and then I've also written a great deal in my home language, in Finnish, for Finnish publications — and, well, since everything interests me, well, you spend a while enjoying

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one theme, and then, then move, move on to others. I have two more books in the works. One of them ties into this military-science doctorate role of mine, and it's about nuclear weapons.

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The other one is about the future of the European Union over the long run, and, well, in that one we look, among other things, once again at the demographic question, but also at the economic question of why Europe has fallen behind.

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Do I get to quote Keynes, that in the long run we're all dead? I can certainly find room for that — we can find something like that in his body of work — lovely — let's look at how he actually did as an investor, by the way, because he was, [unclear], a wealthy man — and, by the way, on the Bancor model, I have to say now, I have to bring it up — well, I'd suggest, by the way, that we save a little insider discussion for the Nordic nuclear-weapons doctrine — meaning, well,

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save this one for the inside crowd — this debate of ours about whether to put, well, the development projects in Uppsala or not — but anyway, so, this Keynesian line of thinking and exchange rates — well, when there were these problems caused by Bretton Woods, and the building of the IMF, Keynes floated this Bancor idea, and, well,

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— that would be that central banks would also have their own settlement system based on that, offsetting surpluses and deficits, and then, in a way, central-bank money would get allocated based on that — and, in a certain sense, the IMF actually did do that. So we have this kind of Special Drawing Right — a shared currency of central banks, the IMF, and states, which, for instance, has been used to lend to Greece too — but, well, from that

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no full system ever actually came out of it, but I think it's incredible that the guy came up with even that much, in a way. You do have to remember, even though people generally classify Keynes as some kind of god of the wool-sweater economists, there are genuinely, genuinely broad and brilliant theories in his work — but maybe we'll stop there.

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So, well, either Bancor, or — you had a bit of a Chicago Plan flavor here too, in my view. I really have to bring this up now. So, so, since we just teased the point that these commercial-bank villains are, in a way, part of that M2 problem — that we have this M1, the central banks, and then M2, where the commercial banks also get folded in with their endogenously generated, overly generous lending, bad projects, and that sort of excessive capitalist recklessness comes into view — one

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solution is this kind of Chicago Plan. I don't know, this is a bit of a rambling question, but pick it up from wherever you like.

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Yeah, yeah. So it's a fact that the capitalist financial system goes through these crises, and, well, now I'd like to see people dare to trace this back to central banks' policy mistakes, but also to the role of greedy banks in the markets in creating the credit expansion

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— all of which runs counter to what Milton Friedman — if I may, good — well, Milton Friedman wrote, back in 1960, that the money supply should be grown at a constant rate. Mm, and that was somewhere between three-and-a-half and four percent, roughly. So this digital, digital money now is actually trying

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to move toward that. The idea was put forward under the name the Chicago Plan, or it was called that — by Fisher — and then, as you mentioned, he guessed a little wrong — seven days before, no, nine days. Nine days. Yeah, but he put this forward, this is how it went, and it would mean that when a bank, that banks', banks', well, banks'

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a bank would be obligated to hold reserves at the central bank equal to the amount of its deposits. And this would of course have shackled the banking system, and, well, monetary policy, fairly tightly, and it was then felt to be, without question, too rigid — and it probably would have

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been too rigid indeed. Now, having seen these crises, the idea has arisen that this kind of Chicago Plan could be realized in a way where the central bank starts taking in not only money into government accounts and bank accounts, but also deposits from the general public. So there'd be retail deposits at the central bank.

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The central bank would, in a way, then compete with the banks over who manages those deposits — and yes, over the longer run the central bank would come out ahead there. Um, financing banks on market terms, and through the central bank, would of course continue, but you wouldn't need a deposit-insurance system.

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Deposits would be, would be safe there as digital deposits at the central bank, and the central bank would probably have the ability to stabilize the amount — meaning how it controls banks' lending, which is what creates those, those deposits, and, well, too much, too much money, and too much private debt, and

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then you end up having to bail out banks. Well, now, in this implementation, you no longer need to worry about who's responsible for depositors, because they're safe. And so banks would then be held accountable for their own lending policy — when they lend to the housing market, and lend to companies, to their investment projects — and, well, if banks then make decisions that get a bank into trouble, you wouldn't need

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to bail out banks anymore. Depositors are protected, and so bank shareholders would have to bear full investor liability. That investor liability was exactly what was missing, during the euro crisis, from the banks that had recklessly financed Greece and the other crisis countries.

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Now, in this digital, digital model, investor liability actually gets implemented. And yes, there's an appealingly simple idea here — um, this pins responsibility on the central bank for how much it finances the banks, and, through that, the credit expansion

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that it's, that it's creating — and, well, we're getting close to the point where Friedman gets brought back up. Milton Friedman's beautiful idea, that you let the money supply grow at a constant rate. For some reason I like this idea, even though, well, you brought Keynes into it there too, and quite rightly so.

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Keynes really was, was such a high-caliber economist, but so was — and he always dressed neatly, and rarely in wool sweaters — but, yeah, that brought up an absolutely insane number of threads there. Anyway, I have to say, by the way, I do kind of miss our Euro Think Tank — should we set it up again? Because that's exactly the kind of discussion we used to have there, happening in the halls of Ekonomicum, in secret — or, I don't know, was it secret — that

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ended up as part of the working day, it was a secret. There was nobody else there. KP Uusitalo once wandered out into the corridor and wondered who these twelve people were. Yeah, but that's exactly the kind of discussion we had — and, by the way, I'm happy to keep discussing this in the comments, because this is definitely going to get people thinking, since we just floated the idea — even in my own bubble there's this — that this central-bank-deposit thing is going to lead to total control, that you get this China angle, meaning China already has central-bank digital currency, but doesn't

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even really need it, because, well, the Chinese Communist Party's fiscal authorities can simply tell every commercial entity — whether that's banks, or WeChat, or other payment platforms — that whatever you do there with your customers, you also report to us here at central command, so we know where it went, and then we can step in if a loan or a transaction is heading to the wrong parties. And this

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is then the big fear — that once you strip the anonymity out of money from this admittedly decentralized commercial-bank system, with all its flaws, some central-planning-type figure ends up taking a peek at who's actually getting hold of our euros here. So this, this is a big problem here with this central system. So even though this could be theoretically useful from a finance standpoint,

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in that direction, in totalitarian terms it works against this decentralized, libertarian kind of economy. That's what you're saying — that this is a big problem.

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Now someone could say that this is actually the solution to a big problem. Isn't that so?

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Well, if I get to look at your transfers, but not the other way around — I don't really want you looking at my, my bank transactions from over there — if we pretend that one of us is the central bank in this future system.

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Exactly. But then, they could get through anyway, you know.

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Yeah. Probably not, probably not. But it is quite, quite true that criminal money would come under a certain kind of oversight here, and, and yes, yes, that grey sector is significant enough that maybe this could even work out positively — yeah — as long as it's not some overly nosy parties poking around in citizens' transactions and movements, but rather going after the

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criminals — after them, not, you know, us good guys. But, well, in China this is common knowledge — in Nigeria too, I've read that they're trying it out now, yes, yes — and you shouldn't overstate it. My own philosophy, though, is that I personally don't keep much in a bank account, nor in a central-bank account either, of course, because — actually, by the way, Mervyn King was a guest here in Finland, wonderful book, this one,

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"The End of Alchemy" — so I asked, at that Bank of Finland event, before they got the chance to censor anything else, "Mervyn, couldn't we just move to central-bank money — what's your take on that?" And he said that the Bank of England, back in the day, actually used to pay its own employees' wages in central-bank money. And — well, he didn't know me from anyone, but he said this used to be done, and it was quite funny, because you didn't have your account anywhere at RBS, but right at the Bank of England — so this was

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done that way, technically. But then somebody thought this was a bit, a bit of an inside joke, so, well, we cut that part.

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And Mervyn King was a great friend of Finland. He came to Finland a great many times, and he was also a brilliant public-economics economist. I met him on several occasions and knew him, knew him personally, and I knew his body of work well, well — and of course, as a professor, he had

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an analytical eye, and in that book of his he does consider how bank supervision could perhaps, perhaps be made more effective within the current system — that's all covered in there — and I probably have to raise one more thing — so, so, where I think, in my view, is a solution I apply myself

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— he had this side idea, that you'd build a kind of digital asset wallet that doesn't just hold the euro, but something more like an equity savings account, or a securities savings account — you'd simply build the systems that let you pay with whatever's inside it. And if you'll accept, say, my Nordea shares as payment for a lunch you're buying, or vice versa, well, why not? So it's just a matter of building a system for that, because, in a way, I think it's a bit of a Stone Age

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way of thinking, that everything has to be settled in this — in fiat money.

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Yeah. I'd put it this way — that this maybe already belongs in that same category, that it's worth educating the public in that sense, so they learn these basics of the national economy, and that could be one, one direction to take. And then, well, I have to bring up this ECU2 thing I've been teasing — let me hijack this interview a little just for

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myself here — that in this Future of the Euro book, on Finland's options, there's this ECU2 model, and its implementation just isn't going to happen, because this monolithic central-bank-money model is already so far along that there's no backing out of it now into this sort of sound model — but the idea would have been that we'd now create a euro-area, member-state-specific digital central-bank currency, initially locked at a one-

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to-one rate across the board, much like the ECU itself was set up once — but then you'd give national parliaments the right to, say, with some kind of two-thirds majority, adjust that, and even let the markets determine it, so it's no longer just one single rate — and then this monolithic euro would be calculated as a weighted sum of these, weighted, say, by market shares or by the ECB's capital key, and then

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as a sum function — and from that, you'd still be able to use today's euro even as these country-level digital central-bank currencies started to take on a life of their own a bit. And the smarter minds among us might notice that this really isn't any different from, say, Sweden's system right now. You can pay in euros in Sweden too, but then they've got this funny little thing, a digital central-bank currency created by the local central bank, the krona. This, this is, this is a beautiful idea, and

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well, it's really, really worth thinking about. There's no fundamental obstacle to it. It would be wonderful if some researcher at the Bank of Finland could produce a proper study on this, and just look into it.

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So then, if we think about implementing plans like this, we'd have to work out what the payment system would be — meaning in what currency, what money, these things get paid in. That's right, and in a way you end up back at that Bancor problem — you need some kind of settlement system there, but it could be this existing euro. And, by the way, I,

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this is an open challenge to the Bank of Finland — you can be wool-sweater economists or whatever you like, but I'd be very happy to talk with your monetary-policy experts, your technical experts, about how this could actually be implemented. If, say, someone there were to take up that challenge — I'd still like to believe this could at least be debated before we end up with that monolithic central-bank euro — so that at least it would go on record somewhere, that someone thought it through, that something got raised in response

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to it. And a system did come out of it. This, by the way, was actually worked out together with Nomura's chief economist, Jens Nordvig. He was aligned with me on this same idea at the time, and we both entered this Wolfson economics competition, and he made it to the finalist round. I dropped out along the way, but once I noticed he had a fairly similar model to mine, I got friendly with him, and there was this — we wanted, in his

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book, or something like it — "The Ruin of the Euro" or so — that got read there, EuroFiss, and we tried to arrange an event in Finland too, where he would have come, come along, but yeah — it fell through because we couldn't get funding for an event like that, and we didn't get, by the way, [unclear], either — so here, a bit — yeah, somehow the official system just didn't want to fund things like this

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these, well, unwanted voices, a bit. There was a slightly paranoid angle to it there — yeah, that not everyone was welcome after all. But luckily we did get you on, at least.

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Yeah, good. Well, I'd suggest — you clearly produce quite a lot of this excellent material, and I was actually suggesting there that you should digitize all of your material and feed it into some kind of digital, personal-AI setup, so the rest of us could discuss things with it too — I could even code that together with you, since I've actually gotten pretty good at coding these days — just a thought, just as an offer, if, if

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that interests you — this kind of, well, digital "Vesa-can" ... with the publisher, we'd probably have to sort things out — yeah, that's true — yeah, absolutely true, there's some kind of copyright issue here that isn't just yours to decide — good point, we've immediately gotten into thinking about GDPR and copyright through all of this — which is indeed important — yeah, yeah — but, but a worthwhile, worthwhile idea — yes, of course, I

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hope those ideas would interest some members of the public, and, well — this is an economics book. There's a lot of research-based, scholarly thinking in here on different themes, not just monetary policy. But, but, but also on many other economic, economic themes, and, well, it aims

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to still be accessible to a general audience, though. Mm, great. Well, somehow we ought to bring the Euro Think Tank back to life — but let's think about that again after this — one for the road, so to speak. Anyway, I'd say — thank you very much, Vesa Kanniainen, for all this — go take a look at his body of work, it's worth googling, and running some AI searches on it too. So you'll find a whole lot of really, really interesting

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openings there, things that get far too little coverage in Finland. And now, I think, let's deliver on that promise. Let's go over to the insider side and start speculating hard. Hopefully this won't spoil the topic of your upcoming book. So here's my flag in the ground: the Nordic countries ought to build a joint nuclear deterrent as a priority project — preferably even openly, publicly.

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And I'd suggest we go over to the insider side and debate this. Thanks for coming on, Vesa Kanniainen. Thank you. Mm.