Although Tómasson does not identify himself as an Austrian, the interview is wonderful and comes down on the right side of almost every issue. He names names and blames both Paul Samuelson and Milton Friedman for the positivist and mathematical orientation of mainstream economic theory, which he argues is the underlying cause of the current breakdown of the global monetary and financial order.

This transcript is a translation of the first part of Egill Helgason's interview of Gunnar Tómasson, a former IMF economist, on Icelandic state television's "Silfur Egils" on February 1, 2009. (The video is available on YouTube .)

Egill:

Economist Gunnar Tómasson has come here from Washington. He was employed for a long time by the International Monetary Fund and now works as an independent economist. Welcome Gunnar. It is a pleasure to have you come across the Atlantic to appear on the program. You have been writing articles in the newspapers and on the Internet. One thing which has attracted attention is that you have been critical of world monetary policies for a very long time, and it seems that you are one of those who saw what was coming. But we should perhaps go over this somewhat systematically. And I begin by asking you about the collapse of the Icelandic banking system. Was it the result of domestic policies or due to external factors?

Gunnar:

Well, both domestic and external factors were involved. For several years there had been excessive credit expansion within the banking system, which drew an emphatic warning from the International Monetary Fund in May 2006. I remember having written an article in Morgunblaðið at the time endorsing the IMF's words of caution. The timing of the banking system's actual collapse was determined by external circumstances. That is the foreign aspect in this, but the underlying domestic conditions were in place long before things went awry abroad.

Egill:

I remember that you have mentioned in your writings both leverage and currency speculation, the lack of supervision and other things in that connection.

Gunnar:

The things we are now witnessing in world financial markets have in fact been ongoing and evolving ever since the fall in the early 1970s of the Bretton Woods system, which was established by the victors at the end of World War II to prevent recurrence of monetary problems associated with the Great Depression. The fall of the Bretton Woods system ushered in anarchy in the international monetary system. At the time both Paul Samuelson and Milton Friedman were columnists for Newsweek and both applauded the new world monetary order. I wrote to both of them at the time and expressed a different view. But there is no point taking on founding fathers of so-called schools where people simply take it on faith that their gurus know what they are talking about. Paul Samuelson is the one who laid the theoretical foundation for this systemic anarchy. Milton Friedman then provided the emperor's new clothes, dressing it in the garb of neoliberalism. That is how these two leading figures in American economic thought were united in unleashing on the world community the system that has now collapsed.

Egill:

That is this monetary system in which it seems that credit creation is somehow no longer in sync with the world community's real wealth creation.

Gunnar:

Yes, I remember that while visiting Iceland in 1982 I was invited by someone in the know to present ideas to the Icelandic Chamber of Commerce. The key to successful economic management, I suggested, was to maintain some appropriate balance between paper wealth and real wealth, the production generated by the economy. I likened this to a ship's superstructure, where the ship is production and the superstructure is paper — if the superstructure's growth is excessive, there comes a point in time — and circumstances that cannot be specified in advance — at which the superstructure will overturn the ship. That is what is happening now and has been going on since 2007. In this connection, I noted in an article the other day some remarkable comments by Alan Greenspan, former chairman of the US Federal Reserve Board. He said that for a period of more than 40 years he had believed himself to have solid grounds for trusting that this anarchy that succeeded the Bretton Woods system was stable — that it could be sustained thanks to automatic market forces which would restore the anarchic system to its equilibrium path in the event that its equilibrium conditions were about to be displaced. This is nonsense; it cannot be called anything else. The idea apes Newtonian ideology, which is concerned with the physical universe where human decisions do not enter the picture. To equate the world's monetary system, a man-made structure, with the laws of physics, an aspect of nature, is such nonsense that future economics students will not be able to comprehend how it could have become a basic premise of modern thought.

Egill:

Does this mean that generations of students have been brought up on nonsense ideology? For this is ideology, of course.

Gunnar:

Yes, nonsensical ideology. The root of the problem goes back to a point made in the mid-19th century by John Stuart Mill, one of the sharpest minds of all time, in an overview article on unresolved methodological aspects of economics. Mill viewed economics as a branch of logic and noted that the least error in the premises of any logical argument would infect with like error the whole superstructure built thereon. A seemingly small error is embedded in the premises of modern monetary economics. Paul Samuelson noted it very briefly in his Ph.D. thesis in 1942 and said it didn't matter. Today, this small error is destroying the world's monetary system.

Egill:

And what is this logical error?

Gunnar:

Joseph A. Schumpeter, who is one of the two greatest economists of the 20th century — the other is John Maynard Keynes — Schumpeter noted in 1935 that the source of interest and profit in the production process was unclear. That issue has never been satisfactorily resolved. Keynes had sought to clarify this in Treatise on Money in 1930. He then moved on to write his major work, General Theory published in 1936, in which he bypassed the issue because his principal concern was to argue for a new approach to getting the world economy out of the Great Depression and the point was not germane in that respect. Paul Samuelson, the godfather of modern monetary thought, addressed the source of interest in the production process in a 1939 paper entitled "The Rate of Interest Under Ideal Conditions." He did not succeed in resolving the matter. Then, in his Ph.D. thesis at Harvard three years later, he said that interest and profit were the product of "something" and it didn't matter what we called it. And that is how a tiny logical error slipped into the foundations of modern economic analysis, without which what is happening now would not be happening. And thirty some years ago I realized that this was nonsense.

Egill:

You have argued for a very long time that this system, the world monetary system, was fatally flawed.

Gunnar:

Yes, absolutely. But in this business there is something else that one discovers early on; namely, that if you are in a position of responsibility in the world monetary system and management, in the world's central banks, the International Monetary Fund etc., then you must always go with the stream if you plan on continuing in that position. This has completely destroyed all professionalism in central-bank management here in Iceland and elsewhere. You must go with the stream and never go against it. I had come across this so often that I decided at the end of 1996 to document that, at the highest levels, both in the United States and Britain, there was knowing malfeasance in the field of monetary management. In the first instance I sent a letter to Laurence Meyer who was a member of the US Federal Reserve Board. At the time, a certain problem had surfaced in Mexico, much like the domestic aspects of Iceland's current problems. I wrote to Mr. Meyer that it was fair to surmise that as long as the Fed continued to use the macroeconomic models of modern monetary economics to forecast the future, it would be setting itself up for what I termed "nasty surprises."

Egill:

Is the system not salvageable?

Gunnar:

It is not salvageable.

Egill:

And must then a new world monetary system be created?

Gunnar:

That's where the British party, Professor Patrick Minford, who was an economic advisor to Margaret Thatcher, comes into the picture. I wrote to him in January 1997 and that's where you have the answer to your question. The last sentence of my letter to him was as follows: "This [post-Bretton Woods] system is certain to come crashing down." You cannot put it any more clearly. I just wanted to have it documented.

Egill:

And there is this enormous production of …

Gunnar:

…money and paper wealth. Money and paper wealth out of all proportion to the national economy's output or that of the world economy.

Egill:

And now we are facing this problem in the world, having to unwind this devilish mess … and people are completely at a loss about what to do.

Gunnar:

The system has collapsed and it cannot be rebuilt on the foundations that were put in place with Paul Samuelson's ideology in 1942. It is very difficult to change something like this. I have collaborated for many years with colleagues in an economics group known as Gang8. Icelanders can look it up on the Internet. The group includes economists from Europe and the United States, a total of ten or so. I said to them, There is no point debating these issues with those whose livelihood depends on them being sound. We must wait until everything goes to hell in a handbasket, if you excuse the language, and then we will give them our telephone number. It is awfully arrogant to put it like this, but that is the situation we face today. There is talk here in Iceland of calling on foreign experts to give advice on how to reconstruct the economy or the monetary system. And, lo and behold, they come with these same ideas. In the United States we see how George Bush responded to the unfolding US economic crisis. Barack Obama is taking the same approach. One must realize that this system cannot be salvaged.

Egill:

Among things that you have criticized in writing on Iceland are loan indexation and interest-rate policy.

Gunnar: