Steve Keen’s ” Can we avoid another finacial crisis?”: A review (Updated)

[UPDATE: This is a heavily revised and improved review]

Steve Keen is one of the few economists to have warned about the impending Global Financial Crash (GFC) of 2008.  Here he  shows the core reasoning that helped him make that call. Using the same approach, what can he say about the present in 2017 going forward?  Whether one ultimately agrees with his arguments or not, surely he has better earned a position at the high table than many others who failed to call the GFC, who  undeservedly remain at that table without merit? Would we not all benefit by having him and his arguments as part of the core debate of economic policy? This book is a bold, accessible and provocative attempt to remedy that sorry situation.

The Professor and Head of the School of Economics, History and Politics at Kingston University in London,  “Can we avoid another financial crisis” is his second book after “Debunking Economics” (He also has a collection of his papers in
“Developing an economics for the post-crisis world”). It is far more accessible than his first book and clearly his intended audience is different and broader. Indeed, even MPs and political journalists should be able to understand this except, maybe, it is still beyond George Osborne … since this is not a Ladybird book.

His concern is over the growth and change in growth of private debt as a threat to economic growth and financial stability. His main argument is that when the debt grows too large, its maintenance becomes unsustainable, and the process of us repairing our balance sheets leads to a reduction in the demand for credit, which, in turn, reduces total demand the economy and, especially if the debt is large enough, this can stall the economy and lead to a recession. This makes it even harder to repair our balance sheets and a vicious cycle can ensue.

He argues that a demonstrably erroneous and almost anti-empirical design and application  of mainstream neoclassical macroeconomics has rendered this perspective invisible, until recently mostly denying any importance or significance of private debt, as they must, given that their core models, as Steve says, excludes “banks, debt and money”! This  is why they all missed calling the GFC. This, in turn, misinformed and misinforms its ideological neoliberal sibling, so policies since the GFC have not enabled us to sufficiently repair our balance sheets and slow or negative credit growth has turned some economies into “zombies”.

Now  whether one agrees with him or not, can one reasonably deny that this should be part of the Overton window (the window of discourse)?  and, if nothing else, this book is a highly forceful and concisely readable argument to make this a central focus of future economic and populist debate.

Given modern attention spans this is a short book and certainly readable in a few hours but possibly quite dense in new ideas if one if unfamiliar with his work. This is probably easier to get with the background of  a decent scientific understanding but far less so if one is already immersed in (or corrupted by?) mainstream dogma or, even worse, educated in a  PPE course at university as far too many of our politicians and commentators have been.

There are many things he does not address (but maybe I read it too quickly) such as criticising the erroneous application of the household analogy to governments nor does he specifically mention the Loanable Funds doctrine although he does discuss this foundational mistake of mainstream economics at length and very clearly. Overall he amply argues for and demonstrates his theme that one of the main concerns of policy makers should the growth and change in growth of private debt – worryingly still not a concern of the UK Treasury and OBR. He shows, in very elegant fashion, without a single equation in sight (some are verbally stated to describe the most simple of his pure credit models) why this is likely the case. He also makes some very concise and clear arguments as to why the mainstream neoclassicals and New Keynesians – the backbone of neoliberal political ideology – repeatedly miss the point. I, in particular, liked his simple and profound verbalisation of the Sonnenschein–Mantel–Debreu theorem  which really demolishes the micro-foundation argument for macro economic DSGE models. However  he does not mention issues such as the Arrow Debreu model which was one response to this, although he does note Gorman‘s arguments. The point is this work will suffice to get you to understand the main issues involved, but would not be sufficient to argue with someone suitably informed but there are other sources, including his first book to take you further, if you are so inclined.

He is relatively pessimistic over the final outcomes that are possible or, certainly, politically feasible and, sadly, I have to agree. I wonder if he does not dwell enough on policy space and bank reform. He does discuss his debt forgiveness jubilee approach and how to circumvent the moral hazard issue of only rewarding debtors. Still he does not mention say, MMT’s Job Guarantee whilst possibly too fleetingly discusses MMT’s Godley inspired sectoral balances approach to clarify what Government or Public debt really is.  Futher, as two off the cuff examples, both Bill Mitchell‘s argument that banks should not on sell their originated loans and Richard Werner‘s argument over how to direct banking to more productive financing (he does discuss that though) could have augmented his arguments without much addition, focus or loss of clarity.

All in all this feels like a well-edited if not, possibly, an over edited book. By this I mean some other points including some as just noted could have been also simply argued but this might have detracted from the overall force of the book.

Still what results is a very important and accessible work. We need to insure that every MP, journalist and pundit is familiar with this.  I hope if you read this and you happen to know such a person you send them a copy in return for them giving you their informed opinion on it. If they are unable to do so then they really have no business being involved in politics.  What would result is that no-one could claim ignorance of the issue of private debt and that it becomes a key focus of the economic debate going to forward.