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.

 

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Cowdung and Credit Creation

Today is a momentous day for the United Kingdon, as Teresa May officially invokes article 50 to leave the European  Union.

Sadly, I am not yet ready to add commentary to current events, however important. My initial theme is to carry on explaining the operations of the UK banking system, presented in a way that should be available and understandable to anyone who is concerned about the economic reality we live in. No-one should be denied such access and needs to be equipped to detect and avoid the distortions presented by the COmmon Wisdom of the DominaNt Group a.k.a. “CowDung”. hopefully these posts can help in that regard.

In my last post on this topic, Can Banks Create Credit?, I noted that you should not take my word for this. This post is the first answer to that.

The Bank of England publishes an online  quarterly magazine called the Quarterly Bulletin. The Quarterly Bulletin 2014 Q4  contains two important articles with accompanying video overviews:-

This is essential reading for anyone interested money, pretty much everyone!

Money in the modern economy: an introduction

Money is essential to the workings of a modern economy, but its nature has varied substantially over time. This article provides an introduction to what money is today. Money today is a type of IOU, but one that is special because everyone in the economy trusts that it will be accepted by other people in exchange for goods and services. There are three main types of money: currency, bank deposits and central bank reserves. Each represents an IOU from one sector of the economy to another. Most money in the modern economy is in the form of bank deposits, which are created by commercial banks themselves.

This article has introduced what money means and the different types of money that exist in a modern economy. Money today is a form of debt, but a special kind of debt that is accepted as the medium of exchange in the economy. And most of that money takes the form of bank deposits, which are created by commercial banks themselves. A companion piece to this article, ‘Money creation in the modern economy’. describes the process of money creation by commercial banks in more detail.

and

Money creation in the modern economy

This article explains how the majority of money in the modern economy is created by commercial banks making loans. Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits. The amount of money created in the economy ultimately depends on the monetary policy of the central bank. In normal times, this is carried out by setting interest rates. The central bank can also affect the amount of money directly through purchasing assets or ‘quantitative easing’.[My emphasis]

This article emphasizes some of the themes I have noted in previous posts regarding the myths of  Loanable Funds, Fractional Reserves and the Money Multiplier and the implications of these myths will be explored in following posts. Note that “some popular conceptions” (and other statements in the article) are a polite and diplomatic way of calling bullshit (or cowdung) on the banking sections of economics textbooks.

I need to finish with a  couple of caveats.

First is that just because this is published by the BoE does not mean it is immune from criticism. Far from it. Indeed a theme I will develop is how many central banks have misled themselves as well as others with distorting if not fatally flawed in-house models of their economies. Still I do regard the above two articles as very accurate given my background in actual banking.

Second, these articles were published in 2014, there are other and older references for these accurate descriptions of money in the Uk and elsewhere. I have not yet found a good summary post of all those central bank references and am slowly building up a file which I will post when I am satisfied with the content.

5000 Years of Debt

As I noted last Friday, my posts on Friday are for weekend reading. This week I am highly recommending David Graeber‘s Debt – Updated and Expanded: The First 5,000 Years.[1]

No time for a review but the publisher’s overview does present a very good idea about the issues covered in the book:

Here anthropologist David Graeber presents a stunning reversal of conventional wisdom: he shows that before there was money, there was debt. For more than 5,000 years, since the beginnings of the first agrarian empires, humans have used elaborate credit systems to buy and sell goods—that is, long before the invention of coins or cash. It is in this era, Graeber argues, that we also first encounter a society divided into debtors and creditors.

Graeber shows that arguments about debt and debt forgiveness have been at the center of political debates from Italy to China, as well as sparking innumerable insurrections. He also brilliantly demonstrates that the language of the ancient works of law and religion (words like “guilt,” “sin,” and “redemption”) derive in large part from ancient debates about debt, and shape even our most basic ideas of right and wrong. We are still fighting these battles today without knowing it

All the key themes I wish to explore on this blog, specifically over money and debt, are presented with anthropological evidence in support. You may or may not agree with his overarching model of virtual versus physical money eras and I too am undecided about that. Regardless the evidence over the origins and evolution of money and debt is very still very relevant.

[1] There is also an earlier edition freely available online, although I am not sure as to whether this is with the permission of the author or publisher – I will let you decide and search for that.