Video of Whitlam Institute Talk

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Last month I spoke at a seminar on the financial crisis organised by The Whitlam Institute, in reply to a speech by Professor John Quiggin. Guy Debelle, the Assistant Governor (for Financial Markets) of the Reserve Bank of Australia, was the other discussant.

The Institute has put together a very professional video of the discussion, which has been picked up by SlowTV, a free internet TV channel run by The Monthly, an Australian magazine of comment and analysis which, amongst many other things, published Australian Prime Minister Kevin Rudd’s lengthy essay on the Global Financial Crisis in which he explicitly critiqued neoliberalism.

The video comes in 4 parts, which are respectively

The Question and Answer session with the audience isn’t available at SlowTV, but it is on YouTube in three parts:

The Powerpoint presentation that I gave is available here.

My presentation includes simulations of two dynamic models that are the core of my analysis of the financial crisis:

  • The Minsky Model simulates a cyclical economy with debt in the form of both productive borrowing–where the money borrowed finances increases in productive capacity–and “Ponzi” borrowing–which gambles on asset prices (which are not explicitly modelled here as yet) and therefore adds to debt without increasing productive capacity;
  • The Circuit Model models the endogenous creation of credit in a pure credit economy, and also simulates a crisis caused by a sudden shift in the willingness to lend and to take on debt–a “credit crunch”. I also model an “exogenous” government rescue one year into the crisis in one of two ways:
    • By injecting a $100 billion sum into banks unlent reserves over a one year period; and
    • By injecting the same sum into the bank accounts of the debtors (firms in this model) over the same period

The simulations are run in the visual simulation program Vissim; I have embedded a link to download the free Vissim Viewer into the presentation; that embedded link may no longer work, but the one given here should do so after a registration process (I use Vissim mainly to showcase the models; I develop them in the mathematical program Mathcad).

My main research objective for the next year is to combine these two models to develop an explicitly monetary model of financial instability. This will be the bedrock of the book Finance and Economic Breakdown that will be published by Edward Elgar Publishers.

Finally, my speech is embedded below (Reuters will soon start publishing a regular vidcast by me, and I’ll reproduce it on this site.)

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87 Responses to Video of Whitlam Institute Talk

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  4. Steve Keen says:

    I don’t often recommend a Peter Hartcher piece–while I generally find him OK on international issues, he’s just standard MSM on economics–but the jokes he relays in this report of a talk are well worth reading:

    http://www.smh.com.au/opinion/friendly-banter-in-the-back-channels-that-nurture-an-alliance-20090824-ewg5.html?page=-1

  5. LT says:

    Hi Steve,
    I’m still very interested in any thoughts you had on my original query re the implications of increased bank reserve ratios if you had time?
    Thanks very much,
    Lyall

  6. Steve Keen says:

    Hi LT,

    It’s easily sidestepped by banks’ innate ability to create credit independently of government money creation. Check the Roving Cavaliers on that front–the reserve ratio and money multiplier are the tail wgged by the private sector lending dog.

  7. LT says:

    Hi Steve,
    Sorry I should have been clearer & more specific – I was refering to the question on the implications of bank’s reserve ratios increasing over time as deleveraging ensures. I’ve reproduced the earlier post in full below. You mentioned at the time that you would come back to me on this point.
    Cheers,
    LT

    Original post:

    Thanks for another very interesting and persuasive presentation. I’m a big fan of your innovative analysis which has certainly contributed enormously to my understanding of how credit-driven economies actually work.
    I do have a few questions on the model however: firstly, what eventually happens to all the excess reserves that accumulate in banks during the deleveraging? I have read your cavaliers of credit piece, and can see how the cessation of growth in PSC contribues to a sharp reduction in aggegate demand. However, when people attempt to deleverage, the repayment of loans, if they are not relent out by banks (which in aggregate needs to happen if deleveraring is to occur), become excess reserves (although obviously some are needed merely to replenish equity against bad loans). I note in your modelling outcomes, unemployment rises, debt/GDP declines over time, and also back reserves increase materially.
    I can see how when new credit growth occurs, new “money” and aggregate demand is created. but when the debt is paid back, that “money” does not disappear – it just gets pulled temporarily out of circulation but remains very much real on the balance sheet of banks. this would seem to imply a massive excess of capital and ultimately very low interest rates for a long time. I guess my question is, what are the implicaitons of this? Seems unrealistic to think banks are going to have equity/asset ratios of 20-30%??
    Thanks in advance,
    Rgds

  8. Steve Keen says:

    Sorry LT!

    Yes, the model does show excess reserves accumulating, and this is also happening in the real world. I think that in the longer term the banks would find themselves having to write off debt on a grand scale, and this raises the question of the mechanics of that process vis a vis their reserves. This is where I would have to defer to my colleagues who have a better knowledge of the rules on such things, but my feeling is that the rise in reserves would to some degree counter the fall in their assets from the debt write-off process. However at some point they would become technically insolvent.

    It’ something I’ll consider in full detail when I get into writing the book; at the moment that’s the best I can do. Sorry for an inadequate answer at this stage, as well as a wrong-headed one initially!

  9. LT says:

    PS it would seem that the dynamics of credit creation you outline in your caviliers of credit piece result in an expansion of the money supply, as banks lend first and then find reserves later. If I am correct, the latter is facilitated by the RB creating additional money.

    However, when the process goes into reverse the credit-created money does not get destroyed through a reversal of the said process, because the excess reserves held at banks do not trigger the RB to destroy money to despose of the excess reserves. In fact to the contrary, global reserve banks are currently inclined towards creating still more reserves to wage a battle against deflation.

    So you have all this credit-money created during the great credit expansion which now has to go somewhere. What are the implications of this? Low interst rates and asset price inflation would prima facie seem to be two likely consequences, the beginning of which we are starting to see. And perhaps ultimately we need huge consumer price inflation to effectively effectively “mop up” all the excess money supply, much as a share consolidation reduces the shares outstanding but increases the price?

    Very interested in your thoughts on this as I’m still trying to figure out what all this means.

    Rgds,
    LT

  10. LT says:

    Hi Steve,
    As I posted the above while you were writing your reply, I had not had the benefit of reading your previous reply.
    That was my initial thought too, but ultimately all the bank needs to do is swap out debt for equity to remain solvent, which is what banks have been doing by raising significant equity. From a money supply perspective, giving a bank $1 in the form of equity or debt makes no difference.

    This equity is needed to offset the bad loans, but ultimately under a deleveraging scenario there would also be a large cash inflow from the steady repayment of good loans. So this would not seem to resolve the problem of there being a systemic excess money/reserves in the bankign system, which need to be relent. Perhaps the great depression played out differently because the aggregate money supply was shrinking so reserves fell this way?

    Cheers,
    LT

  11. LT says:

    PS no problem re your reply – appreciate you taking the time. Will look forward to hearing more of your thoughts when you have a chance, and will eagerly anticipated the release of your book!!
    Rgds,
    LT

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