Naked Capitalism and My Scary Minsky Model

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I met with Yves Smith of Naked Capitalism on the weekend, at a superb Japanese restaurant that only New York locals could find (and I’ll keep its location quiet for their benefit–too much publicity could spoil a spectacular thing). Yves was kind enough to post details of my latest academic paper at her site in a post she entitled “Steve Keen’s scary Minsky model“.

Yves found the model scary, not because it revealed anything about the economy that she didn’t already know, but because it so easily reproduced the Ponzi features of the economy she knows so well.

I have yet to attempt to fit the model to data–and given its nonlinearity, that won’t be easy–but its qualitative behavior is very close to what we’ve experienced. As in the real world, a series of booms and busts give the superficial appearance of an economy entering a “Great Moderation”–just before it collapses.

The motive force driving the crash is the ratio of debt to GDP–a key feature of the real world that the mainstream economists who dominate the world’s academic university departments, Central Banks and Treasuries ignore. In the model, as in the real world, this ratio rises in a boom as businesses take on debt to finance investment and speculation, and then falls in a slump when things don’t work out in line with the euphoric expectations that developed during the boom. Cash flows during the slump don’t allow borrowers to reduce the debt to GDP ratio to the pre-boom level, but the period of relative stability after the crisis leads to expectations–and debt–taking off once more.

Ultimately, such an extreme level of debt is accumulated that debt servicing exceeds available cash flows, and a permanent slump ensues–a Depression.

There are 4 behavioural functions in the model that mimic the behaviour of the major private actors in the economy–workers, capitalists and bankers. Workers wage rises are related to the level of employment and the rate of inflation; capitalists investment and debt repayment plans are related to the rate of profit; and the willingness of banks to lend is also a function of the rate of profit.

The model is explicitly monetary–with bank accounts for workers, bankers and capitalists–and the crisis is marked by a collapse in deposits and a rise in inactive bank reserves.

The same phenomenon is evident in the data, though the sharpness of the turnaround is far greater than can be replicated by the smooth functions in my model.

There’s a lot more work to do before the model is complete–notably including the impact of a goverment sector that can add its own spending power to a depressed economy–but its basic features fulfil Minsky’s challenge:

Can “It”-a Great Depression-happen again? And if “It” can happen, why didn’t “It” occur in the [first 35] years since World War II? These are questions that naturally follow from both the historical record and the comparative success of the past thirty-five years. To answer these questions it is necessary to have an economic the¬ory which makes great depressions one of the possible states in which our type of capitalist economy can find itself.

This is the first economic model ever that meets Minsky’s standards for realism. Its final stage emphasises a message that Michael Hudson, one of the very few others to see this crisis coming, puts very simply: “Debts that can’t be repaid, won’t be repaid”. As Americans now seem to be realising, the financial crisis has not gone away, because the debt that caused it is still there.

Having got ourselves into a debt-induced economic crisis, the only permanent way out is to reduce the debt–either directly by abolishing large slabs of it, or indirectly by inflating it away. I have very little confidence in the ability of the Federal Reserve to do the latter, while the former will take a level of political fortitude that is far beyond our current politicians.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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146 Responses to Naked Capitalism and My Scary Minsky Model

  1. sirius says:

    I just posted a very long post providing evidence for my claim and it did not appear.

    I shall not attempt to repost it.

  2. Steve Keen says:

    It was captured by the spam filter because of the number of links sirius. I’ll classify it as not spam now that I am awake.

  3. sirius says:


    Thank you. People are thus free to make up their own mind.

    Is the federal regulator going to get tough or is it just noise ?

  4. Philip says:

    Here’s a good blog post on Australian residential property history.

  5. GeeDubbleya says:

    A few here are discussing rent and supply and demand. Let me just say that as a renter I can tell you why rents rise even when there is no housing shortage. It’s called sales & marketing. I wonder if economists ever take into consideration when developing models? Let me explain.

    20 years ago I was a student. When we needed to rent a place we’d give the agent a fifty and grab the key, visit the house and return the key and get our fifty back. If we wanted the place we’d fill out an application form.

    Over the ensuing 20 years I bought and paid off a home and owned an investment property. We chose to rent it ourselves rather than use an agent and we picked our tenant by way of a ‘home open’. That was 11 years ago. Seems we were ahead of our time.

    Now, I am a renter again, due to cashing in my real estate chips to fund a business. Now when I turn up at a house I’d like to rent I am literally given a 15 minute window to view the property with everyone else who is interested. The agent turns up 5 minutes late, everytime, and hands out application forms as you go through the door.

    This creates the IMPRESSION that there is a huge demand for the property. So as a viewer, you get the feeling that unless you 1) put in an application now, you aint gonna get another chance and 2) Offer more than the rest of the herd, you’re gonna miss out too!

    The demand is an illusion! It’s created by great sales and marketing technique.

    And running a business I know that price isn’t just about supply and demand…its about emotion too! Tap into that emotion and you can quite literally sell ice to eskimos.

    Australia has built 800,000 more homes since 1990 than there are households to to fill them. The figures are available on the ABS and takes half an hour to compile. There may have been more immigrants coming here in the last 4 years on average than the average for the previous decade and a half but 800,000 spare houses is a big number and the additional migrants haven’t made much of a dent yet. And the stats show that most of these ARE houses, not additions, caravans or lean to’s.

    There is no housing shortage! There are plenty of places to rent! Spruikers, who know how to sell and market to the panicky emotional renters are what has been driving rents higher. Put that variable in the number driven textbook demand and supply analysis of the Australian housing market and see what comes up!

  6. PETER_W says:


    David Airley comparing real estate with the ASX is an interesting… the ASX fell 50%

    David Airey, president of the Real Estate Institute of Australia, says the market is slowing to the extent that listings are accumulating, and “buyers have lost their desire”.

    “We are just going through an adjustment period, no different to what the stock market is experiencing. The ASX peaked, and has come back, and the same thing is happening in the property market. You run out of buyers, but they’ll be back.”

  7. PETER_W says:


    When this bubble busts it will be interesting to see just how many ‘liar loans’ are on the books in Australia.

    How many bankrupt sole proprietor service companies paid phantom wages to spouses.

    How much ‘equity’ got extracted into spouse deposit accounts at ‘record breaking auction prices’.

    ~40% refinance and ~40% investment of total monthly lending is an ominous sign that alot of ‘equity’ is being extracted into a safe place.

    Very reminicent of 1880’s land boom

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  9. PETER_W says:


    Any similarity between the New Zealand and Australian banking system is purely coincidental.

    Any creeping nationalization of the Australian resource companies over the next 5 years via increasing the resource tax is purely coincidental.

    Krona Plunge

    Iceland’s financial crisis was exacerbated by banks that borrowed in currencies such as Japanese yen and Swiss francs to take advantage of lower interest rates, then repackaged them as kronur loans for clients. The krona has lost 39 percent against the yen and 31 percent against the franc since Sept. 15, 2008. The ruling limited borrowers’ liabilities to the principal, while lenders were left to foot the bill for currency losses.

    Icelandic banks have as much as 900 billion kronur ($7.2 billion) of foreign currency loans and may have to write down their value by 40 percent to 60 percent, Finance Minister Steingrimur J. Sigfusson said July 7.

    By comparison, the three biggest bank have combined equity of 340 billion kronur, said Gunnar Bjarni Vidarsson, an economist at IFS Consulting in Reykjavik, which provides research for financial companies and investors.

    “If the banks have to write off 40 to 60 percent” of their foreign currency loans “they are bankrupt,” he said.

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  11. glubilee says:

    the start of US real estate bubble bursting was decrease in volume of sales, volume went down, then prices…hardest hit areas are still seeing declines

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  14. creditdefaultswap says:

    Steve, rather late to ask this, but as your model ends at 40 percent unemployment, any ideas on when/if the recovery occurs?
    Also the US collects a payroll tax on all wage income, 2.9 percent for Medicare. From the US Treasury reports we can see that this is now running about 4 percent below last year. US wage income has an incredible amount of inertia, it has fallen less than half as much as full time jobs for example.

  15. Steve Keen says:

    It comes down to Michael Hudson’s oft-repeated phrase: “Debts that can’t be repaid, won’t be repaid”, and the only way out is debt reduction via either bankruptcy or deliberate repudiation. I favour the latter course.

    My model doesn’t yet include bankruptcy and its effects on economic performance, and effectively any unpaid debt simply continues to compound. If I work out a way to validly model bankruptcy and the like, then I could get a resetting effect turning up.

    My expectation is that we’ll need 2-2 years before debt falls substantially and the effects of deleveraging diminish; at the moment I think they’re still accelerating, which is why I expect the US economy to tip back into recession.

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  19. Kozak says: thoroughly recommend it. Much work based on Taleb’s fragility theories. Intelligent commentary.

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