ABC Rear Vision: The US Economy post the 2008 Crash

Flattr this!

The ABC Radio National program Rear Vision is a current affairs program that presents “contemporary events and people in their historical context”.

I was recently interviewed by Rear Vision for a retrospective on the crisis, entitled “Here we go again: A look at the US economy post the 2008 GFC crash” which debated why the crisis is still with us today.

Other speakers were Ed Harrison from Credit Writedowns, with whom I’m very much in agreement, economic historian Richard Sylla from New York University, and Steve Hanke from John Hopkins with whom I almost completely disagree. Hanke doesn’t even discuss the level of private debt, puts the standard neoclassical argument that government debt is the problem, that a stimulus is contractionary (the so-called “reverse Ricardian Equivalence” argument) and so on, ideas which I regard as total nonsense.

Follow the link above to hear the program via the ABC website, or click below to listen to it here. I’ve also reproduced the transcript below, and corrected a few errors in the ABC original.

Steve Keen's Debtwatch Podcast


The Transcript

Journalist [archival]: One of the top three credit rating agencies, Standard & Poor’s, has downgraded its rating of US debt from AAA to AA+. It’s the first time the US has been downgraded since it first received a Triple-A rating from Moody’s in 1917.

Journalist [archival]: John Chambers said S&P’s decision to reduce US creditworthiness was because for too long it’s been spending when it should have been saving.

John Chambers [archival]: Instead of storing our nuts for the winter, we ate out nuts and now we’re in a position where we have very little fiscal room to manoeuvre with an economy that’s taking a second leg down.

Annabelle Quince: Just over a week ago, Standard & Poor’s downgraded the United States credit rating from AAA to AA+. The downgrade sent shockwaves through stock markets across the world and raised the spectre of a double-dip recession.

Hello, I’m Annabelle Quince and this is Rear Vision on ABC Radio National, Radio Australia, and via the net. Today, we’re going to try to piece together how and why it is that the United States of America, the largest economy in the world, has ended up in such a mess.

While there’s a debate about how to fix America’s economic woes, most economists and commentators agree that the main cause of the crisis is debt-both private and government debt.

According to Steve Keen, associate professor in economics and finance at the University of Western Sydney, debt in the United States has been accumulating for decades.

Steven Keen: You need private debt to finance proper investment, but what the banks make money out of is financing Ponzi schemes. Right from the get-go in America and from about the mid-60s in Australia, private debt to income has been rising. And America’s gone from 45 per cent of GDP in 1945 to 300 per cent of GDP by 2009; that’s when it peaked out.

Now, all that’s been financing speculation, and when you finance speculation what you’re really doing is gambling on rising asset prices. The gamble itself drives the asset prices up and then at some point, of course, it has to fall over, because when you’re borrowing money to gamble on rising asset prices, you’re not actually increasing the number or the productivity of those assets. So you’re increasing the debt burden on society without actually increasing society’s capacity to pay.

As soon as people start to try to reduce their debt, you go from rising debt boosting the economy to it slashing demand. Go back to 2008: the GDP in America was roughly $14 trillion but the increase in debt that year was roughly $4 trillion. So that means total spending in the economy was about $18 trillion. Simply slowing down the rate of growth of debt; that means you went from having an $18 trillion economy to a $12.5 trillion economy in two years. That’s what caused the crisis.

Journalist [archival]: A year ago, those who predicted that giant investment banks would fail were dismissed as madmen. Today, in the early hours of the morning in New York, the venerable firm Lehman Brothers announced that it would file for bankruptcy.

Steve Hanke: Towards the end of 2002, one of governors of the Federal Reserve Bank gave an important speech in November-now Chairman Bernanke, he was a governor at the time, but he’s now the chairman of the Central Bank.

Annabelle Quince: Steve Hanke, professor of applied economics at John Hopkins University.

Steve Hanke: He said the main danger we faced in the United States is deflation and he convinced the then chairman of the Federal Reserve, Alan Greenspan, that he was right and Greenspan concluded that deflation was the number one problem facing the United States.

They started pressing on the money supply accelerator as fast as they could at the central bank and they reduced interest rates down to one per cent by June of 2003. Now, at the time that was a record low and this started and enabled all the bubbles to be created-the housing bubble and commodity price boom was associated with this. Loads of liquidity all over the world and a falling dollar, and the falling dollar was the cause for roughly, in my estimation, between about 55 and 65 per cent of all the commodity price increases. All these things were started with the Fed. So that’s how we got all these bubbles that started expanding and eventually popped.

Journalist [archival]: And so what is the feeling? Is the feeling that bankruptcy is inevitable now, is that the concern?

Interviewee [archival]: Yeah, I think so and there’ll be more, there’ll be more.

Journalist [archival]: Hours ago Merrill Lynch also confirmed it has fallen victim to the bear market.

Steve Hanke: They saw nothing coming. The Fed and all the establishments all over the world, the establishment politicians, they saw none of this coming. The International Monetary Fund, they had not a clue that anything was amiss. It did of course really hit the fan in September of 2008 when Lehman Brothers collapsed and then the US officials in particular went into kind of a panic mode, indicating that if there wasn’t an enormous bailout provided that the whole financial system would collapse.

Journalist [archival]: The US government has launched a takeover of the nation’s two biggest mortgage companies.

Henry Paulson [archival]: Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in the financial markets here at home and around the globe.

Steve Hanke: And the secretary of treasury, Paulson at the time, had sent a three-page letter up to the congress requesting hundreds of millions of dollars in bailout money-$700 million in bailout money-you know, close to a trillion dollars. And just in a three-page letter with no background or anything. And of course they turned him down and no one paid any attention to it. And he said, ‘Well, if you don’t give me the money everything’s going to collapse.’

Henry Paulson [archival]: This turmoil would directly and negatively impact household wealth from family budgets to home values to savings for college and retirement.

And Paulson, the secretary of treasury, panicked. He was a former head of Goldman Sachs and had a fine record as an investment banker but no qualifications whatsoever for operating in the public sphere and as a secretary of treasury.

And he panicked, he totally panicked. That’s the general problem. You had personalities in there that were amateurs who had no idea of what they were doing and no idea that they were creating public panic. It wasn’t the recession or depression of 2009; it was the panic of 2009 that we’re talking about here.

Steve Keen: The reason we’re in this crisis-many, many reasons, but one essential reason is extremely bad thinking. Bernanke was publishing papers with titles such as ‘The Great Moderation’, talking about how wonderfully the economy was going and congratulating himself for his good monetary management, right up until 2006–2007. So they just basically saw stability. They were completely ignoring the level of debt.

So the crisis took them completely by surprise, they had no idea it was coming, and because it was so devastating they went into total panic mode. Now if you read Hank Paulson’s account, On the Brink, at one point he’s explaining that $700 billion injection he got the congress to give, which he actually gave to the banks. And explaining what was going on he said, ‘I didn’t dare mention a trillion dollars, that would cause sheer panic, but I had to mention a large number and I said $700 billion,’ and then he said, ‘I was then asked, “What would happen if you didn’t sign it all over?”‘ His answer was, ‘May God help us all.’

Journalist [archival]: ‘Desperate’ is a word being used a lot in the United States at the moment, and ‘crisis’. Both are apt descriptions of what’s going on. The American Congress failed to pass the bailout bill and the collapse of the financial rescue plan has sparked a huge sell-off on Wall Street.

Journalist [archival]: Well, there’s disbelief at this death blow for the bailout bid. After all, let’s not forget President George W. Bush was predicting a deep and painful recession for the US if it’s not passed.

George W. Bush [archival]: I was disappointed in the vote with the United States Congress on the economic rescue plan. We put forth a plan that was big because we’ve got a big problem.

Annabelle Quince: The Emergency Economic Stabilization Act, or Bank Bailout Bill, did eventually pass, in October 2008. The aim of the bill was to shore up the failing banks by pumping $700 billion into the system.

Edward Harrison is an economic analyst and the founder of economic website Credit Writedowns.

Edward Harrison: Basically what they were trying to do was put a floor underneath the system, because all hell had broken loose and there was utter panic. And all of the other institutions were imperilled at that time: Goldman Sachs, Morgan Stanley, those were the two remaining institutions that were investment banks and they were both in jeopardy of going bankrupt. AIG had to be rescued. We also saw a very large bank, Washington Mutual, which went out of business and was bought out by JPMorgan.

So really what they wanted to do, they wanted to put a floor under all of that. And what they had originally planned to do was to buy up a lot of these assets-these dodgy assets-which had been causing these banks to fail and had been causing the panic. But as time went along they realised it would be better for them to inject capital into these institutions to shore up their balance sheets, as opposed to buying the capital, and so that’s what they ended up doing. And that’s what the bailouts were all about in the United States. So all of the largest institutions received capital from the US government.

George W. Bush [archival]: I believe in the long run this economy is going to be just fine.

Journalist [archival]: US President George Bush-‘Everything’s just fine.’ It’s been a few days since the congress passed that massive bailout package for the American financial system. How soon is it going to be up and running?

Interviewee [archival]: Well, the Bush administration has selected a former Goldman Sachs executive, 35-year-old Neel Kashkari, to be the interim head of this massive rescue effort.

Annabelle Quince: What was the kind of political thinking? Because clearly there was a lot of support, especially from the US public, to actually let some of these banks go under, and yet the political will didn’t seem to be there.

Steven Keen: Who are you trying to get to say “let the banks fail”? The people who actually run the American political system are the financiers. The same thing happened back in the 1930s, when you had this incredible growth in the power of the financial sector over the 1920s in particular, the JPMorgan firms of the world and so on, and then Roosevelt came along and his inauguration speech-which I recommend you reading-said that we’ve handed over control to the money lenders, problem caused by debt, their only solution is to say yet more debt. And he then led to the shutting down the banks, the bank holiday, reorganising them all and then destroying the political power of the banks.

So when the Second World War ended, the size of the financial sector, or called the ‘non-bank financial sector’, their debt level was about two per cent of American GDP. It since rose to 120 per cent. Now, ironically, when you borrow that much money you have that much political power. So you’re trying to tell people that they should commit harakiri for the better of the system-well they’re not going to do it.

Annabelle Quince: Not everyone agree that the bank bailouts were wrong. Richard Sylla, professor of the history of economics at New York University, argues that without the bank bailouts the United States might have fallen into another depression.

Richard Sylla: Ben Bernanke, who’s the chairman of the federal reserve system, was a great scholar. He was a Princeton University professor, studied the Great Depression a lot in his academic work, and he had written articles and books on that the Great Depression got to be as bad as it was because they allowed the many banks to fail, which caused a deflationary spiral, which caused even more bank failures in a weaker economy. So his stance was he wasn’t going to allow that to happen again, and so he would create a mass amount of liquidity, which was not done in the Great Depression of the 1930s.

Ben Bernanke [archival]: Credit is the lifeblood of the economy. If the credit system isn’t working, then firms cannot finance themselves, people cannot borrow to buy a car, to send a student to college, to buy a house. That’s not just an inconvenience, because if that is true generally, it’s going to cause the economy to slow markedly.

Richard Sylla: Of course I think that staved off another Great Depression, but it produced what’s called a ‘great recession’ now and a lot of people are not used to that and so they’re very critical of both Federal Reserve policy in bailing out banks, which I think was probably a good thing, and they’re not quite understanding what Bernanke did. But I think when this is all over and things get to be more normal again, we’ll look back on it and say, ‘Well, Bernanke didn’t turn things around right away, but he prevented something much worse from happening.’

Steve Hanke: The money ultimately comes from the taxpayers-I mean, it was financed by debt, of course, because the deficit went up and the amount of debt issued by the US Government went up, so the immediate source of the money was debt.

We went into the crisis by being over-indebted with no cushion and then we decided to ramp up the debt and even go into further debt to bail some of these institutions out. The ultimate result has been a very bad result in terms of the structure of the financial institutions.

Annabelle Quince: So you think without the bailouts that actually the financial institutions that were able to survive would have come through stronger and fitter?

Steve Hanke: Yes, because they would have themselves gone on to mend themselves, shall we say. It would have been like Bear Stearns. Bear Stearns, it was voluntarily gobbled up by other financial institutions and they hardly missed a beat, shall we say. And that would have occurred with other financial institutions if, if-there’s a big if, here-if there hadn’t been a panic, Annabelle. Once you get into a panic, then the ballgame starts changing on you.

Annabelle Quince: Since the crisis hit in 2008 there has been a number of investigations into the practices and reward systems of the investment banks in the United States.

US Congressman Henry Waxman [archival]: You have been able to pocket close to half a billion dollars and my question to you is, a lot of people ask is that fair for the CEO of a company that’s now bankrupt to have made that kind of money? It’s just unimaginable to so many people.

You have a $14 million ocean-front home in Florida, you have a summer vacation home in Sun Valley, Idaho, you and your wife have an art collection filled with million dollar paintings, your former president Joe Gregory used to travel to work in his own private helicopter-I guess people wonder…

Annabelle Quince: Has there been any significant change in the way those banks work today?

Steven Keen: No, they’re still doing the same stuff. They still basically finance mergers and acquisitions and share market speculation. And they’re not doing as much housing speculation anymore, for obvious reasons-that bubble’s over-but fundamentally they look for bubbles to finance.

Edward Harrison: We’re back to square one. The banks are… they’re pretty much operating as they did before. The big difference, however, is that it’s likely the banks will need to have more capital in order to function; that is, that the capital buffer will have to be larger; and that’s going to make them less profitable going forward.

I think you may have seen that HSBC, a British bank, just today, in fact, said that they were going to lay off 30,000 employees out of their nearly 300,000. And the reason they’re doing this is basically even though they earned $11 million in the first half of the year, given their enormous capital base that wasn’t a very good return on capital. And they know that they’re going to have to increase their capital, and so what they want to do is cut their costs so that they can have a higher return on capital.

So really, nothing’s really been done except for the capital, and perversely the increase in capital over the short-term may have the effect of causing these banks to try to cut costs in order to make a return on capital that their investors are looking for.

Annabelle Quince: You’re with Rear Vision on ABC Radio National, Radio Australia, via your MP3 player or the internet. I’m Annabelle Quince and today we’re piecing together how and why it is that the US economy is in such a mess.

The crisis in the financial market led to an economic recession-house prices fell, the number of unemployed rose, and US consumers stopped spending. Barack Obama won the US presidential race in November 2008 and in at the beginning of 2009, he introduced a huge stimulus package in an attempt to kick start the economy.

Journalist [archival]: The US president, Barack Obama, has signed his massive economic stimulus package into law. Mr Obama hopes the $1.2 trillion-worth of new spending and tax cuts will help steer the US economy out of recession.

Barack Obama [archival]: I don’t want to pretend that today marks the end of our economic problems. Nor does it constitute all of what we’re going to have to do to turn our economy around. But today does mark the beginning of the end, the beginning of what we need to do to create jobs for Americans scrambling in the wake of layoffs.

Richard Sylla: I think Obama didn’t quite realise the extent of the problem as much as Roosevelt did in the 1930s, but of course the problem was much bigger for Roosevelt, so maybe it was easier for him to understand it. Now, Obama pushed through a stimulus package and it turned out to be, what, seven or eight hundred billion dollars, which is quite a bit and added a lot to the government deficit. That was probably the right thing to do, but maybe there wasn’t enough of it.

Probably half of the United States-you know we are a federal system, I think Australians probably understand that-a lot of the spending of the federal government was offset by reductions in spending by state and local governments. So the net effect of Obama’s stimulus was zero. But of course things would have been much worse had he not had that stimulus package. It just turns out that what we’ve done here in the United States for the last couple of years, in terms of government spending to alleviate the downturn in the economy, what was done at the federal level was offset by cuts in state and local spending. So the net effect of all government spending in the United States has been effectively no stimulus.

Annabelle Quince: Professor Steve Hanke argues that the stimulus package rather than kick starting the economy has actually prevented its recovery.

Steve Hanke: A lot of the stimulus package was spent bailing out these financial institutions and some of it did seep in in shovel-ready public works projects and government projects of one sort or another. That didn’t really amount to too much in my opinion and it certainly didn’t stimulate anything because, paradoxically, it slowed the whole economy down. Because when you run a great big deficit, people get very anxious about it and it puts the brakes on things because people are afraid. They know eventually they’re going to have to pay more taxes, or there’ll be more inflation-one way or another, something has to be done with the debt that they’re running up.

And you have just the opposite of what, you know, many people are taught in economics textbooks-that if you have a bigger government deficit, you have a so-called Keynesian fiscal stimulus, you stimulate the economy. No. You contract the economy. It’s a contractionary policy. So the stimulus package actually is one reason that the economy has been so retarded.

Edward Harrison: It was somewhat effective in terms of getting the economy back by… Basically when Lehman Brothers went down, that was at the end of the third quarter of 2008. By the middle of 2009, the economy was back into a technical recovery. And so basically, in conjunction with the stimulus, the economy moved into a technical recovery and it stayed there ever since.

So in a real sense it did provide the necessary kick to get us through at least a year or so, but already by 2010 you could see that the effects of the stimulus had started to fade and the economy had sort of been in this low-growth phase for about a year now.

US Congress [archival]: The yeas and nays are ordered and the clerk will call the role. [Woman starts calling role of names]

Journalist [archival]: After so many months and so much doubt, finally a vote.

US Congress [archival]: If not on that question, the ayes are 74 and the nays are 26…

Journalist [archival]: And with that, the US stepped back from the brink. It ended what many regarded as an unprecedented political struggle. The vote in congress gives the US Treasury immediate access to $400 billion in new borrowing and cuts the deficit by a little over $2 trillion over ten years. And it’s not over. The hard choices about additional savings have now been put to a special committee, which must report back by November.

Senate Minority Leader Mitch McConnell [archival]: We need to quit doing what we’ve been doing. Quit borrowing, quit spending, quit trying to raise taxes, quit over-regulating, and let the private sector flourish.

Steve Hanke: It will start bringing the government spending as a proportion of the total economy-this so-called GDP measure-it’ll bring that down from around 25 per cent to 23 per cent, or something like that. But I do not think what they have done today, as we speak, in Washington DC, is going to change the overall mood and the overall level of confidence in the economy and confidence in economic policy or vision.

Richard Sylla: The United States of America is a country that has always been bailed out by economic growth. I mean, it’s been a country that’s been growing since the beginning, since the 1790s. Generally, when the country has problems they aren’t always solved right away, but higher economic growth generates more government revenue and the problems seem magically to go away as the economy becomes bigger. I suspect that’s what will happen this time, or at least that’s what we can hope will happen based on past experience.

Steve Hanke: The name of the game is, restore confidence you’ve got to shrink the size of the federal government dramatically and talk about things like having a stable dollar is important, having less regulation. You’ve really got to go back and reproduce somebody like Reagan or-in your context-like Lee Kuan Yew in Singapore. Go back to 1965, when Lee Kuan Yew came in, and Singapore was a complete basket case after literally being thrown out of Malaysia. And you came in with a leader who had a vision and he said, ‘Look, we’re not going to waste our time passing the begging bowl, we’re going to have a competitive free market economy and have civil servants that are first class and pay them first class wages.’ And you know the rest of the story. It worked.

Edward Harrison: Really you need to put everyone back to work. You need to take the maximum productivity that you can out of your economy. And so instead of concentrating on cutting government spending, really the United States should be concentrated on reallocating resources to areas of the economy that have prospects for growth going forward. And that would automatically cut the deficit.

To the degree that the deficit’s a problem going forward, it’s largely a question of military spending in the United States, which is much larger than the rest of the world, and also the entitlement spendings; that is, pensions for retirees-state pensions-and healthcare for retirees. Those are the only real questions in terms of the deficit over the long term. All the other stuff is insignificant by comparison.

So basically what we’re doing now is only going to create problems that will make the deficit worse over the short to medium term.

Annabelle Quince: So how do you see the next couple of years for the US and the US economy?

Steve Hanke: Well, two years is quite a long period of time for an economist to be giving a forecast, Annabelle, but I would say for the next year I’m very comfortable with the tack I’ve been on and been writing about. Ever since this fiasco of 2009 occurred, I have said that at best we can expect what’s called a growth recession, and that is we’re growing-there’s positive growth-but the growth is actually at a lower rate than the overall long-run trend rate of growth of 3.1 per cent that we’ve realised in the United States over a long period of time.

So very sluggish growth and a very bad state of affairs, economically. I just don’t see a lot of light at the end of the tunnel right now in the United States-and Europe is even worse.

Edward Harrison: What I think is likely to happen is that we’re going to have some cuts-they’re not going to be enormous cuts, but they’re going to be large enough. The United States is at stall speed right now. Manufacturing is near as a contraction point. We also have monetary policy which has become less accommodative in the US and we are starting to see a lot more job cuts.

So what that means is any sort of shock that we get to the economy will cause the United States to tip into recession.

So I would say that at this point we’re looking at, say, a 30 per cent likelihood of recession. It could be higher going forward, depending on how things progress. And this is exactly the same sort of thing that we saw in Greece when they went to austerity; we saw the exact same thing in Ireland when they went to austerity; that austerity that tipped the economy into recession increases the deficit as opposed to decreases the deficit. And so the United States would be in a worse situation as a result. This is exactly what happened in Japan in 1997 and also what happened in the US in 1937.

Annabelle Quince: Today’s guests were Edward Harrison, economic analyst and the founder of web site Credit Writedowns; professor of applied economics at Johns Hopkins University, Steve Hanke; Professor Richard Sylla, economic historian at New York University; and Steven Keen, associate professor in economics at the University of Western Sydney.

Announcer [archival]: Chief Justice Hughes will administer the oath to Franklin Delano Roosevelt.

Franklin Delano Roosevelt [archival]: This great Nation will endure, as it has endured, will revive and will prosper. So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself.

Annabelle Quince: And if you’re interested in economic history, check out the website for a program that traces the events that led to the Great Depression and the historical arguments surrounding Roosevelt’s New Deal.

Judy Rapley is Rear Vision‘s sound engineer and I’m Annabelle Quince. Thanks as always for joining us.


Steven Keen
Associate Professor in economics and finance at the University of Western Sydney and author of Debunking Economics: the naked emperor of the social sciences.

Steve Hanke

Professor of Applied Economics at Johns Hopkins University

Edward Harrison

Economic analysis and the founder of economic web site – Credit Writedowns.

Richard Sylla

Professor of The History of Financial Institutions and Markets and Economics, at New York University.


Title: Debunking Economics: the naked emperor of the social sciences
Author: Steve Keen
Publisher: Pluto Press & Zed Books, Sydney & London 2001


Annabelle Quince


Annabelle Quince

Radio National often provides links to external websites to complement program information. While producers have taken care with all selections, we can neither endorse nor take final responsibility for the content of those sites.

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.
Bookmark the permalink.

141 Responses to ABC Rear Vision: The US Economy post the 2008 Crash

  1. elliottwave says:

    My oh my what is going on here?

    Look at this chart below and thank the great EW for his brilliance and knowledge.

    Look at the gold price in $AU and you will see that the great EW needs an apology from the doubters.

    If anyone would like the great ones new predictions please ask and you shall receive.

  2. ken says:

    It just takes a quick calculation to show what is wrong. Private debt 300% GDP, public debt about 100% GDP. Total debt 400% GDP. Now most of that debt is longer term bonds which have interest rates overall of at least 5% (lower for government, higher for private) and you have at least 20% of GDP going to interest payments. Fine when new debt is 30% GDP but in any realistic economy its not going to last, and it didn’t. So basically the US economy is spinning its wheels and going nowhere.

  3. TruthIsThereIsNoTruth says:

    It is certainly a historical day, US yields are at historical lows. Ironically one of the most bankrupt countries’ in the world bonds are considered a safe haven assets. Everyone knows the US economy is screwed, but everyone knows they will never default on their debt obligations, funny sort of world. There is a cyclone rampaging the markets, wherever the markets and the economy end up from here ain’t going to be Kansas.

  4. sj says:

    Mr Keen
    Where are some of the old time bloggers with a sense of humour?
    Good to hear from Home for Aussies,Barney Is Right,Bullturnbear,Noah cross,Ak
    TruthIs ThereIs No Truth good to see you are still here.
    Elliotwave even if we disagree on gold I will say you have been upfront from day one all bloggers knew you own gold and you don’t see gold as some sort of extreme right wing religion to be worshipped.

  5. ak says:


    There is nothing historic I am afraid. It will be a historic day when all the delusions about the markets and the economy are purged and the common sense is restored.

    Steve’s explanation of the root causes of the crisis is correct – debtors are paying back debts while savers are trying to save even more.

    August 12, 2011
    Selected Assets and Liabilities of Commercial Banks in the United States 1
    Percent change at break adjusted, seasonally adjusted, annual rate

    Bank credit (2006-1010) 8.4 9.4 1.7 -6.0 -2.8
    Real estate loans (2006-1010) 10.4 6.7 -0.6 -5.1 -5.6
    Deposits (2006-1010) 7.4 9.1 5.7 5.2 2.6

    but the only way forward is to use functional finance to fix the real productive economy by restoring the consumption and investment flows so that the saving desires of the private sector are not frustrated by lowering the GDP.

    But how to achieve that if these few people who understand functional finance can’t even see the essence of the problem with the productive economy manifesting itself with the reduction of productive capacities caused by negative trade balance (losing the competition)? It is not a matter of just printing more money as the system will not fix itself austerity or no austerity.

    Please look at the composition of the trade deficit of the US:

    YTD June 2011 Seasonally Adjusted mln USD

    Exhibit 16. Exports, Imports, and Balance of Advanced Technology Products
    Balance YTD June 2011 mln USD

    Exhibit 16a. Exports, Imports, and Balance of Advanced Technology Products by Technology Group and
    Selected Countries and Areas

    Balance YTD June 2011 mln USD

    Information and Communications
    Balance YTD June 2011 mln USD

    China (total Advanced Technology Products)
    Balance YTD June 2011 mln USD

    There is only a surplus in “Aerospace”

  6. ak says:


    Don’t worry if more austerity is implemented we may soon have a chance to join the second Kosciuszko walk.

  7. TruthIsThereIsNoTruth says:

    Someone has to keep the bears honest SJ.

  8. elliottwave says:


    You are right, where has some of the fun banter between myself and bullturnedbear and all the other guys that frowned upon my comments.

    People know that i am being very over the top with my comments but at least i hope that i am brightening up the place.

    By the way look at the chart below and thank me for my great calls.


  9. elliottwave says:


    I would like to tell you that these people did see the crisis coming and they played the congress, the american public and the world for the fools that we are for letting them get away with the biggest bank robbery in the history of the world.

    Bernanke and Co. are some of the smartest people on earth, but also the most morally corrupted human beings to ever walk the earth.

    Derivatives is what caused the massive escalation in the problems that we have and when these greedy guys started losing control of this they triggered the Lehmann collapse so as they could get paid on their bets 100 cents in the dollar and whistle dixie all the way home.

    The $700 million in toilet paper that they got paid in from the front door and quickly exited the back door is fully protected from whatever the world will see, that is still to be delivered to the world, it has not arrived yet but it will.

    This was pure and simple looting of the US treasury.

    Yet when you see what happened in London, the public was disgusted and outraged that this could happen.What Wall St has done is not evened mentioned anymore and they are still producing these derivatives as if nothing had happened.

    Anyone who does not own any gold by now is really really disappointing as it will be the only currency that will be accepted as real.


  10. Pingback: ABC Rear Vision: The US Economy post the 2008 Crash | Steve Keen's … : - Learn the truth , no more lies

  11. Steve Keen says:

    Then you haven’t read their academic writings, Elliottwave–nor have you lived 40 years amongst academic economists. Bernanke didn’t have a clue that this crisis was coming, and his so-called expertise on the Great Depression was expertise in trying to find an explanation for the GD that was consistent with neoclassical theory. The only explanation that fits is “somebody else did it”, that somebody else being the Federal Reserve. I now regard it as a delicious irony that he is now in charge of that same body.

    There were plenty of morally bankrupt people who made a fortune off the naivety of economists like Bernanke–and others like Hank Paulson who were as naive and still made a fortune–but Bernanke and his academic ilk were clueless.

    I agree entirely with you on Wall Street, and (almost all of) the derivative trade. But I never expected them to go down straight away–as they should–because they still hold the reins of power in America.

  12. RickW says:

    Apparently Venezuela is getting nervous about stability of certain countries’ economies:
    Consequence is that they want their gold back from the Bank of England and other locations.

    There is some concern that a lot of gold being held is only paper. Could be a factor in recent price hike. Or maybe just another factor as it is clear the US is in deep poo and sinking further. This measure is accelerating again:
    This measure is on the decline again:
    Neither good news.

  13. Pingback: ABC Rear Vision: The US Economy post the 2008 Crash | Steve Keen's … | Business News- Market News- tweets

  14. mahaish says:

    interesting isnt it ak,

    the high water mark for the US trade balance was 2006,

    at 753 billion,

    and by 2009 it had fallen off a cliff down to 381 billion.

    a similar phenomenon or cycle before the 91 downturn,

    a high water mark of 151 billion in 87, and by 91 , fallen off the cliff to 31billion,

    2001 , no such effect, and the trade ballance kept getting wider, going from 361 billion to 490 billion in a space of 3 years

    so we are told, a shrinking trade deficit is supposed to be good for us, isnt it

    well it may be a portent of trouble ahead perhaps

    shrinking trade balance means shrinking foreign holdings of domestic currency balances in the banking system,

    short to medium term stress on the capital base of the domestic banking system perhaps.

    and the fed has to step in eventually

  15. Lyonwiss says:

    Steve Keen August 19, 2011 at 2:04 pm

    If an economic theory assumes that there is no credit default (most theories ignore defaults), then the level of debt is inconsequential, because as Bernanke and mainstream economists say “one man’s debt is another man’s asset”: everything cancels out in overall wealth terms.

    During the Great Moderation, credit defaults were so low that neoclassical economists (eg Greenspan) interpreted that as a new stable global economic equilibrium arising from advances in risk management and globalized risk sharing. Derivatives were considered the main financial innovations, which eliminated risk.

    The evidence mostly appeared to support this, except for few well-known scandals and crises, which were ignored. Regulation of derivatives was definitely rejected in the US. But derivatives are leveraged financial instruments, which is a new form of debt, which is not even mentioned in any of the comments on debt in the banking system. As a simplest example, when I buy one ASX200 futures contract on the SFE, I am effectively buying 4100X$25=$102,500 worth of a portfolio of 200 stocks. But my initial margin is currently only $7,000, impying a borrowing of $95,500.

    The analogy with buying a $102,500 house with a mortgage of $95,500 is clear. A 10 percent fall in asset price in either case would lead to negative equity and potential credit default.

    In the case of the above derivative, the face-value or notional-value is $102,500, which does not by itself indicate the leverage involved or hence the implicit debt. But in general, the nature and rationale of derivatives, suggests that the implicit debt is a significant proportion of the notional-value.

    BIS data show the global notional-value of outstanding derivatives is about US$600 trillion. You can guess how much effectively unregulated debt there is, outside the formal banking system.

    The risk of default and potential disruption to the financial system is enormous. Many of the derivatives based on subprime mortgages may not have been marked down. If Madoff could hide a $50 billion black-hole, others can do the same.

    Monetary theories in economics, including neither credit default nor derivatives, completely miss the elephant in the room.

  16. TruthIsThereIsNoTruth says:

    The implication of my statement AK was that I have a view that yields can’t go much lower and if they don’t 18 Aug marks a historical low in yields.

    Both sides of the debate are ignoring the price of debt and liquidity. There seems to be this implicit assumption that the government can just print money with no market effect, the twisted situation at the moment is that the US government can get away with it because it’s bonds are seen as safe haven assets. It is a good time to borrow for the US, the problem is they can’t seem to be able to spend this borrowing productively, rescuing corrupted banks, although probably the lesser of two evils isn’t exactly productive. They need to heavily subsidise their productive businesses to even out the playing field. They’ve been getting screwed by the currency peg and they bend over and take it so they could get widgets with borrowed money.

    btw this doco on debt was made in 2006, pretty interesting.

  17. alainton says:

    Letter from Richard Koo to Economist on economists not having a clue

  18. elliottwave says:

    For my deflationistas,

    Please see attached chart and see what i said would happen to $au gold prices when the haters were pounding me about the $A gold under performance.

    You can see that i was correct as always and have given you a road map into the future for gold priced in Australian dollars.

    If you would have listened to me 2 years ago you would now be retired like me.

    Buy Gold.

  19. Philip says:

    On the matter of debt, I was thinking about how the government warns away consumers from tobacco with pictures of cancer and diseased corpses.

    Maybe the government should force banks to show pictures of people putting plastic bags over their heads, hanging themselves or blowing out their brains with a gun – images that are placed upon every bank loan application!

    This could make people think twice about taking upon debt.

  20. alainton says:

    Its interesting that yesterday Haldene was arguing were up s%%% creek because of a banking aversion to risk whilst today Jürgen Stark has bizarrely told German newspaper Handelsblatt:

    “(Euro-bonds) are a false solution, which … provides completely wrong incentives.” When asked whether the use of loose monetary policy by central banks is speeding up the crisis, he says: “Keeping interest rates too low for too long carries risks. Such a policy contributes to excessive risk-taking and wrong investments and therefore undermines an economy’s growth potential.”

    And dissenting fed member last week said the problem was the old canard ‘policy uncertainty’ preventing entrepreneurs taking risks.

    Its easy to take the p out of central strike W strike Bankers but its shows how economists, like markets, are all at sea at understanding and pricing risks.

    Excessive risk taking on debt fuelled asset bubbles, squeezing capital for insufficient risk taking in the real economy.

  21. Linus Huber says:

    I am no economist. Around 2001 I lost like about 100k with bonds of the former airline Swissair (today Swiss). In Switzerland, that airline was called the flying bank because it was tops in so many ways, well, until some people thought that they have to expand and felt they were greater than simply managing Swissair. Anyhow, from that day on I decided to not trust anyone but to have to inform myself on how to manage my wealth.

    In this context I really appreciate these very valuable insights I gain from Steve Keen and like to express my gratitude. I tried to follow the online lessons but somehow lost a bit interest when confronted with all those formulas that are probably very common to a trained economist. I will check them out again when I feel very keen and alert.

    Coming back to the Swissair story, I got like 7 cents on the dollar on my bonds when they went bankrupt and it really makes me fed up when I see how bondholders get that much consideration today at the expense of tax payers. I accepted those losses grudgingly and went on with life but today (maybe it is the banks and not private persons that would lose) everybody plus his pet is being bailed out. E.g. Greece cannot pay and the banks did were not diligent enough when extending credit to that country; a haircut in the range of 50-80% is only a question of time. The delay allows the banks to transfer the losses again to the citizens of the EU due to the market interference by the ECB.

    So my question, if I may, Steve:

    Do you, based on your evaluation of the current situation, foresee that soon these bail out activities in whatever obscure form and under whatever newly found heading, will halt or will it require a political shift at the ballot box before real change comes?

    Thanks again for all your great work.

  22. mahaish says:

    see where you are coming from titint,

    but i think the issue is why issue any debt at all. if the yanks are so worried about the debt ceiling, well get rid of the treasury overdraft rules and dont issue any debt.

    they have rate targeting by decree at this stage, and further more they are running at near zero fed fund rate anyway.

    so liquidity management isnt an issue,

    the right would argue , what about inflation,

    well what about it, where are we going to get inflation with unemployment rates at between 9 and 17%.

    and besides is a bond issue by the government to cover every dollar of spending any less inflationary than no bond issue. i would argue the difference is perfunctory. cash or government bond they are both very liquid .

    i certainly think we can challemge economic orthodoxy on this point

  23. Pingback: Gold Backwardation, Fiat Paper Money System Collapse « The Bash Street Kids serfdom jailbreak blog

  24. Pingback: Steve Keen Rips “conventional economics” …

  25. economicminor says:

    As said, especially with fiat money, all debt is some one else’s asset. Worse than that in today’s over indebted situation, almost all assets are some one else’s debt.

    What worries me and should be worrying everyone else is what happens when so much debt has to be deleveraged?

    The world as we know it is going to change dramatically. Those with great pensions will be without most of or all the income they have grown accustomed leading to even more deleveraging. The cycle of deflation and disrupted lives is going to be unthinkably bad. No one really want to think about the probable consequences.

    I don’t care much about the derivatives as there aren’t enough real assets in the world to pay them off and by then fiat money will be toilet paper. The deleveraging of debt and derivatives will take down much of the powerful elite of today as their assets are mainly debt and require lots of income to sustain. Their reign will be history as there is no possible way to prevent the deleveraging of this much debt, no matter what kind of insurance they have bought. Their assets will be rendered worthless.

    Gold may be a good asset to hold pretending that there is a reasonable outcome to all this messy promising what we can’t deliver. But in the world of Mad Max or the Blade Runner, I just don’t know where it gets you unless you are ruthless enough to protect it.

    My best guess is that living rurally with water, soil and decent climate will be the best chance of decently surviving the great depression yet to play out.

    Good luck to all of us.

Leave a Reply