This is the video of the seminar I gave in Oxford earlier this month that The Guardian‘s George Monbiot attended. George then wrote the feature “It’s in all our interests to understand how to stop another Great Depression“, which briefly propelled the new edition of Debunking Economics to No. 89 on Amazon UK‘s Bestseller list.
Given that my audience included academic economists–from PhD students to Professors of some note–I went into more depth on the modelling I have done of Minsky’s Financial Instability Hypothesis than I normally do in public talks. The discussion I had afterwards is also recorded, which is why the video is so lengthy.
One part of the discussion that I found quite notable was that, even after showing empirical evidence on the impact that rising and then falling private debt had on the economy both now and during the Great Depression, I couldn’t convince several of the academics in the audience of the importance of private debt: they kept coming back to “one person’s debt is another person’s asset, therefore the level of debt doesn’t matter”. They therefore argued vehemently that the distribution of debt was important, but its aggregate level was irrelevant.
I tried to point out that since the rate of change of debt contributes to aggregate demand (for both newly produced goods & services, and existing assets), then the change in debt matters, but I made no headway at all with the argument.
As I noted at the end, maybe I’d better come back for a longer seminar then. The point I would make, in much more detail, is that even if one accepted that the level of debt can be anything at all without having macroeconomic consequences on its own (which I don’t accept–at some level of debt, debts can’t be repaid and both creditor and debtor fail in a chain reaction of bankruptcies), the rate of change of debt and its acceleration do matter. This in turn gives the level of debt an imputed relevance, since at a low level of debt the rate of acceleration of debt can be both positive and quite high, while at higher levels of debt it will generally be low and can be substantially negative–just as a car’s acceleration can be very high and positive when the car is moving slowly, but will be low and potentially very negative when the car is travelling at a high speed.
I hope that argument would get through, but there’s a lesson to be learnt in the failure of my argument on the day to get past economic a-prioris–even amongst economists who were quite sympathetic to my overall critical attitude to neoclassical economics. This is that a static mindset is so much a part of economic thinking that the “slice of time” consideration that “one person’s debt now is another person’s asset now” completely dominated how they thought about the macroeconomic impact of debt.
I would have left that seminar somewhat deflated if George hadn’t been in the audience. But of course his presence there, and his subsequent column, made it all worthwhile–and helped the first print run run out in a couple of weeks (hence the delay in getting copies to some blog subscribers and CfESI Partners and Fellows; they’ll be on their way–and as signed copies to make up for the delay–after I get to England again in mid-November)
If you’re not a regular reader of Monbiot, you’re missing some real gems of both commentary and journalism. Being an Australian, I have almost no idea of who Christopher Booker is, but George’s hatchet job on him in The superhuman cock-ups of Christopher Booker in his blog today is a gem of a piece.
Dr. Keen,
Arnold Kling has a short review of your book on Econlog. Though the first part is fairly worthless (‘banks were regulated so it was the government’s fault they blew up the economy’) I was wondering if you might respond to a couple of his criticisms.
http://econlog.econlib.org/archives/2011/10/of_bunk_and_eco.html
@steve
Geophysicist Johnathen Carter proves that any financial model that requires claibration can never fully predict the future
http://www.scientificamerican.com/article.cfm?id=finance-why-economic-models-are-always-wrong
The debt credit inequality issue is quite a subtle one and many of the arguments I have advanced (including here) I have found to be flawed on further thought, though there is one argument I now am pretty sure is watertight. The problem is for every credit creation event there is always an asset, often hidden, and often somewhere else and valorizable at some future time – which is the nub of it. Two flawed arguments advanced in this thread I have made similar flawed arguments for before.
1) Gambling can create a debt without an asset
A gamble is a contract to create a debt to one party transferring that sum as an asset to another. The gambler might not have the money to pay? Same as any other contract they can be misvalued.
2) Credit can be spent on consumption not investment
Again a contract that I as a debtor will create an asset out of future earnings. That monies will be withdrawn from future spending, savings and investment so it has macroeconomic consequences – but there is still an asset
3) The One Good Argument – Credit as Monetary Stock
Credit is the creation of a stock of money – which you can spend now
That is priced at the point in time of that loan against an asset value, that asset value on an unsecured loan is the net present value of the future income stream on the loan, for a secured loan is a risk adjusted price based on both the income stream and the value of the collateral.
The value of the income of the debtor can go up or down. If it goes up no impact, but if it goes down risk of default. So you can seize the collatoral right? Well if others incomes are going down the risk adjusted price of the original loan was misvalued, it was valued too highly. If the collatoral is a firm which now has a negative balance sheet because of poor demand liquidation can have an avalanche effect.
Whats more the income stream from the original loan can be financialised, it can be used to leverage credit from others – the potential for doing so will go up and down through time, and for variable rate loans will depend on interest rates.
The only thing you can be sure of is that at the point of the loan the price of the stock of money (the loan) is the same as the speculated price of the future flow of money from repayments or sale of collatoral -from that point on the speculation can be good or bad, its price can rise or fall. The asset value can diverge from the level of the original debt in either direction.
As Minsky argued credit expansion fuels growth which makes lending seem risk free, the stability sows the seeds of destruction as too much lending goes on consumption not investment and too much lending is valued on anticipated collatoral price. Both of these are examples of undervalued risk created by a flase prospectus of stability.
What I think would sink the argument is putting this verbal argument into a formula to show how a credit and asset backing prices can vary through time. Similar formulas in a lot of finance (but not economics) text books.
Shouldn’t it be obvious that one persons debt is another bank’s conjured up asset?
When fractional reserve banking allows bank assets to be brought into existence through no effort on the banker’s behalf, is that not a problem? Surely there’s some moral hazard purely in that act alone?
Thanks Matthew, and yes I think this is sensible.
One thing I’ll be pushing in a forthcoming court case is that “caveat emptor” should be applied to loan contracts–because in a loan contract, the lender is the buyer! There are some clear cases–especially in subprime lending–where the buyer took no care at all, and therefore shouldn’t expect to be able to enforce the default clauses of the contract.
Steve,
I find it very persuasive when I use the other party argument against them.
So if we agree that “one person’s debt is another person’s asset”
then we have to agree that
“change in one person’s debt is a change in another person’s asset”
Now change in another person’s asset matter a lot because of the wealth effect.
Therefore change on one person’s debt matters a lot.
Therefore we should not ignore levels of debt.
QED
@ Steve Keen October 28, 2011 at 9:33 am
You said: “in a loan contract, the lender is the buyer”
That’s an over-simplification. The lenders in over 50 percent of US mortgages were intermediaries. The buyers are the owners of mortgage securities. Because the lenders are not the eventual owners, could the lenders legally foreclose on properties? This “puzzle” is one part of the subprime mess.
How does “caveat emptor” work, if the buyers had no information, but depended solely on investment ratings approved by the regulator?
Hacktuary -
I think my example illustrates the principle. What happens next depends on what is done next.
If my repayment is immediately put back into circulation, via another “loan”, it’s true the amount of money in circulation (and the amount of debt) doesn’t change. Therefore, in Steve’s terms, there is no credit impulse.
However if lots of people suddenly start repaying and no-one wants a new loan, then the amount of circulating money drops and the economy bombs, much to the amazement of Chairmen of the Federal Reserve.
On the other hand, if the amount of new “loans” exceeds the amount repaid by a small steady percentage, then the amount of debt will increase slowly but exponentially, there is a small positive credit impulse, the economy ticks along, and Australian treasurers think they are the world’s greatest economic managers.
The latter is the “normal” condition, but of course it can’t last forever because debt is steadily rising.
So it’s the net aggregate level of debt, and its fluctuations, that count, as Steve says. I agree debt creation needs to be discouraged.
I think a powerful persuasive tool could be to speak in terms of a Real Real GDP rate which subtracts debt-growth financed GDP from the initial number. Realizing that most Western economies have effectively been in recession for the last 30 years might knock a few people to their senses. Greenspan would go from still looking somewhat respectable for residing over the growth period prior to the bust to being exposed as an absolute clown.
LCTesla -
I think that’s an excellent concept. Steve’s graphs show that Australia’s net private debt increased by 20% of GDP in 2007. Without that we would have been in severe recession – shrinking by 16% instead of “growing” by 4%. It would make the smirking Peter Costello look pretty stupid too.
Well, remember, it’s the acceleration that adds to GDP growth, not the growth rate itself. But I probably misspoke on that count in post as well. I don’t know the exact figures, so maybe “30 years of recession” was too strong a claim too. but a debt-adjusted growth rate would certainly not look pretty.
@ Lyonwiss
October 28, 2011 at 11:29 am | #
@ Steve Keen October 28, 2011 at 9:33 am
“You said: “in a loan contract, the lender is the buyer”
“That’s an over-simplification. The lenders in over 50 percent of US mortgages were intermediaries. The buyers are the owners of mortgage securities.”
This infers a chain of owners especially when the mortgages are sliced and dices numerous times. Hence the famous and first Ohio Court ruling against Deutsche Bank?
How does “caveat emptor” work, if the buyers had no information, but depended solely on investment ratings approved by the regulator?
I am not a Lawyer but from what I can remember from Law, is that “caveat emptor” places full and direct responsibility of 100% Plus the Risk and associated costs, upon the (first) buyer; after which, if the first is illegal, the future transactions are fraudulent (with knowledge or not)?
However, I was of the opinion that “caveat emptor” had been removed from Australian Law? (Not that it should be as it applies to every damn transaction in this land of the gouger).
@ lyonwiss – what the mainstream economists will not tell you: its fairly straight forward especially when one considers the whole foundation of the profession of economists in practise is pretence and manipulation to political advantage.
I don’t know how these economists can live with themselves as they don’t appear to know anything about “money”, banking, usury, or lending or gold or interest or in fact, humanity.
Caveat Emptor indeed!
GEAB N°58 is available! Global systemic crisis – First half of 2012: Decimation of the Western banks
- Public announcement GEAB N°58 (October 16, 2011) -
As anticipated by LEAP/E2020, the second half of 2011 is seeing the world continuing its unstoppable descent into global geopolitical dislocation characterized by the convergence of monetary, financial, economic, social, political and strategic crises. After 2010 and early 2011 which has seen the myth of a recovery and exit from the crisis shattered, it’s now uncertainty that dominates the States’ decision-making processes just like businesses and individuals, inevitably generating increasing apprehension for the future. The context singularly lends itself: social explosions, political paralysis and / or instability, return to the global recession, fear over banks, currency war, the disappearance of more than ten trillion USD in ghost-assets in three months, widespread lasting and rising unemployment…
Besides, it’s this very unhealthy financial environment that will cause the “decimation (1) of Western banks” in the first half of 2012: with their profitability in freefall, balance sheets in disarray, with the disappearance of trillions of USD assets, with states increasingly pushing for strict regulation of their activities (2), even placing them under public supervision and increasingly hostile public opinion, now the scaffold has been erected and at least 10% of Western banks (3) will have to pass that way in the coming quarters.
However, in this environment, increasingly chaotic in appearance, trends emerge, the outlook sometimes appears positive… and most importantly, the uncertainty is much less than one might think, if only one analyzes the changes in the world within the framework of the world after the crisis rather than with the criteria of the world before the crisis.
In this GEAB issue, our team also presents its 2012-2016 “country risk” forecast for 40 States, demonstrating that one can depict the situations and identify strong trends through the current “fog of war” (4). In such a context, this decision-making tool is proving very useful for the individual investor as well as the economic or political decision-maker. Our team also presents the changes in the GEAB $ Index and its recommendations (gold-currencies-real estate), including of course the means to protect oneself from the consequences of the coming “decimation of Western banks”.
For this GEAB issue, our team has chosen to present an excerpt from the chapter on the decimation of Western banks in the first half of 2012.
First half of 2012: Decimation of Western banks
In fact, it will be a triple decimation (5) culminating in the disappearance of 10% to 20% of Western banks over the next year:
. a decimation of their staff
. a decimation of their profits
. and lastly, a decimation of the number of banks.
It will be accompanied, of course, by a drastic reduction in their role and importance in the global economy and directly affect banking institutions in other regions of the world and other financial operators (insurers, pension funds …).
An example of bank information at the time of a global systemic crisis Intesa SanPaulo’s stress test results compared to its European competitors (and compared to the first casualty: Dexia) (6)
Our team could address this issue like the Anglo-Saxon media, the president of the United States and his ministries (7), Washington and Wall Street experts and, on a wider basis, mainstream media (8), have done recently over all aspects of the global systemic crisis, that’s to say by saying, “It’s Greece and the Euro’s fault!” It would obviously be a virtue to reduce this part of the GEAB to just a few lines and suppress any hint of analysis of the possible causes in the US, the UK or Japan. But, coming as no surprise to our readers, it won’t be LEAP/E2020’s choice (9). As the only think tank to have anticipated the crisis and rather accurately foreseen its various phases, we’re not now going to give up an anticipation model that works well, benefitting from prejudice without any predictive power (Don’t let’s forget that the Euro is still alive and well (10) and that Euroland has just completed the small feat of, in six weeks, putting together the 17 parliamentary votes needed to strengthen its financial stabilization fund (11)). So, instead of echoing the propaganda or “readymade thought” let’s remain faithful to the method of anticipation and stick to a reality that we must uncover in order to understand it (12).
In this case, for ages, when one thinks of “banks” one thinks first of all of the City of London and Wall Street (13). And with good reason, London for over two centuries and New York for nearly a century have both been the two hearts of the international financial system and the lairs par excellence of the world’s major bankers. Any global banking crisis (as any major bank event), therefore, begins and ends in these two cities since the modern global financial system is a vast process of incessant wealth recycling (virtual or real) developed by and for these two cities (14).
The decimation of the Western banks that begins and will continue in the coming quarters, an event of historic proportions, cannot therefore be understood without first of all measuring and analyzing the role of Wall Street and London in this financial debacle. Greece and the Euro will undoubtedly play a role here as we have discussed in previous GEAB issues, but these are triggers: Greek debt is yesterday’s banking venality that is exploding in the public arena today; the Euro is the arrow of the future that is piercing the current financial balloon. These are the two fingers that highlight the problem, but they aren’t the problem. This is what the wise man knows and the fool doesn’t, to paraphrase the Chinese proverb (15).
In fact, one only needs to look at London and Wall Street to anticipate the future of Western banks, since it’s quite simply there that the banking flock gathers together to come and drink its dollar dose every evening. And the condition of the Western banking system can be measured through changes in bank staff numbers, their profitability and their shareholders. From these three factors one can directly deduce their ability to survive or disappear.
The decimation of bank staff numbers
Let’s begin with the numbers then! Here the picture is bleak for banking sector employees (and now even for the “banking system stars”): since mid-2011 Wall Street and London have continuously announced mass layoffs, spread by the secondary financial centers such as Switzerland and Euroland and Japanese banks. A total of several hundreds of thousands of banking jobs that have disappeared in two waves: first of all in 2008-2009, then since the late spring of this year. And this second wave is gradually gaining momentum as the months go by. With the global recession now under way, the drying up of capital flows to the United States and the United Kingdom as a result of the geopolitical and economic changes under way (16), the huge financial losses in recent months, and all kinds of regulations which gradually “break” the super-profitable banking and financial model of the 2000s, the heads of major Western banks have no choice: they must, at any price, cut their costs as quickly as possible and deeply. Therefore, the simplest solution (after that of overcharging clients) is to lay off tens of thousands of employees. And that’s what is happening. But far from being a controlled process, we see that every six months or so Western bank leaders find that they had underestimated the extent of the problems and are therefore obliged to announce further mass layoffs. With the political and financial “perfect storm” looming in the U.S. for next November and December (17), LEAP/E2020 anticipates a new series of announcements of this kind from early 2012. The “cost-killers” in the banking sector have some good quarters in front of them when we see that Goldman Sachs, which is also directly affected by this situation, reduced to limiting the number of green plants in its offices to save money (18). Although, after eradicating the green plants, it’s usually the “pink slips” (19) that flower.
The decimation of the number of banks
In a way, the Western banking system looks increasingly resembles the Western steel industry of the 1970s. Thus the “ironmasters; thought they were the masters of the world (incidentally actively contributing to the outbreak of World Wars); just like our “major merchant bankers” thought they were God (like Goldman Sachs CEO) or at least masters of the universe. And the steel industry was the “spearhead”, the “absolute economic example” of power for decades. Power was counted in tens of millions of tons of steel just like the power of billions in bonuses for merchant bank executives and traders in recent decades. And then, in two decades for the steel industry, in two / three years for the banks (20), the environment has changed: increased competition, collapsing profits, massive layoffs, loss of political influence, the end of massive subsidies and ultimately nationalization and / or restructuring giving birth to a tiny sector compared to what it was at its heyday (21). In a sense, therefore, the analogy applies to what awaits the Western banking sector in 2012/2013.
Share price changes (and, therefore, losses) for the British taxpayer following the partial government takeover of RBS and Lloyds – Source: Guardian, 10/2011
Already on Wall Street in 2008, Goldman Sachs, Morgan Stanley and JP Morgan had to suddenly turn themselves into “bank holding companies” to be saved. In the City, the British government had to nationalize a whole swathe of the country’s banking system and to this day the British taxpayer continues to bear the cost because the banks’ share prices have collapsed again in 2011 (22). This is also one of the Western banking system’s characteristics as a whole: these private financial players (or market listed) are worth practically nothing. Their market capitalization has gone up in smoke. Of course this creates an opportunity for nationalization at low cost to the taxpayer from 2012 because it’s the choice that will be imposed on States, in the United States as in Europe or Japan. Whether it be, for example, Bank of America (23), CitiGroup or Morgan Stanley (24) in the United States, RBS (25) or Lloyds in the United Kingdom (26), Société Générale in France, Deutsche Bank (27) in Germany, or UBS (28) in Switzerland (29), some very large institutions “too big to fail” will fail. They will be accompanied by a whole swathe of medium or small banks such as Max Bank which has just filed for bankruptcy in Denmark (30).
?
Faced with this “decimation”, States’ resources will be quickly overrun, especially in these times of austerity, low tax revenues and the political unpopularity of the bank bailout (31). Political leaders will, therefore, have to focus on protecting the interests of savers (32) and employees (two areas full of electoral promise) instead of safeguarding the interests of bank executives and shareholders (two areas full of electoral pitfalls, whose precedent in 2008 demonstrated its economic futility (33)). This will result in a new collapse in financial stock prices (including insurance, considered very “close” the banking situation) and increase hedge funds, pension funds (34) and other players’ turmoil traditionally closely intertwined with the Western banking sector. No doubt this will only strengthen the general recessionary environment by limiting loans to the economy just as much (35).
Global public debt (1990-2010) (as a % of GDP, constant 2010 exchange rates) – Sources: BRI / McKinsey, 08/2011
To simplify the view of this development, one can say that the Western banking market, significantly reducing its scope and the number of players in this market, has to downsize proportionally. In some countries, especially those where the very large banks account for 70% or more of the banking market, it will inevitably lead to the disappearance of one or another of these very large players … whatever their leaders, stress tests or rating agencies say (36). If you are a shareholder (37) or customer of a bank that may collapse in the first half of 2012 there are, of course, precautions to take. We offer a number in the recommendations in this issue. If one is an officer or employee of such an institution, things are more complicated because we now think it’s too late to avoid serial bankruptcies; and the banking job market is saturated because of massive layoffs. However, here is a piece of advice from our team if you are an employee in any of these institutions, if you are made an interesting offer of voluntary redundancy, take it as the next few months, the redundancies won’t be voluntary and will be under much less favorable conditions.
———
Notes:
(1) Decimation was a Roman military punishment by death of one legionnaire in ten when the army had shown cowardice in battle, disobedience or inappropriate behavior. The Roman system of decimation worked by drawing lots.
(2) Regulations that severely excise the banks’ most profitable activities. Source: The Independent, 12/10/2011
(3) Our team believes the percentage to be somewhere between 10% and 20%.
(4) Fog of war to which the mainstream media incidentally contribute to a great extent instead of trying to clarify the situation.
(5) Considering decimation in its widest sense, that’s to say a sharp decrease can be much more than the Roman era’s 10%.
(6) As far as LEAP/E2020 is concerned, this type of classification presages nothing since the current shock is much higher in intensity and duration than the assumptions of the stress tests. And this equally applies to the US banks of course.
(7) Taking everything into account regarding Barack Obama, in difficult position for the next presidential elections because of his disastrous economic record and the deep disappointment of most of those who voted for him in 2007 because of his many broken promises, he must at all costs try to blame anyone or anything for the disastrous state of the economy and American society. So why not Greece and the Euro? When that doesn’t work anymore (in a couple of months), it will be necessary to find something else, but short-sighted management is an Obama administration specialty; no doubt his Treasury Secretary Timothy Geithner, the faithful Wall Street link, will find another explanation. In any case, it’s not Wall Street’s fault, we can at least be certain of that. Otherwise, the Obama administration will always bring out the “specter of Iran” to try and divert attention from the United States internal problems. Incidentally, this seems to be the current situation with the cock-and-bull story of the attempted assassination of the Saudi ambassador to Washington by Mexican drug traffickers paid by Iranian intelligence. Even Hollywood would balk at the improbability of such a scenario, but to save the “Wall Street” soldier and try to be re-elected, isn’t it worth a try? Sources: Huffington Post, 26/07/2011; NBC, 13/10/2011
(8) This mainstream media (financial or general) have, in fact, a brilliant history in anticipating the crisis. You certainly remember their 2006 headlines warning you against the 2007subprime crisis, announcing the Wall Street “implosion” of 2008 and, of course, in early 2011 telling you of a major return of the crisis in summer 2011! No, you don’t remember? Don’t worry, your memory is good … because they never made the headlines, they never warned you of these major events and their causes. So, if you continue to think that, as they repeat every day, the current problems are caused by “Greece and the euro”, it’s that you think they have suddenly all become honest, intelligent and insightful … and you must therefore also believe in Father Christmas in the same sense. It’s beguiling, but not very effective for facing the real world.
(9) For a long time, our team has been underlining the European difficulties, anticipating rather correctly the evolution of the crisis on the « Old Continent ». But we try not to fall victim of the syndrom of the European tree that hides the forest of major US and UK problems.
(10) A bit of education: those who bet on a Euro collapse a month ago have lost money again. To the rhythm of “the end of the Euro crisis” roughly every 4 months, they won’t have much left by 2012. Whilst the United States for example have not been able to demonstrate their ability to overcome the opposition between Republicans and Democrats on the control of their deficits.
(11) Whilst the United States, for example, have not been able to demonstrate their ability to overcome Republican and Democrat opposition on the control of their deficits.
(12) It’s appalling to see the G20’s preoccupation with the Euro whilst the central issue of the future is the Dollar. Obviously, the huge media manipulation operation launched by Washington and London will have succeeded once again in deferring, for a time, the inevitable questioning of the US currency’s central status. As anticipated by our team, one can expect nothing from the G20 until the end of 2012. It will continue to talk, pretend to act and to actually ignore the key issues; those are the hardest to put on the table. The recent announcements of an increase in resources for the IMF are a part of these empty words that will not be acted upon because the BRICS (the only ones able to augment IMF funds) will not finance an institution in which they continue to only have marginal influence. Meanwhile, these announcements make believe that there is still a shared commitment to international action. The alarm will be all the more painful in the months to come.
(13) If you think of Greece it’s because you are Greek or that you are a manager of shareholder of a bank which has lent too much to the country over the last ten years
(14) And in a way also for the two States involved. But this is already a moot point, and widely discussed for that matter, to know if such financial markets are a blessing or a curse for the States and people that host them.
(15) “When a finger is pointing at the moon, the fool looks at the finger”
(16) Between Euroland’s increasing integration which deprives the City of lucrative markets and closer economic, financial and monetary ties with the BRICS, bypassing Wall Street and the City, they are growing shares of the global financial market escaping London and New York banks.
(17) See GEAB N°57
(18) Source: Telegraph, 19/08/2011
(19) In the United States the « pink slip » is a pink form indicating layoff. Source: Wikipedia
(20) It takes more time to relocate heavy industry than a trader’s desk.
(21) This is, more or less, the procedure followed in the United States and Europe.
(22) See chart above.
(23) Bank of America is definitely at the confluence of major and growing problems: a lawsuit against it claiming $50 billion for concealing losses on the acquisition of Merrill Lynch in late 2008, a massive grassroots rejection by customers following its decision to impose a $5 per month cost for cash cards, a long and unexplained crash of its website; series of trials over subprime involving individual owners and local authorities, and a threat to place Countrywide in bankruptcy, another of its acquisitions in 2008, to limit its losses. According to LEAP/E2020, it embodies the ideal US bank for a crash scenario between November 2011 and June 2012. Sources: New York Times, 27/09/2011; ABC, 30/09/2011; Figaro, 29/06/2011; CNBC, 30/09/2011; Bloomberg, 16/09/2011
(24) The US bank which, in 2008, received the largest slice of public financial support and which, once again, is panicking the markets. Sources: Bloomberg, 30/09/2011; Zerohedge, 04/10/2011
(25) One of the most vulnerable banks in Europe. Source: Telegraph, 14/10/2011
(26) Which itself is also seeing the hour of the cut in its credit rating approach. Source: Telegraph, 12/10/2011
(27) The leading German bank, which is already exposed to a cut in its credit rating. Source: Spiegel, 14/10/2011
(28) UBS is also on the road to a cut in its credit rating. Source: Tribune de Genève, 15/10/2011
(29) Société Générale, Deutsche Bank and UBS have a point in common of particular concern: all three rushed to the US “El Dorado” during the last decade, investing like drunken sailors in the US financial bubble (Deutsche Bank in subprimes, as Société Générale in CDS and UBS in tax evasion). Today, they don’t know how to exit this maelstrom that increasingly drives them to the bottom each day. In passing, we recall that in 2006, we recommended that European financial institutions free themselves from US markets as soon as possible, which appeared very dangerous to us.
(30) Source: Copenhagen Post, 10/10/2011
(31) Even the BBC, certainly marked by the UK riots in summer 2011, asks itself a question, “unthinkable” just a year ago for this type of media: can the United States expect social unrest? To ask the question is to answer it. And in Europe, a country like Hungary, with Social-Nationalist government, directly accused the banks, especially foreign ones, of being responsible for the crisis facing the country. Source: BBC, 20/09/2011; New York Times, 29/10/2011
(32) Of which an increasing number have begin to rebel against banking system practices, especially in the United States where Wall Street rejection is growing exponentially, weakening major US banks on a daily basis. Sources: CNNMoney, 11/10/2011; MSNBC, 10/11/2011
(33) And it’s even worse than economic futility since a recent study had shown that banks that received public financing were subsequently shown to be the most prone to make risky investments.Source: Huffington Post, 16/09/2011
(34) US public pension funds are now facing a financial chasm estimated at between one and three trillion USD. Will the US public authorities choose to save the banks or their retirees? Because they will soon have to choose. Source: MSNBC, 23/09/2011
(35) Source: Telegraph, 02/10/2011
(36) None of these banks are able to withstand the global recession and the implosive melding of financial assets that will prevail in the coming months.
(37) We could have also developed the point that we are witnessing a process of “bank shareholder decimation”.
Dimanche 16 Octobre 2011
In the same category:
Advice to the G20 leaders: The G20’s three strategic priorities in 2012/2014 to avoid a « tragic decade » – 10/10/2011
For 200 euros, have access to 6 years of GEAB archives! – 14/09/2011
Traffic – LEAP/E2020 website has become the main website on the global crisis enjoying a worldwide audience – 21/08/2011
Reminder – Open letter / London G20 Summit: Last chance before global geopolitical dislocation – 03/08/2011
The decade from 2020 to 2030: Welcome to the World Afterwards… the babyboomers ! by Franck Biancheri – 11/07/2011
MAP3-July2011 – Contents – 11/07/2011
The first half of the decade marked primarily by world geopolitical dislocation – 05/02/2011
@ Peterjbolton October 28, 2011 at 5:16 pm
Caveat emptor is at work, because buyers of mortgage securities are suffering losses. Except they are suing.., thus letting law decide the actual meaning of “caveat emptor”. The law will probably enforce signed contracts.
Thanks Steve – the legal process of debt origination is an interesting area, i doubt it’s declared anywhere in the loan agreements that the lender is pre-purchasing the borrowers commitment to repay or that the exchange is for bank credit and not currency (what is the consideration?)
Can a bank actually own someone elses future commitment to repay or is that borrowed? If borrowed, is it truly an asset? Are the disclosures complete on this regard? If the industry experts don’t understand the origination process than how can a debt contract to an ordinary person be enforceable?
On the subject of one mans debt is another mans asset
-Assets fluctuate but debts are fixed so only comparable at an origination point
-What happened in 2008 and currently in Europe? Aren’t we in the midst of the empirical rejection of this notion?
-Isn’t it just as true that ‘many mans debts to become a few mans assets’ which leads to an inability for the many to meet the repayments?
Steve on your minsky/schumpeter formula
GDP+delta debt
It seems to be derived from aggregates and an example of what you criticise elsewhere as period analysis
I.e. GDP t1 = GDP t0 +delta Debt t0
It might be sounder to derive from from continuous flow equations, ensuring debt and asset backed debt income are represented on both sides of equations
and in the form Y = (Cs +Cs dd)+ (I+I dd) + E + (Gs +GS dd) = R + Id + P + W
Where
Y = GDP
Cs = Consumer Spending
I = Investment made by industry
E = Excess of Exports over Imports
Gs = Government Spending
R=rents
Id=income from debts, interest plus principal repayments
P= profits (after statistical adjustments)
W= wages
Then if
dd = change in debt in that sector, DD = total change in debt
Simplifying
Cs+I+E+GS+DD = R +Id +P+W
divide both sides by the non debt based asset income
CS+I+E+GS+DD
______________=Id
R+P+W
or change in debt
CS+I+E+GS
____________=DD
R+P+W+Id
Interesting relationships, very Abba Lerner, a fall in debt based incomes cripples aggregate demand, unless new debt is created.
Of course I should have added a term for debt repayment on the LHS
Steve,
I was really fascinated by the question and answer period, and while I agree with your point that part of what is driving the neoclassical blind spot to debt is the “time slice” bias, I wonder if you might have been more rhetorically successful if you leaned on the “loans create deposits” point until it really sunk in.
I first came across “endogenous money” here, and it really changed my view. How I understand it: When I get a loan from a bank, the total purchasing power in the economy and therefore aggregate demand (assuming I spend my loan – a fair assumption that I think one of the questioners explicitly mentioned) increases, because no other deposits in the banking system are debited. Isn’t that kind of it? From there your view about the way change in debt adds to aggregate demand falls right out. To me, at least, it seems hard to really understand one and not the other, whatever the distribution effects of the process.
Then we get the parable of the American with the hundred euro note. Which totally misses the point because it goes back to two-party transactions and leaves out the banking system. In the real world, the American plunks the 100 euro note down on the counter, the hotel manager takes the note to the bank, pays off his debt, and the banking system has an extra 100 euro note in it. The bank might make a loan to allow other indebted people to refinance, or to fund sound investment… or it might not, especially if everyone else in the community (the baker, the tailor, the prostitute, whoever) is terribly underwater. In the latter case the banker probably takes the 100 euro note and buys the safest government debt on the planet. The American then comes back downstairs and wants to know where the hell his euros are. End of parable.
which of course cancels out – stupid – so implying that the aggregate demand only depends on the change in debt not the level of debt.
You’re dead right George. I am so aware of the endogenous money approach that sometimes I forget how foreign it is to people who haven’t been exposed to it. So I present it quickly and then move on to analysis based on it, not appreciating that my audience is still stuck in the “deposits create loans” view and I’ve lost them at that point.
Thanks too for that lovely rebuttal of the “hundred Euro” parable. I get that one thrown my way every now and then, but mainly by friends and family so I just laugh at the joke and move on to the next topic. That’s a very nice way of bringing that one down; however I can also see said friends and family thinking “but wouldn’t it be better if the parable were true” and then I’d have some serious discussion to cope with.
That was one of the disasters of securitisation Lyonwiss: lenders got to defraud the public twice rather than merely once. It’s why I wrote the following to the Wallis Committee back in 1996, after they casually told me–at the end of my own testimony–that they favoured securitised lending:
…
(2) The impact of securitisation
The securitisation of debt documents such as residential mortgages does not alter the key issue, which is the ability of borrowers to commit themselves to debt on the basis of “euphoric” expectations during an asset price boom. The ability of such borrowers to repay their debt is dependent upon the maintenance of the boom, and as the share market reactions to yesterday’s comments by Alan Greenspan reminded us, such conditions cannot be maintained indefinitely.
Should a substantial proportion of eligible assets (e.g., residential houses during a real estate boom like that of 87-89) be financed by securitised instruments, the inability of borrowers to pay their debts on a large scale will not, of course, directly affect liquidity in the same fashion that a failure of bank debtors does. Instead, the impact will be felt by those who purchased the securities, or by insurance firms who underwrote the repayment.
Where this is a government, the impact on liquidity will again be slight, since public debt will replace private.
Where this is a financial institution, such as a bank, it will be in a very similar situation to the State Bank of Victoria (and many others) after the last real estate crash, with similar consequences.
Where this is an insurance company, it could be driven into bankruptcy, with an impact on liquidity via its shareholders and its own creditors. However this would not be as serious as the second instance above.
Where the securities are tradeable, there would obviously be a collapse in the tradeable price, and, potentially, the bankrupting of many of the investors–depending again on their own financing arrangements.
Steve, Re George and endogenous money -
I wonder if the “loans create deposits” business is still making it more complicated than it needs to be.
Correct me if I’m wrong, but it seems to me the essence is that new money (new purchasing power) is created out of nothing.
That is true which ever comes first – loans, deposits, chickens, eggs. Even in the textbook fractional reserve process, a “loan” comprises 90% (or whatever) new money. No-one else has to do without their purchasing power, so purchasing power rises. Perhaps is worse if loans lead deposits, but that seems to be a secondary point.
Dynamic Stochastic General Equilibrium theory appears to be a contradiction in terms, there fore is nonsense from a math point of view. A model that is purely equilibrium based cannot be dynamic. On this point alone, one could desire to quickly abandon the whole thing.
Perhaps Geoff; the key point of course is “out of nothing”: no-one has to forego spending power in order for a loan (and a deposit) to be created.
@ Steve Keen October 29, 2011 at 9:03 am
You said: “That was one of the disasters of securitisation Lyonwiss: lenders got to defraud the public twice rather than merely once.”
You don’t seem to have read what I said! I said very clearly that the lenders are effectively the buyers of mortgage securities. These lenders are the losers (ie they are not defrauding themselves). You have to understand that this makes the old idea of “only banks lend money” substantially wrong. You have to understand the difference between origination and lending.
Debt securitisation radically and fundamentally changes the debt process. The reason why it occurred was because the “loans create deposits” view is not entirely correct. (Otherwise, there is no incentive for securitisation.) I’m discussing this in greater detail in the paper I’m writing at the moment.