INET Presentation: Minskian Perspective on Instability in Financial Markets

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Below is the video of my talk at INET’s Berlin 2012 con­fer­ence. The other videos for the con­fer­ence are avail­able from INET’s web­site: Day 1; Day 2; Day 3.

Bear­ing in mind that I didn’t see all pre­sen­ta­tions,  my favourite talks (in deliv­ery order) were those by: George Soros; Gerd Gigeren­zerAxel Lei­jon­hufvud; Michael Hud­sonYanis Varo­ufakis; Dirk Beze­mer; and Moritz Schu­lar­ick.

 INET will pub­lish this paper on their web­site in due course. Click here for the Pow­er­point file;
Click here for the data: Debt­watch mem­bers; (CfESI mem­bers link to come in Syd­ney morning)

Introduction

In the seem­ingly never-ending after­math to the eco­nomic cri­sis that began in 2007, there is lit­tle dis­agree­ment that finan­cial mar­kets are char­ac­ter­ized by insta­bil­ity rather than sta­bil­ity. Even Eugene Fama, the most influ­en­tial pro­po­nent of the Cap­i­tal Assets Pric­ing Model (CAPM; Fama 1970), now acknowl­edges that CAPM is strongly con­tra­dicted by the data:

The attrac­tion of the CAPM is that it offers pow­er­ful and intu­itively pleas­ing pre­dic­tions about how to mea­sure risk and the rela­tion between expected return and risk. Unfor­tu­nately, the empir­i­cal record of the model is poor—poor enough to inval­i­date the way it is used in appli­ca­tions… whether the model’s prob­lems reflect weak­nesses in the the­ory or in its empir­i­cal imple­men­ta­tion, the fail­ure of the CAPM in empir­i­cal tests implies that most appli­ca­tions of the model are invalid. (Fama and French 2004, p. 25)

CAPM’s empir­i­cal demise as a the­ory of finance has been accom­pa­nied by the rise of behav­ioural finance, which attrib­utes much of the insta­bil­ity of finance mar­kets to the lim­ited and heuris­ti­cally ori­ented cog­ni­tive capac­i­ties of actual traders (Kah­ne­man and Tver­sky 1979; Kah­ne­man 2003). While this is clearly an impor­tant aspect of insta­bil­ity, I will take a dif­fer­ent tack and sit­u­ate my expla­na­tion in the inte­grated macro-financial vision of Hyman Minsky’s Finan­cial Insta­bil­ity Hypoth­e­sis (FIH). Pre­vi­ous papers have applied Minsky’s vision to macro­eco­nom­ics (Keen 1995; Keen 1997; Keen 2000; Keen 2011); in this paper I will focus on the impli­ca­tions of Minsky’s analy­sis for the behav­iour of finan­cial markets.

A lengthy pre­lude is nec­es­sary before I con­sider Minsky’s analy­sis of finan­cial mar­kets, since past expe­ri­ence has shown that a neo­clas­si­cal per­spec­tive on eco­nom­ics (which the vast major­ity of pol­icy mak­ers have, as well as most econ­o­mists) obstructs com­pre­hen­sion of the link Min­sky pos­tu­lates between debt and asset prices.

A Primer on Minsky

Min­sky enjoyed a strong fol­low­ing amongst Post Key­ne­sian econ­o­mists, but he was almost com­pletely ignored by neo­clas­si­cal econ­o­mists before the cri­sis. Bernanke’s treat­ment of him is not atypical:

Hyman Min­sky (1977) and Charles Kindle­berger (1978) have in sev­eral places argued for the inher­ent insta­bil­ity of the finan­cial sys­tem but in doing so have had to depart from the assump­tion of ratio­nal eco­nomic behav­iour… [A foot­note adds] I do not deny the pos­si­ble impor­tance of irra­tional­ity in eco­nomic life; how­ever it seems that the best research strat­egy is to push the ratio­nal­ity pos­tu­late as far as it will go. (Bernanke 2000, p. 43)

Now, after the cri­sis that his the­ory antic­i­pated, neo­clas­si­cal econ­o­mists are pay­ing some atten­tion to his hypoth­e­sis, and there has been at least one attempt to build a New Key­ne­sian model of a key phe­nom­e­non in Minsky’s hypoth­e­sis, a debt-deflation (Krug­man and Eggerts­son 2010). How­ever, to those of us who are not new to Min­sky, it is hard to recog­nise any ves­tige of the Finan­cial Insta­bil­ity Hypoth­e­sis in Krugman’s work. This reac­tion is based not merely on Minsky’s explicit denial that his hypoth­e­sis could be mod­elled from a neo­clas­si­cal per­spec­tive (Min­sky 1982 , p. 5), but on ways in which it is strictly incom­pat­i­ble with New Key­ne­sian method­ol­ogy. There are many facets to this, but I will focus on two that are cru­cial to the link between the FIH and finan­cial mar­ket insta­bil­ity: dis­e­qui­lib­rium and endoge­nous money.

Disequilibrium

Min­sky pre­cur­sors Schum­peter and Fisher accepted that cap­i­tal­ism was always in dis­e­qui­lib­rium. Schum­peter saw insta­bil­ity as intrin­sic to cap­i­tal­ism, and regarded it as not a flaw, but as the source of capitalism’s vital­ity (Schum­peter 1928). Fisher, as an apos­tate from neo­clas­si­cal equi­lib­rium mod­el­ling after the Great Depres­sion ruined him, put the neces­sity for dis­e­qui­lib­rium mod­el­ling very clearly—even for those who believe that cap­i­tal­ism is fun­da­men­tally sta­ble. Fisher argued that, even if a ten­dency towards equi­lib­rium is assumed, as a mat­ter of fact, all eco­nomic vari­ables will be in dis­e­qui­lib­rium at all times in the real econ­omy. Eco­nom­ics the­ory there­fore must be dis­e­qui­lib­rium in nature:

We may ten­ta­tively assume that, ordi­nar­ily and within wide lim­its, all, or almost all, eco­nomic vari­ables tend, in a gen­eral way, toward a sta­ble equi­lib­rium… But … New dis­tur­bances are, humanly speak­ing, sure to occur, so that, in actual fact, any vari­able is almost always above or below the ideal equilibrium…

The­o­ret­i­cally there may be—in fact, at most times there must be—over-or under-production, over– or under-consumption, over– or under-spending, over– or under-saving, over– or under-investment, and over or under every­thing else. It is as absurd to assume that, for any long period of time, the vari­ables in the eco­nomic orga­ni­za­tion, or any part of them, will “stay put,” in per­fect equi­lib­rium, as to assume that the Atlantic Ocean can ever be with­out a wave.’ (Fisher 1933, p. 339; empha­sis added)

Min­sky went fur­ther than Schum­peter and Fisher to argue that equi­lib­rium itself was inher­ently unsta­ble, and con­tained the seeds of dis­as­ter as well as of bounty. Because sta­bil­ity was the excep­tion rather than the norm in a cap­i­tal­ist econ­omy, any period of sta­bil­ity will have been pre­ceded by a more tur­bu­lent time; and because the future was uncer­tain, a period of tran­quil­lity would lead to cap­i­tal­ists revis­ing their expec­ta­tions upwards:

Sta­ble growth is incon­sis­tent with the man­ner in which invest­ment is deter­mined in an econ­omy in which debt-financed own­er­ship of cap­i­tal assets exists, and the extent to which such debt financ­ing can be car­ried is mar­ket deter­mined. It fol­lows that the fun­da­men­tal insta­bil­ity of a cap­i­tal­ist econ­omy is upward. The ten­dency to trans­form doing well into a spec­u­la­tive invest­ment boom is the basic insta­bil­ity in a cap­i­tal­ist econ­omy. (Min­sky 1982, p. 67)

Minsky’s clas­sic phrase that “Sta­bil­ity … is desta­bi­liz­ing” (Min­sky 1982, p. 101) encap­su­lates his cycli­cal vision of cap­i­tal­ism. Any attempt to shoe­horn this into the com­par­a­tive sta­tic, shift­ing equi­lib­rium method­ol­ogy of New Key­ne­sian macro­eco­nom­ics is cer­tain to car­i­ca­ture his analy­sis rather than do it justice.

Endogenous Money

Banks play a cru­cial role in Minsky’s analy­sis because they can endoge­nously expand the money sup­ply in response to entre­pre­neur­ial or Ponzi Finance demands for funds. This empha­sis upon the cru­cial role of banks can be traced back to Minsky’s PhD advi­sor Schum­peter, who argued that invest­ment is not financed by sav­ings, but by the endoge­nous expan­sion of the money sup­ply by banks:

Even though the con­ven­tional answer to our ques­tion is not obvi­ously absurd, yet there is another method of obtain­ing money for this pur­pose, which … does not pre­sup­pose the exis­tence of accu­mu­lated results of pre­vi­ous devel­op­ment, and hence may be con­sid­ered as the only one which is avail­able in strict logic. This method of obtain­ing money is the cre­ation of pur­chas­ing power by banks… It is always a ques­tion, not of trans­form­ing pur­chas­ing power which already exists in someone’s pos­ses­sion, but of the cre­ation of new pur­chas­ing power out of noth­ing. (Schum­peter 1934, p. 73)

Schum­peter thus saw invest­ment as being pri­mar­ily financed not out of income, but out of the increase in the money sup­ply caused by banks issu­ing loans to entrepreneurs—where this increase in the money sup­ply was exactly matched by and caused by an increase in debt.

Schumpeter’s entirely the­o­ret­i­cal argu­ments on both the nature of bank­ing and the ulti­mate source of finance for invest­ment received sub­se­quent sup­port from empir­i­cal researchers. Basil Moore (Moore 1979; Min­sky, Nell et al. 1991) over­turned the “money mul­ti­plier” model of money cre­ation with empir­i­cal research which showed that bank lend­ing pre­ceded reserve cre­ation (see also Holmes 1969; Car­pen­ter and Demi­ralp 2010). Fama and French con­cluded that cor­re­la­tions they found between invest­ment and the change in cor­po­rate debt lev­els “con­firm the impres­sion that debt plays a key role in accom­mo­dat­ing year-by-year vari­a­tion in invest­ment.” (Fama and French 1999, p. 1954)

How­ever, ris­ing debt does not only finance invest­ment: it also finances spec­u­la­tion. Enter Min­sky, who extended Schum­peter by con­sid­er­ing the demands of Ponzi Financiers as well. These bor­row­ers do not invest, but buy exist­ing assets and hope to profit by sell­ing those assets on a ris­ing mar­ket. There­fore, unlike Schumpeter’s entre­pre­neurs, whose debts today can be ser­viced and repaid from prof­its tomor­row, Ponzi Financiers always have debt ser­vic­ing costs that exceed the cash flows from the assets they pur­chased with bor­rowed money. They there­fore must expand their debts or sell assets to con­tinue functioning:

A Ponzi finance unit is a spec­u­la­tive financ­ing unit for which the income com­po­nent of the near term cash flows falls short of the near term inter­est pay­ments on debt so that for some time in the future the out­stand­ing debt will grow due to inter­est on exist­ing debt… Ponzi units can ful­fil their pay­ment com­mit­ments on debts only by bor­row­ing (or dis­pos­ing of assets)… a Ponzi unit must increase its out­stand­ing debts. (Min­sky 1982, p. 24)

Schum­peter and Min­sky both saw credit money cre­ated by the bank­ing sys­tem as the source of the aggre­gate demand in excess of income. Min­sky put this explicitly:

If income is to grow, the finan­cial mar­kets, where the var­i­ous plans to save and invest are rec­on­ciled, must gen­er­ate an aggre­gate demand that, aside from brief inter­vals, is ever ris­ing. For real aggre­gate demand to be increas­ing, … it is nec­es­sary that cur­rent spend­ing plans, summed over all sec­tors, be greater than cur­rent received income and that some mar­ket tech­nique exist by which aggre­gate spend­ing in excess of aggre­gate antic­i­pated income can be financed. It fol­lows that over a period dur­ing which eco­nomic growth takes place, at least some sec­tors finance a part of their spend­ing by emit­ting debt or sell­ing assets. (Min­sky 1963; Min­sky 1982) (Min­sky 1982, p. 6; empha­sis added)

This endoge­nous money per­spec­tive thus tran­scends Wal­ras’ Law, which plays such a key role in Neo­clas­si­cal equi­lib­rium mod­el­ling but is valid only in an econ­omy with­out banks. In a credit econ­omy, a dynamic dis­e­qui­lib­rium “Walras-Schumpeter-Minsky’s Law” applies instead: aggre­gate demand is income plus the change in debt, and this is expended on both goods and ser­vices and finan­cial assets. There­fore in a credit-based econ­omy, there are three sources of aggre­gate demand, and three ways in which this demand is expended:

  1. Demand from income earned by sell­ing goods and ser­vices, which pri­mar­ily finances con­sump­tion of goods and services;
  2. Demand from ris­ing entre­pre­neur­ial debt, which pri­mar­ily finances invest­ment; and
  3. Demand from ris­ing Ponzi debt, which pri­mar­ily finances the pur­chase of exist­ing assets.

Neoclassical misinterpretations of Fisher, Minsky & Banking

The endoge­nous cre­ation of money by banks means that the level and rate of change of pri­vate debt play cru­cial roles in Minsky’s macro­eco­nom­ics. In con­trast, neo­clas­si­cal the­ory treats banks as mere inter­me­di­aries between savers and bor­row­ers, for­mally ignores them in DSGE mod­el­ling, and treats the level and rate of change of pri­vate debt as macro­eco­nom­i­cally unim­por­tant. Before the cri­sis, Bernanke dis­missed Fisher’s debt-deflation expla­na­tion for the Great Depression:

because of the coun­ter­ar­gu­ment that debt-deflation rep­re­sented no more than a redis­tri­b­u­tion from one group (debtors) to another (cred­i­tors). Absent implau­si­bly large dif­fer­ences in mar­ginal spend­ing propen­si­ties among the groups, it was sug­gested, pure redis­tri­b­u­tions should have no sig­nif­i­cant macro-economic effects. (Bernanke 2000, p. 24)

Even after the cri­sis, when pri­vate debt had to be acknowl­edged as a fac­tor, neo­clas­si­cal mod­ellers insisted that the aggre­gate level of debt was unimportant—only its dis­tri­b­u­tion could matter:

Ignor­ing the for­eign com­po­nent, or look­ing at the world as a whole, the over­all level of debt makes no dif­fer­ence to aggre­gate net worth — one person’s lia­bil­ity is another person’s asset…

In what fol­lows, we begin by set­ting out a flexible-price endow­ment model in which “impa­tient” agents bor­row from “patient” agents, but are sub­ject to a debt limit. If this debt limit is, for some rea­son, sud­denly reduced, the impa­tient agents are forced to cut spend­ing… (Krug­man and Eggerts­son 2010, p. 3)

Krug­man reasserted this analy­sis in a recent blog, argu­ing that the level of debt doesn’t mat­ter, because debt is “money we owe to ourselves”:

Peo­ple think of debt’s role in the econ­omy as if it were the same as what debt means for an indi­vid­ual: there’s a lot of money you have to pay to some­one else. But that’s all wrong; the debt we cre­ate is basi­cally money we owe to our­selves, and the bur­den it imposes does not involve a real trans­fer of resources.

That’s not to say that high debt can’t cause prob­lems — it cer­tainly can. But these are prob­lems of dis­tri­b­u­tion and incen­tives, not the bur­den of debt as is com­monly under­stood. (Krug­man 2011)

The flaw in this neo­clas­si­cal approach to debt and bank­ing is eas­ily illus­trated using book­keep­ing tables. In the fol­low­ing two tables, trans­ac­tions are shown from the bank’s point of view, so that cred­it­ing an account by an increase in deposits is shown as a neg­a­tive (since deposits are a lia­bil­ity for the bank) and deb­it­ing an account by an increase in debt is shown as a pos­i­tive (since loans are an asset). The neo­clas­si­cal vision of sav­ing as mod­elled by Krug­man (after insert­ing an implicit bank­ing sec­tor into Krugman’s bank-less model) is shown in Table 1. From this per­spec­tive, lend­ing makes no dif­fer­ence to the level of aggre­gate demand (unless the impa­tient agent has a markedly higher propen­sity to spend) because lend­ing does not change the amount of money in circulation—it only alters its distribution.

Table 1: Neo­clas­si­cal per­spec­tive on lending

Assets Deposits (Lia­bil­i­ties)
Action/Actor Patient Impa­tient
Make Loan +Lend –Lend

 

The endoge­nous money vision is shown in Table 2. From this per­spec­tive, lend­ing increases the amount of money in cir­cu­la­tion, and adds to the spend­ing power of the “Impa­tient agent” (in prac­tice, nor­mally either an investor or a Ponzi spec­u­la­tor) with­out sub­tract­ing from the spend­ing power of the “Patient agent”. Aggre­gate demand there­fore rises by the increase in debt.

Table 2: Endoge­nous money per­spec­tive on lending

Bank Assets Bank Deposits (Liabilities)
Action/Actor Patient Impa­tient
Make Loan +Lend –Lend

 

Table 2 is not only more faith­ful to Minsky’s vision: it is also more real­is­tic. Real world lend­ing is not a trans­fer of money from one depositor’s account to another’s, but a con­tract between a bank and a bor­rower in which the bank cred­its the borrower’s account (thus increas­ing the bank’s lia­bil­i­ties) in return for the bor­rower agree­ing to be in debt to the bank for the same amount (thus increas­ing the bank’s assets). This increases the aggre­gate amount of money in cir­cu­la­tion, increas­ing aggre­gate demand in the process—and pre­dom­i­nantly financ­ing invest­ment or spec­u­la­tion rather than con­sump­tion. Con­trary to neo­clas­si­cal a pri­ori logic, the level of pri­vate debt has seri­ous macro­eco­nomic effects, and plays a dom­i­nant role in set­ting asset prices.

The pri­mary focus of this paper is the lat­ter, but given the extent to which macro­eco­nom­ics and finance are inter­twined in Minsky’s work, I would be remiss not to cover his inte­grated vision of finan­cial macro­eco­nom­ics. The next sec­tion is an abridged extract from Keen (1995).

Minsky on Debt-driven booms and busts

Minsky’s analy­sis of a finan­cial cycle begins at a time when the econ­omy is doing well, but firms are con­ser­v­a­tive in their port­fo­lio man­age­ment, and this con­ser­vatism is shared by banks. The cause of this high and uni­ver­sally prac­ticed risk aver­sion is the mem­ory of a not too dis­tant system-wide finan­cial fail­ure, when many invest­ment projects foundered, many firms could not finance their bor­row­ings, and many banks had to write off bad debts. Because of this recent expe­ri­ence, both sides of the bor­row­ing rela­tion­ship pre­fer extremely con­ser­v­a­tive esti­mates of prospec­tive cash flows: their risk pre­mi­ums are very high.

How­ever, the com­bi­na­tion of a grow­ing econ­omy and con­ser­v­a­tively financed invest­ments means that most projects suc­ceed. Two things grad­u­ally become evi­dent to man­agers and bankers: “Exist­ing debts are eas­ily val­i­dated and units that were heav­ily in debt pros­pered: it pays to lever” (Min­sky 1982, p. 65). As a result, both man­agers and bankers come to regard the pre­vi­ously accepted risk pre­mium as exces­sive. Invest­ment projects are eval­u­ated using less con­ser­v­a­tive esti­mates of prospec­tive cash flows, so that with these ris­ing expec­ta­tions go ris­ing invest­ment and asset prices. The gen­eral decline in risk aver­sion thus sets off both growth in invest­ment and expo­nen­tial growth in the price level of assets, which is the foun­da­tion of both the boom and its even­tual collapse.

More exter­nal finance is needed to fund the increased level of invest­ment and the spec­u­la­tive pur­chase of assets, and these exter­nal funds are forth­com­ing because the bank­ing sec­tor shares the increased opti­mism of investors. The accepted debt to equity ratio rises, liq­uid­ity decreases, and the growth of credit accelerates.

This marks the begin­ning of what Min­sky calls “the euphoric econ­omy” (Min­sky 1982, pp. 120–124), where both lenders and bor­row­ers believe that the future is assured, and there­fore that most invest­ments will suc­ceed. Asset prices are reval­ued upward and finan­cial insti­tu­tions now accept lia­bil­ity struc­tures for both them­selves and their cus­tomers “that, in a more sober expec­ta­tional cli­mate, they would have rejected” (Min­sky 1982, p. 123). The liq­uid­ity of firms is simul­ta­ne­ously reduced by the rise in debt to equity ratios, mak­ing firms more sus­cep­ti­ble to increased inter­est rates. The gen­eral decrease in liq­uid­ity and the rise in inter­est paid on highly liq­uid instru­ments trig­gers a market-based increase in the inter­est rate, even with­out any attempt by mon­e­tary author­i­ties to con­trol the boom. How­ever, the increased cost of credit does lit­tle to tem­per the boom, since antic­i­pated yields from spec­u­la­tive invest­ments nor­mally far exceed pre­vail­ing inter­est rates, lead­ing to a decline in the elas­tic­ity of demand for credit with respect to inter­est rates.

The con­di­tion of eupho­ria also per­mits the devel­op­ment of an impor­tant actor in Minsky’s drama, the Ponzi financier (Min­sky 1982, pp. 70, 115). These cap­i­tal­ists profit by trad­ing assets on a ris­ing mar­ket, and incur sig­nif­i­cant debt in the process. The ser­vic­ing costs for Ponzi debtors exceed the cash flows of the busi­nesses they own, but the cap­i­tal appre­ci­a­tion they antic­i­pate far exceeds the inter­est bill. They there­fore play an impor­tant role in push­ing up the mar­ket inter­est rate, and an equally impor­tant role in increas­ing the fragility of the sys­tem to a rever­sal in the growth of asset values.

Ris­ing inter­est rates and increas­ing debt to equity ratios even­tu­ally affect the via­bil­ity of many busi­ness activ­i­ties, reduc­ing the inter­est rate cover, turn­ing projects that were orig­i­nally con­ser­v­a­tively funded into spec­u­la­tive ones, and mak­ing ones that were spec­u­la­tive “Ponzi.” Such busi­nesses will find them­selves hav­ing to sell assets to finance their debt servicing—and this entry of new sell­ers into the mar­ket for assets pricks the expo­nen­tial growth of asset prices. With the price boom checked, Ponzi financiers now find them­selves with assets that can no longer be traded at a profit, and lev­els of debt that can­not be ser­viced from the cash flows of the busi­nesses they now con­trol. Banks that financed these assets pur­chases now find that their lead­ing cus­tomers can no longer pay their debts—and this real­iza­tion leads ini­tially to a fur­ther bank-driven increase in inter­est rates. Liq­uid­ity is sud­denly much more highly prized; hold­ers of illiq­uid assets attempt to sell them in return for liq­uid­ity. The asset mar­ket becomes flooded and the eupho­ria becomes a panic, the boom becomes a slump.

As the boom col­lapses, the fun­da­men­tal prob­lem fac­ing the econ­omy is one of exces­sive diver­gence between the debts incurred to pur­chase assets, and the cash flows gen­er­ated by them—with those cash flows depend­ing upon both the level of invest­ment and the rate of inflation.

The level of invest­ment has col­lapsed in the after­math of the boom, leav­ing only two forces that can bring asset prices and cash flows back into har­mony: asset price defla­tion, or cur­rent price infla­tion. This dilemma is the foun­da­tion of Minsky’s icon­o­clas­tic per­cep­tion of the role of infla­tion, and his expla­na­tion for the stagfla­tion of the 1970s and early 1980s.

Min­sky argues that if the rate of infla­tion is high at the time of the cri­sis or the debt level is rel­a­tively low, then though the col­lapse of the boom causes invest­ment to slump and eco­nomic growth to fal­ter, ris­ing cash flows rapidly enable the repay­ment of debt incurred dur­ing the boom. The econ­omy can thus emerge from the cri­sis with dimin­ished growth and high infla­tion, but few bank­rupt­cies and a sus­tained decrease in liq­uid­ity. Thus, though this course involves the twin “bads” of infla­tion and ini­tially low growth, it is a self-correcting mech­a­nism in that a pro­longed slump is avoided.

How­ever, the con­di­tions are soon re-established for the cycle to repeat itself, and the avoid­ance of a true calamity is likely to lead to a sec­u­lar decrease in liq­uid­ity pref­er­ence. A sec­u­lar trend toward ris­ing debt to equity ratios devel­ops, as each new cycle begins before all debt accu­mu­lated in the last cycle had been repaid. Col­lo­qui­ally, firms bor­row dur­ing a boom and repay dur­ing a slump, which gives the debt to income ratio a ten­dency to ratchet up over time, mak­ing the sys­tem more fragile.

If the rate of infla­tion is low at the time of the cri­sis and debt lev­els are very high, then cash flows will remain inad­e­quate rel­a­tive to the debt struc­tures in place. Firms whose inter­est bills exceed their cash flows will be forced to under­take extreme mea­sures: they will have to sell assets, attempt to increase their cash flows (at the expense of their com­peti­tors) by cut­ting their mar­gins, or go bank­rupt. In con­trast to the infla­tion­ary course, all three classes of action tend to fur­ther depress the cur­rent price level, thus at least par­tially exac­er­bat­ing the orig­i­nal imbal­ance. The asset price defla­tion route is, there­fore, not self-correcting but rather self-reinforcing, and is Minsky’s expla­na­tion of a depression.

The above basi­cally describes Minsky’s per­cep­tion of an econ­omy in the absence of a gov­ern­ment sec­tor. With big gov­ern­ment, the pic­ture changes in two ways, because of fis­cal deficits and Reserve Bank inter­ven­tions. The col­lapse in cash flows that occurs when a boom becomes a panic is at least partly ame­lio­rated by a rise in gov­ern­ment spending—the clas­sic “auto­matic sta­bi­liz­ers,” though this time seen in a more mon­e­tary light. (Keen 1995, pp. 611–614)

That’s the the­ory: how well does it stack up against the data? Firstly, the level of pri­vate debt has cer­tainly dis­played the sec­u­lar trend that Min­sky iden­ti­fied (see Fig­ure 1).

Fig­ure 1: Aggre­gate Pri­vate and Pub­lic Debt

Sec­ondly, Minsky’s ver­bal model of the cycle also focused pri­mar­ily on the bor­row­ing behav­iour of the non-financial busi­ness sec­tor, and here the cycli­cal­ity he pre­dicted is also obvi­ous. But over­laid on top of it is an expo­nen­tial rise in finance sec­tor debt, as Ponzi Finance became the dis­eased back­bone of the US economy.

Fig­ure 2: Pri­vate Debt by Sector

Finally, the Min­skian dynam­ics of debt also explain what neo­clas­si­cal analy­sis will always find per­plex­ing: the sud­den tran­si­tion from The Great Mod­er­a­tion to The Great Con­trac­tion (Rogoff 2011).

Applying Minsky to Macroeconomic Data

The Walras-Schumpeter-Minsky propo­si­tion that aggre­gate demand is income plus the change in debt, and that this is expended on both goods and ser­vices and pur­chases of finan­cial claims on exist­ing assets, can be put into a sim­ple equa­tion (with Y and D stand­ing for nom­i­nal income and debt lev­els, GDP for the nom­i­nal value of out­put and NAT stand­ing for “Net Asset Turnover”):

Net Asset Turnover can be fac­tored into the price index for assets PA, times their quan­tity QA, times the annual turnover TA expressed as a frac­tion of the num­ber of assets :

There will thus be a rela­tion­ship between change in debt and the level of both eco­nomic activ­ity and asset prices.

Focus­ing on the for­mer for now, it is eas­ily shown that the Great Mod­er­a­tion was dri­ven by a sub­stan­tial rise in debt-financed aggre­gate demand, while the Great Con­trac­tion coin­cided with a dra­matic rever­sal from ris­ing to falling debt.

Fig­ure 3: Aggre­gate demand as income plus change in debt

Sim­i­larly, when the rate of change of aggre­gate demand is con­sid­ered, there is a rela­tion­ship between the accel­er­a­tion of debt and both the rate of change of GDP (Biggs and Mayer 2010; Biggs, Mayer et al. 2010) and the change in asset prices:

The rela­tion­ship between the “Credit Accelerator”—defined, fol­low­ing (Biggs and Mayer 2010; Biggs, Mayer et al. 2010) as the rate of change of the rate of change in debt per annum, divided by GDP at the midpoint—and change in the employ­ment rate is shown in Fig­ure 2. Far from aggre­gate debt not being macro­eco­nom­i­cally impor­tant, change in employ­ment is strongly cor­re­lated with the accel­er­a­tion of debt.

Fig­ure 4: Credit Accel­er­a­tion and change in employment

The scale and tim­ing of the down­turn is much eas­ier to com­pre­hend from Minsky’s credit-based per­spec­tive than the income-only per­spec­tive of neo­clas­si­cal eco­nom­ics. The down­turn in GDP was rel­a­tively minor—from $14.4 tril­lion at its peak to $13.9 tril­lion at its low­point, a fall of just over half a tril­lion or 4% of nom­i­nal GDP—and it com­menced late (in July 2008) and fin­ished early (in May 2009) com­pared to the cri­sis itself, which is gen­er­ally regarded as hav­ing started in August 2007 and con­tin­ued get­ting worse in macro­eco­nomic terms until late 2009.

The down­turn in pri­vate aggre­gate demand was much more severe: from $18.4 tril­lion at its peak in Novem­ber 2007 to $11.4 tril­lion in Feb­ru­ary 2010, a fall of $6.9 tril­lion or 38% over 2.3 years. The decel­er­a­tion of debt was 5 times greater than any other decel­er­a­tion in the entire post-WWII period, and even stronger than in the Great Depres­sion itself, when the max­i­mum neg­a­tive value of the Credit Accel­er­a­tor was –18% of GDP.

The pro­found effect of the cri­sis not only on employ­ment and GDP, but also on asset mar­kets, is now far eas­ier to comprehend.

This now brings us to Minsky’s dis­tinc­tive argu­ment that there are (at least) two price lev­els in capitalism—one for com­modi­ties and the other for cap­i­tal assets—and his analy­sis of the finan­cial dynam­ics that can wedge them apart dur­ing spec­u­la­tive bubbles.

Minsky on Finance: Two Price Levels

As a Post Key­ne­sian, Min­sky argued that the prices of most end-consumer com­modi­ties are set by a markup on prime cost (Reynolds 1987; Blinder 1998; Lee 1998). He por­trayed changes in the price level for “cur­rent goods” as mainly a con­se­quence of cost pres­sures (largely from wages and raw mate­ri­als) and changes to markups. The largely inde­pen­dent price level of assets is based, not on the orig­i­nal cost of pro­duc­tion of the assets, but on the net present value of antic­i­pated cash flows. These in turn depend on the gen­eral state of expec­ta­tions, which vary sys­tem­at­i­cally over the finan­cial cycle, lag­ging behind cur­rent prices in a slump, run­ning ahead of them in a recov­ery and boom, and are financed largely by Ponzi bor­row­ing. This per­spec­tive allows for sig­nif­i­cant diver­gence between the two price lev­els as expec­ta­tions rise and fall over the medium term, and as the growth of debt that finances Ponzi activ­ity in asset mar­kets rises and falls with them. How­ever over the very long term, asset prices must even­tu­ally return to some kind of har­mony with cur­rent prices, since the only sus­tain­able sup­port for asset prices is the sales of the com­modi­ties they pro­duce. The price sys­tem thus dis­plays far-from-equilibrium dynam­ics, accord­ing to Min­sky, in con­trast to the neo­clas­si­cal argu­ment that the price sys­tem is a sta­bil­is­ing force in a cap­i­tal­ist economy.

This implies that a sim­ple com­par­i­son of asset prices to con­sumer prices can iden­tify bub­bles, since Min­sky saw no rea­son for a long-term trend for the asset to con­sumer price ratio to rise over time—the only basis for this would be the cap­i­tal­iza­tion of income streams gen­er­ated by assets into asset prices. This is fea­si­ble with share prices, given retained earn­ings and in par­tic­u­lar the zero-dividend poli­cies of firms like Berkshire-Hathaway, but not with house prices.

Even given the exis­tence of a trend to the real share price, the com­mence­ment of the “Great Mod­er­a­tion” share price bub­ble in 1995 is obvi­ous (see Fig­ure 3).

Fig­ure 5: Two price lev­els (shares)

Fig­ure 4 sub­tracts the trend from 1915 till 1995 from the data.

Fig­ure 6: DJIA minus expo­nen­tial trend 1915–1995

The role of the accel­er­a­tion of debt in dri­ving these asset price bub­bles is evi­dent. Equa­tion casts the role of spec­u­la­tion on asset prices in a far dif­fer­ent light than does neo­clas­si­cal eco­nom­ics, which sees spec­u­la­tion as aid­ing in price dis­cov­ery (Schwartz, Wolf et al. 2010). Instead, lever­aged spec­u­la­tion plays a dom­i­nant role in price formation—leading to the devel­op­ment of debt-financed bub­bles in asset prices.

The equa­tion as stated ignores the feed­back rela­tions between income and out­put and change in debt, but even then it indi­cates that the impact of the accel­er­a­tion in debt will be dis­persed through at least five highly aggre­gated vari­ables. Clearly behav­ioural sen­ti­ment issues will also affect how much debt is lev­ered into asset mar­kets ver­sus parked else­where. Nonethe­less sig­nif­i­cant cor­re­la­tions exist between debt accel­er­a­tion and real share prices (see Fig­ure 7 and Fig­ure 8), and espe­cially between accel­er­a­tion of mort­gage debt and change in real house prices (see Fig­ure 10).

Fig­ure 5 shows the cor­re­la­tion of the devi­a­tions from trend with the accel­er­a­tion of pri­vate credit dur­ing the Roar­ing Twen­ties and the Great Depres­sion (lagged one year since the pre-1950 debt data is end-of-year annual only).

 

Fig­ure 7: Credit Accel­er­a­tion and share price move­ments 1922–1942

Fig­ure 6 shows the same rela­tion­ship from 1986 till today.

Fig­ure 8: Credit Accel­er­a­tion and share price move­ments 1986-Now

The rela­tion­ship between the change in house prices and the accel­er­a­tion of debt since 1990 are more eas­ily iden­ti­fied, for three rea­sons. Firstly, there is no need to sub­tract any trend in real house prices prior to the bub­ble, since there is no rea­son to expect a trend, and the empir­i­cal data con­firms that there was none. Sec­ondly, there is a spe­cific sub­set of debt—mortgage debt—whose accel­er­a­tion can be directly be com­pared to change in real house prices. While some mort­gage debt bleeds into expen­di­ture on other items (espe­cially with “mort­gage equity with­drawal” loans) and into expand­ing the stock of hous­ing, the major­ity of mort­gage debt goes into pur­chas­ing exist­ing housing.

Thirdly, this was the first truly major house price bub­ble in America’s his­tory. Minor bub­bles are evi­dent in 1895, 1979 and 1990, but they are mere Catskills com­pared to the Ever­est of the 2006 bub­ble. The Sub­prime Bub­ble clearly began in 1997 (see Fig­ure 7), and burst nine years later. With this data read­ily avail­able since 2000 (Shiller 2000), it beg­gars belief that, just 10 months before the peak, Greenspan could assert to Con­gress that there was no national hous­ing bub­ble, and that any house price declines would “not have sub­stan­tial macro­eco­nomic implications”:

That said, there can be lit­tle doubt that excep­tion­ally low inter­est rates on ten-year Trea­sury notes, and hence on home mort­gages, have been a major fac­tor in the recent surge of home­build­ing and home turnover, and espe­cially in the steep climb in home prices. Although a “bub­ble” in home prices for the nation as a whole does not appear likely, there do appear to be, at a min­i­mum, signs of froth in some local mar­kets where home prices seem to have risen to unsus­tain­able lev­els… Although we cer­tainly can­not rule out home price declines, espe­cially in some local mar­kets, these declines, were they to occur, likely would not have sub­stan­tial macro­eco­nomic impli­ca­tions. (Greenspan 2005)

At the time of Greenspan’s tes­ti­mony, the real house price index was 240, a mere 8 per cent below the even­tual peak and almost 2.5 times the long term average.

Fig­ure 9: Two price lev­els (property)

 

The propul­sion for this bub­ble was clearly pro­vided by accel­er­at­ing mort­gage debt, and the rapid decel­er­a­tion of debt drove it back down (see Fig­ure 8). Pos­i­tive feed­back loops work in both directions—up and down.

Fig­ure 10: Mort­gage Accel­er­a­tion & Change in Real House Price Index

This “Min­skian” per­spec­tive on the role of accel­er­at­ing debt in dri­ving asset price bub­bles leads to sev­eral obvi­ous conclusions:

  1. The cri­sis will not be over until pri­vate debt has been reduced substantially—to the order of 100% of GDP or less;
  1. Asset prices will fall with the reduc­tion of debt. Even with the 33% decline by Novem­ber 2011, the real house price Index remains 77% above the 1890–1995 aver­age (and 50% above the mini-peak of 1990), while shares are still 67% above the long term trend from 1915–1995;
  2. Ponzi Lend­ing is the key cause of asset price bubbles;
  3. Since debt can­not per­ma­nently accel­er­ate, all asset bub­bles will ulti­mately burst; and
  4. To avoid asset price bub­bles in the first place, we have to break the pos­i­tive feed­back loop between lever­age and asset prices.

Remedies

If we are to really end the destruc­tive insta­bil­ity of the finan­cial sys­tem, we have to address the cause of this insta­bil­ity, and from a Min­skian per­spec­tive, that cause is the pos­i­tive feed­back loop between ris­ing debt and asset prices.

This can­not be done sim­ply by rely­ing upon banks learn­ing from the cri­sis and behav­ing more respon­si­bly after it, since they have an innate desire to extend as much debt as they can per­suade the non-bank sec­tors to take on. The rea­son is sim­ple: bank prof­its are dri­ven pri­mar­ily by the vol­ume of debt. There is no mys­tery behind why the prof­its and wages of the FIRE econ­omy have grown rel­a­tive to the rest of the econ­omy, nor behind the coin­ci­dence that neg­a­tive FIRE prof­its have occurred only dur­ing the Great Depres­sion and our cur­rent cri­sis (see Fig­ure 11).

Fig­ure 11: The FIRE Econ­omy vs the Real Economy

But lend­ing is a two-sided activ­ity: the non-bank pub­lic has to be a will­ing par­tic­i­pant if debt lev­els are to rise faster than income, and ulti­mately reach lev­els that can cause a finan­cial crisis.

This always requires the prospect of gain from lever­aged spec­u­la­tion on asset prices, since the public—both house­holds and firms—rarely bor­row exces­sively on the basis of income alone. A break­down of house­hold debt makes this point: as Fig­ure 12 illus­trates, despite all the entice­ments to per­sonal debt, it changed very lit­tle rel­a­tive to income, whereas mort­gage debt has risen dra­mat­i­cally over time.

Fig­ure 12: Only Mort­gage Debt has risen substantially

To pre­vent bub­bles, we there­fore have to reduce the appeal of lever­aged spec­u­la­tion on asset prices, with­out at the same time chok­ing off demand for debt for either legit­i­mate invest­ment or unavoid­able bor­row­ing. I pro­pose two mech­a­nisms: “Jubilee Shares” and “Prop­erty Income Lim­ited Lever­age” (“The PILL”):

  1. Jubilee Shares: To rede­fine shares so that, if pur­chased from a com­pany directly, they last for­ever, but after a min­i­mal num­ber of sales (say seven), they become Jubilee Shares that last another 50 years before they expire; and
  2. Prop­erty Income Lim­ited Lever­age: To limit the debt that can be secured against a prop­erty to ten times the annual rental of that property.

Jubilee Shares

Cur­rently, 99% of all trad­ing on the stock mar­ket involves spec­u­la­tors sell­ing pre-existing shares to other spec­u­la­tors. This is under­taken with bor­rowed money in the hope of exploit­ing price bub­bles like that set by Yahoo! in the Dot­Com Bub­ble (see Fig­ure 13), when that the lend­ing itself largely causes the price bubbles.

If instead shares on the sec­ondary mar­ket lasted only 50 years, then even the Greater Fool couldn’t be enticed to buy them with bor­rowed money–since their ter­mi­nal value would be zero. Instead a buyer would only pur­chase a share on the sec­ondary mar­ket in order to secure a flow of div­i­dends for 50 years (or less). One of the two great sources of ris­ing unpro­duc­tive debt would be eliminated.

The objec­tive of this pro­posal is to make lever­aged spec­u­la­tion on exist­ing shares unat­trac­tive, while still mak­ing fund­ing IPOs and share issues attrac­tive, and enabling gen­uine price discovery.

 

Fig­ure 13: Yahoo’s share price bub­bles and bursts

Property Income Limited Leverage

Some debt is needed to pur­chase a house, since the cost of build­ing a new house far exceeds the aver­age wage. But debt greater than per­haps 3 times aver­age annual wages dri­ves not house con­struc­tion, but house price bubbles.

Prop­erty Income Lim­ited Lever­age (“the PILL”) would break this pos­i­tive feed­back loop by bas­ing the max­i­mum that can be lent for a prop­erty pur­chase, not on the income of the bor­rower, but on a mul­ti­ple of the income-earning poten­tial of the prop­erty itself.

With this reform, all would-be pur­chasers would be on equal foot­ing with respect to their level of debt-financed spend­ing, and the only way to trump another buyer would be to put more non-debt-financed money into pur­chas­ing a property.

It would still be possible–indeed necessary–to pay more than ten times a property’s annual rental to pur­chase it. But then the excess of the price over the loan would be gen­uinely the sav­ings of the buyer, and an increase in the price of a house would mean a fall in lever­age, rather than an increase in lever­age as now. There would be a neg­a­tive feed­back loop between house prices and lever­age. That hope­fully would stop house price bub­bles devel­op­ing in the first place, and take dwellings out of the realm of spec­u­la­tion back into the realm of hous­ing, where they belong.

Conclusion

I hope that my Minsky-inspired analy­sis of the source of finan­cial mar­ket insta­bil­ity is com­pelling; I expect that my reform pro­pos­als are less so. But they are not so much rad­i­cal as born from a real­is­tic assess­ment, not only of the cause of finan­cial insta­bil­ity, but the his­tor­i­cal record of our past attempts to tame it.

We can­not rely upon laws or reg­u­la­tors to per­ma­nently pre­vent the fol­lies of finance. After every great eco­nomic cri­sis come great new insti­tu­tions like the Fed­eral Reserve, and new reg­u­la­tions like those embod­ied in the Glass-Steagall Act. Then there comes great sta­bil­ity, due largely to the decline in debt, but also due to these new insti­tu­tions and reg­u­la­tions; and from that sta­bil­ity arises a new hubris that “this time is different”—as the debt that causes crises rises once more. Reg­u­la­tory insti­tu­tions become cap­tured by the finan­cial sys­tem they are sup­posed to reg­u­late, while laws are abol­ished because they are seen to rep­re­sent a bygone age. Then a new cri­sis erupts, and the process repeats. Minsky’s apho­rism that “sta­bil­ity is desta­bi­liz­ing” applies not just to cor­po­rate behav­iour, but to leg­is­la­tors and reg­u­la­tors as well.

Jubilee Shares and the PILL are an attempt to write restraints on Ponzi Finance into the fab­ric of our soci­ety, so that bub­bles do not form in the first instance, so that the pos­i­tive feed­back loop that turns ris­ing asset prices into accel­er­at­ing debt does not hap­pen, and so that another finan­cial cri­sis like the one we are now in never occurs again.

Appendix: Double-entry versions of tables

 

Table 3: Double-entry ver­sion of Neo­clas­si­cal vision of lending

Bank Assets

Deposits (Lia­bil­i­ties)

Action/Actor Patient Impa­tient
Assets Lia­bil­i­ties Assets Lia­bil­i­ties
Make Loan +Lend –Lend
Record Loan –Lend +Lend

 

And

Table 4: Double-entry ver­sion of actual lending

Bank Assets Deposits (Bank Liabilities)
Action/Actor Lend­ing Licence Loan Ledger Patient Impa­tient
Assets Lia­bil­i­ties
Make Loan +Lend –Lend
Record Loan –Lend +Lend

 

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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66 Responses to INET Presentation: Minskian Perspective on Instability in Financial Markets

  1. centerline says:

    Mr. Steve Keen — 

    I do not know if what I have to offer today is of any value. But, I will toss it out here.

    I hear you talk of debt in terms of accel­er­a­tion. Most folks in the pro­fes­sion of eco­nom­ics prob­a­bly don’t relate so well to calculus.

    As an anal­ogy, I offer some­thing from engi­neer­ing. The con­cept herein is that we design for veloc­ity and accel­er­a­tion in terms of say a building’s move­ment at upper floors, or a trans­porta­tion sys­tem, road­way design, etc. The most impor­tant fac­tor in cases where dynam­ics and/or human expe­ri­ence comes to bear is accel­er­a­tion. Why? Well, mainly because this is what is “felt” more than any­thing else. For exam­ple, the upper floor of a build­ing may sway sev­eral feet in a high wind, but no one will really notice unless it moves too quickly. Or say in a trans­porta­tion sys­tem wherein speed is not a prob­lem and dis­place­ment is the goal — but peo­ple will not tol­er­ate so well the accel­er­a­tion (or neg­a­tive accel­er­a­tion). Etc. Lots of good exam­ples illus­trat­ing the need for for­ward move­ment, but not at the expense of being able to main­tain solid standing.

    While I would step­ping out on a very pre­car­i­ous limb here as a non-economist, I would maybe try to con­nect debt with the notion that it’s rel­a­tive increase or even amount (rel­a­tive dis­place­ment) does not mat­ter quite so much as the accel­er­a­tion. And that socially, for­ward move­ment is just part of human nature… a require­ment for progress. 

    Yeah, this might cross over right here to a social sci­ence I think. But, I under­stand that math is a trump card. Hard to refute the likes of physics, while Plato and oth­ers can always be argued. 

    Thank you for the per­mis­sion to post on this site. If you are ever in Cen­tral Florida, let me know. Din­ner is on me and my fam­ily (wife and 2 kids who put up with me! — LOL).

  2. RickW says:

    Cen­tre­line–
    My view is that the sys­tem is eas­ier to change than most believe. How­ever it does require lead­er­ship and there is not much of that vis­i­ble. Sadly the polies in devel­oped economies are directed by banks or are ex-bankers. 

    There is a widely held view that reces­sions are bad but I will gladly take defla­tion over infla­tion. It means less pres­sure on resources. Maybe reduced pop­u­la­tion growth — cer­tainly in devel­oped economies.

    I see the pub­lic QE idea gain­ing momen­tum. Steve made some solid points in the Tonight pro­gram. The woman in the panel is yet another exam­ple of how lit­tle under­stand­ing there is of money — sadly Steve’s point on money cre­ation was drowned out. 

    My view is that infla­tion­ary pres­sure comes about through scarce energy — or maybe, more pre­cisely, scarce “clean” energy. Beyond energy iron ore and cokng coal are tight but pro­duc­tion of these can be ramped up. There are steel mak­ing plants idle. We have huge excess capac­ity in car man­u­fac­ture right now. There is high unem­ploy­ment in con­struc­tion sec­tors. There are ups and down with farm­ing but lots of oppor­tu­nity to use resources better. 

    So if we can move beyond finan­cial­i­sa­tion bleed­ing life out of economies and focus on the tech­ni­cal chal­lenges of improv­ing pro­duc­tive effi­ciency then there are no chal­lenges that are dif­fi­cult to manage.

  3. RickW says:

    Steve’s done it again — the off-the-cuff response to Irish debt prob­lem by issu­ing their own money again. It could be a sound idea but to even men­tion it in the cir­cum­stances reduces credibility. 

    It may be an hon­est response to what seems a good idea but it is not rea­son­able for some­one to be taken seri­ously on global issues when pro­mot­ing an idea that came from an unknown dur­ing a casual tele­phone con­ver­sa­tion unless the idea has been thor­oughly thought through. 

    Topic change — other scarce resources — I expect grow­ing pres­sure on health care due to aging pop­u­la­tions, poor plan­ning for this and poor health habits and atti­tudes across a large pro­por­tion of the world’s pop­u­la­tion. So this area is likely to see infla­tion­ary pressure.

  4. Steve Hummel says:

    The mon­e­tary sys­tem is cred­i­tary in nature. Plusses and minuses. A debt accel­er­a­tion that got out of hand can be dealt with by an accel­er­ated debt reduc­tion. The only prob­lem (and the REAL prob­lem is only for the minor­ity that ben­e­fits from their con­trol and access to credit really) is that this time almost EVERYONE got infected and involved. And the oligarchy’s only refuge this time was pick­ing the pocket of every­one else via sov­er­eign debt while they skated in still wildly prof­itable ways. Well, you can’t fool all of the peo­ple all of the time. 

    We have to raise ques­tions which have rarely if ever been asked in economics. 

    What is the value of tech­no­log­i­cal progress, and who should ben­e­fit from it?

    Were sys­tems made for Man or Man for systems?

    What is the actual psy­chol­ogy of cur­rent eco­nom­ics and money sys­tems, and how can it be made more healthy?

  5. Dannyb2b says:

    rickw

    the solu­tion for ire­land is to cir­cum­vent the bank­ing sys­tem. instead of the cb con­duct­ing mon­e­tary pol­icy through banks that dont lend onwards the cb should deal directy with the pub­lic. Thereby the liq­uid­ity cant get trapped.

  6. Steve Hummel says:

    I’m as agnos­tic as you can get, but the Bible is so incred­i­bly preg­nant with valid human psychological/spiritual insight that you can open it just about to any page, take the advice there and trust its correct.

    For Ire­land, Spain, Por­tu­gal and Italy here’s Deuteron­omy 30:19

    .….I have set before you life and death, bless­ing and curs­ing: there­fore choose life, that both you and your descen­dants may live”

  7. Derek R says:

    Here is a link to Steve’s pre­sen­ta­tion at the Just Bank­ing con­fer­ence in Edin­burgh. It’s not to easy to find but once you have gone to the web­site, look for the videos tab and select the video cap­tioned “Just bank­ing morn­ing day 2?, Steve’s talk starts at the 03:14:30 point. Ann Pettifor’s talk was also pretty good and started at 02:47:45. I haven’t watched the other speak­ers yet. 

    Video qual­ity isn’t that great. In par­tic­u­lar it’s a lot­tery whether you get to see the speaker’s slides and graphs or not. Still a lot bet­ter than not get­ting to see the pre­sen­ta­tion at all. So kudos to the Just Bank­ing con­fer­ence organ­is­ers for putting this online.

  8. mahaish says:

    Steve’s done it again – the off-the-cuff response to Irish debt prob­lem by issu­ing their own money again. It could be a sound idea but to even men­tion it in the cir­cum­stances reduces credibility. 

    It may be an hon­est response to what seems a good idea but it is not rea­son­able for some­one to be taken seri­ously on global issues when pro­mot­ing an idea that came from an unknown dur­ing a casual tele­phone con­ver­sa­tion unless the idea has been thor­oughly thought through”

    seems an emi­nently rea­son­ble idea that steves pro­motng rickw,

    blind paddy with his shay­laylee knows hang­ing onto the euro is about a good an idea as invest­ing in irish potato farm­ing in 1845(not)

  9. mahaish says:

    the solu­tion for ire­land is to cir­cum­vent the bank­ing sys­tem. instead of the cb con­duct­ing mon­e­tary pol­icy through banks that dont lend onwards the cb should deal directy with the pub­lic. Thereby the liq­uid­ity cant get trapped.”

    trea­sury does the spend­ing danny,

    they need to punt the euro, and go back to the punt, and trea­sury can use its agent the cen­tral bank to cre­ate deposits and net assetts ‚and improve the net worth posi­tion of non bank bal­ance sheets.

    but yes agree with your sen­ti­ment, they just cant do it under maas­tre­icht and riechs fuhrer merkel ?

  10. Dannyb2b says:

    Mahaish
    “trea­sury does the spend­ing danny,”

    Im not refer­ring to fis­cal pol­icy. Im refer­ring to cre­at­ing stim­u­lus through mon­e­tary pol­icy. The rea­son mon­e­tary stim­u­lus is inef­fec­tive is becuase the mon­e­tary trans­mis­sion chan­nel is bro­ken. There­fore the cen­tral bank should deal directly with the public. 

    Heres a bet­ter expla­na­tion: http://www.internationalmonetary.wordpress.com

  11. While this does not detract from your main points, I am puz­zled by the state­ment that “debt can­not accel­er­ate forever.” 

    Why not?

    Cen­tral bank pol­icy is to tar­get a con­stant infla­tion rate. If debt is money, does not this infla­tion pol­icy imply indef­i­nite accel­er­a­tion in debt?

  12. Pingback: P2P Foundation » Blog Archive » Steve Keen: Two proposals to eliminate the unproductive debt burden

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  14. Kozak says:

    Steve. See http://www.Azizonomics.com

    A guy called Buddy Rojek has sug­gested the use of elec­tronic Gov­ern­ment issued Debit Cards, loaded with money from a sur­plus bud­get har­vested dur­ing boom times to increase aggre­gate demand dur­ing defla­tionery times. Basi­cally it is not printed cash it is cash the gov­ern­ment har­vested from the peo­ple dur­ing a boom time to reduce infla­tionery pres­sures. Very switched on guys see specifically

    http://azizonomics.com/2012/04/28/krugman-inflation-target/

  15. Pingback: Some notes on Pontus Rendahl’s review of ‘Keensian Economics’ « Decisions, Decisions, Decisions

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