Extensions of the Keen-Minsky Model for Financial Fragility
Aug10
on August 10, 2012
at 5:12 pm
Last Friday 3rd August, Dr. Matheus Grasselli from the Fields Institute in Toronto Canada presents an in depth talk on the mathematical foundations of the Keen-Minsky Model on financial instability. Steve spent 6 weeks with Matheus at the Fields Institute over June and July, with an intensive research agenda to progress the mathematical logic behind Minsky. The event was held at UWS. Unfortunately the audience questions are difficult to hear with microphone setup that was used, and there is a small break in the footage at 12 minutes and 18 seconds in.
Click here to view Matheus’s research paper.
Click here to view the presentation slides.
I think you need to elaborate on the concerns of minute 55 guy. Surely Government stimulus has to come from somewhere either debt or printing. If that is used as unproductively as the private sectors recent use how does this play out in terms of government finances and price structures.
I am neither a mathematician nor an economist, although as an engineer I feel capable of understanding modeling. I love that we are focusing on this outcome of the financial crisis. My analogy is how in the aftermath of the Tacoma Narrows Bridge collapse, we got busy and upgraded out models to include a closer look at problems with resonance. Nice to see the lively participation of the audience. Sign of a healthy institution from an academic perspective. Onward and upward!
Steve, We have seen and I agree that we need to reduce private debt to solve this ongoing part — recessionary state and that government funds should be used to do so. I agree with that assessment however if we were to do that say for Australia what model would you recommend to make it equitable between relevant individuals. This argument has arisen in the USA for mortgage relief but in Australia how would we make it equitable with say 2 neighbours both with $500,000 houses. A has no debt and $250,000 in savings. B has not been as frugal and has no savings and $300,000 debt. A is doing ok but B is struglling to keep his payments current. Apart from giving each an equal amount of say a $50,000 grant — A would increase his savings and possible spending capacity/power and B — to reduce his his debt and his commitments thereby freeing up more spending power. Or do we just deal with B who has the problem.
Can anyone show me a reference where there is money creation and not interest plus principle owing on the other side of the balance sheet?
To me economics seems to lack the depth to work from this premise. For example a collary to the premise is that interest free money to address debt reduction is an eventual practical requirement under most social/economic eventualities.
Socially, interest on principle is accepted and functions on the microeconomic level. For some unknown reason, mechanisms on the micro level for debt free money have not been created. We just have default at the micro level and the debt gets centralized. I see this as a serious lack of innovation.
Centralized debt is empowering and becomes subject to the faith/corruption dictonomy swings; good times faith, bad times corruption; peace, war.
Steve K., perhaps you have done this in the past, and it this is the case, than I apologize, but what exactly is the need in the academic economics community to reduce everything down to mathematical formulas?
How can math possible explain complex human interaction/behavior?
Seems quite similar to medical science that attempts to take completely unique individuals and categorize them simply as a more efficient method of processing.
The truth of the matter is always simple and can probably be best explained by:
‘x’ and ‘y’ don’t really exist
Steve, at minute 41 you say bankruptcy eliminates debt. I do not see how this can happen. To my understanding at bankruptcy, the debt most generally becomes centralized at the lenders rate of interest.
All money and therfore all GDP related exchanges have at least one interest component associated to it. The principle can be eliminated but the interest component lives on!
The talk is quite difficult to follow, because the video of his slides is illegible. Presumably it’s based on Matheus’s paper.
@John Swabey,
Interest itself is not the problem, but you are correct that lack of monetary innovative thinking inhibits solutions.
Especially in times like these where the debt overhang is so blatant, buteven during so called “Good Times” there is still an inherent scarcity of INDIVIDUAL purchasing which contributes to the non ill functioning of the economy. Supplementing this inherent scarcity with a universal individual dividend in addition to paid work (and of course and especially if one cannot find work) makes the economy more free flowing for both individuals and businesses and makes both more creditable also. Then if you institute a retail discount mechanism to consumers and the equivalent rebated to retailers for their total discounts which eliminates any demand pull inflation and essentially all of the asset price inflation that may have occurred within the time period (say monthly) of each dividend issuance.…you resolve the stickiness of the economy on the micro level while ultimately not adding any extra money into the micro-economy.
Its like this:
Inherent deficit of individual purchasing power versus prices = –5
plus a Dividend of 5 — 0
Economic expansion, Demand pull inflation and any asset inflation (regulated or unregulated) for period= 1
Discount to consumers= –1
Compensation back to retailers to make them whole so as to pay their crediters and make their profit of 1 = 0 . Again this keeps the micro-economy in balance.
I might add here that the retail product of Banks is credit, so their retail discount to individual consumers (but not necessarily to their commercial clients) also enables any macro level increase to be identified as indicative of actual productive commercial expansion only. Current economic vices like unregulated derivative bets of course are assumed to be tightly regulated or eliminated also.
In the second paragraph eliminate the word “non” in front of the word “ill”.
Steve H, agreed interest is not the problem. It is a reality I expect to continue. I can not imagine a world without it at this time. With our current monitory/social/economic structure I believe it has been driving a debt snowball with no accepted solution. I am concerned we are applying most of our innovation to keep the ball rolling and not to manage the size.
I see a mechanism for addressing debt reduction with debt free money as the most likely solution. Then again innovation can result in amazing outcomes. From my experience innovation is driven from fast experiments. Any votes for a co-development between Steve Keen and SIM city/kickstarter.
John,
Yes, and it is no coincidence that INDIVIDUAL indebtedness is both the basic reason why the current crisis lingers, and a universal INDIVIDUAL dividend is the means for preventing such individual indebtedness in the future as well as the means of reigning in the inherent tendency for the Financial system to dominate the economy and the government.
When you free the individual from economic and financial extortion and simultaneously largely eliminate Finance’s potentially deadly CONSUMER market, therefore downsizing and de-toothing Finance.….you’ve actually done something Good.
Steve H, so we all, by countries or currencies, (individual, goverment, corporations) include how much we spend on interest each year as a tax filing. There is a correction for inflation and GDP growth. The remaining gets printed as debt free money and paid to individuals as a dividend?
How about the dividend is proportional to the interst paid but the entity that paid the interest can not keep the dividend. The entity must assign the dividend to pay down debt of others where the entities are provided about 100 random choices from a Kickstarter (http://www.kickstarter.com/) type system built to pay down debts.
I see the “good” options as many. How we build a path from here to there is a big unknown. I am hopeful modeling work such as this extension lays a foundation to find a way to decentralize a economic stabilization process with debt free money.
Decentralization and reasonable regulation of speculation look like a good characteristics of a free and stable system to me, but in the last analysis the essential features of any such system are:
1) It sets the individual economically free from extortion by Finance and
2) Its policies have the force of law.
Steve,
Did you see Martin Wolf’s latest?? Your ideas are going mainstream.
http://blogs.ft.com/martin-wolf-exchange/2012/07/12/debt-deleveraging-and-crisis-in-the-us/?#axzz23EbVR215
Hi all,
Everything in the lecture seems convincing and logical, even on intuitive level. At the end of the presentation there are some provisions concerning further development of the model in areas of inflation, international exchange, etc.
I want to ask if there is a chance that the advanced model including those parameters will not find any globally stable equilibriums or the equilibriums not acceptable politicaly or socially? If so what are the alternatives?
My questions comes from the notion that the pathology/crises/crashes arrive not from the models or policy but — on the higher level of abstraction — from general human need or necessity to compete on all levels — from single human beings, groups (like companies) to the whole nations. The competition has its genetically imprinted mechanism for escalation.
I, too, have wondered about the assumption that government spending is automatically productive — if only because we are told that much of the government stimulus in the U.S. meant to be loaned out by the banks to the public ended up just languishing. The banks decided to firm up their own positions rather than take the risk of lending.
The government could theoretically decide, for example, to print ten trillion dollars — but also to seal it all up in a large lock-box somewhere in Kansas. One should not expect this ‘stimulus’ to have much positive effect.
There may also be something to be said about the effect of government spending when it comes to relatively productive vs. non-productive economies. Say the government provided cash for investment either through a special loan program or through direct subsidy. In China, such an investment might take the form of building a factory, leading to increased employment, more goods, etc. In the U.S., as we saw recently, that money might just go into speculation, on real estate for example, or into some other ‘unproductive’ investment.
The assumption that government spending is automatically productive is sort of the mirror-image of the Austrian school’s phobia that all government spending must have a deleterious effect on the economy since every government dollar is a dollar deprived of the (automatically productive) private sector.
Heinrich is right. Government spending may have a huge, a small, or a minimal effect on economic activity depending on who it is directed at and on who the tax “required” to balance the budget is directed at.
For instance if the government gives a $2,000 cash payment monthly to every citizen and balances it with a $2,000 poll tax monthly on every citizen, the overall government spending is zero and, unsurprisingly, the stimulative effect will be zero.
If the government gives a $2,000 cash payment monthly to every citizen and balances it with a carbon tax set at such a level that it returns the total amount spent on the cash payments monthly, the overall government spending is still zero but it is unclear whether there will be a stimulative or a depressive effect. There is no doubt that the cost of fossil fuels will rise and that this will have a knock-on effect on other goods but on the positive side most people will receive more from the cash payment than they will lose from the carbon tax, so on balance there should be a stimulative effect.
It’s also possible to structure spending and taxes so that there is a depressive effect, even though the budget is balanced. For instance if the government gives each citizen a monthly cash payment dependent on the value of the land that they own (more value means a bigger payment) and taxes it all back with a monthly poll tax so that once again the overall budget totals to zero, most people will pay more than they receive so that the overall effect on the economy will be depressive.
Note that in all three of these scenarios, the government tax+spending was balanced, yet the expected outcome is different in each. So in my opinion when adding government tax and spending to any model, some effort should be made to model these effects.
There IS an inherent deficit of total individual purchasing power. THEORIES about the quantity of money and the velocity of its “circulation” are THEORIES, i.e. thinking ABOUT the economy and money system. Cost accounting’s conventions are ENFORCED REALITIES, EVER PRESENT enforced realities about EVERY dollar etc. that ENTERS or RE-ENTERS commerce. A dividend is NECESSARY. The economic and monetary systems must ADAPT to this necessity. Taxing it away is self defeating of individual economic freedom and the actual free flowing of the economy. Regulations as to where the dividend could be spent and how much investors could borrow to speculate with are other matters and also undoubtedly necessary.
Have you done a model for the US economy from 1913, where instead of debt based money, the government issued debt free money and fractional reserve lending by private entities was illegal?
Consider where the economy would be when 100 percent of the value of the original (1913) dollar remained today?
@ Impermanence
Maths is just logic. We will never know wether or not the system can be described logically till we try and succeed or fail.