Can We Avoid Another Financial Crisis – by Professor Steve Keen

Through a lot of research, specifically into the levels of private debt, Can We Avoid Another Financial Crisis has highlighted a number of countries that are on the brink of financial disaster. He explains why they are in trouble, how they have gotten to this position, and what options they have for trying to get out of the ‘danger zone’.

Can We Avoid Another Financial Crisis (dot point) Summary

Ch1 From triumph to a crisis in economics

Macroeconomics

Quote from Dec 200, Nobel Prize winner Robert Lucas

“Its central problem of depression-prevention has been solved, for all practical purposes, and is in fact solved for many decades”

4 years later the claim fell apart

Hyman Minsky a bit different

• The most significant economic event of the era since WW2 is something that has not happened
• Ultimate conclusion that crises in pure free market capitalism are inevitable, due to the financial system, being ‘inherently flawed, prone to booms crises and depressions’

Current Mainstream Economics in two disciplines

Microeconomics:  considers the behavior of consumers and firms. Based on the ideas that consumers act and aim to maximize their utility and firms to maximize profits

Macroeconomics considers the economy as a whole. T

2008 mainstream models conclude that 2008 was going to be a bumper year

• Unemployment was low at 4.5%
• Inflation was right on the money with 2% fed target

In stark contrast to fed models, unemployment rose rapidly and inflation spiked to 5% then went to negative 2%

• Capitalism almost collapsed
• You need an economic model that can generate a depression, currently, there isn’t one
• Mainstream models default state is equilibrium rather than crisis
• A period of tranquil growth after the preceding crisis leads capitalists to shift from being despondent about the future to having euphoric expectations
• The development of euphoric expectations leads to finance being given projects that are doomed to fail
• As the economy starts to boom again thanks to higher investment, employment rises and then there is demand for new materials
• This drives up wages
• Mainstream economists exclude private debt in their models, but it is an essential part

Chapter 3

Steve Keen made warnings in December 2005

He went back and plotted private debt to GDP… 0.98 correlation on the coefficient

Convinced a global economic crisis was coming

Knew that it would take mainstream economists by surprise because they don’t model it

Expenditure in the economy is roughly GDP plus credit

This some generates both incomes and capital gains (net purchases of assets – property and shares)

Credit is far more volatile than GDP and is capable of turning negative and subtracting from demand

The crisis will commence when the rate of growth of private debt slows down

Mainstream believes that changes in debt are pure redistributions

Housing

• The physical supply of housing is the turnover of existing plus new houses on the market
• The money is the flow of new mortgages, which is the change in the level of mortgage debt
• Divide this by current price level, you have how many can be bought at this price
• This creates a relationship between the acceleration of mortgage debt and the change in house prices
• This occurred in the US but not Aus
• In Aus we inflated the bubble with the first home owners boost 14K
• Homeowners can pay with 5 %, so didn’t really need anything
• The incredible increase in demand from China
• The rate of growth decreased in Aus but didn’t go negative like it did in China
• Aus returned to exponential so everything went up
• As of March 2016, Australia’s private debt is 22%  higher than that of the GFC
• You can only avoid a financial crisis

Chapter 4/5 – smoking gun of credit

• Whenever the bank makes a loan it simultaneously creates a matching deposit in the borrower’s bank account, creating new money
• Danger zone. Page 88, private debt to GDP
• Move further into the danger zone or collapse out
• Junkies dilemma, a choice between going cold turkey or continuing to shoot  up on credit
• Mainstream economists are the real culprits in the crisis and its aftermath
• They advise governments hat credit is benign and rising debt is no cause for harm
• Paying off debt destroys money
• Modern debt jubilee
• The current system encourages higher leverage
• Banks cant fund entrepreneurs