Capital Account: Steve Keen on the Minsky Singularity and the Debt Black Hole's Event Horizon

[stockholmer]

Welcome to Capital Account. Greece drops demands for softer bailout terms, fearing rejection from international lenders. Australian economist and Debunking Economics author Steve Keen will tell us if this is a case when debt deflation wins and the real economy loses. In the US, new jobs numbers disappoint again. However, the number of consumer and business bankruptcies are falling and could end the year at the lowest level since the 2008 financial crisis. Is this good news? Maybe not, as it may be due to rock bottom interest rates. Also, student loan delinquencies are rising. Economist and Professor Steve Keen will talk about the toll that too much debt can have on an economy once it has broken past the "event horizon."

Plus, UK authorities open a criminal probe into the attempted rigging of LIBOR. Meanwhile, a US bank regulator warns banks are taking increasing risk as a result of ZIRP (zero interest rate policies). Have we reached the event horizon of a Minsky singularity, which is sucking us into a black hole of all consuming debt? Is this the point of no return? There have been many efforts to paper over the debt, but it hasn't gone away. Economist Steve Keen, author of "Debunking Economics: The Naked Emperor Dethroned," will explain. He agrees that ZIRP is resulting in increased risk taking by banks. Yet the bad practices of banks, including the manipulation of markets and profiting from ponzi schemes, are ignored in the economic models of academics who influence policy. Professor and economist Steve Keen will tell us how this is possible.

the Spanish video mentioned in the interview


http://www.debtdeflation.com/blogs/ (Keen's website)

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related:

Paul Krugman vs. MMT: The Great Debate (Steve Keen is NOT an MMT'er btw, he is an expander of Minsky's theories, Dr. Michael Hudson IS an MMT'er)

http://www.cnbc.com/id/46944145/Paul_Krugman_vs_MMT_The_Great_Debate

There’s a tremendously important debate being waged across a bunch of different websites, including Paul Krugman’s at The New York Times, about how banking really works. Unfortunately, it’s probably a bit tough to wade into the debate at this point. So I’ll do my best to summarize what’s going on.

ACT I: Krugman Answers Keen

Last week, a maverick Australian economist named Steve Keen linked to a paper http://ineteconomics.org/sites/inet.civicactions.net/files/keen-steve-berlin-paper.pdf he had written for a conference to be held in Berlin later this month. The paper, entitled “Instability in Financial Markets: Sources and Uses,” starts with a synopsis http://www.economonitor.com/blog/2012/03/a-primer-on-minsky/ of the work on the financial sources of economic instability by the late economist Hyman Minsky. In particular, Keen argues for the Minskyite point that an understanding of banking is central to understanding the economy.

Paul Krugman weighed in http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/ the very next day with a post arguing that Keen’s insistence that banking is crucial was misplaced. Krugman argues that bank lending doesn’t necessarily increase demand in the economy—it just shifts money around. “If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I’m not sure what,” Krugman writes.

A few hours and scores of blog comments later, Krugman returned to the debate to accuse Keen and the “Minskyites” of engaging in “banking mysticism.” http://krugman.blogs.nytimes.com/2012/03/27/banking-mysticism/ (The Minskyites he most likely had in mind were Modern Monetary Theorists like economist Randall Wray, a former student of Minsky.) Krugman compared Keen and the Minskyites of being similar to Austrian economists in that both assign “unique powers” to modern banks.

Of course, one of the best ways to pick a fight with a Minskyite is to compare him to an Austrian. The typically left-wing Minskyites typically despise what they regard as the right-wing quackery of Austrian economics. (Austrians, as far as I can tell, don’t spend much time thinking about Minsky or MMT at all.) Krugman no doubt knows this, which is why he decided to make the comment in the first place. He wanted to poke the bear.

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http://www.nakedcapitalism.com/2012/04/philip-pilkington-nobel-laureate-paul-krugman-selectively-quotes-rival-to-stitch-him-up-after-losing-argument.html

Nobel Laureate Paul Krugman Selectively Quotes Rival to Stitch Him Up After Losing Argument


Yves here. If comments on this site are any guide, readers appear to have taken considerable interest in a blogosphere debate on the role of money and banking, with Steven Keen and Scott Fullwiler (among others) arrayed against Paul Krugman and Nick Rowe. Krugman’s latest piece http://krugman.blogs.nytimes.com/2012/04/02/oh-my-steve-keen-edition/ not only misrepresents Steve Keen’s argument, as Philip Pilkington explains below, but Krugman also appears to have shut down any discussion at his blog after quite a few of his readers pointed out his sleight of hand.

There were 65 comments from 12:46 PM to 5:22 PM. Krugman put an update (no time marker) at the top of the post”OK, I’m done with this conversation.” Did the last comment, reproduced in full below, hit a nerve?



I predict this sorry exchange that started about Krugman’s misuse of Minsky will one day haunt the good Professor if he doesn’t do his homework with an open mind immediately. If not, the damage to his credibility will be permanent and irreversible.

Paul, at least come clean and admit you misread Keen here and quoted him out of context. It’s obvious.

Your doubling down with each new post is very unbecoming and your beginning to look like a Republican.

What was that post you wrote awhile back on hypocrisy?



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http://www.nakedcapitalism.com/2012/04/philip-pilkington-nobel-laureate-paul-krugman-selectively-quotes-rival-to-stitch-him-up-after-losing-argument.html

By Philip Pilkington, a writer and journalist based in Dublin, Ireland. You can follow him on Twitter at @pilkingtonphil

Oh, its a dark day, my friends. A pall has been cast over the econoblogosphere. Yes, Paul Krugman has just used the New York Times website to undertake a vicious stitch-up on an intellectual opponent who should have, by rights, won the original argument. Here’s how it went down. Post-Keynesian economist and sometimes Naked Capitalism contributor Steve Keen wrote a cogent article http://www.economonitor.com/blog/2012/03/a-primer-on-minsky/critiquing a Paul Krugman paper on Minsky and debt deflation. The key issue was that the so-called money multiplier does not function to restrict credit growth in modern economies operating on a floating exchange rate with a central bank that targets interest rate. We dealt with this briefly the other day http://www.economonitor.com/blog/2012/03/a-primer-on-minsky/ and pointed out the flaw in Krugman’s argument.

Krugman then started to get overwhelmingly negative comments from his usually receptive audience. Many were people who worked in banks trying to appeal to Krugman’s good sense so that he might consider that he failed to understand some fundamental things about modern banking. No luck there.


Then Scott Fulwiller ran a comprehensive rebuttal http://www.nakedcapitalism.com/2012/04/scott-fullwiler-krugmans-flashing-neon-sign.html here on Naked Capitalism yesterday. It was a one-two punch. Krugman fell back on a post written by Nick Rowe. http://krugman.blogs.nytimes.com/2012/04/02/things-i-should-not-be-wasting-time-on/ Rowe’s post was dodgy in the extreme. He made up a quote — specifically that “the money supply is demand-determined” — called it gibberish and then undertook a ‘deconstruction’ of the quote… that he had made up. I called his rhetorical tactics sophistical in the comments section. He called me rude.


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Capital Account Interview on the Keen-Krugman Brawl

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Paul Krugman And Steve Keen Got Into A Massive Fight On One Of The Biggest Issues In All Of Economics

http://articles.businessinsider.com/2012-04-09/markets/31311688_1_banking-sector-glass-steagall-act-home-prices#ixzz1tpI93Z3O

During the last few weeks, economists Paul Krugman and Steve Keen have engaged in a lengthy (and ugly) blogger debate http://www.businessinsider.com/krugman-fights-keen-2012-4 about the role of banks in expanding the monetary base. But beyond the jargon, the nitpicking, and the insults (from both sides) the point they debated is a crucial one: Does the Fed have sufficient power to control the monetary system? Or are the Fed and other central banks given more credit than they are due? The impetuses for this debate are the theories of Hyman Minsky, an American economist who wrote that markets are intrinsically in a state of disequilibrium.

According to Keen, Minsky thought that irrational market actors can exacerbate disequilibrium's when they perceive future stability in the markets. For example, banks in the early 2000s continued extending loans to home-buyers with poor credit because they did not foresee (or did not want to accept) that home prices could not continue rising. Even the initially conservative activity of extending loans to creditworthy homebuyers soon became speculative, as home prices skyrocketed out of control because of unsustainable demand in the market. While it is quite conceivable that bank behavior did indeed exacerbate the housing bubble in this manner, Keen argues that this behavior demonstrates a deeper ideology: Fiscal and central bank policy have far less power in controlling credit conditions than we would like to believe. He writes:

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. Banks, Keen insisted, form the crux of the problem since they are in control of the monetary base. Banks' assessments of the risks and rewards to lending grows virtually without reference to the deposits they receive, so banks—and not the government—ultimately determine credit standards.

He wrote in a blog post: http://www.debtdeflation.com/blogs/2012/03/29/krugman-on-or-maybe-off-keen/


Why does it matter that “once you include banks, lending increases the money supply”? Simply, because the endogenous increase in the stock of money caused by the banking sector creating new money is a far larger determinant of changes in aggregate demand than changes in the velocity of an unchanging stock of money. And in reverse, the reduction in demand caused by borrowers repaying debt rather than spending is the cause of the downturn we are now in—and of the Great Depression too.


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Economist Steve Keen Goes After Paul Krugman With A New Presentation

http://www.businessinsider.com/economist-steve-keen-goes-after-paul-krugman-with-a-new-presentation-2012-4

Post-Keynesian economist Steve Keen really socked it to Paul Krugman in a presentation this weekend in Scotland. http://www.justbanking.org.uk/

If you're just joining the battle http://www.businessinsider.com/paul-krugman-vs-steve-keen-2012-4 this is a good, albeit wonky, starting point.

Keen refutes first the idea that the creation of credit necessarily leads to crisis, and second the idea (Krugman's) that banks have nothing to do with debt crises. Instead he offers a theory of good and bad bank behavior.

We've posted the slides from his presentation. Go to his site http://www.debtdeflation.com/blogs/2012/04/21/just-banking-presentation/ to see a video of the presentation.

Click here to see the presentation >
http://www.businessinsider.com/economist-steve-keen-goes-after-paul-krugman-with-a-new-presentation-2012-4

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http://mikenormaneconomics.blogspot.se/2012/04/marxist-viewpoint-on-krugman-v-keen-and.html

A Marxist viewpoint on Krugman v. Keen (and MMT) It's really an examination of MMT from a Marxist perspective. The author incorrectly seems to think that Steve Keen is MMT.

Read it at Michael Roberts Blog:

Paul Krugman, Steve Keen and the mysticism of Keynesian economics http://thenextrecession.wordpress.com/2012/04/21/paul-krugman-steve-keen-and-the-mysticism-of-keynesian-economics/


But the Marxist theory of money makes an important distinction from the MMT guys. Capitalism is a monetary economy. Capitalists start with money capital to invest in production and commodity capital, which in turn, through the expending of labor power, eventually delivers new value that is realised in more money capital. Thus the demand for money capital drives the demand for credit. Banks create money or credit as part of this process of capitalist accumulation, not as something that makes finance capital separate from capitalist production. I would not say that there is an enormous gap here. It is an established fact that investment has been and remains the primary use of credit in capitalist economies and that interest rates are the cost of obtaining capital through acquiring debt. Most economists would agree with this, I believe, including MMT economists.

And they would also point out that consumer credit was virtually unknown in the day of Marx, other than for the wealthy and powerful. Since the introduction of the credit card and widespread home ownership made government policy, credit extended to workers rather than the ownership class has soared. So when Marx was writing industrial capital was paramount, whereas now finance capital is becoming dominant, with the financial sector responsible for a growing share of GDP. Michael Hudson has observed that Marx never expected that industrial capital would be challenged by finance capital. This is a new phenomenon that is characteristic of a stage of capitalism that Marx did not anticipate, since "capitalism" for him meant industrial capitalism. Financial capital served industrial capital at that time. This is no longer the case as finance capital becomes an ever bigger player.

But according to Roberts, the largest divergence between MMT-PKE and Marxism is that the former focuses on Minskian financial instability and Keynesian "animal spirits," which he sees as entangled in the mysticism of expectations, i.e., subjective, whereas the latter is based on falling rate of profits, which is objective. On the other hand, Wynne Godley was able to accurately predict the coming crisis based on his three sector model, which finds antecedents in the work of Keynes, Kalecki, Kaldor and Robinson on prices, wages, profit and capital accumulation. Godley attempted to "objectify" the Keynesian narrative in stock-flow consistent modeling based on accounting principles and national accounting identities in developing a fresh approach to macroeconomic modeling.

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Further Background:

The Most Important Econoblog Post This Year: The Steve Keen/MMT Convergence

http://www.angrybearblog.com/2012/01/most-important-econoblog-post-this-year.html

Neil Wilson has done yeoman’s duty to (perhaps) achieve a convergence that has been too-long delayed.

A Double Entry View on the Keen Circuit Model. http://www.3spoken.co.uk/2011/12/double-entry-view-on-keen-circuit-model.html

Steve Keen is, to my knowledge, the only person who is actually encoding a Godley-esque, MMT-style, accounting-based, stock-flow-consistent dynamic simulation model of how economies work. But many MMTers have been quite hostile or at least resistant to Steve’s work, based on some different concepts of endogenous/exogenous money, and — this may seem trivial but it isn’t, at least as it has played out over time — based on details of single- versus double-entry accounting.

The debate has been quite acrimonious at times, and that acrimony has greatly hindered a convergence that in my eyes would be the most salutary event possible in the development of economic thinking and practice. You can read the details in Neil’s post, but in short he’s re-jiggered Steve’s accounts to make them conform better to (at least Neil’s view of) standard bank-accounting practices. I’m not qualified to evaluate his new formulation, but I am excited to read Neil’s comment on the post, replying to uber-MMTer Scott Fullwiler:


We need to get all this pulled together into a coherent overall model. Steve’s up for it. I hope you are too. I’ll just say: I’m very much up for watching it happen. Also: run don’t walk to read Steve’s Debtwatch Manifesto, http://www.debtdeflation.com/blogs/2012/01/03/the-debtwatch-manifesto/ posted last week.

Cross-posted at Asymptosis. http://www.asymptosis.com/?p=4747

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Dr. Michael Hudson (a conventional MMT'er) on The Federal Reserve System

http://michael-hudson.com/2012/03/federal-reserve-system/

What is the place of the Federal Reserve System in the American financial and economic structure?

Prior to the Federal Reserve’s founding in 1913, U.S. monetary policy was conducted by the Treasury. Like the Fed, it had district sub-treasuries that performed nearly all the financial functions that the Fed later took over: providing credit to move the crops in autumn, managing government debt, and so forth.

But after the severe 1907 financial crisis, a National Monetary Commission was reformed. Under the then-Republican administration, it recognized a need for more active government intervention to prevent future financial crises. It also recognized the desirability of moving away from the Anglo-Dutch-American system of “merchant banking” based on short-term lending against collateral in place, or for shipping of goods already produced. The National Monetary Commission’s longest volumes were on the great German industrial banks, and Republican policy aimed at bringing banking into the industrial era, to provide long-term funding after the model of German and other Central European banks.

However, the leading bankers sought to use the crisis as an opportunity to grab power for Wall Street, away from the Treasury. In this sense, the Fed was founded in large part to take monetary control away from Washington’s elected officials and appointees, and privatize the supply of money and credit. So its place in the U.S. financial and economic structure is to allocate credit, primarily to serve Wall Street financial interests. That explains the insistence on the financial class here and abroad in insisting on an “independent” central bank. It means that instead of serving the public interest, it serves the interests of the banking class. The hoped-for transformation of commercial banking into long-term industrial banking was not achieved.

Can we imagine the global economic system without Federal Reserve today? If yes/no, why?

As David Kinley’s book for the National Monetary Commission pointed out a century ago, nearly all the financial functions performed by the Fed already were performed by the national Treasury. In more recent times, Milton Friedman and his University of Chicago colleagues suggested that the entire Fed could be reduced to a single desk inside the Treasury. The “Chicago Plan” of the 1930s urged Treasury control, as does Congressman Dennis Kucinich’s current bank reform. There is no inherent need for a monetary agency to exist outside of the national government, except to serve the interests of the financial class as distinct from those of government, industry and labor. And the banking sector’s business plan is to load down real estate, labor, industry and the government with as much interest-bearing debt as possible.

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[westerebus]

1. The time of the great reset is approaching.

It's going to be uncomfortable for some and that's as understated as I can say it.

Unless and until the corruption is prosecuted, the guilty punished, and the rule of law restored, nothing changes.