Can we avoid another financial crisis? Steve Keen’s latest book

Professor Steve Keen is an economist working in the post-Keynesian tradition at Kingston University here in the UK. He is well-known as a critic of mainstream economics (see his excellent and wide-ranging book Debunking Economics) and its failure to predict or satisfactorily explain the Great Financial Crisis (GFC) and recession, which he did some years before it occurred. His latest book is Can we avoid another financial crisis?a 130-page polemic aimed at the intelligent layman.

Keen’s central thesis is that mainstream economics failed because it ignores the role of private debt creation by the financial system, known in the jargon as ‘endogenous money’. This grew unsustainably in many countries in the decades prior to the crisis and drove a boom in the real economy and, even moreso, in asset prices (stock markets and housing). Credit expansion in economies such as the US and UK started growing consistently more rapidly than GDP in the 1980s, following the deregulation of the financial sector. Although it was subject to cycles, the trend in private debt as a share of GDP was upward. When its growth slowed or even went into reverse, the result was a severe recession and the aftermath is still with us both economically and politically. Continue reading

It’s the private debt, stupid

An eleven-minute interview with post-Keynesian economist Steve Keen, which begins one minute into the video. He discusses the huge accumulation of private debt in the US and how it is to blame for the Great Recession and the aftermath of sluggish growth. This story has been repeated in many countries across the world. In my view this is only part of the story, but it is an essential part. He usefully counters the hysteria over public debt and the ignorance over levels of private debt with some lessons from history.

Learning from the Great Depression – Michael Roberts

Recently, the economics editor of the Guardian newspaper in the UK, Larry Elliott, presented us with a comparison of the Great Depression of the 1930s and now. In effect, Elliott argued that the world economy was now in a similar depression as then. The 1930s depression started with a stock market crash in 1929, followed […]

via Learning from the Great Depression — Michael Roberts Blog

Forecasting the Great Recession: listen to the mavericks!

Did anyone forecast the Great Recession that has created so much suffering across the world for close to a decade? The answer is yes, but they tended to be from outside positions of power and either kept quiet or were ignored.

The Bank of England’s Chief Economist, Andy Haldane, recently claimed that ‘big improvements’ have been made in its ability to forecast the British economy. If this is true, it is undoubtedly welcome.

Haldane highlights the failure to take account of high and rising borrowing levels, but still admits that the Bank is ‘not going to forecast the next recession’, since their ‘models are just not that good’.

Greater forecasting success fell to more heterodox economists, those from outside the mainstream, whose work was more prescient. Continue reading

Optimism reigns — Michael Roberts Blog

Global stock markets ended 2016 near record highs and have started 2017 in a similar vein. Optimism about global economic growth, employment and incomes has bounced. The latest data on manufacturing, as measured by the so-called purchasing managers’ index (PMI), the view of companies on their sales, exports, employment and orders, show a rise in […]

via Optimism reigns — Michael Roberts Blog

Keynes on government and the individual under capitalism

Economist John Maynard Keynes“The important thing for Government is not to do things that individuals are doing already, and to do them a little better or a little worse; but to do those things that at present are not done at all.”

John Maynard Keynes (1926), The End of Laissez-Faire

I like this quote from the great economist, but although it may be clear in some instances what is ‘not done at all’ through private initiative, there is still plenty of room for debate about what the state should do.

One must remember that ultimately Keynes worked hard during the latter years of his life to try to save capitalism from itself by remedying its apparent defects, such as mass unemployment and poverty. He lived through two World Wars and the intervening Great Depression of the 1930s. These disasters profoundly shaped his thinking about economics and the role of state intervention in the economy. It is therefore misinformed to decry such intervention as socialist.

The mixed economy of the post-war years in the end outperformed state socialism both materially and socially, although its progress was halted in the 1970s by the crisis of ‘stagflation’ (the novel phenomenon of inflation and unemployment rising together).

I think that Keynes and today’s post-Keynesians are wrong that there is a permanent solution to recession through state intervention, but that despite this, we should not reject the latter which remains vital to the positive evolution of the economy and society.

Why Minsky Matters by L. Randall Wray – book review

why-minsky-matters-coverI wrote this review of L. Randall Wray’s Why Minsky Matters for the Rethinking Economics project back in January. RE have changed their website and my review can no longer be found there, so I thought I would post it here. Minsky didn’t have all the answers, but his Financial Instability Hypothesis remains highly relevant, and his prescience regarding the inevitability of major financial and economic crises was remarkable:

The effects of the 2008 Global Financial Crisis (GFC) are still with us. As I write, forecasts for the growth of the capitalist world economy are being progressively downgraded. One economist whose ideas gained a new lease of life from the GFC’s inception is the late Hyman Minsky. Indeed, as the crisis began to unfold, some commentators initially dubbed it a ‘Minsky moment’.

To sum up Minsky’s most influential contributions to economics in his own words: ‘stability is destabilizing’. Simply put, the financial system under capitalism tends to make the economy unstable and periods of relatively stable growth encourage increased risk-taking in the private sector. Over time, the system becomes more and more fragile, leading eventually to a serious crisis. Minsky died in 1996, but reflecting upon the economic turbulence of the 1930s in his writings, he asked if ‘it’ (another Great Depression) could happen again. Unfortunately, it seems as if he has been proven correct, although to date the GFC has been less severe overall than in the 1930s in terms of lost output and jobs, while the effect on individual countries has been uneven. At least initially, government interventions across the world prevented ‘it’ from happening again, although the recovery since then has been weak.

L Randall Wray has written an excellent account of Minsky’s main contributions to economic thought, aimed at the intelligent and interested reader. Note that there are no diagrams and no equations! This is not a biography, but an attempt to make Minsky’s ideas accessible to a wider audience and for this the author should be highly praised. Wray is a former student and colleague of Minsky and is therefore well placed to write such a book. He is a proponent of Modern Monetary Theory, a development of some of the radical parts of Keynesian thought, and this comes across in some chapters, particularly in the discussions on the nature of money. However this does not detract from the book’s thoroughness, relevance and readability.

Following the introduction, Wray gives a brief biography of Minsky, and an outline of his main areas of research. The author then discusses the evolution of macroeconomic theory since Keynes wrote his magnum opus, The General Theory, in the 1930s. In the view of Minsky, Keynes’s most important ideas were ignored and the less radical ones absorbed into mainstream thought. This became the neoclassical synthesis, which dominated economics and policy-making until the stagflation of the 1970s discredited it. The rise of free-market thinking followed, in the form of monetarism, new classical economics, rational expectations and real business cycle theory. Then in the years leading up to the GFC, the ‘new neoclassical synthesis’ became influential. This introduced imperfections such as sticky prices into theories of otherwise perfectly functioning markets.

As a member of the heterodox post-Keynesian school, Minsky sought to clarify and extend the ideas of Keynes regarding the impact of finance on the economy. In his early career, he had been influenced by American institutionalism, and wrote his PhD under Schumpeter. From the latter he adopted an evolutionary approach to capitalism, applying this to the financial system. It is here that innovation produces gradually increased risk-taking and debt accumulation by the private sector. This tends to become unsustainable, destabilizing investment and from there the whole economy. These ideas became known as the Financial Instability Hypothesis. For Minsky, the business cycle is endogenous, created within the system, rather than by exogenous shocks as in new classical theory. Fluctuations in GDP are driven by changes in investment, which in turn are driven by the behaviour of the financial system. Every so often, financial fragility will increase to such an extent that it leads to a major crash. In this way, Minsky could be said to have predicted the GFC years before it happened.

Wray devotes a chapter to Minsky’s work on Money and Banking, essential for understanding his ideas more fully. This includes the theory that growth in the money supply is driven by the credit creation of the banking system, and therefore cannot be directly controlled by the Central Bank as in mainstream theory.

Also well described is Minsky’s view that the modern capitalist economy is best viewed as a financial system, and should be analysed using balance sheets of assets and liabilities, which interact with flows of income (wages, profits, interest and so on). According to Minsky this is applicable not just to banks, but to firms, households and governments, indeed to the whole system. Mainstream economics tends to ignore balance sheets, and is therefore less able to explain and predict inherent instability.

Less well known are Minsky’s ideas on reducing poverty and inequality under capitalism. Surprisingly he was critical of the welfare state, and believed that public job creation at a reasonable wage would be far more effective in improving social outcomes.

A whole chapter is given over to the causes and evolution of the GFC in a Minskyian framework. Tellingly, Minsky had predicted the rise of securitization, which played such a key role in the crisis, as far back as 1987.

In the book’s conclusion, Wray outlines Minsky’s ideas on how to reform the capitalist economy to deliver ‘stability, democracy, security and equality’. This puts him very much in the spirit of Keynes, who to the end of his life, championed policies to prevent the kind of economic disaster which he felt had played a role in the rise of political extremism in the 1930s. Given recent events, these are surely worthy aims, though some critics, particularly on the right, may argue with Minsky’s policy proposals.

Minsky’s influence has grown in recent years, particularly among heterodox economists willing to incorporate balance sheets into their analysis. Notable academics in this vein include Steve Keen and Michael Pettis, as well as the late Wynne Godley who, like Wray and Minsky himself, was associated with the Levy Economics Institute. Both Keen and Godley predicted a major recession in the advanced economies some years before the advent of the GFC, although they were largely ignored by the mainstream.

Hyman Minsky was a mixture of pessimist and optimist regarding capitalism. His central idea, that stability is destabilizing, highlights the flawed nature of the system, with its chronic unemployment, inequality and cyclical behaviour. On the other hand, he thought that with the right policy interventions we can surely do better. This provides an encouraging end to an important book which deserves a wide readership at a challenging time for the world economy.