Sunday, September 04, 2011

It IS the Debt, But Not Just the Gummint's Debt

Over in Australia there's a fellow named Steve Keen, who is an economist.  He called the Recession (more accurately, the financial crisis) back in 2005.

These are excerpts from a longer article which includes formulas (ugh) and stuff like that.

Neoclassical economics, on the other hand, treats banks as simple intermediaries between savers and lenders. A loan therefore increases the spending power of the borrower, but reduces the spending power of the saver.
If the neoclassical model of banking were correct, then the macroeconomic effects of debt would be muted, as Bernanke and Krugman argued. However, there is overwhelming empirical evidence that this model is wrong. This evidence was first comprehensively analysed by the American Post Keynesian economist Basil Moore (Basil J. Moore, 1979, 1988a, 1995, 1988b, 1997, 2001, 1983), but it was also recognized by the then Senior Vice-President of the New York Federal Reserve, Alan Holmes, in 1969. While explaining why the Monetarist-inspired attempt to control inflation by controlling the growth of the money supply had failed, Holmes quipped that “In the real world, banks extend credit, creating deposits in the process, and look for the reserves later.

Yup.  That's why it's called "fractional-reserve" banking.  And having been in the racket, a long time ago, I can tell you that it is absolutely true that banks 'make the loans, create the deposits, and chase the reserves later.'

Keen identifies Krugman as a 'neo-classical' economist, by the way.

Seventy years ago, the great evolutionary economist Joseph Schumpeter argued that Walras Law was false in a credit economy, because credit gave entrepreneurs spending power that did not come from the sale of existing goods.

That's why the chart above is significant:  the private-debt load in the US is horrific.  And if you think that's all just peachy-keen, then look at THIS chart:
...which shows you that the crash began when private debt crashed--LONG BEFORE October of '08.

Yes, there are debts which are not 'entrepreneur' debts; Keen knows there is mortgage debt, but also knows that a chunk of that was speculative and/or 'feedback-loop' debt.

It's not a problem with an easy solution.  The neo-classical Keynesians don't have it.  The monetarists don't necessarily have it, either.

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