Monday, July 5, 2010

And Now for Something Really Weird

From Steve Keen's Debtwatch of 13 June:

A majority of the 16 individuals identified in Bezemer (2009) and (Fullbrook (2010)) as having anticipated the Global Financial Crisis followed non-mainstream approaches to economics, with most of them identifying as Post-Keynesian (Dean Baker, Wynne Godley, Michael Hudson, Steve Keen, Ann Pettifor) or Austrian (Kurt Richelbacher, Peter Schiff).

Apparently they did a study -- two studies -- and found out that 16 people "anticipated the Global Financial Crisis." Only sixteen people? That is just too bizarre.

As long as I'm pointing our weird, let me offend everyone by saying this: The trouble with economists is that they seem to insist -- even the sixteen wisemen among them -- insist on categorizing themselves as "post-Keynesian" or "Austrian" or "mainstream" or in some other group. Everybody wants to be in a slot. That's weird.

By contrast, I (not an economist) consider myself a student of the economy.

But enough with the weirdness. Keen's post is excellent. It comes as close to Arthurian economics, as close to my thinking as anything I have read. First of all, Keen is more concerned with private debt than public. Second, he seems to accept increases in public debt as the solution, or part of the solution to the crisis. Third, he pays little or no attention to M2 money, at least in this article.

The above excerpt is from the introduction of his post. The excerpt below is from his conclusion, here with my interruptions:

The core propositions shared by the Bezemer-Fullbrook group were that the superficially good economic performance during “The Great Moderation” was driven by a debt-financed speculative bubble which would necessarily burst...

The shift from Keynesian economics to Reaganomics was an attempt to fix a problem. That problem was slow growth. (The problem was that we could grow faster only by accepting more inflation. Since we (reasonably) rejected that alternative, the problem was reduced to "slow growth." But perhaps this reduction muddied the analysis from which the solution emerged.)

The cause of the problem was the decline in credit efficiency. (People say printing too much money causes its value to fall. Similarly, I say using too much credit causes its productive potential to fall: It causes credit efficiency to fall.) I refer you to my Credit Efficiency post, where I say that if growth was better in the 1980s than the 1970s, it was because the increase in debt was monstrous in the '80s.

Keen says the "superficially good economic performance" since the mid- to late-80s was "driven by a debt-financed speculative bubble." I say it was driven by the growth of debt. I say the host of Debtwatch has overstated the case.

Keynesian economics died in a morass of inefficient credit. Reaganomics attempted to solve the problem by greatly increasing the quantity of credit in use. It was a brute force technique, moderately and temporarily successful, but doomed to failure because the solution was based on an incorrect understanding of the problem.

... because the debt added to the economy’s servicing costs without increasing its capacity to finance those costs. At some stage, the growth of unproductive debt had to falter, and when it did a serious financial crisis would ensue as aggregate demand collapsed.

That is a beautiful explanation of an ugly problem. But the explanation is wrong. It suggests that if all the debt was productive debt, there would have been no problem. That's blindly optimistic. Accumulating debt would have created the crisis eventually, no matter how you label that debt.

It costs more to use credit than it does to use money. And debt is the measure of credit in use. A large burden of debt means lots of credit in use. It means the cost of credit-in-use is a large component of the costs in our economy.

Costs have consequences.

The policy rescues since that prediction came true have not addressed the fundamental cause of the crisis, which was the excessive level of private debt.

The excessive level of private debt was the fundamental cause of the crisis. Yes.

The deleveraging that the Group predicted has thus been slowed to some degree by government action, but the need for that deleveraging has not been removed.

The need for deleveraging remains. I recommend direct action: Print money and use it to pay off debt. It's a crude solution, but it solves the problem quickly.

As Figure 13 in particular emphasizes, the scale of that potential deleveraging appears certain to exceed that experienced in the Great Depression.

Yeah, I've been thinking about this. There is no reason to assume that the Second Great Depression will last 10 years just because that's how long the First Great Depression lasted. If the modern version of the "Roaring 20s" lasted two or three times as long, then painful aftermath may also last a generation, this time around.

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