Tuesday, August 9, 2011

Steve Keen on the Return of Bear Markets

An insightful post from Steve Keen analysing the recent stock market collapses from the perspective of Hyman Minsky’s financial instability hypothesis:
Steve Keen, “The Return of The Bear,” Debtwatch, August 9th, 2011.


  1. Keen, Hudson and Yves Smith are all a joy to listen to and read, and absolutely on the money - Keynesian analysis, but with and awareness of private debt levels and misallocation in the FIRE industry. Here are a couple of Hudson's top clips, in case you haven't seen them:




  2. Rebutting Minsky's viewpoint can indeed be pretty educational for non-Austrians: http://mises.org/daily/2787

  3. If only it were as educational for Austrians.

  4. Regarding Shostak's musings on Minsky:


    Did you even bother to read it??

    Not only doe snot "refute" Minsky", he flat says Minsky is essentially right about modern capitalism:

    For post-Keynesians such as Minsky, what matters here is that, in the present institutional setup, banks can create unbacked credit; this fact validates Minsky's theoretical framework. But what is it in the modern capitalistic framework that enables banks to engage in the reckless expansion of credit that makes this system unstable? Careful examination will show that it is the existence of the central bank ....
    So while Minsky's story accurately describes the present financial-market turmoil, ...

    His only real "criticism" is that he thinks the central bank that is the main cause of the instability. That totally ignores the role of effective financial regulation, which can prevent Minsky cycles from happening.

    His other attempt to show that his fantasy world capitalism would be stable is all based on a real theory of the interest rate that is invalid, and false Austrian trade cycle theory.

    Some gems from Shostak:

    "We can thus conclude that there is no inherent tendency in the capitalistic economy to generate unbacked credit that destabilizes the economy."

    False. Capitalism has developed fractional reserve banking in every modern country you care to name.

    "Contrary to Minsky and the other post-Keynesians, it is the existence of the central bank that makes the present capitalistic framework unstable and susceptible to financial turmoil. It is not the expansion of credit as such that leads to an economic bust but the expansion of credit "out of thin air," since it is through unbacked credit that real savings are diverted from productive activities to nonproductive activities, which in turn weakens the process of real wealth expansion."

    This ignores the role of financial asset markets and real assets markets.
    You could still have unsustainble asset bubbles in this Austrian world of 100% fractional reserves: money can flood in via your capital account and cause bubbles.

  5. Correction:

    "Not only does it not "refute" Minsky", he flat out says that Minsky is essentially right about modern capitalism:"

  6. The ancients could accurately describe the sky, but it had nothing to do with explaining it. If you still don't know the difference between the two, oh well.

    Funny, if "capitalism has developed FRB", shouldn't you oppose it?

  7. "Funny, if "capitalism has developed FRB", shouldn't you oppose it? "

    Nope. FRB needs financial regulation and a central bank as a lender of last resort with fiat money.

    The private sector needs a money stock that is capable of endogenously growing to meet the private demand for money for trade and investment. Mild inflation is preferable to deflation.

    With proper financial regulation controlling the flow of credit to stop asset bubbles and reckless lending, mild inflation rewards producers and businesses that take on debt to expand output and increase employment.

    Deflation, on the other hand, imposes a "tax" on them: the deflation tax penalises productive businesses and individuals who must pay back money with higher purchasing power. There may also be debt deflationary effects.

  8. "Capitalism has developed FRB" only inasmuch as capitalism has developed stealing. The fact there is lots of stealing in capitalism merely proves that capitalism produces lots of stuff worth stealing. Now if there exists a way for elites to tax the poor by as simple a procedure as printing money, you can be sure any elite in any country is going to "develop" it. FRB is just modern coin clipping and back then you could also find ideologues like you who were arguing it's good for the poor. In fact, the conclusion directly follows from contemporary Keynesian variant of that ideology.

    "Mild inflation" does indeed reward the rich elites as you describe.

  9. "'Mild inflation' does indeed reward the rich elites as you describe."

    The same nosense that has already been refuted before.

    On the contrary, it is the rich who are mainly creditors - not debtors - and who are in fact the ones who largely pay the cost of mild inflation: they earn their income through lending money or speculating on financial asset markets, and so the money repaid to them is of lower purchasing power.

    The poor are generally debtors - they benefit from mild inflation - so do productive businesses who take on debt for investment in capital goods. Under the classic Keynesian system (1945-1973) where real wages rise along with productivity growth, you get rising real wages for the middle classes and poor, over and above mild inflation. It has been the neoclassical assault on real wages and dismantling of Keynesianism that has seen real wages stagnate for many in the past 30 years.

  10. "Capitalism has developed FRB" only inasmuch as capitalism has developed stealing.

    LOL.. so now your much vaunted capitalism - supposedly the best system imaginable - has just resulted everywhere in the modern era in massive theft because of FRB?
    How can it be the best system we could have?

  11. they earn their income through lending money

    Like banks? Or financial institutions that work with banks? The rich creditors are either people who create new money in the first place or people who are first to get the new money. Poor guys indeed, they have to pay inflation tax on money they have printed themselves in the first place... I guess that's the keynesian final frontier, how to improve their lot even further? Wow, quite a challenge.

    The rest of the rich are creditors: the richer an individual, the higher mortgage they can get, the bigger a company, the higher leverage they can get. And they do, even if they have cash, because borrowing money in a keynesian system pays. Actually with keynesian system the borrowing itself pays.

    And the poor are not the ones with good enough credit rating to borrow, nono. The poor's one and only option is to pay the inflation tax, yesyes.

    Keynesians system is basically massive embezzlement of the poor by rich elites on truly unimaginable scale.

  12. How can it be the best system we could have?

    Capitalism is basically making theft illegal. That's why it is absurd call FRB a creation of capitalism. Correlation is not causation. I have already explained causation to you. Rich elites use ideologues like you to embezzle the poor, hence the FRB. You might say, keynesian ideas were doomed to success.

  13. "The rich creditors are either people who create new money in the first place or people who are first to get the new money."

    The rich and super rich do not "create" money: their money is invested in financial asset markets etc. They are not the ones taking out debt.

    "And the poor are not the ones with good enough credit rating to borrow, nono."

    LOL... god, you write drivel. Seriously why do you even bother?

    We just had a period of incredibly lax lending standards in many countries: banks were giving away loans to people with no income or assets, e.g., liars' loans, NINJA loans, subprime. Credit cards were being given away to people, even the lower income earners and the poor. You could get teh limit raised when you hit it on credit cards, and so on.

    Thanks for the laughs.

  14. They are not the ones taking out debt.

    Of course they are, and big time, ask any broker what "leverage" means.

    NINJA loans

    Precisely, see how you speak of big loans to the poor as a deviation? Normally the system benefits have to be limited only to the rich, higher middle class at most, otherwise you get big bubbles rather than "mild" inflation. It's no different than any other embezzlement scheme, if it is to work for a long time, you have to keep it low.

  15. "Precisely, see how you speak of big loans to the poor as a deviation?"

    LOL... So now you are just admitting that this statmeent of yours was nonsense? Is that right?:

    "And the poor are not the ones with good enough credit rating to borrow"

    As for the poor not getting drowned in debt, I guess this must be a figment of someone's imagination, huh!?



  16. If you support NINJA loans, then yes, you do (slightly) decrease the keynesian transfers from the rich to the poor. But then as you know the system of embezzlement collapses.

    The poor do get drowned in debt. Like the $3,000 as in your example. Maybe $10,000. Funny. $100,000 highly unlikely, no bank would allow any poor person to accumulate such debt, they would have sent his ass on the street much sooner. It's not even nearly the multi million debts the rich routinely use when they invest with leverage, so that's where your keynesian benefits end up.

  17. Reading through some of your archives I don't know how you maintain sanity dealing with idiots who use 'statist' and 'keynesian' as self evident insults at every possible opportunity.

    ED describes them all so well: http://encyclopediadramatica.ch/Libertarianism