Saturday, January 24, 2015

Steve Keen Interview on the Finance News Network

Steve Keen is interviewed below by Lelde Smits for the Finance News Network. More details here.

Steve Keen gives his assessment of the global economy as of January 2015 and predictions for 2015. His final comments on the Eurozone are very insightful: this may be the year one or some Eurozone nations break free of the euro.


  1. This is the same thing that Austrians argue. Interest rates that are artificially manipulated below the free-market level create excess credit, which leads to booming real estate prices, which causes a bubble. When prices rise beyond what the ordinary person can reasonably afford, the bubble bursts causing the inevitable downturn and financial crisis. This is the problem that central bank inflation causes. Same as what Austrians generally state.

    1. "This is the same thing that Austrians argue. "

      No, it is not.

      (1) the Austrian business cycle theory (ABCT) is about alleged real capital malinvestments supposedly caused by a money rate of interest below the unique Wicksellian natural rate of interest (what you call the "the free-market level") that equates saving with investment.

      The ABCT is not concerned with asset bubbles.

      (2) the Post Keynesians rightly reject the Wicksellian natural rate of interest as nonexistent and impossible to even define in a world with heterogeneous capital goods:

      (3) Post Keynesians rightly point out that it is not central banks per se that are the problem but poorly regulated banks and financial markets. Effective financial regulation is what can and does prevent asset bubbles.

  2. The malivestments are being made in real estate since the majority of a house purchase is financed by bank credit. In this day and age credit is used to finance consumption goods and the purchase of company equities on margin, not just capital investments. Hence, the housing and stock market bubbles.

    There was plenty of financial regulation before the financial crisis of 2008-09. Banks had to comply with global Basel 2 regulations and Basel 3 is in the works. Look it up.

    The free-market regulates and prevents asset bubbles. Govt regulation fails, just like it failed in 2008.

    BTW, you have yet to answer my question on what causes unit costs to rise over time, and I would appreciate it if you would stop the immature name calling and foul language. Furthermore, you haven't explained where governments get the money to engage in so called stimulus spending.

    1. Like many internet Austrians you seem quite ignorant of your own Austrian theory:

      (1) the classic Austrian business cycle theory (ABCT) has no place for asset bubbles.

      Even economists sympathetic to the Austrian school admit this:

      If were honest you would acknowledge this.

      (2) you have not addressed my point about the non-existence of the Wicksellian natural rate, which is devastating to your ABCT.

      Again, If were honest, you would acknowledge this.

      (3) I know perfectly well consumer loans are a big part of credit these days, but if you knew a damn thing about ABCT, you'd know Rothbard in Man, Economy, and State (2004 [1962]: 994–1008) said explicitly that comsumer credit does not cause Austrian business cycles:

      “What happens, however, when the increase in investment is not due to a change in time preference and saving, but to credit expansion by the commercial banks? …. What are the consequences? The new money is loaned to businesses.110 These businesses, now able to acquire the money at a lower rate of interest, enter the capital goods’ and original factors’ market to bid resources away from the other firms. At any given time, the stock of goods is fixed, and the [new money is] … therefore employed in raising the prices of producers’ goods. The rise in prices of capital goods will be imputed to rises in original factors. The credit expansion reduces the market rate of interest. This means that price differentials are lowered, and … lower price differentials raise prices in the highest stages of production, shifting resources to these stages and also increasing the number of stages. As a result, the production structure is lengthened. The borrowing firms are led to believe that enough funds are available to permit them to embark on projects formerly unprofitable.

      110 To the extent that the new money is loaned to consumers rather than businesses, the cycle effects discussed in this section do not occur." (Rothbard 2004 [1962]: 995–996).

      (4) Basel II was a grossly ineffective system of regulation. The effective system that, say, America had after WWII was gutted by any number of deregulatory pieces of legislation:

      Depository Institutions Deregulation and Monetary Control Act (1980)

      Garn–St. Germain Depository Institutions Act (1982)
      These two acts were major contributors to the Savings and Loan crisis.

      Riegle-Neal Interstate Banking and Branching Efficiency Act (1994)

      Financial Services Modernization Act of (1999), also called the Gramm-Leach-Bliley Act

      Commodity Futures Modernization Act (2000).

      The SEC’s Voluntary Regulation Regime for Investment Banks (2004).

    2. (5) "The free-market regulates and prevents asset bubbles. Govt regulation fails, just like it failed in 2008."

      No, it does not. Free markets make asset bubbles much more common and dangerous.

      E.g., look at Australia in the 1880s, it had a gold standard, free banking, virtually no regulation, but a huge disastrous bubble occurred:

      (6) What causes costs to rise? Depends on the sector that is producing the inputs for a given firm and how this accounts for its costs :

      (i) in the flexprice non-labour factor input sector it happens when demand exceeds supply, and

      (ii) in the mark-up pricing capital goods sector it is because firms often shun price reductions when demand falls or even when their total unit costs fall (so that they can enjoy a larger profit margin) and prefer price rises to price reductions, and

      (3) in the labour sector human beings often strongly resent and oppose nominal wage cuts,

      These 3 factors are major causes of the strong inflationary tendency seen in modern capitalist economies.

      (7) whenever they spend, governments use high powered money usually via their central bank or Treasury accounts. This money is fiat money and doesn't "come" from anywhere.

      It is fiat money created by the central bank.

      Government issue bonds or tax people $for$ to match spending or deficits, but this does not really "fund" government spending in the way people normally think: that is just a hang over from gold standard thinking:

      (8) let me tell you something for nothing: there are Austrians I respect, but you are not one of them. You have already proven on the previous thread that you're here to be a troll.

      If you want my respect, you need to earn it, by properly understanding my positions, not using straw man arguments and actually showing you understand your own theory and mine.

  3. Austerity does work. It's working in the Baltic states. In a 2013 speech by the managing director of the IMF, Christine Lagarde stated:
    " While challenges remain, you have pulled through. You have returned to strong growth and reduced unemployment...You have lowered budget deficits and kept government debt ratios to some of the lowest in the European Union. You have become more competitive in world markets through wage and price cuts. You have restored confidence and brought down interest rates through good macroeconomic policies. We are here today to celebrate your achievements. "

    So, there you have it. Straight from the horses mouth. Let's celebrate AUSTERITY!!! Hip...Hip...Hooray!!!!!

    Perhaps the stupid Greek government can learn something from the Baltic states.

    1. Christine Lagarde has no idea what she is talking about.

      Austerity in the Baltic states was an utter catastrophe:

      If all countries engaged in austerity and wage and price cuts, it would cause massive debt deflation and a collapse in demand inducing a global depression.

      As for Greece, it has already pursued an extreme form of austerity for years now and has nothing to show for it except economic collapse. Much the same story can be seen in Ireland.