Wall St was down 94 overnight, its biggest fall in a month, while the local market is down 66.
It’s (still) hard being a bear: good economic theory
|
You have just come from your annual medical checkup, where your doctor assures you that you are in robust health. Walking jauntily down the street, you bump into a practitioner of alternative medicine. He takes one look at you and declares “You have a serious tumour! It must be removed or you will die”. You ignore him as you always have and continue your merry way down the street. One day later, a stabbing pain suddenly cripples you and you collapse to the pavement. In agony, your call your doctor, who initially refuses to send an ambulance because he knows you are well. When you lapse into a coma and stop talking mid-sentence, your doctor concludes that perhaps something is wrong and sends an ambulance to take you to hospital. Initially, the doctor waits for you to revive spontaneously, because he still knows there’s nothing really wrong with you. But as your pulse starts to weaken, he reluctantly calls a retired doctor who had experience of a similar inexplicable malady in the distant past. She prescribes massive doses of tranquilisers, painkillers, vitamins and oxygen — all substances that had been removed from the medical panoply due to recent advances in medical theory. Reluctantly, your doctor follows his retired colleague’s advice — and miraculously, you start to revive. After a year of expensive medical treatment, you return to the same robust health you displayed before your inexplicable illness. Triumphant, if somewhat puzzled, your doctor declares you well once more and releases you from intensive care. As you stride confidently away from the hospital, you have the misfortune again to bump into the practitioner of alternative medicine. “But they haven’t removed the tumour!” he declares. … One shouldn’t have to spell out the details of such an analogy, but in times of widespread denial, one has to:
The final reason for me being a bear is that I am that practitioner of alternative medicine. Minsky’s Financial Instability Hypothesis has been ignored by conventional economists for reasons that are both ideological and delusional. A small band of “post-Keynesian” economists, of whom I am one, have kept this theory alive. According to Minsky’s theory:
That is where we were … in 1987. The great tragedy of today is that naïve Neoclassical economists such as Alan Greenspan and Ben Bernanke allowed this process to continue for another three or more cycles than would have occurred without their rescues. In 2008, they did it again — only with methods they would have disparaged a mere year earlier (“Rational Expectations Macroeconomics”, a modern neoclassical fad, preaches that government intervention can’t influence the level of economic activity at all — yet another belief that reality has recently crucified). This time, while the rescue has worked, the recovery they expect afterward can’t happen — because there’s almost no one left who will willingly take on any more debt. This time, there’s no re-leveraging way out. The tumour of debt has to be removed. |
|
|
12 Comments
Good article. I only have one gripe with it in that you put Benanke in with Greenspan when it comes to acting on asset price bubbles.
I can actually remember reading a Benanke speech in 2002 when he was Governor (I think of Kansas, I may require correction….). I found it here…
http://www.federalreserve.gov/BoardDocs/Speeches/2002/20021015/default.htm
In this article Benanke addresses the concern of asset price bubbles, but notes the inherent difficulty in ‘popping’ the bubbles, especially by using monetary policy, which, as Chairman of the Fed, he would have been required to do. Firstly, there is definately a difficulty in identifying the asset price bubble exists and secondly, once it is ‘popped’ the government has little control over the reaction of the economy. Unfortunately, there was very little in his power he was really able to do other than let the cycle run its course. There is definitely a good case to be made that popping a bubble prematurely, or continually popping bubbles prematurely can result in more harm to economic growth than good. Just because the economy is rising through debt does not always mean asset prices over overstated.
Either way, Minsky’s theory does seem sound in this case. Let’s face it, Minsky is right. That’s how the cycle looks like continuing and you can’t exactly say to your population if you are a national leader ‘everybody pay off debt’ because then you get your depression a lot quicker than you expected….
I agree though, the neo-classical system has demonstrated its terrible inadaquacies for all to see. Surely, by now, this indicates enough ‘emperical evidence’ for economists to start demanding more regulation over the financial system.
Steve Keen may well be right as far as his analysis and predictions for the future are concerned-only time will tell.
I would like to know if he were Ben Bernanke,(or Kevin Rudd for that matter!)what would he have done differently?
Would he have let the banks fail in the US or have provided a much smaller economic stimulus.It is easy to analyse something from the comforts of academia,but what about the real world?
I have to agree with Ian Lynch here, just how would Steve Keen have removed this tumour of debt? If a rescue package had not interviened the banks and other companies would have been made bankrupt and their assetts sold off to the highest bidder. Since the only entities with liquidity at that stage were sovereign funds from China and the Middle East you would have seen much of Wall Street being owned by Beijing and Arab interests. While economically sensible, this situation would be politically untenable. The US seems to be having a hard enough time coming to terms with having a black President, let alone being owned by a bunch of foreigners. Far better to go even further into debt than let these events come to pass.
There may be something else to be gleaned from this analogy: why heterodox economists like Steve Keen (usually) find it hard to be heard. There have been some ideas from “alternative medicine” (a broad umbrella) that have found their way into mainstream medicine, predominantly certainly traditional herbal medicines. However, as a whole alternative medicine is associated with pseudo-science, irrational arguments and charlatanism. Little wonder then that anything that may be of value is heard. Perhaps the same is true of heterodox economics?
Surely treating bad debt crisis with cheap credit & handouts is like curing dysentery with a laxative?
Asdusty - unpalatable, humiliating, politically suicidal to let the phantasy based corporations & banks fail BUT, it will happen, the only question is when, sooner or later, but inevitably.
True AR, but its not up to you or I to accept this inevitability, its the people of the US. And I fear that they would be more willing to go to war with the Chinese and Arabs before allowing their beloved corporations to be foreign controlled. And to the victor will go the spoils…
As commented by others, missing from the Steve Keen’s instructive allegory and Minskian analysis on the cause of re-occurring financial crisis is a cure. A cure would require institutional arrangement and/or market forces that prevent excessive debt being created. Excessive debt is generated by the banking system that creates credit. There are many non exclusive ways to limit the ability of the banking system from creating excessive credit. The solution does not depend upon considering various economic theories but how powerful vested interests can best corralled to stop banks and shadow banks generating excessive debts.
The most conventional way to de-leverage a capitalist economy would be to de-leverage fractional banking and ideally remove the ability of private banks to create credit. Some reformers that at one time included Milton and Rose Friedman (1986) have proposed that the power to create credit be transferred from central banks and commercial banks to the government. My own view is that only trading companies and investors should be allowed to create credit that is accepted as money as explicated in my paper “How might the invisible hand handle electronic money” posted at http://ssrn.com/abstract=1399224
Shann, have a look at Bernard Lietaer’s “The future of money”, who describes the potential for a coming financial explosion and how community currencies may abrogate this. Having perused your paper I would suggest that democracy already inflences both political and economic power. At this time corporatism is attacking democracies ability to influence economic power, and subsequently is also attacking democracies inflence on political power. The great challenge of our time is to decide what we want as a society, democracy or free markets. You can have one or you can have the other, but you cant have both.
Thanks ASDUSTY for your comment. You remarks comes as a surprise as my paper concludes that the “invisible hand” would introduce commodity backed community currencies. In other words the current government created banking system with its fiat money is the source of the cancer of capitalism that creates booms and busts.
The paper you said you read on “How might the invisible hand handle electronic money” is a sequel to the paper I presented in Milan, London and Paris in June/July on “Options for rebuilding the economy and the financial system” posted at http://ssrn.com/abstract=1322210. This paper cites the work of Bernard Lietaer that you mention.
Is Minsky really the economist equivalent of a naturopath? I’ve seen him being quoted extensively in the investment bank commentaries since early 2007. As in: don’t panic but the Minsky Moment is at hand.
And if the analogy refers to our predicament in 1987, does that mean we’re prepared finally to acknowledge that Paul Keating’s “recession we had to have” was not a “let them eat cake” expression of arrogance but the simple truth?
@Shann & Asdusty
Unfortunately, that’s always the way isn’t it? There are always an abundance of people in the economy telling you what you’ve done wrong or what you shouldn’t be doing, rather than coming up with an idea about what to do themselves.
I’d love to see how Steve Keen intends on telling everyone in the economy that they should all be simultaneously paying off their debts, at the same time the government is paying off theirs.
If you wanted to wreck the capitalist system this was the best way to go about it.
De regulate.
Float the dollar, allow multi nationals in, foreign banks, and pretend that there is a level playing field awaiting in “free trade”.
Sit by while local manufacturing is swallowed up by multi nationals who retain the brand and take the manufacturing off shore, while smart local companies do the same before it is too late.
Watch the growing trade deficit and do nothing.
Watch the growing private and business debt, and housing bubble, and do nothing.
Borrow or print money when the whole experiment collapses, or issue IOUs’ in the form of bonds.
Sell off everything the Australian tax payer owned.
Do debt for equity swaps with commodities.
Earn a dollar and spend a dollar seventy five cents.
Continue trade with China who has thousands of years of trading in their genes and a ruthless control of its’ working population, and no intention of ever becoming a democratic country.
Pretend that further debt to help people purchase more imports from China to put us further in to debt is a “STIMULUS”!!!!
Ask Pacific Brands “is there anything we can do?” and not tell the Australian people the answer.
Ignore Hills Hoist CEO and “the China price”!!!!
Learn to speak Mandarin and pretend you have communication that puts you as an equal.
Ignore the fact that America is going to put A TARRIFF ON TYRE IMPORTS FROM CHINA.
IGNORE THE SUBTLE WAYS CHINA MANIPULATES IMPORT AND EXPORT BALANCES. (As an investor in Schaffer Corp WA I could tell you lots about China using Tarriffs by any other name to exploit trade to their advantage)..
Ignore the fact that for every dollar America imports from China, China controls American exports to China to 19c in the dollar!!!! What is the ratio in Australia??? Ask yourself why we ran up an emormous trade deficit during the commodities boom!!!!!
Ask yourself how long it will take for America to collapse now that China is gradually withdrawing its Bonds and watch how Gold prices increase. China has instructed its citizens to buy GOLD. According to the Canadian Bechh (spelling?) he gives it maybe two years before the whole experiment folds up like a house of cards.
We are seeing history unfold. The collapse of the mighty USA. We could well be approaching a third world war where the entire globe will again change and whole countries will be taken by others. Fantastic?? Ask the Chinese if Japan ever took China, or was going to take Australia if they hadn’t made the mistake of bombing Pearl Harbour. Human nature has not changed, and after debt, depression, there is war. Australia may lose part of its country to Indonesia. A bankrupt America unwilling to commit soldiers to save us. Australia, unarmed and impoverished will be easy pickings. Except that China moves in to protect its assets, and funny thing!!!! After beating the Indonesians, China decides to stay to protect the poor Australians. Australia is a prize. No doubt.