The Science of Predicting the Next Financial Crisis

 

By

Can We Avoid Another Financial Crisis?

Steve Keen

Polity Press (2017)

Book Review

This book is a well-researched and documented critique of macroeconomics, the so-called “science” of capitalist economies. Maverick Australian economist Steven Keen’s main criticism of conventional economics is its inability to predict the extreme bubbles and recessions that plague capitalism. He blames this failure on macroeconomic models that pretend money and debt don’t exist. Instead conventional economics employs models that are based on primitive barter and treat money as a replacement for barter.

In contrast, Keenn’s economic modeling is based on the inconvenient reality that most mainstream economists choose to ignore – that private banks create 97-98% (see  An IMF Proposal to Strip Banks of Their Power to Create Money) of our money out of thin air when they issue loans. Keen also criticizes conventional economists for failing to track private debt (corporate, small business and household debt – which includes mortgage, credit card and student loan debt).

Based on careful research, Keen reveals how all recent recessions were triggered by a rise in private debt above 150% GDP* – preceded by five years of private debt exceeding 10% of GDP. The recession occurs when various economic stresses cause banks to reduce the amount of credit they issue (ie the amount of money they create).

He disputes that public (government) debt plays any role in triggering recessions. He points out that government debt had been declining world wide as a percent of GDP prior to 2008 – when governments increased public debt to try to compensate for the collapse of private debt.**

Keen predicts the next debt zombies headed for recession (based on extremely high levels of private debt) are Ireland, Hong Kong and China.**


**The US private debt to GDP ration reached 210% at the end of 2017 (US private debt to GDP ratio) and continues to increase.

**Because nearly all money is created by banks as loans (debt), when private debt declines, government must increase public debt to keep money circulating in the economy.

 

 

Fed Chairman Yellen Breaks 50 Year Taboo on “Helicopter Money”

yellen

At a June 15 press conference, Federal Reserve Chairwoman Janet Yellen made the surprise announcement that the Fed “might legitimately consider” using “helicopter money” in an “all-out” effort to rescue the U.S. economy from a severe downturn.

“Helicopter money,” a term coined in 1969 by late economist Milton Friedman, is money government creates by spending it into the economy.

As economist Richard Murphy describes in The Joy of Tax, government has always played a role in creating money whenever private banks generate insufficient money (by issuing loans from money they create out of thin air) to maintain the smooth running of the economy. Following the 2008 recession, the Obama administration pursued a policy called “quantitative easing,” in which the US Treasury created $500 billion (out of thin air). Unlike “helicopter” money, quantitative easing provided these funds directly to private banks, hoping they would use them to generate more loans. This, in turn, was meant to stimulate business investment and job creation.

Although it probably prevented the US economy from collapsing, Obama’s quantitative easing did little to promote business investment and job creation. This was because the banks used most of these funds for purposes other than making new loans – ie buying back their stock (to increase stock prices) and paying obscene CEO bonuses.

In contrast, “helicopter money”, a policy that has been virtually taboo for fifty years, calls for a central bank to print money and spend it into the economy for social services, infrastructure development, or even a citizen’s dividend. The idea is to put the money directly into people’s hands – rather than using banks as an intermediary – as they are more likely to stimulate the economy by spending it.

As Murphy details in The Joy of Tax, libertarian corporatists obsessed with balanced budgets, government debt and austerity are largely responsible for the taboo against public money (aka sovereign money) that the government creates and spends into the economy. Their position is that only private banks should be allowed to create money – in most cases due to immense financial benefits (from interest payments) they derive from this type of money creation.

Ironically former Federal Reserve Chairman Ben Bernanke also raised the possibility of the US using “helicopter money” as a tool to stimulate a flagging economy in an April blog post.

And in a similar move , 18 Members of the European Parliament have written to European Central Bank (ECB) president Mario Draghi requesting that the ECB should revisit its opposition to using “helicopter money” to boost the EU’s deteriorating economy.