Wednesday, February 11, 2009

This piece by Steve Keen on his Debtwatch blog is very enlightening and also - for the five people in the world who have any faith that massive payouts to banks and the printing of money are going to get us out of recession (or, dare I say it, depression) - very distressing. He argues that we do not live in a world where printed money precedes credit; in fact, it is the reverse, the overextension of credit creates the need for the Fed to print more money. Keen argues that this is the normal functioning of a credit market. His argument is very compelling.

Note Bernanke’s assumption (highlighted above) [that if the feds print massive amounts of money, a "helicopter effect will occur, and inflation will counteract the rampant deflation created by stagnant credit] in his argument that printing money would always ultimately cause inflation: “under a fiat money system“. The point made by endogenous money theorists is that we don’t live in a fiat-money system, but in a credit-money system which has had a relatively small and subservient fiat money system tacked onto it.

We are therefore not in a “fractional reserve banking system”, but in a credit-money one, where the dynamics of money and debt are vastly different to those assumed by Bernanke and neoclassical economics in general.[10]

Calling our current financial system a “fiat money” or “fractional reserve banking system” is akin to the blind man who classified an elephant as a snake, because he felt its trunk. We live in a credit money system with a fiat money subsystem that has some independence, but certainly doesn’t rule the monetary roost—far from it.

Bernanke thinks it's really cute when Geithner stands up with his paws in the air, "like he's people"

Keen, an economist at Western Sydney University, is someone whose work I have just found, but who seems to offer a needed corrective to econometrics. As he says in this description of his method, he is taking a very different approach:
While I am an academic economist, I don’t build nor believe in the type of econometric models that dominate economics these days–generally so-called “New Keynesian” or “Dynamic Stochastic General Equilibrium” models.

Instead I build nonlinear dynamic models based on Minsky’s “Financial Instability Hypothesis”, and I have started constructing a strictly monetary model of a pure credit economy.

My predictions based on these models are qualitative rather than quantitative, but on the grounds of Minsky’s extremely prescient hypothesis the sheer scale of private debt that has been accumulated, and the abundant historical data on debt with which we can review past economic performance in the light of Minsky’s hypothesis, I have been arguing that this crisis is beyond bailouts.


traxus4420 said...

Some of Keen's papers on Marx can be found here (in case you haven't found them already):

and this blog has a pretty great running commentary on the crisis. hilarious bit here that i think is important to keep in mind when reading up on this stuff:

This story is not complex. Any junkie can rehearse that narrative arc.

Thus, it rather breaks my heart to see how the debate on the stimulus, among the liberal bloggers and pundits, so quickly turned into a debate about who could make smarter references to the economist’s abracadabra. This is what happens when your liberal pundicrats were brought up on debating and going to a good college. Matters of fact get entangled with the meritocrats favorite thing: taking a test. Having been malformed by an educational system that identifies thinking with test scores, the meritocrats, in Pavlovian synch, all salivated when the right attacked with “economics”, and they are busy having fun chasing fallacies off the cliff in some distant part of the world. Nothing, absolutely nothing, will be gained by showing that Krugman is right and Fama is wrong. Or rather, much will be lost. For instance, the opportunity to point out that the “economist’s” standard model of the U.S. economy is a fantasy that hasn’t been true since 1929. That, in fact, if full employment really meant full employment by the private sector, the Great Depression never ended – for the private sector can not and will not and will never employ even 85 percent of the employable population in any developed state, and in the U.S. in particular, is doing good when it employs 80 percent of the population. “Fiscal policy” isn’t some newfangled government toy, but the structure that has held up the American economy for seventy years. It is crazy to talk about “crowding out”, or “Ricardian equivalence”, before understanding the composition of the target economy. An economic theory that technically disallows the economic reality all around us for the last sixty years is, well, did I mention public masturbation already?

traxus4420 said...

p.s. i just got through keen's article criticizing the labor theory of value on the basis of a contradictory resolution of use value and value in marx's account of fixed capital. i must still be a fuddy-duddy because i don't buy it. it seems like just another attempt to depoliticize marx to me. curious to hear what you think of it.

Alex Greenberg said...

I saw the Labor Theory article and downloaded it. I'm going to try and get to it this weekend, but I think I might have the same reservation that you do. The problem with the Limited, Inc. attitude, on the other hand, is that, if it doesn't do the boring work of actually investigating the phenomena, it ends up being as pointless as a Krugman editorial. Robert Reich, I think, shares the view of Limited, Inc. (though he's no Marxist) that the entire thing boils down to the increasing disparity between wages and production. But if you want to understand this, you have to look at finance, because that's where the social lubricant is produced: wages continue to get paid because capital continues to run because loans continue to flow because people continue to buy because wages (and personal credit, lots and lots of personal credit) continue to be forthcoming... In the Limited Inc. article, they point to government as the central factor: it undermines labor, it tells companies to outsource, etc. But again, I think Keen is right in pointing out that it's probably the financial sector tail wagging the government dog. In any case, both Keen and Limited Inc agree that throwing more and more money at the financial sector is just going to be a gigantic fucking sink hole.

traxus4420 said...

the limited inc. guy (roger) does address the credit machine in other posts and (if i'm not mistaken) does support the view that the financial sector is driving (or at least steering) the crisis and responses to it. but it doesn't have to. government could be part of the solution to this situation; that it's not, or isn't enough of one, doesn't logically follow from the laws of an economist's model but is the result of politics.

just because the gov't doesn't wield the force of an a priori over the credit system doesn't mean it isn't a major player -- not just in financial policy but also in terms of its effect on why the public might be 'willing' to take on more debt. and the 'ponzi lending' was at the very center of the burst bubble leading to the last crisis, which would not have been possible without relaxed controls and the gov't's going along with the wall street plan, the effective formation of a public-private cartel. the major players here all know that bubbles and crises are inevitable, but for decades they've been able to both survive and thrive off of them basically by increasing their velocity while exporting their costs as much as possible. keen's model is basically the ideal implementation of Marx's money capital circuit M-M.' That this has more or less been the actual tendency is a result of concerted private/public action. a publicly owned and managed banking system could at least keep the credit system as far away from its 'ideal' functioning as possible, at most (ha!) transition away from capitalism.

traxus4420 said...

the point is really just that there is no such thing as a newtonian economic physics.