Understanding the crisis

Steve Keen is an Australian economist who believes that the classical economic theories taught in university economics departments are wrong and dangerous. (He was recently interviewed on the BBC's Hardtalk.) I have great difficulty understanding economics, and knowing that he is a post-Keynsian influenced by Minsky and Schumpeter means little to me. However, he did predict (in 2005) that the 2007+ crisis would occur and that it would be the fault of large amounts of private debt, of borrowing to speculate rather than to invest. He also thinks the US and maybe Europe are probably in for two decades of recession, as happened in Japan.


A few quotes from his book Debunking Economics:

"You don’t need an accurate theory of economics to build an economy in the same sense that you need an accurate theory of propulsion to build a rocket. The market economy began its evolution long before the term ‘economics’ was ever coined, and it will doubtless continue to evolve regardless of whether the dominant economic theory is valid." (http://bit.ly/vspTwV)


Here's his explanation of our present crisis:

“When borrowing is undertaken to speculate on asset prices, debt tends to grow more rapidly than income. This growth causes a false boom while it is happening, but results in a collapse once debt growth terminates – as it has done now. 


Though borrowers can be blamed for having euphoric expectation of sustainable capital gains, in reality the real blame for Ponzi schemes lies with their financiers – the banks and the finance sector in general – rather than the borrowers. That is blindingly obvious during the Sub-Prime Bubble in the USA, where many firms wilfully wrote loans when they knew – or should have known – that borrowers could not repay them. 


These loans should not be honoured. But that is what we are doing now, by maintaining the debt and expecting that debtors should repay debts that should never have been issued in the first place. ” (Steve Keen, Debunking Economics, Zed Books, 2011, p354)

"It may astonish non-economists to learn that conventionally trained economists ignore the role of credit and private debt in the economy—and frankly, it is astonishing. But it is the truth. Even today, only a handful of the most rebellious of mainstream “neoclassical” economists—people like Joe Stiglitz and Paul Krugman—pay any attention to the role of private debt in the economy, and even they do so from the perspective of an economic theory in which money and debt play no intrinsic role. An economic theory that ignores the role of money and debt in a market economy cannot possibly make sense of the complex, monetary, credit-based economy in which we live. Yet that is the theory that has dominated economics for the last half century. If the market economy is to have a future, this widely believed but inherently delusional model has to be jettisoned." (http://bit.ly/vspTwV)


Keen's solution to our present crisis is to have a jubilee, a general write-off of private debts, similar to the ones that took place every so often in the ancient world. Keen suggests that instead of giving money to the banks, as we have been doing, governments should give money to the people and businesses so they can pay off their debts. This leaves the banks with the same assets as before, though less cash flow. Brian Davey proposes a practical way to do this in http://bit.ly/symnIx 


However well his analysis appears to work for the US crisis, it doesn't seem to fit well with the sovereign debt crises in Europe (sez I).

See also a popularizing account of Keen's theories by George Monbiot, originally published in The Guardian in October 2011, at http://bit.ly/tY9rRZ