Steve Keen's Debtwatch

That was the title of an “Intel­li­gence Squared” debate I took part in last month–on the affir­ma­tive side. It was broad­cast on ABC TV’s Big Ideas pro­gram last week. The title is a play on a favourite say­ing of Aus­tralian politi­cians back in the coun­try’s “White Aus­tralia” days, and the immi­gra­tion surge it caused iron­i­cal­ly led to Aus­tralia becom­ing one of the world’s most mul­ti-cul­tur­al nations. You can watch it on the Big Ideas Web­site:

http://www.abc.net.au/tv/bigideas/stories/2011/08/23/3299095.htm

Or on YouTube, below:

If you’d pre­fer to lis­ten rather than watch, here is the audio, down­loaded from the ABC Radio Pro­gram Big Ideas:

The CAPM and EMH stick to the neo­clas­si­cal script of believ­ing that the econ­o­my and finance mar­kets are sta­ble, at or near equi­lib­ri­um, and on this basis argue that “you can’t beat the mar­ket”. But there is an alter­na­tive view, far more aligned with the actu­al data, that says that mar­kets are chaot­ic, far from equi­lib­ri­um sys­tems, and for that rea­son it’s very hard to beat the mar­ket.

Eugene Fama was an enthu­si­as­tic pro­mot­er of CAPM and the Effi­cient Mar­kets Hypoth­e­sis, argu­ing that despite their absurd assump­tions, the data sup­port­ed the the­o­ries. But was this a fluke, the result of the nar­row data range he used–from 1950 till 1966?

The Finance News Net­work has just released an inter­view with me on the cur­rent finan­cial tur­moil. Click the link below to watch it (or read the tran­script):

Steve Keen pre­dicts a decade of volatil­i­ty

FNN is about to estab­lish a paid sub­scrip­tion ser­vice, so short­ly inter­views such as this will only be avail­able to sub­scribers.

On a sim­i­lar note, I urge read­ers of this blog to sup­port CfE­SI, the Cen­ter for Eco­nom­ic Sta­bil­i­ty Incor­po­rat­ed (www.cfesi.org) by sign­ing up to one of the three lev­els of mem­ber­ship (see the table below for details).

The Cen­ter for Eco­nom­ic Sta­bil­i­ty Incor­po­rat­ed was first formed in March 2010, with the ini­tial aim of sup­port­ing the Keen Walk to Kosciuszko (which took place in April 2010). That ven­ture was extreme­ly suc­cess­ful, but it took place at a time when–certainly in Australia–there was opti­mism that the  eco­nom­ic and finan­cial cri­sis that began in 2007/08 was over.

One year lat­er, that opti­mism is evap­o­rat­ing around the world, in the face of per­sis­tent bad news. Eco­nom­ic growth in Amer­i­ca, Europe and Aus­tralia is ane­mic, unem­ploy­ment is ris­ing, and stock mar­kets have gone from a sus­tained ral­ly back into near Bear Mar­ket ter­ri­to­ry.

The ABC Radio Nation­al pro­gram Rear Vision is a cur­rent affairs pro­gram that presents “con­tem­po­rary events and peo­ple in their his­tor­i­cal con­text”.

I was recent­ly inter­viewed by Rear Vision for a ret­ro­spec­tive on the cri­sis, enti­tled “Here we go again: A look at the US econ­o­my post the 2008 GFC crash” which debat­ed why the cri­sis is still with us today.

Oth­er speak­ers were Ed Har­ri­son from Cred­it Write­downs, with whom I’m very much in agree­ment, eco­nom­ic his­to­ri­an Richard Syl­la from New York Uni­ver­si­ty, and Steve Han­ke from John Hop­kins with whom I almost com­plete­ly dis­agree. Han­ke does­n’t even dis­cuss the lev­el of pri­vate debt, puts the stan­dard neo­clas­si­cal argu­ment that gov­ern­ment debt is the prob­lem, that a stim­u­lus is con­trac­tionary (the so-called “reverse Ricar­dian Equiv­a­lence” argu­ment) and so on, ideas which I regard as total non­sense.

I was high­ly crit­i­cal of Paul Krug­man’s recent aca­d­e­m­ic paper on the finan­cial cri­sis, because it argued, on neo­clas­si­cal a pri­ori grounds, that:

Ignor­ing the for­eign com­po­nent, or look­ing at the world as a whole, the over­all lev­el of debt makes no dif­fer­ence to aggre­gate net worth — one per­son­’s lia­bil­i­ty is anoth­er per­son­’s asset. (p. 3)

Giv­en that crit­i­cism, I feel oblig­ed to point out that in his recent com­ment on Rick Per­ry’s nom­i­na­tion for the Pres­i­den­cy, “The Texas Unmir­a­cle”, Krug­man makes a very sen­si­ble obser­va­tion about the impor­tance of “the over­all lev­el of debt” that con­tra­dicts the assump­tion he made in that paper. Observ­ing that Tex­as­’s alleged­ly bet­ter per­for­mance on employ­ment growth is due main­ly to “cheap labor”, Krug­man com­ments that:

CAPM still dom­i­nates the teach­ing of finance, but it was always non­sense because it relied on the fol­low­ing two assump­tions:

In the first half of this lec­ture, I show that even if all con­sumers were util­i­ty max­i­miz­ers whose indi­vid­ual demand curves obeyed the “Law of Demand”, the mar­ket demand curve derived from aggre­gat­ing these con­sumers could have any shape at all. This result, known as the “Son­nen­schein-Man­tel-Debreu Con­di­tions”, is actu­al­ly a Proof by Con­tra­dic­tion that mar­ket demand curves do not obey the “Law” of Demand, and there­fore that Mar­shal­lian par­tial equi­lib­ri­um mod­el­ing of indi­vid­ual mar­kets is invalid–let alone the Neo­clas­si­cal prac­tice of mod­el­ing the entire macro­econ­o­my as a sin­gle agent in “Dynam­ic Sto­chas­tic Gen­er­al Equi­lib­ri­um” mod­els.

Ann Pet­ti­for is one of the hand­ful of econ­o­mists who pre­dict­ed and warned about the finan­cial cri­sis of 2007 well before it hap­pened. Ann first came to promi­nence when she led the Jubilee 2000 cam­paign to abol­ish the debt of the world’s 42 poor­est coun­tries. She was one of the 12 nom­i­nees for the Revere Award; some of her pre-cri­sis com­ments that were high­light­ed there were:

Remov­ing con­trols over the finance sec­tor paved the way for its rise to dom­i­nance, which in turn has led to a trans­for­ma­tion of the glob­al econ­o­my and increased insta­bil­i­ty.

Fig­ure 1: Asset Prices ver­sus Con­sumer Prices since 1890

Far be it from me to under­es­ti­mate the stock mar­ket’s capac­i­ty to pluck the embers of delu­sion from the fire of real­i­ty. How­ev­er, the crash in the past few days may be evi­dence that san­i­ty is final­ly mak­ing a come­back. What many hoped was a new Bull Mar­ket was instead a clas­sic Bear Mar­ket ral­ly, fuelled by the mar­ket’s capac­i­ty for self-delu­sion, accel­er­at­ing pri­vate debt, and—thanks to QE2—an ample sup­ply of gov­ern­ment-cre­at­ed liq­uid­i­ty.