Steve Keen's Debtwatch

I’ve just com­plet­ed sec­ond year of my sub­ject Behav­iour­al Finance at the Uni­ver­si­ty of West­ern Syd­ney. This is of course a non-tra­di­tion­al subject–meaning non-Effi­cient-Mar­kets-Hypoth­e­sis–but even here I take a non-stan­dard approach. While I have great respect for the work of Kah­ne­man and Tver­sky on behav­iour­al eco­nom­ics, I argue that much of the sub­se­quent work is mis-direct­ed, because of a cru­cial mis­in­ter­pre­ta­tion of the orig­i­nal work on expect­ed util­i­ty by von Neu­mann and Mor­gen­stern.

Much of the stan­dard behav­iour­al finance lit­er­a­ture shows that indi­vid­ual behav­iour vio­lates the pre­cepts of expect­ed util­i­ty the­o­ry when faced with a choice between two hypo­thet­i­cal options, and then devel­ops some mod­i­fied util­i­ty func­tion that fits the actu­al behav­iour. The options are nor­mal­ly pre­sent­ed in this man­ner:

As usu­al, I’ll be putting an argu­ment that is con­trary to pop­u­lar opin­ion on the need for more com­pe­ti­tion I the bank­ing sec­tor. So to clar­i­fy the issue, here’s a quick poll: who thinks that Aus­tralia does­n’t have enough debt?

Nobody? OK, now let’s dis­cuss the “need” for more com­pe­ti­tion in the bank­ing sec­tor.

The rag­ing debate is miss­ing the point–Hockey and the Coali­tion are right to go after the banks, but they’ve made a mis­take in sug­gest­ing that the sec­tor’s ills would be cured by more com­pe­ti­tion. In fact, we allowed too much com­pe­ti­tion in the 1980s, and again in the 1990s. The out­come, both times, was too much debt—firstly for busi­ness­es, and then for house­holds. That’s the sec­tor’s real prob­lem, and adding a third dose of com­pe­ti­tion won’t fix it.

The Eco­nom­ics E‑Journal

The Eco­nom­ics E‑Journal is a rel­a­tive­ly new jour­nal that imple­ments sev­er­al new approach­es to aca­d­e­m­ic pub­lish­ing:

• It is open access and free. Most aca­d­e­m­ic jour­nals are restrict­ed to sub­scribers or those with access to aca­d­e­m­ic libraries that sub­scribe, which excludes the gen­er­al pub­lic from access to intel­lec­tu­al endeav­our.
  
• Any­one paper sub­mit­ted to the jour­nal is per­ma­nent­ly avail­able. Nor­mal­ly only papers that have been ref­er­eed and accept­ed for pub­li­ca­tion can be accessed.
  
• Any­one can com­ment on a paper, and com­ments and the num­ber of down­loads goes some way to influ­enc­ing whether a paper is pub­lished in the jour­nal prop­er.

Com­pe­ti­tion is the Vit­a­min C of con­ven­tion­al eco­nom­ic the­o­ry: there’s no eco­nom­ic prob­lem that can’t be solved by a dose of more com­pe­ti­tion.

As you might expect, I’m less than con­vinced by this “one cure fits all” approach to eco­nom­ic pol­i­cy. Com­pe­ti­tion in bank­ing led to a “race to the bot­tom” in lend­ing standards–both to house­holds in the last decade after the Wal­lis dereg­u­la­tions, and back in the 1980s, (when then Trea­sur­er Paul Keat­ing allowed 16 for­eign banks to enter the mar­ket, who then duly lent buck­et­loads to such respon­si­ble busi­ness­es as Bond Cor­po­ra­tion and Qin­tex). What we need now is less lend­ing, not more, and we’re hard­ly going to get a reduc­tion in sup­ply out of an increase in com­pe­ti­tion.

Aus­tralian read­ers may have seen the crit­i­cisms I made of the Aus­tralian Research Council’s (ARC’s) fund­ing process  in Eri­ca Cervini’s arti­cle “Show us the Mon­ey”, pub­lished in The Age and the Syd­ney Morn­ing Her­ald in the last week. The basic propo­si­tion was that the sys­tem is like­ly to sup­port research in an exist­ing par­a­digm, and reject explo­ration of alter­na­tives to that par­a­digm:

If Albert Ein­stein had applied for an Aus­tralian research grant, he may nev­er have devel­oped his the­o­ry of rel­a­tiv­i­ty. Those sup­port­ing the old style of physics would have stopped him obtain­ing fund­ing, says an asso­ciate pro­fes­sor in eco­nom­ics and finance at the Uni­ver­si­ty of West­ern Syd­ney, Steve Keen.

I don’t have time to write a full post on Joe Hock­ey’s call for Aus­trali­a’s banks to be brought to heel, so I’m sim­ply going to link here to David Llewellyn-Smith’s blog “Go Joe”, with which I large­ly agree. Hock­ey copped a rol­lick­ing lev­el of abuse from the stan­dard com­men­ta­tors for his call, which is one of the best indi­ca­tors that he was on to some­thing sen­si­ble.

Below are some excerpts from David’s arti­cle on Hock­ey; for the full sto­ry, please click on the link.

Much opti­mism flowed from last week’s dec­la­ra­tion by the Nation­al Bureau of Eco­nom­ic Research that the US reces­sion offi­cial­ly end­ed in June 2009. How nice of them to let us know.

Mar­kets react­ed warm­ly and the 8 per cent ral­ly in US stocks through Sep­tem­ber seemed more impor­tant than the rev­e­la­tion that the US Fed is wor­ried enough about defla­tion to be plan­ning anoth­er round of quan­ti­ta­tive eas­ing — dubbed ‘QE 2’.

I made the mis­take of post­ing the talks from the AMI con­fer­ence in SWF rather than Flash Video for­mat; I’ll amend that post short­ly, but in the mean­time here are the talk by myself and Michael Hud­son, and the pan­el dis­cus­sion.

Keen Talk: Why Credit Money Crashes

| Open Play­er in New Win­dow

Hudson Talk

| Open Play­er in New Win­dow

Hudson Discussion

| Open Play­er in New Win­dow

AMI Panel Discussion

| Open Play­er in New Win­dow

Stephen Zarlen­ga of the Amer­i­can Mon­e­tary Insti­tute invit­ed me to speak at the 2010 con­fer­ence in Chica­go, which I did on the top­ic of “why a cred­it mon­ey sys­tem does­n’t have to crash, and why it always does”. My speech, the dis­cus­sion, the speech­es of Michael Hud­son and Kaoru Yam­aguchi, and a pan­el dis­cus­sion, are linked at the end of this post. I rec­om­mend watch­ing them all if you can spare the time.

I was pleased to be invit­ed, since this indi­cat­ed a very open-mind­ed approach by the AMI: they are cam­paign­ing to have the Amer­i­can Mon­e­tary Act passed to estab­lish a 100% reserve mon­e­tary sys­tem, which is a pro­pos­al that I have expressed ambiva­lence about in the past.

I’m pre­sent­ing this talk to the Aus­tralian Con­fer­ence of Econ­o­mists this morn­ing (at 11 am). If you’d like to see the slideshow, right click on the link to save it to your PC (a sim­ple click may bring it up in Google Docs where you lose the ani­ma­tions and some of the for­mat­ting).