Counterpunch | Keen’s “Minsky” model traces this to what he has called “endogenous
money creation,” that is, bank credit mainly to buyers of real estate,
companies and other assets. He recently suggested a more catchy moniker:
“Bank Originated Money and Debt” (BOMD). That seems easier to remember.
The concept is more accessible than the dry academic terminology
usually coined. It is simple enough to show that the mathematics of
compound interest lead the volume of debt to exceed the rate of GDP
growth, thereby diverting more and more income to the financial sector
as debt service. Keen traces this view back to Irving Fisher’s famous
1933 article on debt deflation – the residue from unpaid debt. Such
payments to creditors leave less available to spend on goods and
services.
In explaining the mathematical dynamics underlying his “Minsky”
model, Keen links financial dynamics to employment. If private debt
grows faster than GDP, the debt/GDP ratio will rise. This stifles
markets, and hence employment. Wages fall as a share of GDP.
This is precisely what is happening. But mainstream models ignore the
overgrowth of debt, as if the economy operates on a barter basis. Keen
calls this “the barter illusion,” and reviews his wonderful exchange
with Paul Krugman (who plays the role of an intellectual Bambi to Keen’s
Godzilla), who insists that banks do not create credit but merely
recycle savings – as if they are savings banks, not commercial banks. It
is the old logic that debt doesn’t matter because “we” owe the debt to
“ourselves.”
The “We” are the 99%, the “ourselves” are the 1%. Krugman calls them “patient” savers vs “impatient” borrowers,
blaming the malstructured economy on personal psychology of indebted
victims having to work for a living and spend their working lives paying
off the debt needed to obtain debt-leveraged homes of their own,
debt-leveraged education and other basic living costs.
By being so compact, this book is able to concentrate attention on
the easy-to-understand mathematical principles that underlie the “junk
economics” mainstream. Keen explains why, mathematically, the Great
Moderation leading up to the 2008 crash was not an anomaly, but is
inherent in a basic principle: Economies can prolong the debt-financed boom and delay a crash simply by providing more and more credit,
Australia-style. The effect is to make the ensuing crash worse, more
long-lasting and more difficult to extricate. For this, he blames mainly
Margaret Thatcher and Alan Greenspan as, in effect, bank lobbyists. But
behind them is the whole edifice of neoliberal economic brainwashing.
Keen attacks this “neoclassical” methodology by pointing that the
logical fallacy of trying to explain society by looking only at “the
individual.” That approach and its related “series of plausible but
false propositions” blinds economics graduates from seeing the obvious.
Their discipline is the product of ideological desire not to blame banks
or creditors, wrapped in a libertarian antagonism toward government’s
role as economic regulator, money creator, and financer of basic
infrastructure.
Keen’s exposition undercuts the most basic and fundamental
assumptions of neoclassical (that is, anti-government, anti-socialist)
economics by showing that instead of personifying economic classes as
“individuals” (Krugman’s “prudent” individuals with their inherited
fortunes and insider dealings vs. spendthrift individuals too
economically squeezed to afford to buy houses free of mortgage debt) it
is easier to start with basic economic categories – creditors, wage
earners, employers, governments running deficits (to provide the economy
with money) or surpluses (to suck out money and force reliance on
commercial banks).
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