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Financial Instability For (Keynesian) Dummies

Tyler Durden's picture




 

In a little under eight minutes, a plethora of today's more outspoken realists, economists, and journalists provide a simple yet clear path through the financial crisis to critically explain how the so-called equilibrium that so many mainstream analysts and economists trusted as fact has been proven as simple fiction. The hard-to-accept truth is that financial instability is in fact the natural state of our economic environments and that credit and banking lie at the very heart of that difference between Keynesian / Neo-classical dogma and the tough new reality that the world's major economies now face. The political and economic elite have "blind-sided themselves to the role of rising debt in funding what is really the biggest ponzi scheme in human history" and that the "blind-faith in institutions and mechanisms has cracked post-2007". From too-simple DSGE 'economic models' to 'representative agents' to the fact that financial systems are the cause of economic instability, a number of the new normal's best thinkers (including Stiglitz, Keen, Kinsella, and Bezemer), courtesy of INETeconomics, provide a very layman's guide to the (hopefully not so shocking to our readers) new reality of how critical credit and debt is in our brave new world and how entirely misrepresented it is in mainstream thinking. Must Watch, if for nothing else, the crushing conclusion for many neo-classicals that when you can't tweak your models any more, you need to move on to some next paradigm.

 

 

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Sun, 04/15/2012 - 23:01 | 2347684 km4
km4's picture

 

Excellent piece

http://ineteconomics.org/about

The Institute for New Economic Thinking (INET) was created to broaden and accelerate the development of new economic thinking that can lead to solutions for the great challenges of the 21st century.

The havoc wrought by our recent global financial crisis has vividly demonstrated the deficiencies in our outdated current economic theories, and shown the need for new economic thinking – right now.

INET is supporting this fundamental shift in economic thinking through research funding, community building, and spreading the word about the need for change. We already are a global community of thousands of new economic thinkers, ranging from Nobel Prize winning economists to teachers and students who have emerged out from the shadows of prevailing economic thought, attracted by the promise of a free and open economic discourse.

follow on twitter @INETeconomics

 

The Institute for New Economic Thinking provides fresh insight and thinking to promote changes in economic theory and practice.

New York, NY · http://www.ineteconomics.org

 

 

Sun, 04/15/2012 - 23:19 | 2347713 spankthebernank
spankthebernank's picture

It is called greeeeeeeeeeeeeed!!! The economist are owned just like the politicians. The people at the very top dont think 'the smart guy' will act rationally, they know the rest of America will act like a bunch a fucking idiots and they do everything to exploit it. The puppet masters are pushing for collapse to further their power. The economists are in no mans land.

Mon, 04/16/2012 - 00:38 | 2347830 Oh regional Indian
Oh regional Indian's picture

In the middle there somehwere, I think Steiglitz said "Markets Cannot produce Full employment"...

That is a loaded supply-side-ism for me.

The "Market" is now just a grab-bag of "Economy/FInancialSector/Main Street" all rolled into one.

If the market is tasked with everything, supernatural powers to defeat the best of us everytime, be irrational....

Well, any wonder why we are collapsing.

We've given "Market" a personhood. It's a barely functioning chimera is what it is.

It's dissolviing, not being destroyed.

ori

It's Never Too Late

 

Mon, 04/16/2012 - 01:14 | 2347866 Manthong
Manthong's picture

Ditto..

Nice people.. nice ideas.. one teensy problem..

Not one mention of greed, fraud, theft, or megalomania.

Factor those variables (or are they constants now?) into the model for an accurate and elegant equation.

 

Mon, 04/16/2012 - 03:07 | 2347963 Nukular Freedum
Nukular Freedum's picture

Agree totaly. All these grandiose theories assume law abiding behaviour, which is their great achilles heel. My thoughts on what is to be done;

http://pearlsforswine.wordpress.com/2012/04/15/my-biggest-problem/

Mon, 04/16/2012 - 04:43 | 2348006 Acet
Acet's picture

The problem of Economic theories is that they don't take in account the influence of economists in changing the rules of the game mid-experiment.

In hard sciences, like Physics, the processes under study are so fast that a scientist that is conducting an experiment to try and disprove a theory cannot interfere (or, in those processes that are slow enough, they are still fast enough that the scientist can refrain from interfering). Even in softer sciences, like Psychology, there are things like double-blind tests. Not in Economics:

- In Economics an entire cycle from start to end can take decades, even a century, so most economists, human beings that don't have a century to wait and need to make a living, start pushing their theories long before a whole cycle has happened, influencing policy and thus changing the conditions of the experiment.

This cycle it seemingly was worse than before because the profession of Economics was glorified beyond its true value and Economic theories like the Free Market Theory were co-opted as means to maintain the status quo and used to justify policy at the highest levels.

 

Sun, 04/15/2012 - 23:28 | 2347729 Oppressed In Ca...
Oppressed In California's picture

It's really easy to express valid criticisms of the current state of economics, but building a new and better theory/model is an entirely different thing.

My prediction: INET research will eventually reach the conclusion that a small group of really, really, really smart people should centrally plan the economy. 

Mon, 04/16/2012 - 00:04 | 2347781 Zero Govt
Zero Govt's picture

Yes INET will come up with a major 'surprise' and all fresh thinking

...replace one monopoly on money with another monppoly on money

a Free Market is way too radical to even contemplate

Mon, 04/16/2012 - 01:14 | 2347867 michael_engineer
michael_engineer's picture

Like the authors of this!!

http://m.whitehouse.gov/the-press-office/2012/03/16/executive-order-nati...

Seems like they almost have everything worked out already too.

Mon, 04/16/2012 - 01:58 | 2347908 A Nanny Moose
A Nanny Moose's picture

ding ding ding!! we have a winner!!

Sun, 04/15/2012 - 23:00 | 2347685 AU5K
AU5K's picture

Politicians want instability.  It creates a voter base.  Economists/CBs want instability.  It justifies their jobs.  Hedge funds want instability.  They can profit through HFT, et al.  When you understand TPTB want what they say they are fixing, everything becomes clear.

Gold is money.  The one fact they can't subvert.

Sun, 04/15/2012 - 23:35 | 2347741 11b40
11b40's picture

Agree that gold is a monetary asset, but the point is, to have any hope of 'fixing' things, there is a lot of educating to be done.  The people and society in general, seek stability, and with a proper understanding of the way credit based systems work [or don't work], we can implement controls on the financial system that are far past due.

From a marketing point of view, the name should be changed to i-Net, and of course, they need an app.

All these theories make my head hurt, and way down deep inside, I think the bowl holding the world's economies has already been flushed.  The swirling around the top of the bowl is just getting underway, but with every rotation, the speed accelerates - slowly at first, then rapidly until we hear that last sucking sound as the bowl drains.  the problem is, once the flush starts and the bottom of the bowl is opened, nature takes her course and the rest is both automatic and inevietable.

Sun, 04/15/2012 - 23:44 | 2347760 TBT or not TBT
TBT or not TBT's picture

NO, people seek to improve their situation and to acheive/attain various goods and services they don't yet have.  

Very few in the game of life seek "stability."

Mon, 04/16/2012 - 00:40 | 2347834 mr. mirbach
mr. mirbach's picture

Most people on the planet today are seeking food, shelter and clothing. Rising numbers in the USA are giving up their iGadets and cable tv in favor of food. The NEW reality doesn't jibe with MMT or Keynesian economics. 

I crossed paths with a young woman today who was obviously having a hard time, she was disheveled and looked rough and only had on one shoe. I asked her how she had lost her shoe and she told me that she hadn't lost a shoe, she had found a shoe.

Things are getting worse in Amerika. 

Mon, 04/16/2012 - 01:56 | 2347902 iinthesky
iinthesky's picture

See.. i like the toilet bowl analogy.. The Bernank heard the flush and is now stuffing the bowl with so much toilet paper that it clogs the toilet. Then all you have left is a still pool of shit water, a couple of floaters, and huge amounts toilet paper and noone knows what happened to the plunger.

Mon, 04/16/2012 - 04:58 | 2348010 Acet
Acet's picture

Some instability is needed.

It's a bit like the situation with forest firest in some parts of the world:

- These are places where frequent forest fires are natural. They clean the accumulated brush but don't kill the large trees. However when people started managing those forests, they started putting down fires as soon as they started. So tinder started accumulating, fires got bigger and bigger, requiring more effort to put out, and eventually you would get a fire which is so large that it can't be put out, laying waste to a large area and, because so much tinder has accumulated, actually killing all the bigger trees.

As it turns out, the frequent small fires when allowed to run its course help maintain the forest in prime condition and thus major fires are impossible. They are even helpfull for larger trees since they do things like killing parasites.

A very strong parallel exists in Economics: social and economic systems tend to accumulate worthless, parasitical and even nefarious tinder. Random small fires will get rid of those, helping to keep the whole system healthy. I believe this what's called creative destruction. Look at the current economic cycle and you'll see that all the way back to the Greenspan put, central banks were stopping the small, natural fires that helped keep the system clean, with the end result that so much tinder accumulated that we now have a major fire.

Mon, 04/16/2012 - 06:06 | 2348031 Mitzibitzi
Mitzibitzi's picture

Good analogy.

Sun, 04/15/2012 - 23:06 | 2347690 HyperLazy
HyperLazy's picture

Ah yes, the good old blind faith. Crutch of normalcy bias. Wanna shatter some of that?

American Dream Film - half hour cartoon about the FED, good for showing normals wotz happening:
http://bitsnoop.com/the-american-dream-film-animated-q20892324.html

Inside Job - movie that will help normals understand what happened financially a couple years ago:
http://h33t.com/tor/358739/inside-job-2010-brrip-720p-h264-aac-mxmg

Margin Call - dramatic movie representing a financial threat, from the bankster perspective:
http://1337x.org/torrent/258523/0/

Chekist - movie about the socio-political purge in the beginning of communism in Russia:
http://www.demonoid.me/files/details/2901302/001874580528/
I can't help but wonder if America will get its own version of the Cheka...

PS: On July 12th, ISPs and the big media distributors will start tagging people who download stuff. May as well grab these goodies while you can.

Sun, 04/15/2012 - 23:09 | 2347697 TBT or not TBT
TBT or not TBT's picture

How is this starts July 12th?

Sun, 04/15/2012 - 23:13 | 2347702 Caviar Emptor
Caviar Emptor's picture


I can't help but wonder if America will get its own version of the Cheka...

You can check the answer, comrade, at the minitsry of secret police.

You know, the one that gave you the idea to write that silly post in the first place through the micro chip implanted in your brain. 

 

Sun, 04/15/2012 - 23:20 | 2347714 HyperLazy
HyperLazy's picture

Yer right, twas a silly post after all. I best turn myself in to be liquified and then congealed into Soylent Green.

Sun, 04/15/2012 - 23:33 | 2347739 Caviar Emptor
Caviar Emptor's picture

Thank you, number 78934761. Have a pleasant journey. 

Sun, 04/15/2012 - 23:04 | 2347694 Vlad Tepid
Vlad Tepid's picture

Don't know why but this verse from Byron seems approriat about now...and I'm not a very big fan of Byron.

"The mountains look on Marathon---
And Marathon looks on the sea;
And musing there an hour alone,
I dream'd that Greece might yet be free
For, standing on the Persians' grave,
I could not deem myself a slave.A king sat on the rocky brow
Which looks on sea-born Salamis;
And ships, by thousands, lay below,
And men in nations;---all were his!
He counted them at break of day---
And when the sun set, where were they?

And where are they? and where art thou,
My country? On thy voiceless shore
The heroic lay is tuneless now---
The heroic bosom beats no more!
And must thy lyre, so long divine,
Degenerate into hands like mine?"

Sun, 04/15/2012 - 23:05 | 2347695 traderjoe
traderjoe's picture

Economics is NOT a science. It is witchcraft pitched by banker/PTB shills to cover for the theft and fraud perpetrated against the people. 

Sun, 04/15/2012 - 23:08 | 2347696 Caviar Emptor
Caviar Emptor's picture

Charming little vignette. But very smuggly self-reassuring to the economists that their ideas were never really wrong, that they saw it all coming and that their notions and theories are somehow still  undisturbed in a world that hungers for them. 

Sorry, the crisis and the aftermath have shattered old economic theories forever. There is a very clear demarcation line between the old and the new world. The old theories failed as they inevitably do. They have a life-cycle. Trying to deny it, thinking that somehow this time is different is stupid as it is futile. 

 

Mon, 04/16/2012 - 00:13 | 2347792 Zero Govt
Zero Govt's picture

i agree economists are rubbish 

what they all seek to ignore is the central system that is destroying our economies: Govt and its central banking monopoly on money

Govt is the cancer that is eating every economy alive.. it's not like it hasn't happened hundreds of times before but they still don't 'get it'

Sun, 04/15/2012 - 23:11 | 2347701 slewie the pi-rat
slewie the pi-rat's picture

it looks like the markets are starting to get ready to melt up at the close tomorrow...

Sun, 04/15/2012 - 23:16 | 2347708 WoodMizer
WoodMizer's picture

The Heritics speak out; to bad it felt like kony 2012.

This is smacks of my favorite summer drink, moonshine and koolaid.

I guess, softballing the current temple overlords will be more effective on those fence riders.  Most Econ professors, I have met, believe themselves infallable; I doubt they will win many converts.

Sun, 04/15/2012 - 23:19 | 2347715 Bear
Bear's picture

Soros is everywhere have just given INETeconomics $25m this year and $100m over ten years

Sun, 04/15/2012 - 23:43 | 2347757 11b40
11b40's picture

links to that?

Mon, 04/16/2012 - 00:13 | 2347794 Amish Hacker
Amish Hacker's picture

Try:  http://www.rooseveltinstitute.org/new-roosevelt/soros-johnson-shake-econ...

Looks like INET hasn't been around for ten years. Their first conference was in April 2009, funded by a Soros donation of $50 million.

 

Sun, 04/15/2012 - 23:21 | 2347716 q99x2
q99x2's picture

Humble gooey smiles. Where's Hugh Hendry?

Sun, 04/15/2012 - 23:22 | 2347718 jimmyjames
jimmyjames's picture

It's well known that the availability of money supply-abundant or scarce has the power to herd the masses in either direction-

The problem for the Keynesian mind set is-that sentiment can unexpectedly switch-like it did when houses "stopped" selling and prices stopped going up-

Sentiment changed and it still has Bernanke stymied-

Sun, 04/15/2012 - 23:22 | 2347721 hairball48
hairball48's picture

Stiglitz, et al are just wrong....and have been wrong, and will never be right.

Rednecks like me go here for our economic wisdom

http://mises.org/

 

Sun, 04/15/2012 - 23:59 | 2347776 AMack
AMack's picture

Likewise. Stiglitz is a shill for central banking and a fiat monetary system. He isn't a "new" thinker. He's part of the same old paradigm that got us here.

This video makes me sick. Please tell me Tyler isn't convinced by this trash.

Sun, 04/15/2012 - 23:33 | 2347731 proLiberty
proLiberty's picture

 

Ralph Raico is professor of history emeritus at Buffalo State College.  In his 2008 article, Was Keynes a Liberal?, he wrote:

Throughout Keynes’s career, however, clear indications appear of his longing for a much more radical social order—in his words, a “New Jerusalem” (O’Donnell 1989, 294, 378 n. 27). He confessed that he had played in his mind “with the possibilities of greater social changes than come within the present philosophies” even of thinkers such as Sidney Webb. “The republic of my imagination lies on the extreme left of celestial space,” he mused (1972, 309). Numerous statements strewn over decades shed light on this somewhat obscure avowal. Taken together, they confirm Joseph Salerno’s (1992) [1] argument that Keynes was a millennialist—a thinker who viewed social evolution as pursuing a preordained course to what he conceived to be a happy ending: a utopia (O’Donnell 1989, 288–94).[2]

Please observe that Keynesian economics assumes absolute power to manipulate and impose an arbitrary value on money, even money held in private hands.  Thus, Kenynes proposes that government has title to all income and assets of those who use its currency.  This is coveting and theft on a scale never before achieved in human history.

 

[1] Joseph Salerno, 1992. The Development of Keynes’s Economics: From Marshall to Millennialism.Review of Austrian Economics 6, no. 1: 3–64, link to PDF: http://mises.org/journals/rae/pdf/RAE6_1_1.pdf

[2] Ralph Raico, Was Keynes a Liberal? The Independent Review, v. 13, n. 2, Fall 2008, ISSN 1086–1653, Copyright © 2008, pp. 165–188.  link to PDF: http://www.independent.org/pdf/tir/tir_13_02_1_raico.pdf

 

 

Sun, 04/15/2012 - 23:36 | 2347744 Caviar Emptor
Caviar Emptor's picture

You mean we don't live in a utopia? 

Mon, 04/16/2012 - 00:34 | 2347826 TBT or not TBT
TBT or not TBT's picture

On the bright side, we live in the best of all possible fiat currency / fractional reserve banking worlds....that are in this solar system.

Mon, 04/16/2012 - 05:46 | 2348023 Belarusian Bull
Belarusian Bull's picture

Did you know that aliens are drilling the other side of the moon? I bet their fiat and central bank are better...

Sun, 04/15/2012 - 23:40 | 2347755 jimmyjames
jimmyjames's picture

Throughout Keynes’s career, however, clear indications appear of his longing for a much more radical social order—

**************

Well his partner that helped lay the rules of  Bretton Woods certainly had that mindset-

**************

Harry Dexter White: the man behind Bretton Woods, the World Bank and the IMF was a Soviet Spy

Harry Dexter White (1892 – 1948) was an American economist and senior U.S. Treasury department official. He was a primary mover behind the Bretton Woods Conference, the formations of the World Bank and the IMF (International Monetary Fund).

http://thecounterpunch.hubpages.com/hub/Harry_Dexter_White

 

Sun, 04/15/2012 - 23:34 | 2347740 Grand Supercycle
Grand Supercycle's picture

The Big Picture Wile E. Coyote Equity Top.

http://www.zerohedge.com/news/2012-12-24/market-analysis

Prepare for a substantial USD rally.

Sun, 04/15/2012 - 23:40 | 2347756 steelrules
steelrules's picture

No econimic model works where banks can bet against the fraudulent loans they make and sell all over the world.

 What economic model ever took into account a thousand trillion dollar derivatives market?

Mon, 04/16/2012 - 00:01 | 2347782 Real Estate Geek
Real Estate Geek's picture

Well, that rang about as true as the commercials touting BP's environmental credentials.

Mon, 04/16/2012 - 00:19 | 2347805 Lost Wages
Lost Wages's picture

Just noticed I'm getting tired of interview-montage style documentaries.

Mon, 04/16/2012 - 00:46 | 2347817 mr. mirbach
mr. mirbach's picture

Sciences are capable of producing repeatable and provable results within a very small margin of error.   Economics is a contrivance born from sociology and philosophy. Sociology uses scientific methods and statistics to draw broad conclusions about observed events, behaviors and trends.  Philosophy is not a science, it is mental masterbatiory speculations about things that cannot be proven with complete certainty.

Therefore, economics is a mental masterbation that uses math to model sociological events, behaviors and trends in an attempt to manipulate people and public policy towards profit maximization and to explain failed attempts to manipulate people and public policy towards profit maximization.

Economic writings date back to Mesopotamia, Aritotle wrote on economic subjects. Early economics was simple forcasting (such as plant in spring, harvest in fall, drought is bad, keep stores for bad times, winters are cold) and understanding value, interest and monetary alternatives to barter. Economics was not distinguihed from Philosophy as a seperate discipline until Adam Smith's The Wealth Of Nations treatise in 1776. 

It is irrefutable tha many of  Keynes most basic assumptions were antiquated (such as the assumptions regarding the 40% agrain society), flawed (assumptions about the nature of "utility") or just totally wrong (infinite growth, infinite resources).

Keynesian Economics will eventually be discredited just as blood-letting to balance the humors was abandoned for real science. Austrian Economics is better than Keynesian economics in the assumptions, but still ALL economics is based on assumptions and historical trends. 

I have more faith in astrologers than economists. 

Mon, 04/16/2012 - 06:04 | 2348030 Belarusian Bull
Belarusian Bull's picture

Austrians are sane and careful in their assumptions, because they take into account not only previous trends, but nature of those who create them - humans.

Economics is, first of all, psycological study (not science).

Mon, 04/16/2012 - 07:30 | 2348076 Vince Clortho
Vince Clortho's picture

"Keynesian Economics will eventually be discredited ..."

Eventually?  Does the patient have to die before this realization occurs?

Mon, 04/16/2012 - 01:08 | 2347859 michael_engineer
michael_engineer's picture

a number of the new normal's best thinkers (including Stiglitz, Keen, Kinsella, and Bezemer),

and this author : http://www.zerohedge.com/news/observations-engineer

Mon, 04/16/2012 - 01:09 | 2347861 shuckster
shuckster's picture

Economists = Astrologists

Mon, 04/16/2012 - 02:52 | 2347957 californiagirl
californiagirl's picture

Soros cofounded INET. The "solution" will be worse than the problem - Soros's wet dream of a world-wide feudal oligarchy run by him and his elitist cronies, that controls every aspect of our lives in order to "protect" us from another economic disaster (which, of course, was largely created by their ilk in the first place - in other words, a return to a Lords and Serfs model a la Agenda 21 (kind of like the Hunger Games), and the current economic disaster being the perfect excuse, not to implement laws to actually prevent or punish fraud and theft, but to control the rest of us that are complaining about it. The INET clip forgot to mention the "Gordon Gekko" effect of massively increasing disregard of any morals or ethics (propogated with Hollywood's assistance). And, unfortunately for the rest of us, the former deterent of fines, criminal prosecution, and loss of wealth, no longer exists.

Mon, 04/16/2012 - 03:17 | 2347965 Troy Ounce
Troy Ounce's picture

 

 

Perhaps an idea to put "economics" as an academic study in the art department. Next to hobo or clarinet or something.

Mon, 04/16/2012 - 03:32 | 2347976 Overflow-admin
Overflow-admin's picture

This is a little out of the subject, but I think it's important:

I AM FUCKING SICK OF THIS AND WILL NOT TAKE IT ANYMORE! DO NOT FORGET WHAT ANONYMOUS SAID 11:11AM 11:11PM RED PILL TIME FOR EVERYONE! HACK REALITY! TROLL THE SHIT OUT OF THE INTERNET! MAKE SOME CHANGE!

Mon, 04/16/2012 - 05:57 | 2348027 tradewithdave
tradewithdave's picture

The deception here is that they are suggesting a move to a "new paradigm."  The new foundation that Steve Keen mentions is merely a rejiggering of the agent model into one which attempts to recognize the individual behavior through the behavioral economics which is nothing more than choice architecture.  You can't measure human consciousness, but you can measure the Pepsi Challenge, so to speak, by measuring the inputs and results and the influence of the observer on the observed.  Don't confuse measurement with control. 

This is still a scarcity paradigm which is the basis of all economics; the efficient distribution of scarce resources.  Without a basis of scarcity there is no need for the work of any of these people who are the same people who got us here in the first place, but re-packaged as "new and improved." 

A genuine new foundation would require a shift from scarcity to abundance.  How can this happen you ask in a world of scarce oil or clean air or jobs?  You're looking for oil instead of looking for energy.  You're looking for jobs instead of looking for heat.  Our natural state was one of abundance and it will return to one of abundance but only when the government is on His shoulders, not Soros shoulder. 

He came that we might have life and have it more abundantly.  The basis of Marxism is that someone else has a calling on your life and that if you're willing to abdicate your calling, then they're willing to accept the accountability for your life.  It seems like a fair deal if there's "no exit" as Sartre's existentialism suggests.  That my friends, is a lie and we know who the father of all lies is. 

The Good News is that there is a path away from scarcity towards abundance and the first step is forgiveness.  In a state of forgiveness, you can pick up and move forward because the burden is light.  In a state of scarcity, the one suggested by INET, the burden is crushing and there's no way to carry on except to give your life over to the super-state (which in this case is a central world governance) based on the belief that you will never have enough water falling from the sky or plants sprouting from the earth. 

Dave Harrison

www.tradewithdave.com

Mon, 04/16/2012 - 06:10 | 2348032 Belarusian Bull
Belarusian Bull's picture

Amen, brother! Now, pass that pipe.

Mon, 04/16/2012 - 07:33 | 2348082 tradewithdave
tradewithdave's picture

Here's something to hang in your smokehouse:  http://tradewithdave.com/?p=9915

Mon, 04/16/2012 - 07:17 | 2348057 monsi
monsi's picture

 Keen is the way to go...his nutshell::::3 points  Euro trade deficit numbers today support.....investors are still buying Spanish and Italian debt, it just costs them more to insure it (seen it all before).....IMF will not decide coming Friday about aid for Europe.  June is the date.  ECB will recommence the SMP or stump up another LTRO or 2....Big sell off Friday last with profit taking and some repositioning (we`ve seen all this how many times)  Euro is climbing away from another successful defence of a barrier interest @ $1.300 (how many times do we have to see this?)  Any conspiracy theorists out there?

Read on:      

Central banks are doing what they can to lift post-crash economies back into growth. They're finding it hard because the same force that was so crucial to economic expansion before the credit crunch was also behind the financial markets' collapse and is now being unwound: bank debt. And while central banks can force banks to lend, they can't make people borrow.

        This is the thesis presented by Steve Keen, an Australian academic who is fast becoming one of the leading analysts of the financial crisis.

        In a nutshell, a normal credit-based economy has three sources of aggregate demand, he argues. One is from income earned by selling goods and services, which in turn largely finances consumption of those same goods and services. Second is entrepreneurial demand for debt, which finances investment. And third, that increase in debt fosters demand for another sort of debt, Ponzi debt, which finances the purchase of assets, driving asset prices higher and, eventually, asset bubbles.

        After a big financial crisis, people are reluctant to take on debt, maybe for a generation. Economic growth and asset prices stagnate or trend at lower than previous levels. Eventually they forget the pain debt busts cause and start to borrow again. Banks lend. They will always find a way to fill debt demand and then later find the reserves to justify it. And the cycle begins again. Debt leads to investment and rising consumption, which leads to debt demand for asset purchases, which leads to rising asset prices and more debt for investment. Ultimately, because credit expansion can't accelerate for ever, the whole thing comes to a messy stop and the private sector deleverages.

        And that's where we are now; in a very long deleveraging process.

        Central banks are trying to get around this in two ways: by providing extremely cheap money and punishing savers, they are hoping to stop the deleveraging. Meanwhile, inflation over the long run will erode the value of those debts.

        But the fact of the matter is that the unprecedented rise in private-sector debt has only started to be reversed. This could be a process that lasts more than a decade and could yet prove to be as long as Japan's.

        So how to get out of the problem now? Keen suggests that rather than pumping quantitative-easing liquidity into the financial sector, central banks should be pumping it into the hands of individuals. Those who have debts would be made to use the central-bank money to pay those off. Those who were prudent would keep the cash, thus helping to defray the inflationary effects of this helicopter drop of money.

Mon, 04/16/2012 - 07:51 | 2348102 Freewheelin Franklin
Freewheelin Franklin's picture

Wait, wut? Is there more than 1 Stephan Kinsella? The Stephan Kinsella I know of is a former IP attorney at LvMI.

Mon, 04/16/2012 - 09:20 | 2348238 AurorusBorealus
AurorusBorealus's picture

The term "paradigm" is oft used but rarely understood.  The term comes from Thomas Kuhn's "The Structure of Scientific Revolutions."  When data accumulates that no longer accords with the existing models and procedures, a field of science undergoes a "revolution" and shifts to a new paradigm.  (Genetics + Darwinism = Evolution.. Relativity + Atomic Structure = the new physics).  However, a paradigm shift involves more than theory... it requires a whole new generation of thinkers (the old thinkers never give up their paradigm).  It also entails a change in the ways data is collected and what is considered important data. 

Just as they misunderstand economics, these "wise men" also misunderstand Kuhn.

Mon, 04/16/2012 - 09:40 | 2348282 csmith
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I get SO sick of economists bashing the market as the source of the bubble in 2001-2007. Yes, markets go to emotional extremes of fear and greed, but LEFT TO THEMSELVES they are self correcting. Only when politicians put in artificial backstops to risk taking (i.e.; Fannie, Freddie, FHA, etc.) do markets go so far off the rails that they crash.

In other words, only politically-driven "stability" can breed massive INSTABILITY.

Mon, 04/16/2012 - 18:11 | 2349939 Random_Robert
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Hmmm I'd rather not be forced to live at the outer extant of the present systems' models anymore....

Is there any way I can simply choose to move into the next paradigm? Or do I have to be forced to endure all the needless stupidity that is certain to be inflicted upon me in the interim..? 

Mon, 04/16/2012 - 19:36 | 2350063 GeoffreyT
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First, let me say that I like Steve Keen and Stephen Kinsella - they are decently-trained economists. But this video is absolute rubbish.

The demand-supply cross diagram is a pedagogic tool (as is the 2-agent game theory model, the 2-good trade/comaparative advantage model, and the 2-asset Markowitz EV model). It is s sensible way to present a 'pared down', static 'schema' that students can follow.

The Stochastic GE macro model is likewise a pedagogic tool: it is likewise there to attempt to frame economic problems in a way that is tractable, while introducing uncertainty.

No decent economist believes that any economy's production structure is Cobb Douglas (or CES, or even CRETH/CRESH), or that the utility functional is CRRA with ?=1 (i.e. log utility), or that the interest rate is exogenous and fixed.

Those functional forms and parametric assumptions are used for tractability, and because they conform to the 'stylised facts' - stable labour-capital ratios and factor shares (within a range), a stable long-run rate of total factor productivity growth, and approximately-constant returns to scale.

Likewise, no decent economist believes there is such a thing as the 'risk-free rate'; no decent economist believes that market prices/returns are symmetric, mesokurtic and continuous (so bye bye CAPM, Black-Scholes, and Binomial). Brownian motion? Helpful, but not reality.

No decent economist believes that income is Fisk-distributed. No decent economist believes that the strong form of the Rational Expectations Hypothesis holds at every point in time. No decent economist believes that stock prices reflect all known information at every point in time.

Anyone who tells you otherwise is talking what decent economists refer to as fucking horse-shit (that's a 'think tank' term, or it was during my seven years at Australia's premier economic modelling think-tank - which was full to the gunwales with decent economists).

 

But here's what the 'documentary' (deliberately) left out: Public Finance theory - which is sensible right up to the point that it STOPS at undergrad (which is when most students stop studying it).

The theory starts out nicely:

  • there are goods that are non-rival and non-excludable in consumption (can't argue with that);
  • markets underprovide such goods (can't argue with that either);
  • some of these 'public' goods are important (hmmm, OK, let's accept that);
  • so 'social welfare' would be augmented if government increased output of public goods (wait, what? We can add utils across individuals now?);
  • in doing so, government needs to fund itself (OK that's true as a statement);
  • money has diminshing marginal utility (yep - you're talking sense again);
  • so if there are taxes, they should be progressive (yep - good insight, Pub Fi!).

It then stops. At, say, Masters' level you might get the very briefest discussion of rent-seeking, parasitism and capture theory.

In a 'vanilla' undergrad/Honours Pub Fi course, you never get

  • a discussion of whether or not there is any moral case (even a utilitarian one) for forcing all members of a society to fund government programs whether they want to or not.
  • a decent discussion of the opportunity costs of the money taken by force (which would have been put to its highest-expected-utility use).
  • any discussion of the extent to which government intervention in a market changes the SUPPLY function for that industry, and therefore the structure of demand for the inputs into that industry (and therefore all other industries).

The fact of the matter is, the entire political class is now a rent-seeking parasitic organism - as predicted by Mises/Hayek in the 1920s - and (with a hat tip to Lobaczewski's "Political Ponerology" of more recent date ) dominated by sociopaths.

As Rothbard observed: it's easy to forget while discussing Public Finance and all the 'consumer welfare' triangles that are brought into existence... that the State is also the sole creator of the biggest public BAD that exists: wide-scale industrial WAR.

 

Furthermore, there is abundant work - after undergraduate comaparative statics - on how markets behave in disequilibrium; on how expectations are formed (e.g., quasi-rationally - the agent 'knows the model' but can only use it as an attractor); and on trajectories from disequilibrium to equilibrium.

Also, the entire idea of equilibrium is predicated (in the dynamic models) on there being a period of time during which the processes can equilibrate - that there are no subsequent shocks to the system...

Again, no decent economist believes that any system will go for more than the gap between Fed meetings without there being a shock - notably, government intereference in the short term price of fucking money, dickheads.

Equilibrium is a pedagogic tool - like zero friction on an inclined plane.

Economics is a fascinating discipline, but part of the problem is that it became identified with smart-ass mathematical algebra spaghetti in the 1980s; this led to an influx into a relatively-high-paying discipline, of graduates of other disciplines who can't tell the difference between a pedagogic tool, and the actual economy. It's THOSE guy - the maths and physics PhD's - who formulate all sorts of whackery...

And as for that fucking JOURNALIST dolly bird, telling economics to be 'humble'? Lay off the fucking peroxide, love, and take a look at your OWN profession... the profession which was the prime mover for the propaganda effort to run the world into Iraq and Afghanistan, and the profession that lionised Greenspan (and which rebroadcast - without irony - every utterance of the Greek political class).

Thu, 05/03/2012 - 17:28 | 2395264 Random_Robert
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You talk like a college-boy....

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