Tag Archives: minsky

New York Times: Keen Right, Bernanke Wrong

22 Jul
Steve Keen, an Australian economist, used the ideas of another economist, Hyman Minsky, to  set forth the possibility of a global debt crisis that now seems prescient. In a 2000 book,  Mr. Bernanke briefly mentioned, and dismissed, Mr. Minsky. (Source: Demetrius Freeman/New York Times)

Steve Keen, an Australian economist, used the ideas of another economist, Hyman Minsky, to set forth the possibility of a global debt crisis that now seems prescient. In a 2000 book, Mr. Bernanke briefly mentioned, and dismissed, Mr. Minsky. (Source: Demetrius Freeman/New York Times)

Oh dear.

What does it tell you — particularly about the gross misallocation (and mis-remuneration) of human intellectual resources — when the New York Times declares the most powerful central banker on the planet, US Federal Reserve chairman Ben Bernanke, to be fundamentally wrong, and a humble Aussie economist, (now unemployed) Associate Professor Steve Keen, to be fundamentally right:

For a time, the period before the collapse was known as the “Great Moderation,” a term that Mr. Bernanke helped to publicize in a 2004 speech. Low levels of inflation, long periods of economic growth and low levels of employment volatility were viewed as unquestioned proof of success.

And what brought on that success? In 2004, Mr. Bernanke, then a Fed governor, conceded good luck might have helped, but his view was that “improvements in monetary policy, though certainly not the only factor, have probably been an important source of the Great Moderation.”

In 2005, three Fed economists, Karen E. Dynan, Douglas W. Elmendorf and Daniel E. Sichel, proposed an additional explanation for the Great Moderation: the success of financial innovation.

“Improved assessment and pricing of risk, expanded lending to households without strong collateral, more widespread securitization of loans, and the development of markets for riskier corporate debt have enhanced the ability of households and businesses to borrow funds,” they wrote. “Greater use of credit could foster a reduction in economic volatility by lessening the sensitivity of household and business spending to downturns in income and cash flow.”

At least Mr. Bernanke’s hubris was not as great as that of Robert E. Lucas Jr., the Nobel Prize-winning University of Chicago economist. In 2003, he began his presidential address to the American Economic Association by proclaiming that macroeconomics “has succeeded: Its central problem of depression prevention has been solved.”

In his speech last week, Mr. Bernanke cited several assessments of the Great Moderation, including the one by the Fed economists. None questioned that it was wonderful.

The Fed chairman conceded that “one cannot look back at the Great Moderation today without asking whether the sustained economic stability of the period somehow promoted the excessive risk-taking that followed. The idea that this long period of calm lulled investors, financial firms and financial regulators into paying insufficient attention to building risks must have some truth in it.”

One economist who would have expected that development was Hyman Minsky. In 1995, the year before Minsky died, Steve Keen, an Australian economist, used his ideas to set forth a possibility that now seems prescient. It was published in The Journal of Post Keynesian Economics.

He suggested that lending standards would be gradually reduced, and asset prices would rise, as confidence grew that “the future is assured, and therefore that most investments will succeed.” Eventually, the income-earning ability of an asset would seem less important than the expected capital gains. Buyers would pay high prices and finance their purchases with ever-rising amounts of debt.

When something went wrong, an immediate need for liquidity would cause financiers to try to sell assets immediately. “The asset market becomes flooded,” Mr. Keen wrote, “and the euphoria becomes a panic, the boom becomes a slump.” Minsky argued that could end without disaster, if inflation bailed everyone out. But if it happened in a period of low inflation, it could feed upon itself and lead to depression.

“The chaotic dynamics explored in this paper,” Mr. Keen concluded, “should warn us against accepting a period of relative tranquillity in a capitalist economy as anything other than a lull before the storm.”

When I talked to Mr. Keen this week, he called my attention to the fact that Mr. Bernanke, in his 2000 book “Essays on the Great Depression,” briefly mentioned, and dismissed, both Minsky and Charles Kindleberger, author of the classic “Manias, Panics and Crashes.”

They had, Mr. Bernanke wrote, “argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behavior.” In a footnote, he added, “I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.”

It seems to me that he had both Minsky and Kindleberger wrong. Their insight was that behavior that seems perfectly rational at the time can turn out to be destructive.

The Only Aussie Economist To Predict The GFC Shows Treasury Department How The Economy Really Works

26 Apr

This past Friday, Professor Steve Keen – the only Australian economist to predict the GFC and give cogent reasons why, and thus one of very few economists in the world who is not a danger to the public – gave this superb, by-invitation (!?!) presentation to staff at the Australian Treasury department.

If you want to gain a better understanding of how the economy actually works – as opposed to how all the people who run the country ass-ume it works – I highly recommend making time to watch the whole thing.

One of many highlights for me came in the question time following Steve’s presentation (1:09:20):

“One of my students put a beautiful question to me once saying, ‘Is the finance sector a Profit centre, or a Cost centre to be minimised?’ It is the latter.”

Logical inference: We must minimise the size (and power) of the finance sector.

The excesses of the finance sector are built, primarily, on the Twin Pillars of currency exclusivity (legal tender laws) … and the power of usury.

Breaking those twin pillars is where any realistic long term “solution” must begin. For those interested, this is my idea for how to begin doing that.

Enjoy this brilliant presentation by Steve Keen, and follow him on Twitter @ProfSteveKeen

* Please help educate others, by sharing this video.

Will You Help Revolutionise Economics?

10 Feb


Back in April 2010, I joined with and supported Professor Steve Keen on his week-long Keenwalk to Kosciuszko.  For readers who don’t know, Steve is one of just 13 economists worldwide who foresaw and forewarned of the GFC.  Indeed, Steve won the 2010 Revere Award as voted by his peers, for being the economist who first warned of the impending crisis and (more importantly) the one who most cogently explained the reasons why.

For some time now, Steve has been working to develop a new computer program for modelling economics.  It is called “Minsky”, in honour of the economist Hyman Minsky. Yes, that’s him, in the cartoon above.  He developed the Financial Instability Hypothesis, which essentially recognised that lengthy periods of economic stability are actually a cause of subsequent instability and crisis.  It was Minsky who famously coined the phrase “Stability is destabilising”.

Steve’s “Minsky” computer program is revolutionary.

How so?

Well – believe it or not – it is the first economic modelling program that actually includes the role of banks, money, and debt.


Mainstream economists – including all those overpaid “experts” in the world’s treasury departments and central banks – failed to see the crisis coming.

But you already know that.  What you may not know is the reason why.  And that reason is simply this.

The mainstream economic theories (thus, models) they all believe in … ignore the role of banks, money, and debt.

You really can’t make this $h!t up.

Steve wants to change all that.  He wants to give the world the tools needed to properly model the real world economy.  Not an imaginary one.  Because in the real world, banks money and debt all matter. A lot.

To make this happen – to revolutionise economics – well, sad to say, it requires money.  Money to hire not just one or two part-timers, but a team of full-time computer programmers.

So, to raise money for this project, Steve has launched a campaign on the well known fundraising website called Kickstarter.

Please visit the campaign page here –


I want to encourage you to take 2 minutes to watch Steve’s introductory video.  If nothing else, it will entertain and educate you. And if you really want to be educated – in (mostly) no nonsense, layman’s language – take the time to read what Steve has to say on his Kickstarter campaign page.

Then, if you feel that this is a worthy project … I certainly do! … then please, make a pledge.

As little as $2.  Because every dollar helps.

And please share the links to Steve’s Kickstarter campaign on your own blog, Facebook page, Twitter, and other social networks.

Your simply spreading the word will be a great help, and a wonderful support.

Thank you.



The Economist recently had a feature on “Economics after the Crisis” called “New Model Army” which featured Minsky as an example of what the future of economics could be:

In Australia Steve Keen, an economist, and Russell Standish, a computational scientist, are developing a software package that would allow anyone to create and play with models of the economy that incorporate some of these new ideas. Called “Minsky”—after Hyman Minsky, an American economist celebrated for his work on boom-and-bust financial cycles—it places the banking system at the centre of the economy. (The Economist, January 19th 2013, p. 68)

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