Why Steve Keen Saw Financial Crisis Coming, and Others Did Not

Steve Keen: The Naked Emperor Dethroned 1/7
 

 
The two intersecting lines of supply and demand penetrate economics textbooks like Einstein’s mass-energy equivalence penetrates physics textbooks. The theory behind the two lines is inherently flawed, says Steve Keen.

It is not possible logically to derive from individuals and their preferences the aggregate demand and supply curves presented in economic textbooks — unless one is willing to make a host of unrealistic assumptions, such as that all people are alike. That is why the theory is flawed, according to Steve Keen, Professor of Economics at University of Western Sydney in Australia.

In part 1 of this INET interview he talks about the flaws in economic theory, and explains why the second edition of his book, Debunking Economics, carries the subtitle The Naked Emperor Dethroned.
 
Steve Keen: How He Saw “It” Coming 2/7
 

 
In part 2 of the interview he talks about how in his search for a realistic framework of capitalism he ended up with the work of Hyman Minsky. Unlike standard theory, Keen says, Minsky emphasizes the role of money and debt in the economy. What firms do is they borrow money to invest during a boom, and then they have to repay part of that debt during a slump. Keen was able to put this simple idea into a mathematical model, in a paper he published in 1995.

The model helped him to predict the financial crisis. Keen is the recipient of the Revere Award, an award given to the economist who first and most cogently warned the world of the coming financial collapse. In this video clip, Keen tells us how being an expert witness in a court case in Perth, Australia, helped him see “it” coming.
 
Steve Keen: Credit Created Out of Thin Air 3/7
 

 
Steve Keen: Predicting a Crash Makes You Lonesome 4/7
 

 
Steve Keen tells us why he prefers to speak of the credit accelerator, rather than the credit impulse. “An impulse implies it comes and it goes; acceleration is always with you.”

Keen also talks about how tough it was to contend that Australia was doomed. He had, early on, and in a minority of one, publicly warned of the coming crash in the housing market — the mortgage industry was not amused. “It’s personally difficult to continue doing that, but I simply couldn’t see how I was wrong on all this.”
 
Steve Keen: We Must Cancel the Debt 5/7
 

 
Steve Keen talks about the world economic outlook. “We’re in a depression”, he says. We can avoid one or two decades of near stagnation, Keen warns, but only if we abolish the mountain of debt that is dragging down the major economies. Debt that the financial sector dishonorably extended should not be honored, he says.
 
Steve Keen on Europe, China, and Brazil 6/7
 

 
Steve Keen shares his views on Europe, China, and Brazil.
 
Steve Keen Urges Economists to Put Money into Their Models 7/7
 

 
In a monetary economy, all transactions are three-sided: There is a buyer, a seller, and a bank that records the transfer of money between the two parties. A realistic model of capitalism should have money in it, says Steve Keen.

Keen and his collaborators are using the INET grant to adapt existing software, traditionally employed by engineers, to the needs of economists. The goal is to develop software with which students can model a monetary economy.

Advertisements

About benvitalis

math grad - Interest: Number theory
This entry was posted in Economics and tagged , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s