Steve Keen shows how private debt, not public debt, causes many of our financial problems, in fact, government debt can help mitigate the worst of looming financial crisis that may be coming due to Covid, but sadly, he says, governments are more likely to do nothing about private debt, while cutting public expenditure, which will make the financial crisis even worse.
Is the financial system acting in favour of society’s needs?
Far from it! As Marx once put it, the finance sector is a good servant but a terrible master, and that’s what the Neoliberal obsession with deregulation has actually allowed to happen: finance has become the economy’s master, rather than its servant. We need to return it to its servant role: it should provide the money that firms need for working capital, that households need for large consumption items, and that entrepreneurs need to finance innovation, and that’s it. Instead, what it has been doing ever since the 1970s is financing asset bubbles. These can make some people extremely wealthy—or make homeowners think they are wealthy—but in the end it only enriches the finance sector itself.
The only way to stop this happening is to regulate finance: to limit the power that a banking licence grants to create money to ways of creating money that are beneficial to society, as well as profitable for the banks. Without those controls, banks end up financing asset price bubbles, as we saw vividly in the Spanish housing market. The huge increase in household debt from the introduction of the Euro caused spiralling house prices, only to come crashing down into Spain’s worst recession since the Great Depression afterwards.
Brave New Europe
Steve Keen – What is the role of public debt and private debt in the next great financial crisis?
He’s been bearish for 20 years… Dow is 35,000… he’s gotta be broke if he has been short this whole time…
ReplyDeleteKeen still around? Wow, felt like I was stuck in a time warp seeing his name. Scary as hell :(
DeleteThere's a name for 'public debt'.
ReplyDeleteThey are called dollars, pounds, Yen, etc.
The big question for Post Keynesians is why do they always seem to want the government sector to operate essentially in a different currency?
I thought MMTer's were Post Keynesians! I guess tribalism is rampant again!
ReplyDeleteSteve Keen has done a good job quantifying the effect of changes in private debt on aggregate demand. But the above article contains a few errors.
ReplyDeleteFirst, he suggests that the McLeay paper was the first to point out that commercial banks create money. Actually Positive Money was making that point YEARS prior to the McLeay paper. Plus Keynes made that point, as did the governor of the Bank of England (Josiah Stamp) in the 1920s.
When the McLeay paper was published, Positive Money supporters in the North East of England (me included) met in pub and bought a bottle of champaigne and drank to the fact that the BoE had eventually caught up with us.
Second, Keen assumes private debts are too high without giving any brilliant reasons. One reason for thinking they ARE NOT too high is that the household debt to debt service cost ratio is now at a 40 year low at least in the US. See:
https://fred.stlouisfed.org/series/TDSP
Of course interest rates might rise, but in the aftermath of the 2007 bank crisis, the private sector paid off the excess debt it had incurred surprisingly quickly. Thus even if they do rise, long as they don’t quadruple over night, I don’t see the problem.