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Steve Keen confounds conventional thinking on continuing economic crisisLatest News

Thurs 07 June, 2012.

Steve Keen, a professor of economics and finance at the University of Western Sydney and one of only a handful of economists to predict the global financial crisis of 2007–08, tangibly confounded conventional thinking on the economy in an interview broadcast on BBC Radio 4 last Monday night, 4 June. The interview, conducted before an audience at the London School of Economics, appeared to leave the BBC, interview host Paul Mason (the economics editor for BBC 2 television’s “Newsnight” programme), and some members of the audience struggling to grasp Keen’s comprehensive demolition of mainstream economic theory.

Introduced as “controversial”, “radical”, and of having acquired “a cult following”, Keen explained how neoclassical (or “mainstream”) economists responsible for the dominant theories that govern our national economies ignore the role of money, banks and debt in their modelling. He convincingly argued that ignoring these three factors cannot produce realistic models of our economic system, which explains why most economists were blind to even the potential of a financial crisis such as the one triggered by the Lehman Brothers collapse in 2008.

Among the many eye-opening points Keen made in the interview are:

• the world is only “about thirty percent through” the crisis that afflicted the global financial system in 2008;
• that unless decisive action based on realistic economic modelling is initiated, the world economy will remain moribund and crisis-ridden for another twenty years;
• the austerity programmes being pursued in many states – for example, in the United Kingdom by chosen government policy, and in Greece and Spain by European Union imposition – are simply aggravating recessionary pressures at a time when the private sector is de-leveraging from debt and reining in spending;
• that unchecked national economic crises in Europe will lead to political instability;
• that the United Kingdom is in a worse position than Japan at the beginning of the latter’s long period of stagnation in the early 1990s because it doesn’t possess Japan’s advanced industrial base and social cohesion;
• that the ratios to gross domestic product (GDP) of private sector debt and financial sector debt in the United Kingdom are running at around 450% and 250% respectively – much higher than the United States’ peaks of 300% private debt-to-GDP ratio and 120% financial sector debt-to-GDP ratio;
• that, at various times over the last three to four years, around 60% of aggregate demand in the UK economy has been financed by rising debt;
• that a Lehman Brothers level of credit crisis is almost certain to hit the United Kingdom later this year, which will wipe out the illusion of twenty years of prosperity and growth.

Keen did not just outline what was wrong with economic theory and our economic and financial systems, but also offered a solution based on his theories of debt-fuelled crises. His suggested solution is “a modern debt jubilee” in which governments, instead of supporting the irresponsible practices of the current banking system by giving electronically generated new money to banks in the form of quantitative easing (QE), give the new money to the population with a policy of “quantitative easing for the public”: those in debt are compelled to pay down their debts, while those in lesser or no debt can use their newly gained cash as see fit. This measure would stimulate economies directly and reduce the power of the financial services industry. A number of “challenges” presented by this strategy would inevitably need to be negotiated, but would be manageable compared with the essentially irresolvable economic problems, social hardship and political instability of twenty years of ongoing financial crises.

In describing how he responds to mainstream economists when they dismiss his theories with “the air of effortless superiority”, Keen points out that these same economists always insisted the crisis we are still experiencing was impossible in the first place, and that they still can not account for it; therefore, “reality is on my side”.

We might ask, then, what the BBC finds “controversial” and “radical” about a coherent explanation for the global financial crisis and soundly based suggestions for reining in an ongoing economic malaise, when the alternatives offered by neoclassical economics has just as soundly proven to be, in Keens’ words, “delusional”.

The thirty-minute interview with Steve Keen, “Why economics is bunk”, will be repeated on BBC Radio 4 this Sunday night at 21:30, but is available to listen to as a podcast, on the BBC website’s page for Radio 4’s “Analysis” programme.

See also the article on Steve Keen in SomethingDark no. 02, “Fantastic economics and the fantasy economy”, by SDk editor Daryl Champion.

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