* Article: The Debtwatch Manifesto. By Steve Keen.
Resulting from reading highlights by Michel Bauwens:
"The seeds of an alternative, realistic theory were developed by Hyman Minsky in the Financial Instability Hypothesis (FIH), which itself reflected the wisdom of the great non-neoclassical economists Marx, Veblen, Schumpeter, Fisher and Keynes, and the historical record of capitalism that had included periodic Depressions (as well as the dramatic technological transformation of production). As Minsky argued, an economic theory could not claim to represent capitalism unless it could explain those periodic crises:
- it is necessary to have an economic theory which makes great depressions one of the possible states in which our type of capitalist economy can find itself. (Minsky 1982, p. 5)
Using insights from complexity theory, I developed models on the FIH that capture its fundamental proposition, that a market economy can experience a debt-deflation (Fisher 1933) after a series of debt-financed cycles (Keen 1995; Keen 1996; Keen 1997; Keen 2000). These models generated a period of declining volatility in employment and wages with a rising ration of debt to GDP, followed by a period of rising volatility before an eventual debt-induced breakdown.
The crisis itself emphatically makes the point that a new theory of economics is needed, in which capitalism is seen as a dynamic, monetary system with both creative and destructive instabilities, where those destructive instabilities emanate overwhelmingly from the financial sector.
I have formed the Center for Economic Stability Incorporated. Our objective is to develop CfESI into an empirically-oriented think-tank on economics that will develop realistic analysis of capitalism, and promote policies based upon that analysis.
Finance performs genuine, essential services in a capitalist economy when it limits itself to (a) providing working capital to non-financial corporations; (b) funding investment and entrepreneurial activity, whether directly or indirectly; © funding housing purchase for strictly residential purposes, whether to owner-occupiers for purchase or to investors for the provision of rental properties; and (d) providing finance to households for large expenditures such as automobiles, home renovations, etc.
It is a destructive force in capitalism when it promotes leveraged speculation on asset or commodity prices, and funds activities (like levered buyouts) that drive debt levels up.
Returning capitalism to a financially robust state must involve a dramatic fall in the level of private debt—and the size of the financial sector— as well as policies that return the financial sector to a service role to the real economy.
The size of the financial sector is directly related to the level of private debt, which in America peaked at 303% of GDP in early 2009 (see Figure 15). Using history as our guide, America will only return to being a financially robust society when this ratio falls back to below 100% of GDP.
America’s period of robust economic growth coincided with FIRE sector profits being between 10 and 20 percent of total profits, and wages in the FIRE sector being below 5 percent of total wages. Finance sector profits peaked at over 50% of total profits in 2001.
Since finance sector profits are primarily a function of the level of private debt, this implies that the level of debt needs to shrink by a factor of 3–4, while employment in the finance sector needs to roughly halve. At the maximum, the finance sector should be no more than 50% of its current size.
Such a large contraction in the size of the sector means that the majority of those who currently work there will need to find gainful employment elsewhere. Individuals who can actually evaluate investment proposals—generally speaking, engineers rather than financial engineers—will need to be hired in their place. Many of the standard practices of that sector today will have to be eliminated or drastically curtailed, while many practices that have been largely abandoned will have to be reinstated.
Capitalism’s crises have always been a product of the financial sector funding speculation on asset prices rather than funding business and innovation.
Some acceleration of debt is vital for a growing economy. As good empirical work by Fama and French has confirmed (Fama and French 1999; Fama and French 2002), change in debt is the main source of funds for investment, and as Schumpeter explains (Schumpeter 1934, pp. 95–107), the interplay between investment and the endogenous creation of spending power by the banking system ensures that this will be a cyclical process. Debt acceleration during a boom and deceleration during a slump are thus essential aspects of capitalism.
The growth in asset prices is the major incentive to accelerating debt: this is the positive feedback loop on which all asset bubbles are based, and it is why they must ultimately burst (see Figure 10 and Figure 11). This is the foundation of Ponzi Finance (Minsky 1982, p. 29), and it is this aspect of finance that has to be tamed to reduce the destructive impact of finance on capitalism.
I do not believe that regulation alone will achieve this aim, for two reasons.
- Minsky’s proposition that “stability is destabilizing” applies to regulators as well as to markets. If regulations actually succeed in enforcing responsible finance, the relative tranquillity that results from that will lead to the belief that such tranquillity is the norm, and the regulations will ultimately be abolished.
There are thus only two options to limit capitalism’s tendencies to financial crises: to change the nature of either lenders or borrowers in a fundamental way. There are proposals for the former, which I’ll discuss later, but (for reasons I’ll discuss now) my preference is to address the latter by reducing the appeal of leveraged speculation on asset prices.
There are, I believe, no prospects for fundamentally altering the behaviour of the financial sector because, as already noted, the key determinant of profits in the finance sector is the level of debt it can generate.
The link between accelerating debt levels and rising asset prices is therefore the basis of capitalism’s tendency to experience financial crises. That link has to be broken if financial crises are to be made less likely—if not avoided entirely. This requires a redefinition of financial assets in such a way that the temptations of Ponzi Finance can be eliminated.
I instead propose basing the maximum debt that can be used to purchase a property on the income (actual or imputed) of the property itself. Lenders would only be able to lend up to a fixed multiple of the income-earning capacity of the property being purchased—regardless of the income of the borrower.
I call this proposal The Pill, for “Property Income Limited Leverage”.
The best of these focus on instituting a system that removes the capacity of the banking system to create money via “Full Reserve Banking”."
"Michael Hudson’s simple phrase that “Debts that can’t be repaid, won’t be repaid” sums up the economic dilemma of our times.
The only real question we face is not whether we should or should not repay this debt, but how are we going to go about not repaying it?
We should, therefore, find a means to reduce the private debt burden now, and reduce the length of time we spend in this damaging process of deleveraging. Pre-capitalist societies instituted the practice of the Jubilee to escape from similar traps (Hudson 2000; Hudson 2004), and debt defaults have been a regular experience in the history of capitalism too (Reinhart and Rogoff 2008).
But a Jubilee in our modern capitalist system faces two dilemmas. Firstly, in any capitalist system, a debt Jubilee would paralyse the financial sector by destroying bank assets. Secondly, in our era of securitized finance, the ownership of debt permeates society in the form of asset based securities (ABS) that generate income streams on which a multitude of non-bank recipients depend, from individuals to councils to pension funds.
Debt abolition would inevitably also destroy both the assets and the income streams of owners of ABSs.
We therefore need a way to short-circuit the process of debt-deleveraging, while not destroying the assets of both the banking sector and the members of the non-banking public who purchased ABSs. One feasible means to do this is a “Modern Jubilee”, which could also be described as “Quantitative Easing for the Public”.
A Modern Jubilee would create fiat money in the same way as with Quantitative Easing, but would direct that money to the bank accounts of the public with the requirement that the first use of this money would be to reduce debt. Debtors whose debt exceeded their injection would have their debt reduced but not eliminated, while at the other extreme, recipients with no debt would receive a cash injection into their deposit accounts.
The broad effects of a Modern Jubilee would be:
- Debtors would have their debt level reduced;
- Non-debtors would receive a cash injection;
- The value of bank assets would remain constant, but the distribution would alter with debt-instruments declining in value and cash assets rising;
- Bank income would fall, since debt is an income-earning asset for a bank while cash reserves are not;
- The income flows to asset-backed securities would fall, since a substantial proportion of the debt backing such securities would be paid off; and
- Members of the public (both individuals and corporations) who owned asset-backed-securities would have increased cash holdings out of which they could spend in lieu of the income stream from ABS’s on which they were previously dependent."
"I propose the redefinition of shares in such a way that the enticement of limitless price appreciation can be removed, and the primary market can take precedence over the secondary market.
The basic idea has to be to make borrowing money to gamble on the prices of existing shares a very unattractive proposition." (https://www.debtdeflation.com/blogs/manifesto/)
"The former could be done by removing the capacity of the private banking system to create money. This is the substance of the American Monetary Institute’s proposals, which are now embodied in the National Emergency Employment Defense Act of 2011 (HR 2990), a Bill which was submitted to Congress by Congressman Dennis Kucinich on September 21st 2011. This bill would remove the capacity of the banking sector to create money, along the lines the the 100% reserve proposals first championed by Irving Fisher during the Great Depression (Fisher 1936), and vest the capacity for money creation in the government alone.
A similar system is proposed by the UK’s New Economic Foundation with its Positive Money proposal.
Technically, both these proposals would work. I won’t go into great detail on them here, other than to note my reservation about them, which is that I don’t see the banking system’s capacity to create money as the causa causans of crises, so much as the uses to which that money is put. As Schumpeter explains so well, the endogenous creation of money by the banking sector gives entrepreneurs spending power that exceeds that coming out of “the circular flow” alone. When the money created is put to Schumpeterian uses, it is an integral part of the inherent dynamic of capitalism. The problem comes when that money is created instead for Ponzi Finance reasons, and inflates asset prices rather than enabling the creation of new assets.
My caution with respect to full reserve banking systems is that this endogenous expansion of spending power would become the responsibility of the State alone. Here, though I am a proponent of government counter-cyclical spending, I am sceptical about the capacity of government agencies to get the creation of money right at all times.
Schumpeterian banking also inherently includes the capacity to make mistakes: to fund a venture that doesn’t succeed, and yet to be willing to take that risk again in the hope of funding one that succeeds spectacularly. I am wary of the capacity of that mindset to co-exist with the bureaucratic one that dominates government." (https://www.debtdeflation.com/blogs/manifesto/)