Debtwatch Manifesto

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* Article: The Debtwatch Manifesto. By Steve Keen.

URL = pdf


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”."

( )

A Modern Jubilee

Steve Keen:

"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:

  1. Debtors would have their debt lev­el reduced;
  2. Non-debtors would receive a cash injec­tion;
  3. The val­ue of bank assets would remain con­stant, but the dis­tri­b­u­tion would alter with debt-instru­ments declin­ing in val­ue and cash assets ris­ing;
  4. Bank income would fall, since debt is an income-earn­ing asset for a bank while cash reserves are not;
  5. The income flows to asset-backed secu­ri­ties would fall, since a sub­stan­tial pro­por­tion of the debt back­ing such secu­ri­ties would be paid off; and
  6. 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."

( )

Jubilee Shares

Steve Keen:

"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." (

Full Reserve Bank­ing

Steve Keen:

"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." (