Summary: The comments on the FM website often have Socratic dialogues, clashing views in the search of truth. Yesterday we had one at the intersection of several of our long-standing themes: debt, deflation, economic theory, making forecasts, and the credibility of experts. Participating was the distinguished economist Steve Keen, discussing if he “predicted” the Great Recession. This is what the Internet could be, if we worked at it.
All the perplexities, confusions, and distresses in America arise, not from defects in their constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.
— John Adams, letter to Thomas Jefferson, 25 August 1787 — True then; true today.
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Contents
- A dialogue with Keen
- About Steve Keen
- Paul Krugman looks at Keen’s work
- For More Information
(1) A dialogue with Keen
The opening act: Looking back at claims to have predicted the Great Recession, 8 April 2014
Many economists and financial experts claim to have predicted the Great Recession. That’s important, since these are the people we should be listening to. Oddly, they seldom quote or cite what must be their greatest accomplishment. Let’s look at one such claim, by Steve Keen.
Steve Keen replies (he provided URL’s; I’ve added full citations and sometimes abstracts).
Good grief Maximus,
Why are you even looking at journal papers or book chapters for proof of calling the crisis before it happened? That’s an inherently straw man critique of such claims: have you never heard of publication lags?
My 1995 paper, for example, was written in 1992, and accepted for publication in 1993–and then took two years to turn up in print in the Journal of Post Keynesian Economics.
At worst you should be looking for working papers or monographs, and at best media articles and interviews–because if you think (as I did from December 2005) that a really serious crisis was coming, you don’t bother with the academic production mill with its refereeing and editorial delays. You go for the mainstream media (and of course blogs).
BTW I chose to use Dirk’s Vox paper rather than the work on which it was based because that was an immediate URL rather than link to a PDF as with the paper. If you had checked that –- which you should have, given the claims you’re making here –- then you would have seen this link: Keen, S. (2006). “The Lily and the Pond“. Interview reported by the Evans {Ed: sic, s/b Evatt} Foundations, 12 December 2006.
The is the story behind Australia’s private debt. It has been growing more than 4% faster than our GDP for 53 years. … It is 147.1% now. If the rate of growth doesn’t slow down, it will crack 150% of GDP by March 2007, and it will exceed 160% of GDP by the end of 2007. We simply can’t keep borrowing at that rate. We have to not merely stop the rise in debt, but reverse it.
Unfortunately, long before we manage to do so, the economy will be in a recession. … So when will this recession begin? On current data, the domestic economy may already be in one.
That’s far from the first such warning I gave of the causes and severity of the crisis I expected (with a focus on Australia since that’s where I live). Here are a few other links for you:
(a) Keen, S. (2006). “The Lily and the Pond“. Interview reported by the Evans {Ed: sic, s/b Evatt} Foundations, 12 December 2006.
The is the story behind Australia’s private debt. It has been growing more than 4% faster than our GDP for 53 years. … It is 147.1% now. If the rate of growth doesn’t slow down, it will crack 150% of GDP by March 2007, and it will exceed 160% of GDP by the end of 2007. We simply can’t keep borrowing at that rate. We have to not merely stop the rise in debt, but reverse it.
Unfortunately, long before we manage to do so, the economy will be in a recession. … So when will this recession begin? On current data, the domestic economy may already be in one.
(b) “Why deflation is really possible“, Paul Amery, MoneyWeek, 7 February 2008
(c) “Boom in Australia goes bust as global slowdown hits“, USA Today, 28 December 2008
The financial crisis is hitting debt-laden Australians hard. “We’re headed for a recession for the same reason the USA is in one now — the bursting of a debt-financed speculative bubble” … Keen predicts the downturn will unfold a bit differently than it did in the USA, where problems began in the housing market and spread to the broader economy. “We’re likely to go into the macro crisis first as debt growth plummets; then a housing crisis as the newly unemployed are unable to maintain their mortgages; and finally a credit crunch where the banks’ solvency doesn’t look so hot anymore.”
(d) “To intervene or not to intervene“, ABC (Australia), 3 November 2008
(e) “Holding tight: can Australia ride the storm?“, The Age, 11 October 2008
“I think the comparison (with the Great Depression) is valid and the prognosis is extremely bleak,” suggested Sydney academic Steve Keen this week. … And Steve Keen, a University of Western Sydney lecturer, holds dire views. He has long warned of Australians’ “unsustainable debt addiction”. His latest musings put it this way: “We are not in a Great Depression — not yet anyway — but a key pre-condition for one has developed right under the noses of central banks: excessive private debt.
(f) “Economics Meltdown 101“, Reporter: Steve Keen, The Age, sometime in 2008 {Similar content to the (e) article}
(g) “Australia facing debt-driven depression“, ABC (Australia), 3 February 2009
The world is facing a “full-blown depression” and Australia needs to drastically rethink its attitude to debt if it is to climb out of its current economic trap, says leading economist Steve Keen.
Prof Keen,
I used that link because it was what you cited. It does not disprove your claim, but does not support it either (as you claimed). Also, as I noted, this shows the crash in US stock and residential home prices — so this is not a case of publication lag.
All that out of the way, thank you for these cites! I looked for an article or blog posts by you following up on your predictions, but could not find it (perhaps limitations of Google, or of my searching skills). I suggest that you write one. Good predictions are too rare to go undocumented, especially amidst all the chaff.
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On the FM website past predictions are listed and tracked — the hits and the misses.
I will review these and post an update, and (depending on the results), a follow-up post. Thank you for your prompt comment, especially valuable from one of your prominence.
Keen replies:
You’re welcome Fabius. It is probably worth a post now, since now that the crisis is passing. See
- Why the US can’t escape Minsky, 2 April 2014, and
- Closing the door on the GFC, Business Spectator, 10 March 2014
{T}his kind of inverse scepticism is actually helping to cement the dominance of the Neoclassical orthodoxy post the crisis they certainly didn’t see coming.
Prof Keen,
(I) My guess is that the next few years will provide a definitive test for current economic theories, of a magnitude not seen since the 1930s. I have written scores of posts about this, but am unable to even speculate about what lies beyond that transitional period. You are better equipped to write about that, however tentatively. It probably would find a large audience.
(II) I’ve gone over these (I also added full citation info to your comment). The fall into two groups. Neither supports your claim of predicting the crash.
(1) The first 2 articles were written before the crash, warning in general terms about the dangers of too much debt. These were common as dirt. I’ve written many. Here’s my first: Death of the post-WWII geopolitical regime – death by debt, 8 January 2008. Here are others.
These 2 articles are IMO not predictions of the 2008-2009 downturn. There are unspecific in terms of time, nor do they describe the specific features that turned a commonplace recession into the great recession: especially the collapse of the banks — perhaps the most surprising event.
(2) The other articles were written during or after the crash, more or less commonplace analysis. A few predictions; some correct, some wrong.
A few more comments about the references you gave:
- (b) The only reference to Keen is to show a graph of long-term debt/gdp growth from his website.
- (c) This was only partially correct; Australia did not have a housing crisis {not yet}.
- (d) This makes no predictions.
- (g) This one is quite wrong, predicting a depression — written near the trough of the downturn.
Keen replies:
If they were all I had, I might agree with you; and if your warnings had a model of debt deflation like the one below, I might put your calls on equal footing–as you do in your next comment.
“Finance and economic breakdown: modelling Minsky’s Financial Instability Hypothesis“, Journal of Post Keynesian Economics, 1995
You’re being a very literal foot-soldier, General, and a lazy one at that. I’ll leave you to your ruminations.
Prof Keen,
(1) “if your warnings had a model of debt deflation like the one below”
That’s a valid point. As an economist, your warnings of debt were based on your expert analysis. Whereas mine were based on citations of economists’ work (examples about deflation here and here). We’re not on the same level. On the other hand, a prediction is a prediction.
(2) “You’re being a very literal foot-soldier, General, and a lazy one at that. I’ll leave you to your ruminations.”
(a) Considering the detailed analysis I’ve given to your citations, that seems quite an odd insult.
(b) Insults aside, citing articles written after the crash as evidence of prediction. What can you intend by this? If that is “being a very literal foot-soldier”, then I plead guilty as charged.
(c) That your defense so quickly descends to insults tells us more about you than I.
This is a nice example of a Socratic dialogue (without the booze), cutting through the chaff to the truth. Thank you for participating.
Fabius,
{Y}ou are making a very big call: that I didn’t predict (or warn of) the crisis, when I spent basically my entire life from December 2005 on doing precisely that. There are numerous entries posts on my website that you could have consulted, including documents such as:
Expert opinion, 22 December 2005 — Summary:
I have been asked to provide my expert opinion “as to the consequences or potential impact of the lending typified in Loan 5 on the {Australian} economy generally”. In summary my opinion is …
“Deeper in Debt“, Center for Policy Development, 13 December 2007
Australians have an unsustainable debt addiction, which will be hard to kick, and painful to recover from. A new report by CPD fellow Steve Keen has found that in just 18 months time we may be spending as much of the national income on interest payments as we were in 1990 – when interest rates were at 17%.
Australia’s level of irresponsible lending isn’t as high as that which brought on the US subprime crisis, but because our debt to GDP ratio is growing so much faster the impact of any slowdown will be more severe here – and the pain will be much more widely spread.
In ‘Deeper in Debt: Australia’s addiction to borrowed money‘, Steve explains the dynamics of Australia’s debt addiction in clear and accessible language. The paper outlines the probable economic consequences of the end of the debt binge, offers advice on how to cope with the debt hangover, and proposes reforms to prevent it happening again.
You can also see reports on the likelihood of a crisis published by me in PDF form as “Steve Keen’s Debtwatch” since November 2006 by going to this page.
Is it amazing that after all the work I have put in, I get exasperated with people dismissing it on the basis of reading one or two blog posts?
Prof Keen,
(a) “you are making a very big call – that I didn’t predict (or warn of) the crisis …”
I believe we have a misunderstanding here. Let’s replay the tape.
First, I quote your claim:
One economist often cited as predicting the crisis is Steve Keen (retired Prof Economics, U Western Sydney.). He often makes this claim, most recently (and unusually mildly): Back in the Olde Days, before the global financial crisis, when I was one of a handful raising the alarm …”
I examine the article you cite as evidence: “‘No one saw this coming’ – or did they?“, Dirk Bezemer (Asst Prof Economic, U Groningen), Vox, 30 September 2009 (see the full paper here).
I draw a conclusion from that evidence:
But this was written after the crash (see the figure 9.11, showing the crash in US stock and housing prices). It’s not evidence that Keen predicted the recession, in any form.
You provide additional supporting evidence,
I examine the new evidence, and draw what seems to be a logical conclusion — You gave two kinds of citation:
(1) These {group 1} are IMO not predictions of the 2008-2009 downturn. There are unspecific in terms of time, nor do they describe the specific features that turned a commonplace recession into the great recession: especially the collapse of the banks — perhaps the most surprising event.
(2) The other articles were written during or after the crash, more or less commonplace analysis. A few predictions; some correct, some wrong.
As a social scientist, who understands precise use of language, you must see that your assertion is incorrect. I do not make the global claim you attribute to me: “you are making a very big call – that I didn’t predict (or warn of) the crisis …”. I examine specific evidence you give as supporting evidence, and draw a conclusion about that evidence.
(b) “There are numerous entries posts on my website that you could have consulted”
As a scientist you understand the nature of claims, and that your statement is methodologically unreasonable. It’s not my job to search your website to find evidence for your claims when your own offered evidence is insufficient.
(c) “I get exasperated with people dismissing it on the basis of reading one or two blog posts?”
I get exasperated when people offer material as evidence that is not apropos, and even more so when their defense is to insult me. But let’s get over these petty things and search for common truths.
(d) Here is my guess at what’s happening here.
You have made substantial contributions to macroeconomic theory regarding the role of debt. That’s a judgement I’m not competent to make, but it seems likely. And the handling of debt is, IMO, the core issue in the paradigm crisis afflicting economics today. As I wrote in October 2008 about the causes of the collapse:
(f) The Thomas Kuhn-type paradigm crisis in Keynesian economics, by which the world economies have been steered for fifty years. The aggregate debt level of an economy is not a significant variable {in mainstream economic theory}; attempts to integrate into orthodox theory by radical Keynesians (e.g., Hyman Minsky) were unsuccessful. Sometime after 2000 we reached and broke though the edge of the “operating envelope” of Keynesian theory. We ran like Wile E. Coyote off the cliff and beyond — a few exhilarating years — and now we fall.
I am no macroeconomic theoretician, but we have been saying similar things during the past few years.
To gain support for your theory you are claiming to have predicted the great recession. Evaluating such things is subjective, but the materials you have shown in my opinion don’t justify such a claim — except in the sense that thousands of people have predicted a bad end to the debt supercycle (to use the term coined by Hamilton Bolton and Tony Boeckh of Bank Credit Analyst).
It’s an understandable impulse to claim predictions as evidence. It’s one I often have as well. Certainly the events of 2007 – now provide ample supporting evidence for your theory, without the need to make perhaps over-reaching claims which distract attention from you more serious insights.
(e) I’ll make one more guess, a wild guess: you might be frustrated that your work — and the work of others like yourself — has been and is being ignored by Australia’s policy-makers while Australia’s real estate bubble grows.
Welcome, brother. It’s a feeling I well understand. We’ll make some room for you on the pew. You can tell us your stories about the land down under. Our tales of madness in America will, I expect, top yours.
Keen replies:
On that “welcome brother” comment I can only agree. The capacity of the mainstream to hang on to their ignorance is incredible.
Prof Keen,
This is where Kuhn is helpful. He says that paradigms cannot be disproven, only replaced. That’s a slow process, even when there is a relatively clear replacement available. Kuhn quotes Max Planck’s grim insight:
“A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”
This process can be accelerated by external pressure, such as the Great Depression provided to economics. We might come to that point again.
Keen replies:
To start where I agree, the serious insights and alternative theory matter more than the prediction–and I’m not claiming to be Nostradamus, but to have an alternative theory of capitalism which (as it happens) did enable me to predict that a crisis was inevitable, and the causal factor behind when it would begin–when the rate of growth of private debt slowed–but not the timing of that event.
… I did integrate private debt into non-orthodox theory – that was the core of my 1995 paper – and my warnings of a crisis were based on the dynamics of private debt. A concise statement about that argument (using Australian data) before the crisis is below:
“So how do I justify the stance of a Cassandra? Because things can’t continue as normal, when normal involves an unsustainable trend in debt. At some point, there has to be a break–though timing when that break will occur is next to impossible, especially so when it depends in part on individual decisions to borrow.
However, it is possible to quantify the minimum impact that the end of the unsustainable might have on the economy: what would happen to aggregate spending if private debt grew no faster than GDP?
Aggregate spending – on both commodities and assets – is the sum of incomes plus the increase in debt. Using GDP as the measure of income, this was $1,001 billion in the last calendar year. Over the same period, private debt increased by $202 billion. Aggregate spending was thus approximately $1,200 billion. Private debt grew by 14.9% in the last year, versus a 7.4% growth in nominal GDP.
If both private debt and nominal GDP were to grow at the same rate as GDP last year, then GDP next year would be $1,075 billion, while debt would rise by $115 billion. Aggregate spending would thus be $1,190 billion – or $10 billion less than spending this calendar year.” (Booming on Borrowed Money, 30 April 2007)
The reason this stuff matters however is that mainstream theory is using the charge that “no-one saw this coming” to support their leaning that “no-one could have seen this coming” – ie that crises like this are unpredictable. That in turn supports the continued dominance of the mainstream. That would do society a great disservice.
(2) About Steve Keen
Keen is a retired Associate Professor of Economics and Finance at University of Western Sydney (or retired Professor?). From the Institute for New Economic Thinking:
He has over 70 academic publications on topics as diverse as financial instability, the money creation process, mathematical flaws in the conventional model of supply and demand, flaws in Marxian economics, the application of physics to economics, Islamic finance, and the role of chaos and complexity theory in economics. His work has been translated into Chinese, German and Russian. … his pioneering work on modeling debt-deflation resulted in him winning the Revere Award from the Real World Economics Review for being the economist whose work is most likely to prevent a future financial crisis.
Other details:
- His website: Steve Keen’s Debtwatch
- His book: Debunking Economics – The Naked Emperor Dethroned? (2011 edition)
- His Wikipedia entry
- “Economist Steve Keen loses housing bet against Rory Robertson“, 3 November 2009 — “The bet was that house prices would tank by 40%.”
- His university attacks him for standing up for his students, 29 January 2013
(3) Paul Krugman duels with Keen
A debate well-worth reading.
- “Misunderstanding IS-LM (Wonkish and Unimportant)“, Paul Krugman, NY Times, 19 March 2012
- “Minsky and Methodology (Wonkish)“, Paul Krugman, NY Times, 27 March 2012
- “Banking Mysticism“, Paul Krugman, NY Times, 27 March 2012 — Second part here.
- “The Case of Keen“, J. W Mason (Asst Professor Economics, Roosevelt U in Chicago), 1 April 2012
- “Things I Should Not Be Wasting Time On, Paul Krugman, NY Times, 2 April 2012
- “Oh, my. Steve Keen edition“, Paul Krugman, NY Times, 2 April 2012
- “Krugman “Knocked out of Neoclassical Orbit by Steve Keen’s Meteoric Rise!”; Lauren Lyster interviews Keen on Russia Today, 5 April 2012
- “Explaining Richard Koo to Paul Krugman“, Steve Keen, Debtwatch, 24 June 2013
(4) For More Information
The other Socratic dialogue with an economist: Ed Dolan discusses Modern Monetary Theory
Posts about debt deflation:
- Debt – the core problem of this financial crisis, which also explains how we got in this mess, 22 October 2008
- A situation report about the global economy, as the flames break thru the firewalls, 26 January 2009
- Inflation or Deflation? Nobody knows what path will we take., 21 July 2009
- Economic theory as a guiding light for government action in this crisis, 10 March 2009
- Fetters of the mind blind us so that we cannot see a solution to this crisis, 1 April 2009
- A lesson from the Weimar Republic about balancing the budget, 10 February 2010
- All about deflation, the quiet killer of modern economies, 19 July 2010
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