Why didn't economists predict the global financial crisis? Because they couldn't; but Dr. Steve Keen did. He won the Revere Award for most clearly and accurately predicting the global recession. Aaron Wissner, founder of Local Future non-profit, interviews Keen.
They discuss debt deflation built on the 1937 work by John Maynard Keynes and later work by Hyman Minsky. Most economists believe in the neo-classical model of economics, which is a false, inaccurate model, especially since it does not take into consideration banks, debt or even money. Keen's advice, do not listen to neo-classical economists.
Keen discusses economists Paul Krugman and Alan Greenspan, and why their neoclassical model belief has contributed to the global debt bubble and economic crisis.
He describes how private debt can grow into a speculative bubble. While a part of the contribution to the growing in private debt comes from households, and those flipping houses, the major portion comes from the financial sector gambling on derivatives.
Keen explains that the ratio of housing prices to gross domestic product, when adjusted for inflation, has stayed more or less the same for the past 100 years, until speculation, and excessive borrowing led to more than doubling of the housing prices in the USA. This bubble has now burst, but housing prices are still 15% above previous levels, and are likely to continue to fall, and overshoot on the downside.
Similar housing bubbles exist in other countries; the debt bubble in Japan has resulted in over a decade of economic stagnation, and a fall in housing prices of 70%.
Keen suggests that the economic downturn in the USA is likely to continue for ten to fifteen more years, as the private sector reduces its debt level, which subtracts from spending and GDP.
Dr. Keen discusses how almost all economists believe in a failed model of economics called the neoclassical model. Other models, or schools of economics, include Behavioral Economics, the Austrian School of Economics, and the Post-Keynesians (of which Dr. Keen is one).
Keen explains that neoclassical economists exist along a neoclassical axis from the strict neoclassicals and modified neoclassicals. This is akin to two thousand years ago when there were strict earth-center-of-the-universe philosophers (geocentric model) vs. those that explained the motions of the planets due to epicycles (the Ptolemic model). Just as the geocentric model of the universe was false, so too is the neoclassical model of economics, and for the same reasons: neither the geocentric model, nor the neoclassic model, can predict and explain certain observable events.
One very general but clear point that Keen makes is flipping houses is not a reasonable thing for people to do because the economy, as currently structured, will always have housing bubbles, which will leave many with enormous debt burdens. Homes should not be purchased for speculation, and they should not be purchased for investment; they are places to live, and are thus consumption items.
Published on Jul 11, 2012, recorded in high-definition at the Fields Institute for Research in Mathematical Sciences at the University of Toronto in Ontario, Canada.
Dr. Keen is in the process of building a new computer software package, named Minsky, to model financial flows.
He served as keynote speaker at Local Future's 2010 and 2011 conference, and will return to North America in November for Local Future's 2012 conference.
Keen authored the 2001 book Debunking Economics, and is professor of economics at the University of Western Sydney in Australia.
Dr. Keen is interviewed by mathematician and speaker Aaron Wissner, founder and executive director of Local Future, a non-profit educational organization based in the the USA.