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Understanding the Global Financial Crisis: Scale, Causes, and Consequences

This work by Steve Keen from the University of Western Sydney delves into the complexities of the Global Financial Crisis (GFC), exploring its scale, underlying causes, and far-reaching consequences. Keen critiques the conventional economic wisdom and emphasizes the role of debt in economic cycles. The text analyzes historical patterns, particularly in Australia, while considering models of financial instability. It calls for better dynamic, credit-aware economic modeling and offers alternative policies for managing debt crises effectively, emphasizing that simply increasing debt isn't a solution.

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Understanding the Global Financial Crisis: Scale, Causes, and Consequences

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  1. The GFC: Scale, Causes, Consequences Steve Keen University of Western Sydney Debunking Economics www.debtdeflation.com/blogs www.debunkingeconomics.com

  2. The Scale: Biggest Bubbles in History

  3. The Scale: Greatest Debt Level in History

  4. The Scale: Greatest Debt Level in History • But Australia’s different, right?... Let’s zoom in here Our “Crisis? What Crisis?” 1890s Depression 1930s Depression

  5. The Ponzi Economy • 72-74 & 84-92: debt-induced boom, bust, & recovery… ? • What odds on a third upward trend? Sustained recoveries only when Debt/GDP ratio rose again ? • Versus 1890/1930 style de-leveraging?

  6. Back in the USA… • Deleveraging-driven downturn… • Correlation 1980-Now: -61% • Correlation 1990-Now: -83%

  7. Why hasn’t it happened here? • Give it time… • Correlation 1980-Now: -84% • Correlation 1990-Now: -94%

  8. Did neoclassical economists see this coming? • “the current economic situation is in many ways better than what we have experienced in years… • Our central forecast remains indeed quite benign: • a soft landing in the United States, • a strong and sustained recovery in Europe, • a solid trajectory in Japan • and buoyant activity in China and India. • In line with recent trends, sustained growth in OECD economies would be underpinned by strong job creation and falling unemployment.” (p. 9) • OECD Chief Economist Jean-Philippe Cotis • in OECD Economic Outlook June 2007 • Why so ignorant? • Static modelling (equilibrium-assuming “dynamics”) • Ignore role of credit & debt

  9. Better dynamic, credit-aware modelling needed… • Minsky’s “Financial Instability Hypothesis” more realistic… Click here to download Vissim viewer program • Click on the icon below to run this simulation after installing the Vissim Viewer

  10. Better dynamic, credit-aware modelling needed… • Which gives more “bang for buck”—rescuing bankers or debtors? • Click on icons below to run this (after installing the Vissim Viewer)

  11. Prognosis & Remedies? • Deleveraging-induced downturn inevitable • Deleveraging outweighs government stimulus • E.g. 1st Rudd stimulus A$42bn (4% GDP) • Aggregate private debt A$2 trillion • 5% deleveraging—A$100 billion cut in demand • Can’t solve debt-induced crisis with more debt • Alternative policies… • Across-the-board debt reduction • Redefine capital assets to reduce Ponzi behaviour • Time-limited Shares (like bonds) • House valuation on imputed rent • Maximum secured mortgage debt say 10 times annual rental • Or we’ll be here again in 2070… ???

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