Dominant sect in economics today: There are none so blind as those who will not see.

Prof Steven Keen hits out at mainsteam economists for choosing to ignore obvious evidence:

This phrase may have religious roots, but there is no better way to describe the dominant sect in economics today than as wilfully blind. A decade after the 2007-08 crisis, most still repeat the mantra that it could not have been predicted.

Nonsense. The data that showed what would cause the crisis, and arguments by non-mainstream economists that one would occur, were available before it hit. There was a runaway bubble in asset markets caused by too much credit being created by banks.

Credit – your capacity to buy something with money borrowed from a bank, rather than from your own cash – is exactly equal to the increase in private debt every year. The bigger this is compared to a country’s GDP (economic output), the more the economy is dependent on credit; and the bigger the accumulated debt is when compared to GDP, the more likely it is that a reduction in credit will cause an economic crisis.

He points how the 2008 crisis was so in your face but the authorities chose to ignore it. What about things going ahead?

Using the same analysis today, I don’t expect a crisis in the US and UK in the near future. I do expect stagnation like that which Japan has experienced since its asset bubble economy burst back in 1990.

There will be revivals and reversals, but not an outright crisis because a prerequisite for that is very high levels of credit. While the overhang of private debt from the last crisis persists, credit-based demand will be anaemic compared to pre-crisis levels.

Instead, crises are likely in countries which side-stepped trouble in 2007 by continuing their private debt bubbles. The pre-eminent candidate here is China, whose credit bubble is easily the fastest growing in the history of capitalism. It will have the company of South Korea, Canada, Australia, Belgium, and a number of others.

So there won’t be another collapse like Northern Rock in the UK or Washington Mutual in the US. But mainstream economists need to quit sticking their heads in the sand over the relationship between private debt bubbles.

The future offers some hope that this is beginning to change. Some prominent mainstreams economists are now doing some serious navel-gazing at their models (people such as ex-president of the Minneapolis Federal Reserve Narayana Kocherlakota, and chief economist at the World Bank Paul Romer). But more likely change will come from central banks, and the new generation of economists such as the students who established the Rethinking Economics movement to address the real issues the world faces.


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