Keen, who foresaw the crash, in Bangkok

Keen’s early works, such as “Use-value, Exchange-value, and the Demise of Marx’s Labour Theory of Value” published in the Journal of the History of Economic Theory and “Finance and Economic Breakdown: Modelling Minsky’s Financial Instability Hypothesis” in the Journal of Post Keynesian Economics, were rather quiet. It was only in 2001, that he emerged with his groundbreaking book “Debunking Economics: The Naked Emperor of the Social Sciences”.

I discovered this book some two or three years before the global economy started to fall apart in 2007, and it informed many of the more prescient views that were attributed to me at that time.

Keen recently said: “Humanity naturally trusts the ordained experts in its midst, because the complexity of our technology and society require it. The great problem with economics is that academic economists weren’t experts on the economy at all. They more closely resembled priests in a religious sect. Hyman Minsky stood out as a rebel realist inside the church, and it’s been my honour to develop his ideas further, while I take great delight in pointing out to a now sceptical public the mad ideas at the heart of conventional economics.” 

For the last 35 years, the global economy has moved from the speculative through to the Ponzi stage, leading to the bubble burst of 2007-8; the repercussions of which also affected speculative and even hedge borrowers, as business volumes fell and credit availability dried up.

The inevitability of the cycle is grounded in human behaviour, with success creating speculative euphoria and crowding out, leading to a distorted relationship between business activity and credit. The ultimate collapse of the financial system following its gradual deterioration is captured in the concept of the “Minsky moment”.

Keen began issuing stark, if premature, warnings of the damage that debt could do to a country’s economy, capital markets, currency and above all property markets, while internationally he made major headlines locking horns in a debate instigated by Paul Krugman.

 

Minsky points to a ‘third way’

The media had generally characterised policy response options to the global financial crisis as a choice between austerity and stimulus. Both responses had been tried previously and in both cases the kindest description would be “with very limited success”. Proponents of each tended to point out the weaknesses of the other approach and ignored their own shortcomings. Keen’s approach, and my own views, are that Minsky points to a more logical third way, one that addresses the failings of the mainstream arguments. The weakness of austerity is that the adjustment process cuts output and asset values more quickly than it reduces debt. Hence, any debt reduction is achieved over such a long period that it destroys asset values, inhibits potential output and heightens the risk of social unrest, threatening the ability to execute the austerity project to completion.

Conversely the weakness with stimulus is that it simply creates a supply of credit, not money. The pushing-on-a-string effect of central-bank stimulus is why capital markets have rallied since 2008 as they have absorbed the extra liquidity, but the real economy has performed much weaker than policy makers expected. 

In fact, the drag created by such policies is getting close to the point of turning the “main street” effect of such stimulus from marginal to non-existent to negative. This negative impact of stimulus will be the eventual cause of its withdrawal, whether sudden or tapered, and the ensuing contraction in central-bank balance sheets will see an ensuing correction in equity markets, which have been very highly correlated to quantitative easing policies.

Both of these polices are so clearly broken, that a third way that addresses these is now the most urgent issue facing policymakers and investors.

Keen’s interpretations of Minsky’s theories provided such an accurate playbook for the economic crisis and its aftermath that he was given the 2010 Revere Award for Economics. The award citation noted that if the world had listened to Keen, then the “global financial collapse could have been avoided”. 

Tomorrow, Keen will be among the three best-selling authors to speak at the event, entitled “What the Future Holds?”, hosted by MBMG and co-sponsored by The Nation. 

 

** Paul Gambles, managing partner of MBMG International, is a regular speaker at events, and is regularly features on CNBC’s “Squawk Box” and Money Channel’s “News at Ten” programme. Gambles’ regular MBMG updates can be found at http://mbmg-group.com/blog/ and he can be contacted at [email protected].