It's the deflation, stupid! (A Sunday Matinee)

Last Sunday's Boston Globe included a feature article about heretofore unknown, and underappreciated economist Hyman Minsky.

Since the global financial system started unraveling in dramatic fashion two years ago, distinguished economists have suffered a crisis of their own. Ivy League professors who had trumpeted the dawn of a new era of stability have scrambled to explain how, exactly, the worst financial crisis since the Great Depression had ambushed their entire profession.

Amid the hand-wringing and the self-flagellation, a few more cerebral commentators started to speak about the arrival of a “Minsky moment,” and a growing number of insiders began to warn of a coming “Minsky meltdown.”

“Minsky” was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. Many economists had never heard of him when the crisis struck, and he remains a shadowy figure in the profession. But lately he has begun emerging as perhaps the most prescient big-picture thinker about what, exactly, we are going through. A contrarian amid the conformity of postwar America, an expert in the then-unfashionable subfields of finance and crisis, Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the kind of meltdown that recently hammered the global economy.

It's a wonderful historical piece that rightly depicts Minsky as an adherent to Keynsian principles while rejecting his New Keynesian contemporary colleagues. Instead, Minsky expanded on Keynes' ideas, resulting in his "Financial Instability Hypothesis" which implies that Capitalism, by its very nature, is unstable and prone to collapse.

Now, whenever I read or hear anything about Hyman Minsky, I immediately think of Steve Keen, the Aussie economist and author, who has been conducting research since 1995 to advance Minsky's hypothesis. He was also one of the "early warners", who proclaimed the coming Global Financial Collapse in December 2005.

Steve was on Max Keiser's show "On the Edge" this past Friday and had some interesting things to say about the crisis and where we stand today. His segment begins early in part 2 and runs through the end of the broadcast. Those of you unfamiliar with "Mad Max", may want to watch the entire show. It is worth catching weekly.

Anyway, Steve has a solution to the crisis, and it's one that Michael Hudson has been harping on for quite awhile. Personally, I think it is the ONLY solution. Unfortunately, I'm pretty sure it won't be implemented any time soon, or at least soon enough to matter to tens of millions of Americans who are and will be suffering. Enjoy the broadcast!!

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Steve Keen interview starts on second video clip

What is the date of this? Also, the actual interview starts on the 2nd clip.

For the plan to really nationalize the banks, bankrupt them, write off the debt and "Restart" is basically what Sweden did and something we wrote up here as well as COP seriously hinted well as many others.

Of course all of that was ignored and here we are...

with lots of claims the banks will "make money" and the government "will get profits" on the money given to the TARP banks.

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It was this past Friday, 9/18/09

I find it kind of compelling that it's the heterodox economists like Minsky, Keen and Hudson that have the best analysis of the problem, IMO. Everyone else is either winging it or trying to fit a square peg in a round hole, so to speak.

I highly recommend looking at some of Steve's research at the link I gave. It is way too wonkish for me, but it looks and sounds very elegant. Plus, he's managed to condense his thesis into words that doesn't require an advanced degree to understand and therefore, I catch his drift.

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My impression on the bail out results is they are playing shell game and kick the can down the road.

But because there is so much non-transparency, from the relaxing mark-to-market to strange "treasury guarantees" never ending changing story on the PPIP to the Fed's $2 trillion we don't know who got it or what...

it's hard to say what's really going on.

I just saw NC has a post on BoA losing $40B in junk bonds by 2013.

In terms of debt being wrongly classified, I'll try to check him out, on surface that sure seems to be the case, but on overall deflation, well, I can feel those speculators hovering over oil esp. just waiting to inflate commodities.

but is the dollar being devalued? I suspect so.

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Naked Capitalism guest post on Steve Keen interview

I just spied this, he goes into a lot of the economic theory details....

Keen out thinks Larry Summers.

Nice amplification to your post!

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Nice catch, RO!

You could almost feel a "sigh" in Keen's words at the end of his speech. Ya know, the neoclassical BS fails AGAIN! Man, we need an anti-Reagan who will start saying whatever the antithesis of neoclassical doctrine is and start re-programming everyone's mind. Sometimes I think it has leeched into our DNA.

The bottom line though,

This is unfortunately the good news: the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.

So, as staggering as everything is that has transpired to date (and many of us are clutching our hearts mightily), Helicopter Ben and Tiny Tim have only begun to spit in the ocean.

BTW, I ran across this analysis of the The Dollar Carry Trade which has a lot to do with the dollar slide. Be sure to read it to the end.

What a crazy world we live in.

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one thing that is useful in blogs, this comment to everyone

is to do a blockquote of key summary points, kind of do a "readers digest" of critical points in articles.

For example, I think EP needs a good overview/tutorial post on international exchange rates and what influences changes...

Carry trade is something and on your link for example, you can pull out a summary quote or put together your own summary to spell out the main point.

People who read blogs often want us to basically edit the information for them, so they can "cut to the chase" in a 2 minute read, i.e. we are the "information condensors" sometimes (as well as the information expanders).

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Great blog - and Keen is the Man - debt financing to the max!

Keen has it right, of course, although his approach is from the general macroeconomics level.

Now I would point out that the Obama Administration, continuing the Bush Administration policy, is simply resecuritizing the resecuritization of the securitization!

If one peruses this GAO chart, p. 53 (listed as doc p. 47) and reflects on how these LBOs were structured with the banks, and how the banks in turn structured, and leveraged upon, those LBO-oriented loans, and how those private equity firms leveraged those funds, and what pension funds, endowments, corporations, foundations, and insurance companies invested in all their various buyout funds, and how many of their "pump-and-dump" schemes have ended up with the target companies going under, or about to go under (Sirius, pretty soon now), then one begins to understand the significance of the Total deal value at the bottom of the chart to the TARP bailout fund amount.

Or, to summarize, debt financing built upon debt financing built upon debt financing (add about 17 more levels) and then we have all these debt-financed billionaires today in America, and elsewhere.

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nice comment James, but a suggestion

earlier I pulled out that chart from the 200+ page GAO report. May I suggest learning how to make images of charts via foxit pdf. You can capture an image, save it to your hard drive and upload it here in a comment by hitting the "rich text editor" link.

that way people can just see the chart instead of digging through a 200 page document.

Yes, I know the GAO reports are excellent, but the problem is they are long, long, long, so it helps to capture some of the critical data and repost it for reference.

But I agree with all of this, the insanity of wanting to increase debt and all the while wages are just viewed as "inflation" and "labor costs" increase of the consumer economy and the middle class, plus overall economic growth.

and us little ole Populists down here are saying the thing anyone with a 2nd grade education knows....hey, no job, can't pay off all of that debt.

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