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Steve Keen's model (http://www.debtdeflation.com/blogs/manifesto/ http://www.debtdeflation.com/blogs/manifesto/) seems to provide a convincing explanation to me

Steve Keen's model (http://www.debtdeflation.com/blogs/manifesto/ http://www.debtdeflation.com/blogs/manifesto/) seems to provide a convincing explanation to me. Basically that debt growth (and acceleration) are key to understanding the business cycle and crashes. He has an open source Kickstarter dynamic modelling tool called Minsky (http://www.debtdeflation.com/blogs/minsky/ http://www.debtdeflation.com/blogs/minsky/). Alarmingly the models used by mainstream economists don't seem to cover crashes (not as in can't predict their timing but really can't model them at all generally).

dnautics 13y ago
I'm highly sympathetic to austrian explanations of economics, and somewhat to chartalist explanations* (but I don't generally agree with chartalist prescriptions) but I'm unconvinced that debt causes crashes. I personally believe that debt systems aggregate small, localized crashes which happen all the time into large, systemic crashes. A good resource is Mandelbrot's (mis)behavior of markets. It explains a lot of things like how the Pareto principle appears. Reading between the lines, it is easy to see how levy-alpha-stable distributed events can aggregate into bigger levy-alpha-stable distributed events, since this distribution obeys the undefined-variance equivalent of the central limit theorem. *The "QE for the public" is a horrible public policy choice and to me is exactly a good example of where chartalist prescriptions go off the rails. The Jubilee is a better idea, but to prevent a total collapse of the banking system, you could structure it differently, like making all debts voluntary. Basically our society has been trending towards this (with currently the exception of educational debts) and so what we are seeing is that people with good credit that don't spend their line of credit boozing through their twenties being highly valued. But because lending from individuals is becoming tapped out as their credit is wasted, a lot of debts have become shifted to the public, in the form of municipal, state, and federal debt - sometimes through public spending and sometimes by explicitly converting private debt into public debt.
- josephlord 13y ago
  I might look into the Mandelbrot book. From my perspective if you accept that GDP is the economy's production plus the change in aggregate debt it seems a small step to see how debt growth builds during the boom and stops suddenly reducing spending to form the crash. Debt in itself is not bad but in the absence of stabilisation it is likely to cause problems. I quite like his Modern Jubilee idea a.k.a. QE for the public (although it is an alternative to TARP and the QE that took place in the midst of the 08/09 crisis not for now) I'm not sure how a traditional Jubilee would work and how it would stabilise the banks at all. The Jubilee Shares are the Keen policy I don't quite buy.
  - dnautics 13y ago
    Basically it seems to me the distinction between the more contemporary, non-crazy, parts of the austrian school (i.e. not the goldbugs) and the chartalist position is how to deal with it. Austrians would suggest that debt is not fundamentally bad, but dangerous, and the market should price in the risk of debt (which it does not, because of things like bailouts and backed reserve lending), and that any attempt to stabilize the swings caused by lending activities will backfire and create moral hazard (the specific economic term). A modern jubilee might take a form like, legally not permitting any debt to last beyond X years. There is a particular moral hazard associated with sovereign and government debt - Unlike debt accrued by you or I, which is discharged upon our deaths, leaving the lender holding the bag (a risk that should be priced in the loan term), sovereign debt is unlimited. If you believe in the principle of "no taxation without representation" which really boils down to the idea that legitimate government should not act (i.e. spend) without the consent of governed - then is it really morally permissible for future generations to be legally bonded to the profligacy of previous generations? Where are the checks and balances? Can our grandchildren go back in time and vote against spending policies that they are responsible for paying back? So generational debt, which is generally considered to be immoral along the lines of slavery, especially among progressives who see it as a means of keeping the poor poor, is suddenly okay when the state does it. Perhaps unsurprisingly, the state itself is also reverting to this feudal practice. http://www.washingtonpost.com/politics/social-security-treasury-target-hundreds-of-thousands-of-taxpayers-for-parents-old-debts/2014/04/10/74ac8eae-bf4d-11e3-bcec-b71ee10e9bc3_story.html http://www.washingtonpost.com/politics/social-security-treas...
- AnimalMuppet 13y ago
  I don't think that debt, by itself, causes crashes. I think it's a bit more complicated than that. Here's a market that's going up. People invest in it. Then it goes down. People lose money. The economy does not collapse, and life goes on. Here's another market. It's going up. People look at it and think that it's going to keep going up, and therefore that it's safe to borrow money to invest in that market. The market goes down. People lose borrowed money. This is much more threatening to the health of the economy as a whole, because it can bring down the banks. So it's not just debt. It's debt used to buy investments in a market that's in a bubble, that when it goes back down wipes out both the borrower and the lender.

dnautics 13y ago

I'm highly sympathetic to austrian explanations of economics, and somewhat to chartalist explanations* (but I don't generally agree with chartalist prescriptions) but I'm unconvinced that debt causes crashes. I personally believe that debt systems aggregate small, localized crashes which happen all the time into large, systemic crashes. A good resource is Mandelbrot's (mis)behavior of markets. It explains a lot of things like how the Pareto principle appears. Reading between the lines, it is easy to see how levy-alpha-stable distributed events can aggregate into bigger levy-alpha-stable distributed events, since this distribution obeys the undefined-variance equivalent of the central limit theorem. *The "QE for the public" is a horrible public policy choice and to me is exactly a good example of where chartalist prescriptions go off the rails. The Jubilee is a better idea, but to prevent a total collapse of the banking system, you could structure it differently, like making all debts voluntary. Basically our society has been trending towards this (with currently the exception of educational debts) and so what we are seeing is that people with good credit that don't spend their line of credit boozing through their twenties being highly valued. But because lending from individuals is becoming tapped out as their credit is wasted, a lot of debts have become shifted to the public, in the form of municipal, state, and federal debt - sometimes through public spending and sometimes by explicitly converting private debt into public debt.

josephlord 13y ago
I might look into the Mandelbrot book. From my perspective if you accept that GDP is the economy's production plus the change in aggregate debt it seems a small step to see how debt growth builds during the boom and stops suddenly reducing spending to form the crash. Debt in itself is not bad but in the absence of stabilisation it is likely to cause problems. I quite like his Modern Jubilee idea a.k.a. QE for the public (although it is an alternative to TARP and the QE that took place in the midst of the 08/09 crisis not for now) I'm not sure how a traditional Jubilee would work and how it would stabilise the banks at all. The Jubilee Shares are the Keen policy I don't quite buy.
- dnautics 13y ago
  Basically it seems to me the distinction between the more contemporary, non-crazy, parts of the austrian school (i.e. not the goldbugs) and the chartalist position is how to deal with it. Austrians would suggest that debt is not fundamentally bad, but dangerous, and the market should price in the risk of debt (which it does not, because of things like bailouts and backed reserve lending), and that any attempt to stabilize the swings caused by lending activities will backfire and create moral hazard (the specific economic term). A modern jubilee might take a form like, legally not permitting any debt to last beyond X years. There is a particular moral hazard associated with sovereign and government debt - Unlike debt accrued by you or I, which is discharged upon our deaths, leaving the lender holding the bag (a risk that should be priced in the loan term), sovereign debt is unlimited. If you believe in the principle of "no taxation without representation" which really boils down to the idea that legitimate government should not act (i.e. spend) without the consent of governed - then is it really morally permissible for future generations to be legally bonded to the profligacy of previous generations? Where are the checks and balances? Can our grandchildren go back in time and vote against spending policies that they are responsible for paying back? So generational debt, which is generally considered to be immoral along the lines of slavery, especially among progressives who see it as a means of keeping the poor poor, is suddenly okay when the state does it. Perhaps unsurprisingly, the state itself is also reverting to this feudal practice. http://www.washingtonpost.com/politics/social-security-treasury-target-hundreds-of-thousands-of-taxpayers-for-parents-old-debts/2014/04/10/74ac8eae-bf4d-11e3-bcec-b71ee10e9bc3_story.html http://www.washingtonpost.com/politics/social-security-treas...
AnimalMuppet 13y ago
I don't think that debt, by itself, causes crashes. I think it's a bit more complicated than that. Here's a market that's going up. People invest in it. Then it goes down. People lose money. The economy does not collapse, and life goes on. Here's another market. It's going up. People look at it and think that it's going to keep going up, and therefore that it's safe to borrow money to invest in that market. The market goes down. People lose borrowed money. This is much more threatening to the health of the economy as a whole, because it can bring down the banks. So it's not just debt. It's debt used to buy investments in a market that's in a bubble, that when it goes back down wipes out both the borrower and the lender.