Who is right? Krugman or Keen or / and 9 Central Bank economists?

from Edward Fullbrook

The monetary theory debate starring Krugman and Keen currently raging on the Web desperately needs real-world grounding in the context of the guest post by Jesse Frederik that appeared on this blog on 26 January.  The debate is centered on how banks work.

Keen holds that:

neoclassical economists . . . get it wrong: by ignoring banks, and treating loans as transfers from “savers” to “spenders” with no bank in between.

This is precisely how Krugman models debt in his recent paper: 

Krugman versus Keen

from Edward Fullbrook

A few days ago Steve Keen’s paper “Instability in Financial Markets: Sources and Remedies” was posted on the Web, and, deservedly, it is attracting a great deal of attention.  Yesterday Paul Krugman entered the fray, with his New York Times column devoted to Keen’s latest. Followers of this blog are encouraged to enter the debate here.  Does the role of banks need to be included in the basic story that economists tell about how modern economies work?  Krugman says no.  Keen says yes.

Below is Keen’s long synopsis of his paper.

The Debtwatch Manifesto

from Steve Keen

Preamble

Click here for this post in PDF

The fundamental cause of the economic and financial crisis that began in late 2007 was lending by the finance sector that primarily financed speculation rather than investment. The private debt bubble this caused is unprecedented, probably in human history and certainly in the last century (see Figure 1). Its unwinding now is the primary cause of the sustained slump in economic growth. The recent growth in sovereign debt is a symptom of this underlying crisis, not the cause, and the current political obsession with reducing sovereign debt will exacerbate the root problem of private sector deleveraging.

Historic Grumpiness

from Peter Radford

I am not sure how to react to the drift of events. It seems as if our leaders, both here and in Europe, are determined to re-create the Great Depression. I guess it must have been fun the first time through. Why else would they be so steadfast in their lunacy?

We live in absurd times. We are lead by fools. Our commentariat is stupid, ignorant, badly educated, or simply to darned lazy to pick up a history book. It surely isn’t difficult. Even I can do it. 

Keen, New Economic Thinking and “The Deluded Discipline of Economics”

The Institute for New Economic Thinking has announced that it has given Steve Keen, winner of the Revere Award, a grant of $125,000 to turn his money-based model of the macro-economy – which draws on the theories of  Hyman Minsky and John Maynard Keynes – into a computer program for students and economists.