Sunday, 27 June 2021

The latest from Steven Keen on debt jubilees.



Steve Keen's latest iteration of his debt jubilee idea is in this article entitled “What is the role of public debt and private debt in the next great financial crisis?”.

SK has long advocated the debt jubilee idea. His basic idea is to have government create vast new amounts of money some of which is given to indebted individuals on  condition they use the money to pay down debts. And as to those not in debt, they have to use the money to purchase shares in corporations which in turn use the money to pay down corporate debt. But as he rightly says, there is not the remotest chance of the idea being implemented.

But more to the point is the question as to whether it actually makes sense. It would certainly make sense if the gyrations in demand that stem from the build up of debt and its subsequent collapse come a recession (which SK rightly highlights) were so enormous that it was impossible for governments and central banks to counter those gyrations with stimulus. However, he fails to demonstrate that: in fact he does not even try.

I’d suggest, in opposition to his jubilee idea that the reason for failure of governments to implement enough stimulus in the aftermath of the 2007 bank crisis had much to do with the ignoramuses at the top of the economics profession (e.g. Kenneth Rogoff, Carmen Reinhart, the IMF and OECD) who were in a panic about the size of government debts.

The reality (as MMTers have been pointing out till they are blue in the face), is that the size of the deficit and debt do not matter unless they cause excess demand or interest rate increases. Thus it is far from clear that a clued up government and central bank cannot deal with the above gyrations in demand.

SK also says “Basically, we need to be smarter than the banks, because by letting them become the “Masters of the Universe” in the last 40 years, they have made fools of us.” In fact the latter sentence is quoted in bold font at the top of the article, so presumably SK thinks the point is of particular significance. Unfortunately though, he does not explain its significance. Well my explanation is thus.

The best way of making the bank system “smarter” is to implement full reserve banking, a system SK is not averse to, far as I remember. And the particular relevance of that here is as follows.

First, debt does not build up to the same extent under full reserve as under the present system (as Positive Money has been pointing out for years).

Second, if a selection of lenders (banks or other institutions) make a series of silly loans, the resulting collapse in demand is not as dramatic under full reserve as under the present system, as intimated by former governor of the Bank of England in his “Bagehot to Basle” speech, passage starting “And we saw in 1987…”.


MMT plus full reserve is a better solution than debt jubilees.

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