How Prof. Steve Keen Predicted the 2008 Crash and What (he says) Economists Still Get Wrong

In a world where most economists failed to foresee the 2008 financial meltdown, Professor Steve Keen stands out as a rare voice who not only predicted the crisis but also understood the underlying causes. In this episode, Keen reveals how mainstream economics, with its outdated models, continues to ignore the real-world chaos and complexity of markets. His insights challenge conventional wisdom, showing why financial crashes are not anomalies but systemic outcomes of a fundamentally unstable system. Discover why the idea of markets naturally reaching equilibrium is a myth, and how physics — not economics — offers the tools to understand economic instability. Keen shares how nonlinear, non-equilibrium models used in weather forecasting and physics actually predict crises before they happen. He explains how debt, particularly private borrowing, acts as a catalyst for financial instability, contradicting mainstream views that see money as a neutral medium. We break down:

• The flaws in the “equilibrium” assumption that underpins neoclassical economics
• How the actual dynamics of credit and debt create cycles of boom and bust
• Why the famous “money multiplier” is a fallacy and banks are money creators, not just intermediaries
• The parallels between markets and complex physical systems like weather and fluid dynamics
• What regulators get wrong when they rely solely on interest rates to control inflation and instability

You’ll leave with a new perspective on how economies really work — an understanding you need to see through the myths and prepare for the crises ahead. Perfect for financial professionals, students of economics, or anyone tired of the outdated models that failed to predict the 2008 crash. This episode challenges everything you’ve been told — and offers a roadmap to understanding the true drivers of economic chaos. Are you ready to see the economy as it really is, not as the textbooks say? Tune in and unlock the science behind systemic instability.

Transcript

SPEAKER_00 0:00

Ben Bernanke, I mean, three weeks before the crisis began, Ben Bernanke made his report to Congress and said what a great year two thousand and eight was going to be. He predicted two and a half percent economic growth was actually minus two and a half percent the year after, okay? He doesn't lose his job, okay? Make can make the biggest mistake in the history of prediction and not suffer as a consequence of it, and gets the bloody Nobel Prize for work that still pretends that the banks are intermediaries. And and the volatility of private debt, that's what caused the 2007-8 crisis, the global financial crisis. That's what caused the Great Depression. And these idiots, and I'm afraid I'm getting the older I get, the less patience I have with people who can't take the blinkers off their eyes for neoclassical theory. Uh, but these are educated idiots who just don't even look at the data because it's not in their mindset to believe that credit can have any impact on the economy. So the what I was looking at that the mainstream ignored is the level of private debt and its rate of training.

SPEAKER_02 1:13

Go to the window, open it, stick your head out of the dead. What? Beat you might to a young child or a golden tree. It wasn't brains that got me here, I can show you that.

SPEAKER_01 1:35

Okay, so happy Friday. It's the 10th of April, and still an awful lot of volatility in financial markets, a lot of volatility going on in Ireland at the moment. Still no sign of uh an end to this blockade, maybe talk about that in a minute. In relation to this week's interview, uh big treat coming up, Professor Steve Keane. Uh, Steve is a reserved kind of guy, doesn't like to give his opinion. Uh, you know, quite shy, quite quite. Uh, anybody that knows uh Steve Keene knows it's the exact opposite. So uh bit controversial, but calls it straight from his perspective. Uh, not afraid to ruffle feathers. Don't shoot the messenger, by the way. Um, before we go into the interview, I thought it might be good to just take a five-minute tour of markets and see what's going on. Some of the interesting things that I'm looking at this week. A couple of charts. Just to put the pressure that Trump is going to come under. Uh, looking at this, this is the US petrol price or gas as they like to call it, a gasoline. This is the average gasoline price month over month. So the percentage change, and what we get here is this big spike up, uh, and it has been the biggest monthly increase since 1967, even surpassing the oil embargo 1973, following the Yam Kippur War, 1979, Iranian Revolution. So, this really puts it into context about Americans, and they might have patience for the moment, just like the government might have patience uh with those blocking critical infrastructure in Ireland at the moment, but it will run out. Uh, and it's only a matter of time. The chart that matters for me this week is looking at this really puts into perspective how this could be the most severe oil shock that the global economy has ever experienced. Like, and it's and this is what this is the estimated supply loss of oil as a share of global demand. There's estimates that there's 13%, 12 to 13 percent of total global demand, oil demand locked up, locked up on in in the Gulf, and that is having a serious impact. And you can see this is the closure of the strait, scrolling down here, and as I said, around 12%. Even going back to the boycott of uh Russia now, looking at the Iraq invasion, various 1973. This is a serious, serious event. And let's be let's be honest about it. As we sit here or stand here on the 10th of April, there's been no real change. Uh, four four vessels went through the Tormo Strait on Wednesday, and none of them were tankers. Uh, before the war, 150, 140, 150 was the average passage. So an awful lot of distance to go, and the markets again probably overreacted on Wednesday. Um yes, it's positive. Big talks over the weekend in Pakistan, I know Vance is heading over there. He seems to be much more conciliatory. Olive branches to Iran. He certainly is thinking about his own legacy. My market voice this week is Gillian Tet in the Financial Times. Gillian Tet is excellent, uh really uh credible voice. And what she has a particular quote here in relation to the lessons that we can learn that investors can learn on pricing disasters. And she says, then there is a final lesson. Investors need to get better at imagining and pricing once unimaginable disasters. It's hard. No business school teaches students how to model something like a presidential threat to wipe out a civilization. And the success of the recent taco trade, Trump albus chickens out, will undoubtedly make even more uh make even more reluctant to do this. So essentially, this is back to Taleb. Uh Nassim Talebs we have way too more too much overconfidence in how much we can forecast and how predictable markets are. Markets are incredibly unpredictable, irrational, uh random. Uh anybody that's interested in that subject, please pick up um Nassim Taleb's book Fooled by Randomness. Absolutely brilliant. Key insight this week is something I read in Wall Street Journal, I think, during the week, is investors are beginning to realize that the reason AI will be transformative is paradoxically the same reason it will wreck tech profit margins. Now, both of those can't be true at the same time, and I think there's a realization that AI might actually be too good and it can't replace everybody. So the utopia of AI means what are we all gonna do, hang around, and there's gonna be this basic income. I don't buy that, I think that's nonsense. Um what am I saying here? US Israeli aggression in Iran. People are talking about uh conflict in Iran, war in Iran. It's it's a US started this war uh on the back, uh supported by Israel, Israel. Uh, we see what happened in Lebanon on Wednesday, you know, indiscriminate bombing. Let's be honest, war crimes, and that's what it is. It's war crimes by Israel. Um, and before anybody you know calls me bias, I am biased. I think it's it's disgusting what's going on there. Uh blanket bombing, uh indiscriminate bombing of civilians, uh 300 dead so far, uh thousands injured, absolute disgrace. In terms of the short term in markets, what's important in the short term? We see little uh agreement over the question of nuclear enrichment. Okay, so there's a long way to go on certain issues, but the question of nuclear uh enrichment and again back to Israel Israeli Operation Lebanon, there's a long way to go there. I know, I think, that uh the Trump White House is putting a lot of pressure on Netanyahu now, um given what happened in Lebanon. Uh Trump again, mixed messages came out. He's not averse to tanker tolls, uh, presumably because he thinks he can get a piece of it. But then I see a tweet just a half an hour ago from uh saying that he doesn't expect Iran to toll on the strait. There's reports Iran is restricting a passage through the strait to 15 vessels. As I said, four went through on Wednesday, none of those were tankers, uh, and again it looks like from estimates that 12% of globalized supply remains trapped. This is the short-term uh implications. What about the long-term implications? And that as investors, if you're a long-term investor, which most of us are, that's what we need to think about. And what we need to think about is that the oil price per barrel has likely is does likely now have a higher floor. What I mean by that is pre-war uh it was maybe sixty-sixty-five dollars a barrel, is it eighty dollars a barrel now just because of that structural risk premium associated with what's going on, all the destruction of the energy infrastructure, uh the risk premium associated with Iran potentially uh blocking the strait in the future, and for every action, there's a reaction. What I mean by that is that if oil is becoming more risky, then is the renewable trade back on? And there are we have uh our own clients in lots of these plays, and uh we are looking at these, we've been very early in some of these uh alternative uh energy producer type options, and but you need to start looking at that. This is not advice, by the way, this is only information, and I need to say that if you do not do anything with your money until you speak with your own financial advisor or a qualified financial advisor, the only question that truly matters now is are we already out of time? What I mean by that sounds very dramatic, but are we already out of time with regard to a global recession? Because even if this thing gets sorted out, is a recession baked in in relation to the you know the lag associated with all the energy infrastructural damage, supply chains, um, oil prices are not just gonna fit go back to normal, as they say. So, input costs, we're seeing that, we're seeing it with transport, Amazon, UPS, we're seeing it with airlines passing on. I think I heard Luftanza, IAG, uh British Airways increasing uh luggage costs. These are just pass-on prices. Uh, there's lots of other industries, fertilizer, plastics, packaging, everything is good is going up. Food, food price cost of food is going up, uh, and that is just going to keep happening. What happens then if if input prices go up, real household incomes decline. So one person's spending is another person's income, and that's how an economy slows down. The reaction function from central banks is important. So, what do central banks do in an inflationary environment? They may not raise rates, but they certainly won't cut rates. So it's not all about whether they raise rates, uh, but do they cut rates? Do they provide some stimulus? IMF estimates that uh for every for memory, every 10% increase uh in a barrel of oil results in a 0.1 to 0.2% reduction in global growth. So it definitely has implications. And then the second round effects really speaks to uh okay, we get a uh resolution, but where do we go from there then and how long will it play? Finally, just in terms of some portfolio insights, um the probability focusing on interest rates, the probability of a rate hike is skewed to the downside, and it just makes sense there because if you think about it, if you do a scenario analysis, if you look at forecast number one, we get a ceasefire and that persists. That plays into a lower inflation outlook, uh, although admittedly not immediate, which means rates uh don't go up. The second scenario is a ceasefire breaks and the war continues, then we get a global slowdown. There's just no cure for high prices, high prices, get a global slowdown. So we know that there's the word of the week I have is that rationing, fuel rationing. I pulled up to my local uh petrol station there uh in Trim and no diesel, no diesel and uh sign on the petrol pump, maximum 50 euro uh per per per customer. Now I remember seeing signs like that in Ireland 1970s. It's really incredible to be living through this. Um my own personal view, and I'm entitled to my personal view, is that what we're witnessing at the moment is really a form of self-sabotage. I don't know of any other country where we're in a the worst global uh crisis in terms of oil. I don't think people realise how serious this is, yeah, and we're blocking fuel coming into the country. I mean, if that isn't uh economic suicide, I absolutely have no idea what's going on. But I do have sympathy, we all have sympathy. Um something has to they need to get around the table, they need to do something, but the government cannot be held hostage either. Um so there has to be a process, but I just think this needs to get sorted quick because the reputation damage for Ireland as well is enormous. Um am I being too negative with all this? I don't think so. Uh some people are pointing to strong uh US earnings problem, only one problem with that. If you dig down and look at US earnings, I think 50% of that earnings growth was two companies. Uh you can guess who. Yes, starts with an N, uh ends with an A, Nvidia, and uh Micron. So very, very concentrated uh earnings profile. So we need to be very conscious of that. That's all I have for you. Up next is Steve Keene's. Now, before we get into Steve Keene, just a word to word of warning to uh some of my economist friends out there. Now I don't necessarily agree with everything Steve Keane says, and there's going to be a series of these interviews. In this first series, I let Steve off a little bit and uh let him uh roll out his own thesis, and he's not shy about that. Now we will uh be challenging him a bit more, so before you all, all my economist friends come in and hit me over the head, uh, it is important that we give alternative voices. It's very important, and I'm sure what we should remember is that there's various types of economists, policy economists, macroeconomists, trade economists, and economists from different schools of thought, different philosophies. Uh, he is particularly critical of this neoclassical type economist. Um as I said, he's not shy about talking about that. But let's go straight into the interview with Professor Steve Keene. This is, as I said, going to be a bit of a series, and I hope you enjoy it. So the good news is that we're very close to launching the website associated with this podcast. My mission with all this is to increase awareness, uh, increase investor knowledge, spread the learning. Uh, there will be a lot of resources. For example, I'll have a hundred-page guide uh from people registered weekly research. As I said, reach out if there's particular topics, areas of interest, or guests that you want me to get on the show. With that said, let's go to Steve Keen. Thank you. Professor Steve Keen joins me now. Uh Steve, you first appeared on my radar a number of years ago. I have a uh little piece of paper here. I call it the Fabulous Five. There's five names on that piece of paper, and and I discussed these individuals with students in the context of the financial crisis in 2008. So you might be familiar with these names. Peter Schiff is number one.

SPEAKER_00 15:52

Yeah, Peter and I have had a couple of conversations. Yeah, okay.

SPEAKER_01 15:54

In uh Rajan Rajaram, uh former famous speech in 2005 in Jackson Hall. I think uh he wasn't uh that didn't go down too well with uh powers that be. And Petophor. And's a close friend. Your good self, uh Professor Steve Keene, and an Irish, uh maybe less well known, an Irish economist, uh Professor Morgan Kelly, who was very uh prescient in in forecasting the collapse of Irish house prices in 2007, and he got a lot of stick for that at the time, as you can imagine, uh going against the grain there. So we like rebels in this country. You might get a small bit of uh background in terms of where did the anti-establishment uh contrain and come from?

SPEAKER_00 16:40

Well, this starts right back when I was first learning economics as an undergraduate student at Sydney University, and in like in literally in first year. And in uh this is in 1971, so we're talking, you know, it's it's well over fifty years now. And uh one of my lecturers uh exposed a flaw in the conventional theory that you don't normally learn at all such time you're so inculcated with the conventional theory that you treat it as an interesting quirk, but you don't really worry about it. And this is what's called the theory of the second best. And this this won won a Nobel Prize for the people who developed it. Uh but what they argued was that if you're if you're if you're two-step from what economists describe as nirvana, say the equilibrium of supply and demand, yada yada yada, that's equal that that's you know that's nirvana for neoclassical economists. If you're two steps away from what gives you that nirvana, then moving one step closer to it will make social welfare worse. And I remember just being, what the hell? Because the conventional theory argues in favor of competition everywhere, and particularly competition in labor markets. So the idea is that the best outcome for both workers and and and firms is that uh the firms are the workers aren't organized and neither are the firms, and you get a competitive market determining the wage rate and the number of people with a job. And the idea is that uh if you have trade unions, they get in the way of that, they they demand a higher wage, and that leads to lower employment, etc., etc. So you're better off abolishing trade unions. And of course, that's been a focus of economic uh pressure for the last half cent half century. But if you also acknowledge that the the firms are organized, so you have uh employer associations bargaining with trade unions, the theory of the second best shows that if you remove one or the other, but not both, you according to conventional economic theory, you reduce social welfare. Now, that means that what the theory says in the first pass, you know, get rid of all in in in impediments to competition. That's the best that's the way to the to have the best possible outcome. Then you take account there's more than one flaw in terms of the difference between the real world and what the economic theory says is the ideal situation. Uh there's more than one flaw, then getting rid of one of them alone is not enough. It makes things worse. And I thought this is stupid because you shouldn't have something which is a realistic extension of your theory, which undermines the proposition your theory teaches you in the first place. It should attenuate in some way, but it shouldn't totally contradict it. So I was just horrified by that. And I went down and uh at the time I was doing uh uh an arts law degree. So I was doing I could do whatever I liked as my other subjects, and I did I did psychology and mathematics as my other subjects. So I was well equipped with the mathematics needed to read what read economics papers. I read that paper, realized it was correct, um, and and thought, why am I not being taught this? Why does it not turn up in the textbooks? So I've been a critic ever since then. And uh that's that's the defining moment for me.

SPEAKER_01 19:46

In terms of looking at the core mistake in your mind that main mainstream economists make, but what is the what are the core issues you find.

SPEAKER_00 19:57

Well the core mistake that they make they make is treating the economy as if it's an equilibrium system. So they believe that markets reach you know markets reach equilibrium between supply and demand. All markets in general tend towards equilibrium. Capitalism is something which gives you equilibrium. And this was something which sprung out of the limitations of the nineteenth century, that we of course we didn't have computers then. You had pen and paper if you were lucky. Uh so if you wanted to to make a analytic argument, you had to do whether you could either do with mathematics or what you could do with drawings. And and and that was quite that was something which for the nineteenth century economists who developed what we now call neoclassical economics were quite conscious of. They realized that their analytics techniques weren't up to the issue. So Marshall, for example, whose his his his uh principles of economics was basically the foundation of all modern textbooks until Samuelson came along, and then you get a a blend of the two. He said if we want to do the analysis properly, we should be modeling it as an evolutionary system. He said the mecca of the economist lies in in in uh uh uh evolutionary biology.

unknown 21:05

Okay.

SPEAKER_00 21:05

So he said evolution is necessary. But we can't do that at the moment, so we use this con this construct of equilibrium. Jevons probably said it in a more articulate way, said if we wanted to cover uh the actual behavior of the economy in all its complexity, and literally use the word complexity, we should treat it as an issue of dynamics, uh process of change. Uh and everything is changing at all times in capitalism. So uh that that that means that that those techniques are beyond us, who said uh it would be foolish of us to not do the static analysis, even though it's imperfect. And then what will happen is we'll do the static analysis, and then our successors will do the dynamic analysis. Now, in fact, all the attempts they made to make the static models work the way they thought they work failed. And ironically, uh this this this is made uh case is made well by my good friend Janus Verafaka. in one of his academic papers, that the failure to show that equilibrium applied in these static models led to the economists exalting equilibrium from a a half-baked analytic technique of the nineteenth century to a serious proposition about the nature of capitalism. So they distorted their theory to hang on to the belief that it reaches equilibrium. And that has led to an enormous load of nonsense, which has also insulated economics from the development's in genuine sciences. So it's a it looks like a mathematically sophisticated discipline to anybody looking at it from the outside, but it's mathematically simplistic because they're leaving out processes of change. And they they they argue they do it in the what they call dynamic stochastic general equilibrium models today. But everything's twisted to be equilibrium when modern sciences have well well and truly transcended that and realize that most realistic dynamic and evolutionary systems exist far from equilibrium. And you need analysis which enables far from equilibrium dynamics to be covered and economic theory is completely incapable of doing that. And if they do it the whole the rest of the edifice collapses. So they they basically remain insulated from the rest of the academic disciplines and in in a little fantasy world where equilibrium applies and that becomes what they think is the real world and they end up being zealots for their vision of the economy rather than analysts as people think they are I think I I remember recently reading something from Professor Richard Warner, um Princes of the Inn author and it was basically the the field of economics hasn't advanced in in over 200 years or or maybe 150 years, something like that. So a guy got the Nobel Prize and it's not a Nobel Prize by the way for those who don't know there was a Nobel's prize did not include economics and he actually specifically said he wouldn't because he didn't regard it as a science. It was an invention of the Swedish Central Bank in 1969 and it was invented as part of a battle they were having against social democratic policies in Sweden at the time and that basically was there to enhance the what they call market oriented thinking basically the neoclassical model over the rival approaches. So anyway so this this one of the guys they gave a Nobel prize to was Paul Roma and Paul Roma wrote a paper called The Trouble with Macroeconomics and he said that from his point of view economics had gone backwards for the previous thirty years. So everything everything between you know 1980 and and and 2016 roughly when he got the prize or 2018 he's saying was a backward step. So it's not just Richard who's saying that sort of thing it's people who've been given Nobel prizes in economics who feel the same way.

SPEAKER_01 24:50

It's interesting I mean I I'm a I have a finance background I'm in financial markets that's my day to day and what I what I studied but I can see the parallels as well I mean we go back to 1952 Harry Markowitz this notion of modern portfolio theory and the assumptions built into that you know irrational agents homogeneous expectations we all want the same frictionless markets linearity normality and in fairness to Markowitz I mean he it was groundbreaking at the time 1952 and it allowed us to have a bit more sophistication in terms of how we we model markets. But it's amazing they're still teaching this stuff in the on the CFA program though. And modern portfolio theory remains the foundation stone of asset allocation today.

SPEAKER_00 25:40

So that's that's where I see the parallels between what you're talking about in the assumptions around normality etc finance is just a branch of neoclassical economics and the like the the whole efficient markets hypothesis that's another example of the nonsense that neoclassical economists will continue promulgating even when they've they themselves have said it doesn't work. So there's probably I don't know that you would know about this paper, but you'd know the names FAMA in French? Yep. Okay. They published a paper called the capital asset pricing model theory and evidence in 2004 and they literally said that this should not be used for practical purposes. Now do they continue promoting it because they can't work anything else to do. You'd also know of Sharpe who came up with the idea of the the capital asset price pricing model itself wrote that he made the assumptions to actually go from a model of a single individual to the model of the entire market. He said he's seeing what he called homogeneity of exp investor expectations. Investors are seemed to agree on all the various details the mean returns, standard deviations, etc. for every share in the market and he justified that by an appeal to Freeman's nonsense ideas of methodology. But in the paper in 2004, FAMR in French first of all said it fails. It doesn't empirically fit the data by any stretch of imagination. In fact the angle like it'll talk about the angle the uh the slope of a trade off between risk and return. Well the slope happens to be the opposite of what they say when you do the empirical measurements.

SPEAKER_01 27:14

And they they admitted in that paper that not only does Sharp assume that we all share the same expectations, he also assumes they're correct Yeah if I if I push back a little bit there now, right, and said that if you look at uh so a lot of the factor factor research that's and you're talking about the low volatility premium there where you know the old linearity between high risk high r uh high return like there is evidence, empirical evidence that uh there is such thing as a low volatility premium. So low stocks outperform low volatility stocks outperform higher volatility stocks Yeah well that that's stuff you can find in alternative theorem.

SPEAKER_00 27:54

So you've got for example the uh the the the stuff that Mandelbrot gave us the fractal markets hypothesis okay that's one that covers it you get the work of Hagan okay yeah he bought it he wrote the book Robert Hagan he's uh he has a big uh textbook I think Robert Hagen Yeah well he's the textbook bullshit you might not be aware of this so when you I mean I was reading his stuff before he r retired as an academic and you have got a one of his books up here on my shelves and it's all the efficient markets hypothesis. However, there was always an appendix at the back that went into detailed mathematical and empirical crackdown of that theorem. Now when he when he r retired he started publishing other books one of which is called The Beast on Wall Street another one called The Inefficient Markets Hypothesis Now you don't get any of this turning up in what you get taught and they and these are far more realistic, far more empirically accurate than the the Sharp and the Cap M attitude and so on. But the thing is to to take this on you've got to abandon the whole equilibrium of session and academic economists will never do that. So they'll they'll add a little attenuations to it but they will never admit that it doesn't work isn't the right reference point. And of course one one thing that Hagan argued in his books that the market is not efficient. It's the opposite it's inefficient. And therefore there are possibilities you can find shares with low volatility and high return which according to the inefficient markets hypothesis they shouldn't exist. They're the entire basis of Hagen's uh investment strategy.

SPEAKER_01 29:24

So you mentioned physics earlier and I I think the more I look at financial markets the more I realize it's more in line with physics than anything else. I mean market gets heavy it falls it's linked to gravity but in in relation to we know markets and the economy is nonlinear. We know it's stochastic it's unstable. So if I was to push it back on you then is it impossible to model such an unstable system then?

SPEAKER_00 29:52

Not at all. Mainstream economics is an obstruction to us doing that modeling properly. Because again this is something that's come out of science rather than economics. The idea you've got to model far from equilibrium systems. So this was became obvious to scientists in general back in the early 1960s because we're all used to watching weather maps these days and you know getting forecasts you can sort of trust you know you can read you can watch the forecast on during the week what the weekend's going to be and plan your activities accordingly. You can't couldn't do that back in the 50s because what they were using was linear techniques and they seemed equilibrium fundamentally. And a mathematical mathematical meteorologist called Hans War Edward Durens, he said, look, it's just wrong to have linear models of the weather the interactions are nonlinear. So a high level of temperature causes a high level of moisture which causes another factor and they amplify each other. And to make his point he took the Navier Stokes equations which are incredibly un ins so far insoluble nonlinear equations that describe fluid dynamics in two dimensions, time and space. He took those and reduced them to a one-dimensional model so just in time with three variables and three parameters. And you couldn't get a simpler looking model and it generated complex systems behavior. So that was back in the 1960s. That's a a paper called deterministic aperiodic cycles. So that's that's been commonplace in science from the 1960s. And meteorologists adopted it almost immediately because they didn't have any ideological belief the weather was an equilibrium. So consequently that's not the only way in which meteorology has advanced since the 1960s but that's typical of sciences in general. They've got used to handling non-equilibrium systems. Economists still obsess and believe you can do equilibrium modeling. So I've used the same techniques to model the economy and that's why I saw the financial crisis coming because they had a nonlinear non-equilibrium model of financial dynamics and it predicted that a high level of private debt would lead to a crisis and that's exactly what happened in n in 2007. And the mainstream economists to this day still don't have a decent explanation for it and they ignore the arguments for the financial sector caused the crisis so you so it was 2005 I think is when you started raising the alarm about the amount of private debt.

SPEAKER_01 32:20

So moving into private debt then I know that's a major factor in how you uh see the economy, how you spot uh instability so what other variables are you looking at and pres as as part of your your forecast as part of your model?

SPEAKER_00 32:38

Well it's actually ridiculously simple. Uh what I look at is the level of private debt. Okay. Now you'd imagine that economists look at the level of private debt. They don't. They collect the statistics because the way that the way that the uh postwar uh statistical architecture was set up, a guy called Copeland established uh what's it called the flow of funds tables in the States and therefore they as part of that they b the economist economists and statisticians and people working for financial institutions collect collect data on levels of household and corporate debt as well as government debt. But the neoclassicals have completely ignored that data. So according to their their pre their preconceptions, they argue that private private debt does not change aggregate demand. So they leave it out completely. I've proven not not just asserted I've proven that that's wrong that uh if when you borrow money from a pr into private individual like if I borrowed money from you or vice versa, we'd be changing who can spend the money. We wouldn't change the amount of money in existence. But if you go to borrow money from a bank, the bank says that's a great idea here's a half a million euro to buy a mans buy a property in Dublin and by the way you owe us half a million dollars. So they've created debt and created money at the same time and that becomes part of spending power. So nobody borrows for the sheer pleasure of being in debt so you borrow to spend and therefore that extra money that's created by the loan adds to aggregate demand and income as well. And that that's obvious. It's very simple to prove mathematically I've done that but neoclassicals don't even look at the literature because they don't want to admit that banks can create money because if they do the rest of their edifice collapses. So they ignore the evidence.

SPEAKER_01 34:24

So the alternative mainstream view is that the money multiplier uh just so people understand that the what the what what this says is that banks will lend out deposits. So so and again if you if you um surveyed a hundred people on a main street in Dublin they would assume it's either that or central bank creates the the funds. There just isn't an awareness out there that commercial banks create money in terms of lending.

SPEAKER_00 34:55

I don't like the expression thin air for the simple reason it applies magic is involved. Okay? It's not magic is double entry bookkeeping. And like you'd think economists understand double entry bookkeeping. In fact most of them think they do and they don't and I can prove they don't again by showing statements they make and show that they contradict double entry bookkeeping. So they don't learn this thing. They they they start from the preconception that money doesn't matter they teach their students things like they call money neutrality. They argue money is neutral in the long run. It can cause short-term fluctuations but it can't change the aggregate level of real output in the economy. That's they they drum that into students in first year. They ridicule anybody who says money matters. But then they teach them two models just to say, hey, we know how the banks operate we can show how they create money and they come up with this trivial idea called the money multiplier. And not only is it false about what banks actually do, again using double entry bookkeeping, I can prove that that system only works if all loans are in cash. No they're not you know so it's nonsense.

SPEAKER_01 36:00

And I I think for people to understand a lot of people get confused about the business model of a bank. Deposits are a deposits are liabilities, loans are assets. That's another thing and that goes to your heart of what you're talking about with the double entry.

SPEAKER_00 36:14

So the money goes in but it's an asset and it's a liability Yeah yeah this this is why I mean I I didn't learn accounting at university either. Though funnily enough when I led the student revolt against uh economics at Sydney University, the professor of accounting and the accounting staff assisted me in that battle because they they they loathed the economists. So they actually accountants supported me. My leaflets were printed on the accounting department's machines. Even when I put in leaflets I'd sometimes some I'd I'd I'd type them up or handwrite them and the secretaries would type them and correct they if I type them they'd correct spelling mistakes. So the accountants are on my side way way back 50 years ago. But uh when when you learn the accounting as I've done by building my software Revell, you just realize that none of the the the ideas that the economists have simply don't stack up in accounting terms because accounting is a prohibition. It shows you some things that you think can be done can't be done. And economists are unaware of that so their models actually violate double entry bookkeeping and they're not even aware that's happening.

SPEAKER_01 37:18

So the mainstream economic view is that banks are seen uh as as intermediaries and as such then it's it's more of a transfer as opposed to creation and that that is at the core. So if we have more capital creation more money supply obviously that has implications in terms of inflation. So are you saying really and this makes sense to me by the way that the system is inherently unstable it's it's boom and bust cycles because uh there's always going to be a requirement for debt essentially I'm not the first person to do this.

SPEAKER_00 37:58

I'm part of a tradition of what's called post-Keynesian economics which is just the label that was applied to rebels for some time and and this particular there's many different strands of thought in economics. They have the Austrian school you'd be aware of the neoclassical that's taught at universities, Marxist which is now a minority of course you you you get particular topics like evolutionary economics it becomes a speciality. But post-Keynesians are basically people who said we're sick of ideology at both extremes. We can't we're sick of listening to the Marxists talk about the declining rate of profit and the inevitable collapse of capitalism. We're equally sick of neoclassicals telling us we're already in nirvana uh heaven on earth is capitalism. You know, let's just realistically describe the bloody system. So when you do that you find that it's not the case that money is a control mechanism in the economy. It's an accommodative mechanism in the economy. So the basic argument too much money chasing too few goods. That's the shit, pardon the French, you'll hear all the time from people who've you know they don't realize they've been conned by Milton Friedman. When you take a look at how banks create money, uh then you look you have if I'm gonna ask you an embarrassing question. You've got a credit card I'm sure. Yeah. How much you got if you got more than a thousand euro headroom inside that credit card? Like you're you be okay, well you might have about say 10 euro 10,000 euro. Okay. If you wanted to create 10,000 euro just go and buy something worth 10,000 euro. And what you do is you'll create the money by that shopping. Okay? Now you're going to face higher prices for petrol at the petrol pump given the the chaos in Iran than on the chaos in the Middle East, you just go swipe your credit card. You've created money. So we we we have all negotiated contracts with the banks one way or the other where we have the capacity to increase the money supply whether the bank notionally speaking wants us to or not. So your credit card, the the the headroom in your credit card is your capacity to create money. Equally major corporations have lines of credit not as they're not as common as they used to be, but lines of credit which are comparable to personal bank cards with all the banks. So when the oil prices increased back in the 1970s because of the aftermath of the OMK War and the pr price of oil went from$2.50 a barrel to ten, the bank the corporations didn't have to go and borrow the money and pay the price. They paid the price and then created the money in the process. So it's not that m increasing the money supply leads to inflation. It's that inflation leads to an increase in the money supply. Now there are there are times when you can get such a degree of money creation like we had during COVID that other factors apply. So the the amount of money being created is so great that people who set prices think there's so much demand coming in we can mark up our prices if we wish to how do we regulate this system then is this are you are we relying on institutions then?

SPEAKER_01 40:52

I mean in terms of the credit you I know that you're in favor of regulation obviously if you've got an unrestricted system where you've got cumulative credit building up you there obviously has to be some governor over that. So how do we how do we regulate the control of credit?

SPEAKER_00 41:10

I mean central banks will say oh interest rates central banks are stopped by neoclassical economists and part in the French they haven't got a fucking clue how the financial system actually operates. So you have people who are make decisions about how to control the rate of inflation and what they're doing they're controlling the rate of inflation in the mental model they have uh we call the dynamic stochastic general equilibrium model and in that model putting up the interest rate reduces consumption because it get inspires you to put aside money uh to put so that your future generations can can can go shopping. It it changes the time horizon of the consumption of your entire dynasty, by the way. So when you go shopping at your local supermarket, you're considering the utility of your entire dynasty out to the year infinity. That's that's built into neoclassical models in what they call the Euler equation that's supposed to represent consumption decisions. So they they argue that consumption is volatile or investment is stable. That's the exact empirical opposite of the real data. And they say that if you change the interest rate you will change the trade off between future and current utility that consumers have. So consumers when the interest rate uh changes will jump to a new location uh in terms of the balance between their savings which leads to investment in their models and their consumption. And that's how they explain fluctuations. And therefore their interest rate works to control the rate of inflation in their mental models, but their models are mental. Okay that's completely wrong. It's not consumption that's volatile, it's investment. Investment is about three in terms of the v the you know standard deviation of investment over time versus that of consumption. It's about three times as large for investment as it is for consumption. Investment's the volatile component. And if when you put up interest rates what you do is you screw people's capacity to service their mortgages. Now the mortgages the debt doesn't even turn up as part of the models these economists are using. So they're all fictional models that come back to saying the only control there mechanism is the rate of interest. When in the real world the control mechanisms are myriad uh but they're not the rate of interest particularly it's a fairly weak control. So what I'd be doing is I'd be controlling who banks can lend money to. I wouldn't let them lend for speculation on on share prices. I'd ban margin debt completely. I wouldn't let them uh lend more than a multiple of the rental income or either actual or hypothetical for a property. Whereas they claim to be basing it on the income of the buyer, I'd say no, you've got to make it on the basis of the income earning capacity of the asset you're buying and that would drastically reduce the amount of money that was lent for mortgages. So you've got to control the behavior of the banking sector. And that's uh by by saying that not worrying about the level of private debt And focusing just upon the interest rate. The the so-called regulators have let the banks do what they damn well like, and that's what led us to the enormous level of private debt. Private debt is out of control. And and the volatility of private debt, that's what caused the 2007-8 crisis, the global financial crisis. That's what caused the Great Depression. And these idiots, and I'm afraid I've got I'm getting the older I get, the less patience I have with people who can't take the blinkers off their eyes for neoclassical theory. But these educated idiots uh for just don't even look at the data because it's not in their mindset to believe that credit can have any impact on the economy.

SPEAKER_01 44:38

Okay, I did warn you, not shy not a shy man when it comes to his views, okay? But as I said at the outset of this, we need to hear alternative voices. If there's people that have strong opinions and would like to challenge Professor Steve Keane, I'm sure he'd be up to a face-off. Wouldn't that be interesting if we had a bit of a face-off, somebody maybe far more qualified than me? I'll adjudicate it, I'll be the uh referee. And you know, if you're not happy with some of the things that Professor Keane has said, contact me, reach out, and let's set it up. In the next series, I'll be pushing back on to on Steve a bit. Okay, give him a bit of free reign there, but I will be pushing back on him because it is important that we don't just nod and agree with everything that somebody says. We have to be credible, and to be credible, we have to push back. Okay, have a great weekend. I hope you enjoyed it, and we'll see you next week. Take care.