Krugman, Keen, Money, Banking (Update)

Quite a debate going on over the last week or so between Nobel Laureate Paul Krugman, resident New York Times economics luminary, and the relatively more obscure Steve Keen from Australia, who is not a Nobel Laureate or a New York Times luminary.  Keen just should be.

Of course I like Steve Keen in the whole thing – he’s on the blogroll, and I’ve had correspondence with him, and despite all the charts and graphs obsession and, you know, high intelligence, he is a normal person (probably unlike Krugman) and very, very decent.  But talk about making a simple thing complicated.  If you dare, read the summary of the whole Krugman-Keen face-off here and follow the links.

The question boils down to:  is bank lending “constrained” by deposits, reserves, capital, or the monetary base?  This is related to another issue known among economists as “exogenous” v. “endogenous” money, two opposing theories that have their various adherents.

Keen, of course, arrives at the correct answer, but not in the right way.  Krugman, it turns out, is completely out to lunch and understands virtually nothing about money and banking as it really is.  He may understand something about a theory of money and banking with which I am insufficiently familiar, but then why become familiar with fantasies when what is pressing upon us is an increasingly exigent reality?

Briefly, though:  bank lending is “constrained” by none of the above.  The “exogenous” v. “endogenous” money debate is completely beside the point and irrelevant.

Does this mean that bank lending is unconstrained by anything at all?  Of course not.  It is constrained by the expectations of the lending bank(s) that their lending will produce a profit for the bank.  How does lending produce a profit for the bank?  The borrower repays the loan, with interest.

Ay, there’s the rub.  Let’s presume virtue in all this.  The borrower takes the borrowed funds, produces value with them, which is then rewarded by others who justly pay him for the value produced.  Everyone works hard, becomes better off, the loan is repaid with interest, value is added to the economy, we congratulate each other for a job well done and take a vacation in the Bahamas.  This is indeed the “virtuous cycle”.

On the other hand, let’s presume vice and low character rather than virtue.  The lending bank is completely unconcerned about the true nature of the borrower’s plans with the loaned funds so long as it’s technically “legal” and he’s a good risk to get a profit for the bank.  For his part the borrower is not necessarily adept at anything, except extracting money from others, whether by fraud and trickery or simple force.  System wide, then, loans – even though on the surface a “success” when they are paid back – don’t produce anything except misery, bitterness, a large pool of losers and a few “winners”, who far from being productive and contributing members of society are actually destructive leeches.

Run the string of reasoning out.  As Bill Black says, where fraud and dishonesty flourish true productivity and contribution are driven out of the market.  So pretty soon there are only a few borrowers that a bank wants to lend to, but they’re all fraudsters and criminals, even if they haven’t gone to jail yet.  Though any of them could at any time, because you never know when the increasingly arbitrary whim of the government is going to focus on this or that person.  Like Bernie Madoff already was, but only after operating for 20 years or more.  Like Jon Corzine could be tomorrow.  Or Lloyd Blankfein.

So bank lending screeches to a halt.  Everyone’s waiting for the other shoe to drop.

Which scenario describes the “financial crisis” we are in – which of course as I always say is really a “rule of law crisis” – better?  The question answers itself.  Indeed this little post, right here, is a lot more relevant to what is actually happening in the economy than discussions about bank reserves or capital or deposits or “exogenous” this or that.

This is a fundamental social moral problem.  It cannot be charted or graphed or muted with intellectual pretensions.

Economists are not just clueless.  They are frustrating.

UpdateLook what they do.  Let me explain the most important point of this article in one sentence.  Jon Corzine needed to use his personal authority to transfer funds illegally, because everyone in the organization would follow his orders, but the email containing his orders that went out was ostensibly from an underling named Edith O’Brien, who is thus set up to take the fall when Corzine later claims he never issued any such orders, if he has to.  He “has to” when it might be his head on the chopping block, which has come to pass, and so he follows the pre-written script perfectly:

“I never gave any instructions to misuse customer money, never intended to give any instructions or authority to misuse customer funds, and I find it very hard to understand how anyone could misconstrue what I’ve said as a way to misuse customer money.”

These people are slimy scum who will feed innocents to the lions to save their own skins, or even for entertainment.  The fair interpretation of the objective facts – that is, pre-spin/pre-perjury – is that Corzine ordered it, O’Brien voiced concerns and Corzine browbeat her into sending that email.  Her “disloyalty” in even objecting at all justifies, in his mind, pushing off as much responsibility as possible onto her, and he has probably already convinced himself that he was “misunderstood” in some way, so why not spin it in the way that is most advantageous to him, and if that gets Edith in trouble, well, why is that his fault?

This is how they think, and act.  These are our leaders.  The man was governor and US Senator from New Jersey.



Filed under financial crisis

10 responses to “Krugman, Keen, Money, Banking (Update)

  1. gyges

    I left this comment over at Naked Capitalism where your above post was linked. Perhaps we are seeing the same thing but using different vocabulary to describe it?

    “This post you linked is much more my view. I am confidently in Keen’s corner as to the technical nature of the creation, and where @strikelawyer calls it a rule of law crisis (a conception I quite agree with) I see a confidence crisis. Confidence in the sense of human relations. I see it every day on the streets; in conversation, interactions, business conduct. And while I do agree that the toxin may ultimately reside upstream in a rule of law crisis that discourages honesty and openness in business and civic life, I also believe we all choose whether or not to drink from that tainted stream. For my part, I strive to associate and do business only with the virtuous. Unfortunately, it seems increasingly difficult for me to do so.

    I look at Greece and I see beyond the obviously broken economic situation a less obviously broken social framework, a place of pervasive mistrust where official and substantive changes in policy and rule of law are required upstream to set the tone but that depends on ordinary Greeks to rebuild the foundations of their social house. I think the US needs the same medicine.”

    Thank you for what is an interesting and through provoking post.


    • Thanks for the encouragement.

      One reason this all gets so obscured is that we’d rather deal with some technical issues and tinker with them than face the moral problem, which is so much bigger and more fundamental. Sooner or later, though, you wind up there anyway whether you want to or not. I know Keen is aware of this aspect of it. I suspect Krugman is, too. The difference is that Keen is at least taking this into account in offering what is still a largely technician’s solution whereas Krugman doesn’t want to face it at all, out of loyalty to his loftily placed friends and colleagues. He’s a one percenter first, and a rational and decent human being second.


  2. VietnamVet

    This is note of appreciation for your posts that I just finished reading. They’re insightful and ring true to me.

    For decades I worked in the technical side of the cozy world of federal regulation of multi-national corporations’ products. A naïve Vet from a loser war, I assumed that all was well with the world that experience to the contrary. Then, the USA invaded Iraq. That was flat out crazy; another war that we would lose. A few years ago, a nationally recognized American company completely ignored our laws and regulations, a first. Just before I retired, I heard they would get a slap on the wrist. The fine is likely less than the money made by ignoring the rules.

    Paul Krugman does write that the Paul Ryan’s Budget is radical but he cannot admit that the rest of us are being marketed a fake make believe world that is cracking apart from corruption.


    • I so agree on the Iraq thing. I remember when they started the “shock and awe” bombing of Baghdad I was down in Norfolk with some old shipmates because they were decommissioning the ship we had been on together in the 1980’s.

      I thought the media ooh-ing and ah-ing as the bombs rained down on the city was surreal. I couldn’t believe how short-sighted they were, not even thinking about nightmarish step 2, where you put a lot of troops on the ground and they go door to door “mopping things up”.

      Anyway, detachment from higher ups can become pathological, to the point where they seemingly have no idea what they’re really doing. Like Corzine.

      Thanks for the comment.


  3. mikkel

    Right on. I used to be very interested in learning about economics and looking at it from a dynamic systems perspective (so of course I loved Keen) but then realized that ultimately economics is a facade. You’re right that the truth is fundamentally grounded in morality, but it’s also grounded in physical reality in terms of resource constraints.

    Keen is very aware of the latter, which is why his work is so important.

    Still economics will always be more appropriate as a philosophy class than a rigorous one.


    • Philosophy classes have rigor if they are well done. It’s just a different kind.

      Not everything can be reduced to a chart or graph or statistic or equation. None of that can account for what goes on between the ears of people who are dealing with each other economically, which is all bound up with money and prestige and status and ego, even as there are also some moral principles involved. Game Theory – really popular with mainstream economists – never deals with the latter. Yet at some point the latter is determinative, one way or the other.

      We’re at that point. When people start raising the moral questions, like “Occupy” is doing, it won’t do to show them a chart or graph.


      • Nathanael

        All the rigorous parts of philosophy got spun off into other fields; we call them “science” and “mathematics”. As fields of philosophy get properly rigorous and empirical, they become fields of science….


        • Science is about knowledge and empirical facts. Philosophy is about reasoning. Either can be rigorous or sloppy, depending I imagine on who is doing it.

          Mathematics, as it happens, is not about empirical fact and is more closely related to philosophy than to science.


  4. RickW

    The Keen Krugman debate sheds light onto why the global economy teetered in 2008. Policy makers, relying on accepted economic theory, do not consider private debt in the models guiding the policy levers. Debt is a complete blindspot in policy setting.

    Steve Keen accurately scripted the onset of debtdeflation some 2 years before the wheels actually fell off. He did this using the results from a basic analytical dynamic model of the private sector that includes banking. It is simple, elegant and mathematical sound. A complete contrast to the assumption dependent economic models in current use.

    He has placed a lecture series on Youtube that works through the formulation of his model as well as the flawed assumptions that give rise to existing models. An inquisitive mind will ask how did he manage to get it so right when so many did not see it coming. Surely that is sufficient incentive to seek an understanding of his work.


    • I completely agree that Keen is probably the most important economist in the world right now. I’m less than enthusiastic about his jubilee methodology, primarily because I believe the law must address the debt issue and should not abdicate its responsibilities to economists.

      Apparently this whole Krugman/Keen debate is receiving some mainstream attention, which is good to the extent it gets more people acquainted with Keen.


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