Saturday, July 14, 2012

Steve Keen's debt jubilee

This post is a reaction to Steve Keen’s debt jubilee manifesto.

Reasons for a debt jubilee

Steve Keen says, as pertaining to the housing bubble, it is the lenders, not the borrowers that are at fault, and that the problem is not about moral hazard (too late), but economic recovery. Surely, I’m leaving out some nuances and  so refer to the original for accuracy.

Steve Keen seems to have in mind the US situation, but the reasoning probably extends, to some degree, to other regions (EU?) with a debt overhang. He essentially says that either the private excess debt is forgiven, and the economy gets back on track, or it faces a slow process of de-leveraging (paying off debt) that can last a decade or more at the cost of dire economic suffering.

The third way, that offsetting the private demand for credit shortfall with government spending, as advocated by Richard Koo in his presumptuously titled book ‘Holy grail of economics’ (+300 pages to describe empirically based intuitions that are far from watertight) is not an option for the Eurozone. Unlike Japan, the markets wouldn’t allow it until the EZ design flaw is remedied. Note: this paragraph is our opinion, not a summary of Keen's manifesto.

Steve Keen warns that a classic debt jubilee would ‘paralyze the financial sector’. He proposes instead a new form of quantitative easing. A whole new territory known as 'modern debt jubilee' that would kill two birds in one stone: economic recovery without causing a banking crisi.

‘innocent bystanders’?!

Steve Keen says non-bank investors (creditors), corporations and individuals alike, should not be penalized. Specifically, holders of securitized loans, direct or indirect (pension funds) are ‘innocent bystanders’. Doesn’t that contradict his earlier claim (lenders are at fault)? Furthermore, according to a UCal professor, the top 1% owns 60% of securities (Source, also Voxeu). Top 1% = ‘Innocent bystanders’.


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