Tag Archives: financial crisis

How banks destabilise the economy – and take your money

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[Extract from The Nature of the Beast]

Almost every institution involved in the financial system is, in the jargon, highly leveraged.  This is as true of old-fashioned banks with fractional reserves and mainstream banks with capital adequacy requirements as it is of shadow banks. What does “highly leveraged” mean?  It means you are betting a small amount of your own money plus a lot of other peoples’ money on a large return.  If the return is positive, you make a handsome profit.  However if the return is negative you lose not only your stake but potentially everything you own.

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The Nature of the Beast: eBook now available

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The Nature of the Beast: how economists mistook wild horses for a rocking chair.

Mainstream free-market economics fundamentally mis-identifies the nature of market economies.  Its record is of retarded growth followed by disaster.  It counts costs as positives instead of negatives.  It is blind to how the present banking system destabilises the economy.  It is relentlessly materialistic and adversarial.  It ignores most of what we know about real people and the real world.

The result is pseudo-scientific gobbledygook, and the unstable, inequitable, undemocratic, destructive and unsustainable mess known as the global economy.

The Nature of the Beast draws out the real nature of market economies using modern knowledge of systems, human behaviour, ecology, biology and physics.  It points the way to stable, prosperous, democratic market economies that can support people, societies and the living world into the indefinite future.

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Bad theory, Bad Practice – Bad Ethics

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[ The three earlier posts “How free-market fundamentalists are hopelessly wrong” are extracted from a paper that is now published by the World Economics Association in an on-line conference on Economics in Society, the Ethical Dimension.  The full text of the paper follows, covering more deficiencies of the mainstream and some new modelling illustrating a more useful approach.   A pdf can be downloaded here (300 kb) ]

A profession that claims to understand economies, and that has gained power over the greater part of our societies, has big responsibilities.  The fundamental responsibility is to ensure its perception of economies gives some useful guidance to the behaviour of real economies.  Here mainstream economics fails utterly, and has been failing for a long time.  Worse, it actively resists alternative views that might overcome its failings.  Ethics do not come much worse than that.

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How Free-Market Fundamentalists are Hopelessly Wrong, III: money, debt and blindness

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Part I presented the evidence that economies in the free-market era delivered only mediocre performance before crashing in the disastrous Global Financial Crisis.  Part II showed how the standard theory of free markets bears no useful resemblance to real economies, and its application amounts to pseudo-science.

Returning to the GFC now, there is a particular reason free-market economists claim the GFC was unforeseeable:  debt and money play no role in their standard equilibrium economic models.  They claim one person’s debt is another person’s asset, and so aggregate “demand” is not affected by debt.  This would be true in a barter economy, or if the banking system was based entirely on savings, for only in those cases would the extra purchasing power of the borrower be balanced by the reduced purchasing power of the depositor.

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How Free-Market Fundamentalists are Hopelessly Wrong, I: the evidence

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Australia’s commentariat is thickly populated with right-wing guardians of the doctrine of free markets.  Many of them have been groomed by right-wing think tanks in a long-term campaign to drag our perceptions to the right.  Chris Berg and Sinclair Davidson, of the Institute of Public Affairs, are regulars on the ABC’s The Drum Opinion.  The campaign has been highly successful, as the free market mantra has taken over both sides of politics and dominates economic discussion.

However it is very easy to demonstrate the doctrine is hopelessly wrong.  The evidence is clear that free markets have retarded growth.  The theory underlying the doctrine is plainly and absurdly unrealistic.  The Global Financial Crisis was caused by financial markets building up mountains of debt, yet debt and money are absent from mainstream economic models and, apparently, from economists’ thinking.  Hence their blindness to the GFC’s approach, its cause and its remedy.

These problems will be covered in a three-part series.  First, the evidence.

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The Nature of the Beast manuscript available on request

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A complete manuscript of The Nature of the Beast is available for comment.  It is under a password, so as not to upset potential publishers, and so I can keep track of who is looking at it.  I would love to have feedback of any kind.

Use the Books and Downloads menu above, or go here.

A sample, the first 16 pages, can be downloaded without password.

Asleep at the Wheel, Accelerating Towards the Precipice

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[This was published at On Line Opinion 29 Nov 2011.]

It is characteristic of some past societies that their highest accomplishments occurred just before a precipitous decline in their fortunes, according to Jared Diamond in his book Collapse.  It is less common that a society’s trajectory comprises a slow rise, a plateau and a slow decline.  Diamond does cite some societies that were able to shift their strategy and successfully negotiate a crisis, so a crash is not inevitable.

The former pattern, accelerating into a crash, is a signature of a society oblivious to imminent peril.  At least, the leadership of the society is oblivious to warning signs of a crisis, and they just keep on doing what they have always done.  Or perhaps they become more and more dissolute, like the later rulers of ancient Rome.

There is an eerie sense of unreality in Australian public life.  The things our leaders argue about, and the evidence they pay attention to, are largely irrelevant to our real situation, which is one of rising multiple crises.  The longer the crises continue unattended, the worse will be the consequences.

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How to crash an economy – some monetary parables

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[Another sample from The Nature of the Beast, from Chapter 11:  Economic Fire.  Another downloadable instalment will be available after Easter.]

Almost every institution involved in the financial system is, in the jargon, highly leveraged.  This is as true of old-fashioned banks with fractional reserves and mainstream banks with capital adequacy requirements as it is of shadow banks.  What does “highly leveraged” mean?  It means that you are betting a small amount on a large return.  If the return is positive, you make a handsome profit.  However if the return is negative you lose not only your stake but potentially everything you own.

Continue reading →

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Prime Minister Julia Gillard’s recent speech to the US Congress was so sycophantic it was more sad than embarrassing.

We who think good ole Oz can be something other than a fiefdom of powerful foreigners are used to cringing when ever an Aussie politician visits the land of the free and the home of the brave.  Ironically it is the Labor politicians who are the most servile, because they think they have to prove they’re not lefties.  That will be one of the reasons for Gillard’s grotesque performance.

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The Nature of the Beast (Post)

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[This post is addressed to fringe economists and others who have broken with ever-more dysfunctional mainstream neoclassical economics, but who still search for a replacement paradigm.]

[2 Aug:  Posted on Real-World Economics Review Blog.]

The need for a new conception of economics is widely acknowledged in the wake of the global financial crisis[1], at least outside of diehard neoclassical circles.  However a common perception seems to be that no adequate and coherent general conception is in sight, though many loosely related or unrelated heterodoxies vie for attention, as noted by the Editor of Real World Economic Review blog.  I argue here that when the subject is approached from the point of view of dynamical systems a broad new framework becomes evident.  Furthermore, once the nature of the beast is identified, some fundamental conclusions can immediately be drawn.

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