Economic theory is like a layer cake: Explanations within one layer make sense, but once you move to another layer, they no longer apply. Economist Steve Keen’s new book ‘Can We Avoid Another Financial Crisis?’ is an illustrative example.
The good news is that Keen accurately describes the current economic system; the bad news is that the answer to the question in the title is ‘no.’ (And, despite what I believe is his accurate overall assessment, he misses, or skips over, a few key, hidden elements of economic theory.)
Keen defines his question within the layer of a corrupt banking system, the system we have now. He explains how it is that banks create money in the form of debt, and how this leads to financial instability. In the book he quotes the Bank of England’s own economists:
‘In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.’
Keen builds on the work of Hyman Minsky and Joseph Schumpeter to explain why it is that private debt created out of nothing by private banks leads to economic instability.
This post was published at Zero Hedge on Apr 17, 2017.
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