Page 2 of 2 Who saw the economic crisis coming and why?
Prof Keen answered: "It's too simplistic, I mean certainly irresponsible borrowing, lending, got worse over time, but it was endemic in the American system anyway, and if you simply looked at the level of debt to GDP you could see that something very dangerous was going on, the only way you could not see it was by ignoring that particular indicator. So his argument is that all that really happened was the transition from slightly irresponsible lending to far more irresponsible lending and the legislators and politicians approving those changes, but the debt crisis is still there inherently because if you go back to 1987 for example, when we had the first stock market crash, the level of debt to GDP back then was already approaching levels of the Great Depression. By 1995/96 it had passed those levels and was still climbing.
"So any time in the last 15 years, we could have said 'hang on, this level of debt's too high, we have to stop this behaviour at this point now'. Even if we'd done it
back then, we still would have had a mini-depression; the only difference is this crisis is far worse. Now, it is not so easy to rob a factory, you know, things can fall off the back of a truck so to speak, but it's much, much easier to police that and much, much harder to make large amounts of money out of theft of commodities. The theft of money is very easy, and of course banks are put in a position of judiciary responsibility towards the rest of society when they're given the capacity to create debt and therefore create money and that requires them to behave in the most responsible of fashions, but of course the way society develops over time, the most reckless of people get allowed to run banks and of course fraudulent behaviour is only a step away from that particular opportunity.
"So it then means that what happens ends up being worse than what I'd predict in my models, because on top of irresponsible behaviour you get fraudulent behaviour and money that's supposed to be there is not there; financial assets that are supposed to be backed by real assets aren't backed by those assets; multiple ownership claims exist; outright stealing occurs; and that of course means that the shock that the system feels is far worse and of course it's allowed to continue because we don't actually prosecute that behaviour.
"The thing which Bill Black can hold his head high is for the fantastic work he did when he was responsible for cleaning up the Savings & Loan mess, when he could send lots and lots of fraudulent people to jail. His successes these days have done absolutely nothing by comparison to what Bill did back then with a far less extreme instance of fraudulent behaviour than we've seen during the global financial crisis."
LS: ''But it is deepening the crisis, that the criminal aspect of it isn't punished.''
SK: ''That's right, if some of these people spent their entire life behind bars rather than on the Cayman Islands, then we might finally get a strong barrier to this sort of behaviour, at least for a while, because that experience gets seeded into the minds of others who might consider indulging in a career of fraud later. But if you actually reward them by rescuing them as we're beginning to do right now and punish the people who were innocent bystanders in the whole crisis thing, the people who are, you know, on public pensions or low paid jobs, depending upon state welfare, if they are in Greece and so on, you're rewarding fraudulent behaviour. You're being told being honest and being poor is not sensible, be dishonest and rich; that's the last message we want to send to society, but that's the one we are sending right now.''
LS: ''And this will have repercussions on the political landscape and societies.''
SK:''Well, ultimately the debt does because a large part of why we had the horrors of the Second World War were those same attitudes towards the financiers who caused the crisis of the Great Depression. So if we continue down this path I have no doubt that at some stage there'll be right wing, normally right wing, maybe in some cases left wing, but normally right wing political military coups in Europe, and politicians who express surprise about it will have nobody to blame than themselves because they punished the masses and the masses will then be quite willing to be led astray by a demagogue, and this is exactly how Hitler got into power, we're letting it all happen again.''
I would like to ask you for a comment on Prof Keen's observations, Mr Henkel. Or let me paraphrase your question at the end of your statement that addressed my interview with Prof Galbraith in a more challenging way: If a so called ''leading opinion-maker / expert'' has not foreseen the crisis, isn't familiar with the work of those economists / financial analysts who predicted the crisis, and refuses to recognize the causes of a financial / economic problem for obvious ideological reasons, how can he be taken seriously in his analysis?
Moreover, back in 2010 you did not respond to it, but what are your actual thoughts on the fact that Prof Black wrote an open letter to Dr Walter E. Massey, then-chairman of Bank of America, in which he called for your termination as Bank of America's senior advisor in Germany?
Please be aware that Prof Keen, Prof Galbraith and Prof Black will be informed about this media request of mine.
Thank you very much for your attention!
Sincerely, Lars Schall.
* In 2009, Keen received the ''Revere Award for Economics'' from the ''Real-World Economics Review'' for predicting the financial crisis before it happened. For my interview with Keen go to: .
Denial of reality?
Until Monday of this week, Mr Henkel had not replied. (His latest Das Handelsblatt column, on the euro, was published on Monday; see here). This from a man who demands quite often - you can't make this stuff up - ''more courage'' in public debates and wants to play a significant role in this year's national elections in Germany (as a mouthpiece for the growing anti-euro movement).
And so I asked Prof Galbraith, Prof Black and Prof Keen this Monday for a final comment: ''Do we witness a kind of denial of reality on the part of Mr Henkel?''
Prof Galbraith (who published in the autumn of 2009 in ''Thought and Action'' an article, "Who Are These Economists, Anyway?" , about some of those economists who did see the crisis coming, and who have not received the credit they deserve), answered: ''I see that Mr Henkel, a humble man, has accused me of arrogance. That is what defenders of the Vietnam War used to say, many years ago, about my father. I'm pleased, of course.'' (James K Galbraith is the son of one of the most exceptional economists of the 20th century, John Kenneth Galbraith.)
Prof Black said: ''Since the time of my open letter to Dr Massey about Herr Henkel, it has become ever clearer that the most important development in the West has been crony capitalism led by the systemically dangerous institutions (SDIs) - the 'too big to fail, manage, regulate, or prosecute' banks. Henkel's anti-regulatory lobbying helped create the international regulatory race to the bottom that created the most criminogenic environment for endemic 'control fraud' in history. A recent study by conservative finance scholars confirmed that control fraud was 'pervasive' at our 'most reputable' banks. Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market. Tomasz Piskorski, Amit Seru & James Witkin (February 2013) ('PSW 2013'). See here.
''The key conclusion of the study is that control fraud was 'pervasive' (PSW 2013: 31).
'''[A]lthough there is substantial heterogeneity across underwriters, a significant degree of misrepresentation exists across all underwriters, which includes the most reputable financial institutions' (PSW 2013: 29).
''By 2006, 40% of the U.S. home mortgage loans made that year were 'liar's' loans (the figure for the U.K. was 45%) - and they had a fraud incidence of 90%. Liar's loans provide an ideal 'natural experiment' to test Henkel's theory that the government caused the crisis by requiring banks to loan to blacks. No entity (and that includes Fannie and Freddie) was ever required to make or purchase liar's loans and because investigations have shown that it was overwhelmingly lenders and their agents who put the lies in liar's loans (and appraisals).
"Indeed, contemporaneous industry documents demonstrate that the government sought to discourage liar's loans. Liar's loans did not count toward Fannie and Freddie's 'affordable' housing goals - and the same 2006 industry study (by MARI) that reported the 90% fraud incidence and the government's efforts to discourage liar's loans also reported that in 60% of the cases the borrower's income was inflated by over 50%.
"To emphasize the obvious, this would have been a terrible strategy for meeting an affordable housing goal even if liar's loans had been eligible for counting toward that goal. (Oh, and consistent with the Bush administration's approach to affordable housing and financial regulation, nothing happened to Fannie and Freddie when they did not meet their affordable housing goals - see here.)''
Prof Keen stated: ''The 'No one could have seen this coming' mantra is almost the exact opposite of the truth: the only way that one could fail to see this crisis coming was to be seriously misled by a naive view of how banks operate. Unfortunately economic theory is dominated by precisely such a naive view, which led those who believe that theory to a denial of reality as profound as that of those who pretended they could see clothing on The Naked Emperor.
''Politicians who repeat this mantra help economics hide from its own weaknesses, when what we need is a revolution in economic theory and an overthrow of the bank-dominated politics of today.
''I am doing my bit for the revolution in economic theory by developing Minsky, a dynamic monetary modeling program - and you can help via my Kickstarter campaign here.''
In addition, I asked him: ''Can you elaborate for the readers of Asia Times Online a bit on what you've pointed out as 'the most important thing in capitalism', please?''
He answered: ''If I can interpret that question as 'the most important thing about capitalism that most economists don't understand', it would be 'that banks are not merely passive warehouses for storing money, but actively produce money, and can destabilize capitalism if they do this badly - which, left to their own devices, they always do."
Lars Schall is a German financial journalist.
(Copyright 2013 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
