[einhverfr]

It comes from the same people trying to distract us.

Steven Keen has shown that there is no public debt crisis. The real issue is a drop in private debt (the international credit crisis) which means a drop in consumption, which leads to recession, which leads to less lending, which leads to a drop in private debt......

[eli_gottlieb]

I agree that the real problem is the recession of the nonfinancial economy based on consumption and production.

I disagree that the problem is a drop in private credit. The problem is the decoupling of productivity from broadly construed returns (on assets and on labor). The problem is that productivity has become unable to outgrow debt service.

We need private debt reduced as close to zero as possible, and we need to rebalance our economies to once again power themselves off productivity improvements (driving returns on investments, labor wages, and hence both consumption and investment) rather than debt growth (which is like cocaine: a temporary high followed by a major fall).

[einhverfr]

Well, what Keen points out is that consumption drops because people aren't spending as much. He also points out that the sources of spending are income and credit.

Basically he picks up on Minsky's idea of credit cycles and uses this to explain both the current economic problems and the Great Depression. He also points out that private debt is much greater than public debt.

I don't know if he sees the reduction in credit as a bad thing or just an inevitable thing.

As he points out, the way banks work is that they lend money, create deposits in the process, and look for reserves later.

As for private debt being reduced to zero, wouldn't that require a drop in housing prices by something like 90% so one could just buy a house without a bank loan?

[eli_gottlieb]

As for private debt being reduced to zero, wouldn't that require a drop in housing prices by something like 90% so one could just buy a house without a bank loan?

Which would, in my mind, be a Good Thing. At the very worst, we should be decreasing housing prices down to 2x or 2x annual income, which would put mortgages back in the 5-year or 10-year range rather than 30-year.

A normal family taking out a mortgage to buy a house should be able to look forward to paying off their mortgage.

[einhverfr]

Actually Keen's proposed remedy for this is quantitative easing except that the money goes to people. Everyone gets, say, a $50k voucher. If you are in debt, you have to use it to pay down your debts. If you are not in debt, you can deposit it and use it to buy things.