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Sunday, November 27, 2011

Agreeing and Disagreeing with Steve Keen

Steve Keen interview here

I agree that the crisis is due to a Minskian debt bubble....
I disagree that the solution is necessarily to write off the debt per capita with new money.

He is asked directly about the moral hazard problem and he simply restates what he always says - the is was a systematic problem not an individual problem and therefore moral hazard, implication being, shouldn't matter. There are two things, as I see it, wrong with that.

1. Moral hazard doesn't care if a problem is systematic or individual or not - it only matters what people think. And, as the interviewer notes, many people would think that 'bad actors' would be given the same handouts that the 'good actors' are given. To some, that's not fair - and that creates moral hazard moreover in so far as 'bad' debtors have some blame. And what about those that have no debts at all - Do they get nothing? ... which brings me to my next point.

2. Keen makes the assumption that creditors should take full blame for the systematic failure. This is not obvious to me. Credit / loans are a multiple-party transaction and while one can argue that relatively speaking the creditors should have known better and have more power in the relationship and therefore more responsibility, the fact nevertheless remains that many debtors should have known better and demanded funds well beyond their means. I find it somewhat ironic that Keen doesn't agree on this point since circuit theory explains that credit money expands, and bubbles are formed, due in part for the the demand for it.

I believe Prof. Keen is correct that the financial failure was a structural failure - but the structure arises from behavior of individuals and institutions, not some amorphous blob immune to moral hazard.

"Everyone gets a boost because we are not trying to boost individuals...."

It's that kind of statement that makes it clear to me that Keen has no ready answer for the question of fairness and moral hazard. I respect Prof. Keen and agree with him on many points, but I can't agree with his prescription on it's face.

8 comments:

Clonal said...

The way to avoid moral hazard is the way Islamic banking does it. The Bank purchases the house, and then it is a rent to buy situation. At any moment of time, the bank and the "home owner" have some equity. So at any point of time, the home owner can bail out. The house is sold, the proceeds shared in proportion of the equity at that point of time.

Thus there is no incentive for the bank to "pay the appraiser" to "value high" Also, if the market tanks, both the bank and the home owner "share" the losses.

This should ideally prevent a bubble from happening in the first place

Clonal said...

On my previous comment see Predatory Lending: Appraisal Fraud

Quote:
Have inflated appraisals helped fuel the surge in foreclosures on credit-strapped borrowers? Are such appraisals at the core of many mortgage-fraud schemes?

The four largest trade groups representing appraisers say yes -- and they are asking federal financial regulators to crack down on lenders and loan officers who put pressure on appraisers to raise valuations to allow overpriced deals to go through.

Led by the 22,000-member Appraisal Institute, the groups told regulators April 11 that subprime lenders experiencing high rates of foreclosures often have been guilty of "systematic inattention" to the accuracy and the sources of the valuations backing the mortgages they funded. For the full story see: Appraisal Inflation

Anonymous said...

Exquisite timing for a moral hazard argument, given the Bloomberg story today. If it doesn't apply at the top of the economy, it shouldn't apply at the bottom.

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