Advice sought on the pros and cons of this article by Steve Keen
Peter
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From: Steve Keen from Building a New Economics <profstevekeen@substack.com>
Date: Sun, 7 Dec 2025 at 21:04
Subject: New video on Credit and why Neoclassicals cannot understand capitalism
To: <peterchallen@googlemail.com>
| Forwarded this email? Subscribe here for more READ ONLINE: New video on Credit and why Neoclassicals cannot understand capitalism Prominent Neoclassical Economists Mistake Debt for Credit STEVE KEEN • 7th December 2025 • READ IN APP This is another of the reaction videos to my interview by Novara Media some weeks ago, which explains how credit—the annual change in private debt—is an integral and volatile component of aggregate demand and income. Since Neoclassicals ignore credit because of their belief in the “Loanable Funds” model of banking, they ignore credit, which is why they didn’t see the Global Financial Crisis coming. Please watch it, for two reasons: it’s informative, and your watching it—till the end!—will lead to YouTube showing it to more people. Especially if you’re a free subscriber (and there are over 12,000 free subcribers, versus just over 300 paying subscribers) it’s the best way that you can help me fight the delusions of Neoclassical economics. Share One factoid in the video that deserves to be highlighted here is a very revealing comment in a paper by the prominent Neoclassical economist Lee Ohanian, “The Economic Crisis from a Neoclassical Perspective“ (it’s one of the few open access papers published by the American Economic Association, so you can check it out for yourself). Ohanian dismisses any role for finance in the “Global Financial Crisis”—which probably explains why American Neoclassical economists refer to it instead as “The Great Recession”. But his way of dismissing it exposes how little Neoclassical economists in general know about finance. He uses the Figure below to reject the argument that the GFC was caused by the financial sector: He comments that: The financial explanation also argues that the 2007-2009 recession became much worse because of a significant contraction of intermediation services. But some measures of intermediation have not declined substantially. Figure 4 … shows that bank credit relative to nominal GDP rose at the end of 2008 to an all-time high. And while this declined by the first quarter of 2010, bank credit was still at a higher level at this point than any time before 2008.6… These data suggest that aggregate quantities of intermediation volumes have not declined markedly. This would just be funny, if mistakes like this by economists weren’t so consequential. The chart is labelled “Credit” in the source data (The Fed’s H8 series), but even a cursory check of the data makes it obvious that this series shows you, not “Credit”, but “Debt”. Ohanian’s Figure 4 shows the amount of outstanding debt at any point in time, and not the change in the amount of debt owed—which is how “Credit” is properly defined. Blind Freddie would have noticed this, because, if the numbers in Ohanian’s Figure 4 actually represented “Intermediation Services”—as he called bank lending—then private debt would by now be thousands of billions of times GDP. Notice the numbers on the Y-axis of Figure 4: the smallest number is 1.0. That would mean that, at the minimum, the rate of growth of private debt was equal to GDP. Therefore, the private debt to GDP ratio would, at the minimum, double every year. Ohanian’s graph begins in 1978. In 1978, as it happens, the ratio of private debt to GDP (as recorded by the Bank of International Settlements) was roughly 100%. By 2010, if Ohanian’s Figure 4 actually showed credit (“intermediation services” in his words), and “credit” flatlined at the lowest number in his graph (1.0 times GDP), then by 2010, when his graph ends, private debt would have been more than 4 billion times GDP (2 to the power of 32 equals 4,294,967,296). Support my relentless but chronically underfunded campaing to reform economics by becoming a paid subscriber. The fact that Ohanian did not even realise this error shows how little attention he and other Neoclassical economists actually pay to financial data. The real numbers for “intermediation services” were not those given in his Figure 4, but the rate of change of those numbers. When you plot them, it is bleedingly obvious that a collapse in “intermediation services” caused the Global Financial Crisis. Debt peaked at 170% of GDP in 2008 (comparable to the different numbers Ohanian used from The Fed), but credit—the annual change in debt—went from plus 15% of GDP in 2007 to minus 5% in 2009. It isn’t just Ohanian who is an idiot here. This paper was passed for publication by the editors of the Journal of Economic Perspectives, and had at least two referees. Ohanian thanked 19 people for comments on the paper, and these include one “Nobel” Prize winner (Ed Prescott). Neoclassical economists in general are idiots on the monetary system, and the economy in general, and it’s time the whole world knew that. So please, watch the video, and share it, as well as sharing this post. Share Invite your friends and earn rewards If you enjoy Building a New Economics, share it with your friends and earn rewards when they subscribe. Invite Friends • SHARE • LIKE • COMMENT © 2025 Steve Keen 548 Market Street PMB 72296, San Francisco, CA 94104 |