Understanding Economics featuring Dr. Steve Keen - Part 3 of 4

Why didn't economists predict the global financial crisis? Because they couldn't, but Dr. Steve Keen did. He won the Revere Award for most clearly and accurately predicting the global recession. In the third of four segments, Dr. Keen explains how private debt can grow in a speculative bubble. While a part of the contribution to the growing in private debt comes from households, and those flipping houses, the major portion comes from the financial sector gambling on derivatives. Keen explains that the ratio of housing prices to gross domestic product, when adjusted for inflation, has stayed more or less the same for the past 100 years, until speculation, and excessive borrowing led to more than doubling of the housing prices in the USA. This bubble has now burst, but housing prices are still 15% above previous levels, and are likely to continue to fall, and overshoot on the downside. Similar housing bubbles exist in other countries. Keen discusses how the debt bubble in Japan has resulted over a decade of economic stagnation, and a fall in housing prices of 70%. Finally, Keen suggests that the economic downturn in the USA is likely to continue for ten to fifteen more years, as the private sector reduces its debt level, which subtracts from spending and GDP. Dr. Keen is author of the 2001 book Debunking Economics, and professor of economics at the University of Western Sydney in Australia. Keen is interviewed by mathematician and speaker Aaron Wissner, founder and executive director of Local Future, a non-profit educational organization based in the the USA. For more exclusive content with Dr. Keen, search the NewCulture YouTube channel for Keen: http://www.youtube.com/user/newculture/videos?query=keen This interview was recorded in high-definition in July 2012 at the Fields Institute for Research in Mathematical Sciences at the University of Toronto in Ontario, Canada. http://www.fields.utoronto.ca/ Dr. Keen maintains an ongoing blog which documents his research into accurate economic understanding: http://www.debtdeflation.com/blogs/ Dr. Keen discussed many concepts, and mentioned many individuals in the full interview. Below is a list of terms and articles mentioned: Tags: neoclassical economics, efficient markets hypothesis, capital asset pricing model, black shoals option pricing, equilibrium, cycles, Charles Kindleberger, Hyman Minsky, Brad Delong, mathematical models, EconLit, Matheus Grasselli of McMaster University, dynamics, financially stable, great depression, bankruptcy, stability, Debunking Economics, Capital Account, hedge fund, shares, futures, put option, distribution, sigma, deleveraging, software Minsky, software QED, Paul Krugman, INET Institute for New Economic Thinking, Credit Writedowns, John Maynard Keynes, General Theory, Rod O'Donnell, post-Keynesian, Robert Skidelsky, chapter 12 of the General Theory, long run expectations, Back to the Future, rational expectations, prediction, neoclassical model, magical thinking, financial crisis, Robert Shiller, Alan Greenspan, central bank, liquidity, Dow Jones, downturn, bubble, Savings and Loan Crisis, receivership, banks, economic depression, flip that house, derivatives, mortgages, asset prices, leverage, positive feedback loop, cycle, 1987, private debt, gross domestic product, public debt, mortgage debt, capitalist, property, leverage, housing bubble, Case-Shiller Home Price Indices, real terms, consumer price index, CPI, Japanese asset price bubble, stagnation, speculators, investment, innovation, debt, demand, change in debt, declining sales, Japanese economic stagnation, non-orthodox economist, John Cochrane, Robert Lucas, Thomas Sargent, John Prescott, model, geocentric model, Brad DeLong, Mark Talmer (?), behavioral economics, external shock, Nouriel Roubini, macroeconomic, Dean Baker, epicycles, competition, marginal cost, wages, Robert Solow, business cycle, Federal Reserve, Ben Bernanke, debt bubble, downturn, market economy, speculative bubble, flipping, intellectual framework, Post-Keynesian, put option, collar, speculation, chaotic distribution, variation, five sigma, fat tails, expectations, rational, prediction, irrational exhuberence, derivatives, hedge fund, leverage, feedback, housing bubble, subprime crisis, capitalism References * Hyman Philip Minsky - * Charles Kindleberger - Manias, Panics and Crashes: A History of Financial Crisis * Steve Keen - Debunking Economics (second edition, newly revised) * John Maynard Keynes - General Theory of Employment (1937) * John Maynard Keynes - The "Ex-Ante" Theory of the Rate of Interest (1937) * Gerd Gigerenze - Rationality for Mortals: How People Cope with Uncertainty (Evolution and Cognition)