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Biggest bubble of all times



July 22, 2011 – Comments (5)

"Fiddling away while living in the biggest bubble in human history."

Steve Keen explains what is taught and how it is taught in universities and why those models don't work, haven't worked and have lead to the insanity in policy. 

I have always thought that some degrees do an incredible job of teaching people to not think and dismiss the obvious and listening to Keen's videos have given me a better understanding of what is taught and why there is such a disasterous group set of thinking.  

If nothing else, I'd listen to and look at the chart from about 11 to 12 minutes in the video.

Just after 13:30 minutes I love how he refers to how we've taught equilibrium systems and not the mathematics of dynamic - differential equations and systems analysis.  I find that interesting as well as I've always said I never really understood the "fluidity" of numbers until I took calculus, and on that point I almost think calculus should be a requirement to run in an election.

Previous videos on his site also show how modern text books do not follow the historical theory and the historical theory has merit that the textbooks have done away with. 

5 Comments – Post Your Own

#1) On July 22, 2011 at 3:33 PM, ikkyu2 (98.13) wrote:

Great and very stimulating video.  I have a few responses:

1)  You're shocked - shocked, I say - to find out there's gambling going on in this establishment, dwot?  Does it really surprise you that a game's being played and that new participants are taught that the rules are different than they really are?  That's called the art of the con and it's as old as human history.

2)  I took introductory economics from Friedman and Feldstein in 1991, and there's nothing in this video that they didn't teach us - but the interesting thing is, this stuff wasn't *tested*.  We were tested on neoclassical economics.

3)  From this, I derive that the principal purpose of neoclassical economic theory is the same as the principal purpose of Prof. Keen: sell textbooks and get your grants for more research funded.  Friedman and Feldstein were substantially successful at both of these endeavors - believe Feldstein still runs the NBER.

4)  He makes a lot of good points, but the one that's really come home to me in the last couple of years, listening to Gentle Ben unroll his doublespeak, is that there are two things that matter in our economy: money velocity and hard asset prices.  (Keen calls money velocity "debt acceleration," and his reason for doing so is sound because he is pointing out where money velocity originates.)  Since small rational agents have little control over money velocity, we like to look at hard asset prices.  A hard asset is a commodity, real estate, or a share of stock in a company that produces something (not a servicer or a financier.)

5)  Most participants in the money markets aren't rational; they can't predict the future, don't try to, believe a dollar is a dollar is a dollar, and believe than an hour of their labor is worth a consistent value compared to the value of a men's suit, an ounce of gold, or a barrel of oil - demonstrably false in the current economy.  We believe this way because we're wired to believe in things we can see or experience, not in differential equations describing the dynamics of artificially manipulated systems.

6)  Since you understand these things, dwot, I can't understand why you're not in the game along with the minority of rational actors.  Do you find you really can't predict future trends to your liking?  Keen's right that private debt to GDP has to fall; is there any doubt that the way this is going to happen is massive inflation of the current money supply, that money supply in which GDP (but not past debt) seeks to be denominated?

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#2) On July 22, 2011 at 3:57 PM, amassafortune (29.12) wrote:

Keen was one of maybe a dozen economists who got it correct and put it in writing before the crisis of 2008. He also warned that the same results were coming to the Australian real estate market. On both predictions, he was largely ignored.

Here's another math-based economics lesson. Prof Albert Bartlet keeps it somple. The eight parts covering > 1hr are dated, but worthwhile. He makes the point that constantly seeking growth is a shortsighted goal. 

This is good instruction for anyone who thinks artificially promoting growth or propping up trends that are trying to self-correct can prevent the inevitable.


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#3) On July 23, 2011 at 1:14 AM, dwot (29.28) wrote:


When I was in the market I was working about half the hours I work now so I was able to follow it better and I had a lot more time for looking around.  When I decided to pull out I tried to transfer money out of an account right in the middle of that finanical crisis and despite a few requests on my part and the bank manager where I was trying to transfer the money to, they weren't doing anything, so that really freaked me out.  I had to write a letter to the authorities and send them a copy before they transferred my money.  What is legally supposed to be done within 5 business days took 3 months.  It really made me uncomfortable and I shut down my trading account because of it.

But, since I got out of the market I bought a house, put in a basement suite (another reason for limited time for the market) and now my rental income covers all utilities, insurance, taxes, and food.  Housing was inexpensive to buy where I am, but rents are high.  If I was to leave here and just rent my whole house right now the rental income would be about a 12% return on my investment.  To me the market isn't the only place to invest.  This is much slower then what I was doing in the market but it also feels like much more of a sure thing.

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#4) On July 23, 2011 at 1:50 AM, ikkyu2 (98.13) wrote:

Take care of your real estate while you're young and it'll take care of you while you're old.  - That's what my mom always said, and for her it's come true.

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#5) On July 23, 2011 at 4:27 PM, dwot (29.28) wrote:

And that is the way it should have stayed.  

I think it was the stepping down the interest rates that started in the 80s that utterly destroyed sound philosophy by creating enormous asset price inflation.  It also hid the decline lifestyle as people either borrowed from their homes for spending or increased their disposable by lowering their payments from refinancing at a lower rate.

In my case I firmly believe looking after real estate when you has made a huge difference in my life even though my first home purchase was at the top of a housing bubble.  Unfortunately it made life financially stressful and grossly limited spending choices the entire time I was a home owner in Vancouver, 15 years.  Prior to that it was trying to put myself through university that gave huge financial stress.

It seems Vancouver's housing bubble has gotten worse even though there is no excuse for not seeing the risks when you look at what the housing bubbles are doing around the world.  I got out of Vancouver's market at a peak prior to a minor decline, but now it is even higher, maybe 10%.

But I think that can be tied to the Bank of Canada lowering interest rates and Canada Mortgage and Housing pulling some of the same incredibly stupid stuff like Fanny Mae.  There are going to be some taxpayer insured losses to eat.  They've reduced the degree to which lending standards were loosened, but they still need to be tightened more to protect taxpayers.

But Whistler, which was even more bubbled then Vancouver, has had a significant decline at the higher end.  I know someone who just exited the high end market for about 2/3rds of the peak, which is still about $800/sq ft.  The peak was around $1200/sq ft.

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