At least since Joseph Schumpeter we know that credit is good for economic growth. At least since 2007 we know that too much credit foreshadows financial turmoil. Inspired by Keynes and Minsky, Dirk Bezemer pieces together a cross-country data set of credit and debt, investigating whether the two faces of credit are different for different forms of credit. And using agent-based modeling, he strives to capture the interaction between the financial and the real -- this is new economic thinking.
About Dirk Bezemer
Dirk works on the economics of growth and development. He conducted research on the economics of transition at Imperial College, University of London, and on agricultural and rural development at the Overseas Development Institute in London. He was employed by the UK Department for International Development as an Advisor before accepting a position at the University of Groningen. More...
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Very similar views to Prof. Steve Keen (www.debtdeflation.com), but Steve Keen, I think, had some concerns about agent based modelling, deciding to go the route of modelling dynamic systems using engineering techniques, with differential equations involving macroscopic entities, rather than elementary agents. Would be interesting to see if those concerns apply, or what the result would be if the two directly collaborated.
Outstanding attempt to shorten the gap between micro-economic dynamics and macro-economic effects!
1. Surely credit from a bank requires a return of interest which is set to cover inflation plus a guarentee (or insurance) against non-return of the original sum. Any bank that is unable to cover its losses in this way is doing bad business and should increase its interest rate.
2. No bank wants to have more cash in its vaults that specified by law, so most of its money is immediately put in giving credit. The bank decides where this is placed, and this is based on the comparative and the average amount of interest charged to cover a loss (see above). When a bank give a lot of credit that is very risky it needs to raise its rate of interest and consequently the current credit crisis is due to the banks themselves who did not do this. They should do it now.
3. A viable business that is able to return a loan within a few years can surely cover the interest. Loans that are long-term and difficult to cover need additional insurance for guaranteed returns.
4. Agent-based models are not new. The first household-firm models in 1933 were of this kind. Please see my 6 agent (entity) model in Wikipedia Macroeconomics, where the mutual circulations of money with goods, services and valuable documents is fully and comprehensively covered (19 double flows).
I hope Dirk Bezemer is linking up with Steve Keen at the University of West Sydney.
If I may reply to the post @Macrocompassion, it's ironic really that macro models treat 'the private bank' as if it was one thing, without the insight that an agent based model can give, that as soon as you have two or more private banks and fractional reserve laws, commercial credit can increase enormously.
Logically, your points make sense, but if banks adhered to them, would it have saved us from the Global financial crisis?
Here's the flaw, as my novice econ brain understands it (at least the mortgage crisis part)...
Banks did follow your points, ensuring that the housing assets were backing the loan. However, when too many loans failed in high concentrations (concentrations both geographically and temporally) such a spike of supply in housing market had a crippling effect of the asset price.
What of your 4 points would have prevented such a market shift? Is that what #3 means... needing additional insurance beyond the house as the asset at risk? Insurance beyond the down payment? (I know there were very low down payment options at the height of the bubble.)
This sort of outlook -- credit disequilibrium foreshadowing financial turmoil with real disequilibrium effects -- was pioneered by Friedrich Hayek. See Hayek's 1929 _Monetary Theory and the Trade Cycle_ and his _Monetary Nationalism and International Stability_.
The common notions of different types of money shared by Wieser & Keynes and Keynes' adoption of Mises' distinction between savings and investment are two links connecting Hayek's monetary disequlibrium/real economy disequilibrium to Keynes/Minsky monetary/credit disequilibrium -- beyond the familiar Wicksell link.
So this sort of project rightly could be described as having a Hayek paternity, as it can any other paternity.
And, rather famously, William White (former chief economist at the BIS) combined Hayek and Minsky to anticipate and warn Alan Greenspan of the coming bust of financial/real economy disequilibrium of the 2000s.
"he strives to capture the interaction between the financial and the real -- this is new economic thinking."
What is old is new again. Hayek "strives to capture the interaction between the financial and the real" in Book IV of his 1929 _Monetary Theory and the Trade Cycle_.
Until academy forgets the darker side of paradigms and stop playing with words as far as the financial system is concerned we will deceive ourselves.
It is about time to rreally look into the negative effect of credit and of multipliers banking. Multìpliers are cocaine. A few lines or pounds of it. Cocaine that leads the system out of reality.
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