finance

The correlation between credit growth and unemployment in the US from 1990-2012 is -0.93. That's not a typo. Negative point nine three.

Any researcher would recognize this as a fundamental relationship. Yet mainstream macroeconomics completely ignores it.

Why? Because neoclassical models treat banks as intermediaries. In their framework, banks enable lenders to transfer money to borrowers. When debt increases, one account goes up and another goes down. Credit cancels out. No macroeconomic effect.

This is completely wrong.

Banks create money when they lend. When you borrow from a bank, your deposit increases and the bank's assets increase. Total money in circulation rises. You borrow to spend. That spending is aggregate demand and aggregate income.

Credit doesn't cancel out. Credit IS demand.

Ben Bernanke wrote in his essays on the Great Depression that the general attitude of the economics discipline was that changes in private debt should have no significant macroeconomic effects. This fundamental misunderstanding is why they missed 2008.

But here's where it gets worse.

After the crisis, mainstream economists tried to defend their position. A leading neoclassical economist published a paper claiming bank credit was 200% of GDP in 2008. Think about what that means. If GDP is 10 trillion, credit would be 20 trillion per year. The debt-to-GDP ratio would be in the tens of thousands of percent.

He had confused the debt stock with credit flow. The Federal Reserve database labeled debt as credit, and he took it literally. The paper was peer-reviewed and published in a top journal.

This shows how little the profession understands about banking in capitalism.

I've been building mathematical models based on Minsky's financial instability hypothesis since my PhD in 1992. These models show how rising private debt creates cycles that destabilize the economy. The cycles start small, appear to converge toward equilibrium, then explode into debt deflation.

US private debt peaked at 120% of GDP before the 1929 crash. It peaked at 170% before 2008. Government debt was low in both periods.

Private debt drives financial crises. The empirical evidence is overwhelming. The mathematical models confirm it. Yet the mainstream still doesn't teach this.

If you're ignorant about the banking sector in capitalism, you're ignorant about capitalism.

P.S. I break down the mathematics, the empirical data, and the failures of mainstream economics in detail in my presentation in the comments.

#Economics #Finance #Banking #MacroEconomics #FinancialCrisis #PostKeynesian #EconomicTheory