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What the Economics Professor has been saying

By on November 5, 2008 in Management

Associate Professor Steven Keen has been writing for the Age over the last couple of months and giving quite some insight into how we got into this financial mess.

I particularly like the simple way he has explained it in one of his earlier articles, entitled Financial chickens are flocking home to roost (September 28th).

He writes:

“BUSINESS as usual” is over. What we have taken as normal times – the ups and downs of Western economies since the 1960s, and the “financial engineering” of the past two decades – have been underwritten by the greatest debt bubble in human history. The meltdown on global financial markets is merely a reflection of the fact that, one day, this bubble had to end.

….So much unnecessary debt was accumulated in pointless speculation that the only way to get rid of it is to write it off – to declare debt moratoriums.

Households may have been naive to take the debt on, but the financial sector was culpable in extending it. Ultimately, it must pay for this folly.

Many of you would have heard me talk about the difference between debt and equity and how the returns from each of them are different.

I believe that the type of return required by a lender determines how that lending will affect a business. When debt and equity get out of balance the way a business operates can be squeezed in a direction by its lenders.

Our definition of the types of return is:

  • Debt lenders look for a fixed, known and limited return. This is normally paid as interest on regular basis.
  • Equity lenders look for a flexible, unknown and unlimited return. This is normally paid as a dividend which can vary both in terms of timing and size of payment.

When too much debt gets into a business it loses it’s flexibility, along with it’s ability to be creative.

Think about this in light of Steven Keen’s comments above and reflect on how our economy is being affected by the debt bubble which he referred to. I’m interested in your thoughts.

Let’s all determine to get more equity into our businesses, squeeze out the debt and head into a position of creativity and flexibility.

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It’s time to hold the debt-peddlers to account!

By on October 2, 2008 in FAQs

Everybody seems to be talking about the (in)stability of the financial system.

What the heck does that mean?

How many people have any idea what it means? Most of the trouble we’re in right now is because common sense has not prevailed and the smoke and mirrors of financial engineering has gone unchecked because the perpetrators have had so much at stake. It has become “Custer’s last stand”.

Think about the comments coming out of the US from Bush, Paulson et al.  If they don’t sound like Custer’s last stand then I’m a fairy penguin and I’ll go back to my burrow in Antarctica!

Here are the facts.

We’ve had a recessionary correction every decade since the 1960’s except we forgot to have one at the beginning of the new millennium. As a result, we’ve gone on for 18 years of unbridled “growth”.

The problem is, much of this “growth” is not real, rather it’s being fuelled by a massive expansion in debt. Asset values have been going up and people have been thinking they are better off, but all the time they have only been looking at one side of the coin.

On the other side — the side people have not been looking at — we have seen unprecedented growth in debt.

Now, to cap matters off, these financial engineers have completely lost their marbles when it comes to how they have done their accounting. We haven’t been growing real value; we’ve been artificially revaluing assets and then balancing the books with more debt.

When I was doing my accounting degree in the late 70’s it was against all accounting principles to revalue an asset and call it a “profit” and then declare that as “profit” through the profit and loss account. But this is now the most common sort of “return” (profit) that is available… as long as we allow that to continue we’ll never get the cash to catch up to all this speculation.

Stabilising the system through a taxpayer-funded bailout is making sure that we don’t bring the system back to the reality of cash returns and we keep up the “smoke and mirrors”, “rabbit out of the hat” false profit system.

Now, the obvious question…

Who has benefited from all this additional debt in the economy? None other than the money managers and financial engineers of the financial system who have created it. The people who have made themselves rich by financing the revaluing of “assets” over and over again.

Now that their folly has been exposed they are saying that “we the taxpayer” must bail them out! Ordinary citizens have paid them all the way up on their crazy ride through higher and higher quantums of interest, and now it seems we have to pay them again as they slide down the other side.

Enough is enough, I say!

It is time that the people who built and run this crazy financial system were brought to account for their folly.

What do you say?

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