Steve Keen: we need a “debt jubilee”

Submitted by Edward Harrison of Credit Writedowns

Last week, I highlighted some of the ideas of Australian economist Steve Keen in my post, “Politics and reform: Say I’m a politician….”  Keen is of the Minsky camp and he believes that an unsustainable debt bubble has build up in the industrialized world which can only be brought to heel through a ‘debt jubilee.’

Below is a video clip of Keen telling Max Keiser a bit more about how he sees things.  Central to his ideas is the concept that demand for credit creates loans which create reserves, which is the opposite causality of what one sees in neoclassical economics.  This would mean that, absent a pickup in demand for credit, inflation is unlikely to reappear – irrespective of what central banks do. I will have more on this subject in later posts.

Whoops: for some reason I haven’t been able to embed the video. You can see it here on Credit Writedowns.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. RebelEconomist

    Well, I hope Steve Keen starts by forgiving his bank’s debt to him in the form of his bank deposits.

    I am sorry to say that I bought his book. Gonna go out and drive a six inch nail throught it and then burn it!

  2. winterspeak

    Keen is a post-Keynesian.

    Another good source for this perspective is Warren Mosler, moslereconomics dot com.

    1. Edward Harrison Post author

      Winterspeak, that is a good recommendation on the post-Keynesians. Two others of note are The Levy Institute and the UMKC blog that features Bill Black amongst others. I have highlighted the UMKC crowd in the past and have been delving into their work, particularly Randy Wray’s, which features the sector financial balances view (see here).

      Long-story short, these modellers say that neoclassists are too caught up in a gold standard mentality and that a fiat currency world is different. in particular, as Keen points out, they believe demand for credit creates loans which creates reserves, not the other way around. These post-Keynesians along with the Austrians see debt build-up as central to the present downturn.

    2. JKH

      Winterspeak, about the only thing Keen has in common with the other PK’s is a basic understanding of how the bank reserve system works, which apparently differentiates all of them from the rest of the economics profession. His methods are very different from there. E.g. he does not use the sector financial balances model at all. And his own models are highly idiosyncratic in their accounting creativity.

      1. winterspeak

        JKH: Agreed. The PKs are a varied bunch, and I’m not enough of an insider to separate out the factions.

        That said, I think Keen would say it was fair to classify him as a post-keynesian. And on the notion of whether or not there is a “money multiplier” — a key idea of our time — they are in agreement.

        1. JKH


          Agreed that Keen is PK; and quite so on the common denominator of the PK family.

          I’ve been attempting to sort out the factions – a work in progress – as I’m not sure they even know the distinctions themselves.

          It’s fascinating that multiple simultaneous claims to the same parcel of real world knowledge can spawn such different ideological rivers – or that they can spawn any ideological implication at all. I’m becoming somewhat sceptical about the full integrity of the “net non government assets” idea at this stage, as it seems to overlook some other important demarcations in the flow of funds. And I’m still reeling from the non-PK view that the PK insight into the “multiplier” myth is merely a belief rather than a fact at this point. How do you explain to them that this is the world in which we live?

          What the hell’s happened to Waldman?

          1. winterspeak

            JKH: Hah! Let me know once you’ve completed your inventory. Occasionally I hear cries of “horizontal vs vertical money” and decide that I’m really not interested. Nothing is more pointless than another’s internecine warfare.

            Would love to chat more about your thoughts re demarcations in the flow of funds. You know how to get me: winterspeak at winterspeak dot com.

            If you follow my blog at all, you know that I am similarly surprised and frustrated at how ineffectual I have been at popping the “money multiplier” myth, surely the least fit idea in this mess of bad ideas. I’m told that my rhetoric needs work. I take solace in the fact that PKs, who are smarter than me and have been doing this for years, have been equally ineffectual.

            I mean, if ~$1T of excess reserves, massive m0, with no increase in any of the other ms, and persistent deflation, and JAPAN SINCE 1980s (!!!) don’t convince people, I declare then impervious to reality. But we still get academic macroeconomists like Hummel worried about US Govt Default — maybe he did not get the memo that the days of the gold standard are over.

            I emailed with Waldman a while back, and he said he was fine. Life, as it does, is intervening.

  3. mwdavis

    I just finished paying off $41,000 in credit card debt to finally be debt free.

    Of course, NOW they start talking debt relief . . .

  4. DownSouth

    So what’s the difference between what Bush/Obama and Japan have done and what Hoover did in the 1930s?

    Hoover had tried to keep hands off the economic machinery of the country, to permit a supposedly flexible system to make its own adjustments of supply and demand. At two points he had intervened, to be sure: he had tried to hold up the prices of wheat and cotton, unsuccessfully, and he had tried to hold up wage-rates, with partial and temporary success; but otherwise he had mainly stood aside to let prices and profits and wages follow their natural course. But no natural adjustment could be reached unless the burdens of debt could also be naturally reduced through bankruptcies. And in America, as in other parts of the world, the economic system had now become so complex and interdependent that the possible consequences of widespread bankruptcy–to the banks, the insurance companies, the great holding-company systems, and the multitudes of people dependent upon them–had become too appalling to contemplate. The theoretically necessary adjustment became a practically unbearable adjustment. Therefore Hoover was driven to the point of intervening to protect the debt structure–first by easing temporarily the pressure of international debts without canceling them, and second by buttressing the banks and big corporations with Federal funds.

    Thus a theoretically flexible economic structure became rigid at a vital point. The debt burden remained almost undiminished. Bowing under the weight of debt–and other rigid costs–business thereupon slowed still further. As it slowed, it discharged workers or put them on reduced hours, thereby reducing purchasing power and intensifying the crisis.

  5. Keli K


    I find Keen’s theories fascinating but see little chance of them being taken seriously as they are so far beyond standard conceptions.

    I have two questions for you (as a non-economist, forgive me if they are basic or even stupid): 1) given the mass outrage that would meet a call for a debt jubilee (moral hazard and all that) is there some way to make such an idea more palatable politically but still achieve the main goal? Could the first x amount be forgiven outright, for instance, but each additional tranche is converted into long-term loans, etc? or could we call the jubilee but establish a very strict new regime for debtors thereafter (full recourse mortgages, say). 2) wouldn’t a debt jubilee have the ironic outcome of reinflating a massive bubble as people jumped to cash out and upgrade (houses, cars, etc.)? Or would a jubilee not necessarily cover mortgage debt (and if it did not, would it get us very far, as excessive mortgage debt is the crux of our consumer credit crunch)?

    1. dogster

      Try this for jubilee – US credit card debt is $1T more or less. How about sending every US adult $1000/month for a year. People with cc debt could service their accounts. Everyone else would spend it into the economy.

      The new money wouldn’t become inflationary until the debts were near to being paid off. In the meantime, unemployment would go to zero.

      This is similar to Richard C cook’s social credit suggestions.

  6. mark m

    Again I think a lot of our discussions stem from the bank bailout of a year ago. By artificially keeping the insolvent banks afloat we’ve entered some kind of Twilight Zone where the normal rules of capitalism don’t exist. A bit like Max Von Sydow playing chess with death in The Seventh Seal, trying every means possible to stave off the inevitable. We’ve left the Free Market highway and veered so far off road no map can lead us back.

  7. Reino Ruusu

    I think Keen is correct in the causality of lending and reserves. Very low levels of cash reserve requirements are one factor in this situation.

    Quantitative easing could have some effect event without the multiplier effect of lending, though. Every bit of newly created base money is reflected in both cash reserves and deposits. Some of the new money is going to flow back into “safe” savings instruments, so the multiplier will actually be less than one. Anyway, the multiplier is not zero.

    What is needed in this situation is that those with massive savings, say in government bonds, put those savings into circulation, either through consumption or investment. Moving savings from government bonds into demand deposits is a step into that direction even if no lending occurs, as the new deposits are not going to just sit there.

    What we need to do is make paper assets riskier so that people will invest in real assets. The overall expected value of savings and (real) investment should be balanced. Unfortunately all these government guarantees are doing exactly the opposite, by providing more (nominally) safe havens for people to park their savings into.

    The only way to make Treasury securities appear riskier is by creating credible uncertainty (not necessarily expectation) about inflation. We are not there yet. Deflation is looking increasingly more probable.

  8. Hugh

    Debt repayment in full does not seem possible. It would keep our economy frozen for a decade, possibly two. The only other options that I know of are inflation and debt repudiation. Since we look to be in more of a deflationary spiral, that leaves debt repudiation.

    It is like the old Sherlock Holmes’ observation: “Eliminate all other factors, and the one which remains must be the truth.”

  9. Ed

    As a net saver, I think a debt jubilee is a useful concept. Start thinking about how to wipe debt off the books in various circumstances, then worry about how to deal with the moral hazard.

    For example, for housing, imagine if the government took over as servicor and obligor on all mortgages, then gave the option or encouraged “homeowners” to exchange their mortgages for very long term leases. Essentially this would greatly expand the stock of public housing. Now this offends all sort of cultural tropes. But arguable one cause of the crisis was the drive to turn into “homeowners” people that really should have been living in public housing and would have been living in public housing in other countries or rented in the US at other times.

    How about a debt jubilee while making it almost impossible for the former debtors to take out new debt? That deals with the moral hazard, gets debt off the books, and prevents a new bubble. Something like this could work for consumer debt.

    There is also the idea of the big bath, just forgiveness and default on everything, including the federal debt. Throw up all the cards in the air and see where they come down and start from there. Well probably only as a last resort, when all other solutions have failed.

  10. Peter T

    Keen get it right on the main point: There is too much debt out there, it must be reduced, instead of trying to push even more debt onto people and businesses. I part with him on the solution: Debt forgiveness leaves the creditor with nothing and the assets in the hand of the debtor, similar to hyperinflation. Instead, I side with Nassim Taleb: debt should be transformed to equity. Yes, that would mean many bancruptcies to determine which creditors get which assets or nothing, but that is in line with the lessons from Lehman: not the bankcruptcy is the problem but the lack of procedures to take big banks apart. Let’s work on that instead of peddling more debt.

  11. Tortoise

    I agree with Peter T’s “Keen get it right on the main point: There is too much debt out there, it must be reduced, instead of trying to push even more debt onto people and businesses.” As for the solution, let us just recognize that any solution can be based on political will and raw power. Historically, “anadasmos” or “New Deal” or whatever you want to call it have been decided from political forces who ordained that it was time to do some, in plain words, redistribution of wealth. Economic theory usually has little to do what how the decision is taken.

    One thing I can say with certainty: We should not have allowed the situation to get to this point. There should have been (and should now be promulgated) Draconian restrictions to how much one can borrow depending on their means. There once were. I remember when in the seventies my application for a master card was rejected even though I had a good job and zero debt.

  12. BryanW

    perhaps there will be a debt jubilee regardless….


    For OpEdNews: Ellen Brown – Writer

    A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

    Eliminating the “Straw Man” Shielding Lenders and Investors from Liability
    The development of “electronic” mortgages managed by MERS went hand in hand with the “securitization” of mortgage loans – chopping them into pieces and selling them off to investors. In the heyday of mortgage securitizations, before investors got wise to their risks, lenders would slice up loans, bundle them into “financial products” called “collateralized debt obligations” (CDOs), ostensibly insure them against default by wrapping them in derivatives called “credit default swaps,” and sell them to pension funds, municipal funds, foreign investment funds, and so forth. There were many secured parties, and the pieces kept changing hands; but MERS supposedly kept track of all these changes electronically. MERS would register and record mortgage loans in its name, and it would bring foreclosure actions in its name. MERS not only facilitated the rapid turnover of mortgages and mortgage-backed securities, but it has served as a sort of “corporate shield” that protects investors from claims by borrowers concerning predatory lending practices. California attorney Timothy McCandless describes the problem like this:

    “[MERS] has reduced transparency in the mortgage market in two ways. First, consumers and their counsel can no longer turn to the public recording systems to learn the identity of the holder of their note. Today, county recording systems are increasingly full of one meaningless name, MERS, repeated over and over again. But more importantly, all across the country, MERS now brings foreclosure proceedings in its own name – even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers’ discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer’s home. . . . So imposing is this opaque corporate wall, that in a “vast” number of foreclosures, MERS actually succeeds in foreclosing without producing the original note – the legal sine qua non of foreclosure – much less documentation that could support predatory lending defenses.”


    “By statute, assignment of the mortgage carries with it the assignment of the debt. . . . Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable. The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation. The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.” [Citations omitted; emphasis added.]

    MERS as straw man lacks standing to foreclose, but so does original lender, although it was a signatory to the deal. The lender lacks standing because title had to pass to the secured parties for the arrangement to legally qualify as a “security.” The lender has been paid in full and has no further legal interest in the claim. Only the securities holders have skin in the game; but they have no standing to foreclose, because they were not signatories to the original agreement. They cannot satisfy the basic requirement of contract law that a plaintiff suing on a written contract must produce a signed contract proving he is entitled to relief.”

    more in the thread at

  13. Skippy

    1. agree with creation of monies.

    2. over hang of debt *realized future monies* (its length and mass will at some point detach from its anchoring point new loans/debt *exteded Temporal summation*) which will smash us flat. Hilariously enough we are extending this paradigm with in the very organizations that brought us to this point, extending their over hang which some have pointed out, as nothing but *air* (hell even air has mass, um so does dark matter, where this has none save the electrons representing it), until realized in the *now* (truly a Quantum and not kicked down the road into the future.

    3. realization/consensus of factors (ie psychological, physiological, sociological etc) which brought us to this point, must firstly be agreed upon, before solutions can be rendered and applied.

    4. deep rooted generational ideology’s will supply the largest frictional component ie: the marriage between wealth creation/concentration and religious/political beliefs.

    5. Infinite expansion is theoretically possible in many scientific areas, but not in regards to human activity’s in a finite world and increasingly shorter time frames, ie: are we not increasingly extending in to the future to pay for today. If I was the future, I defiantly would have a bad attitude, toward today.

    6. In a construct that caters to self realized potential over all other considerations, one would expect moral decline (individually and societal), a concentration of power and wealth to a increasingly smaller percentage of the population globally, with the caveat, that this process is on going and increasing speed.

    Skippy…bloody hell, financial black hole…epicenter Wall st…event horizon any where outside your cranium…if your lucky…Man I feel like my money via time differential is creating this effect, see Spaghettification:

    PS. permission requested to get naked, paint multi-colored circles upon my body and go for a long jog, smiling and waving at the blissfully uniformed as they go about their daily task of mental insulations, anybody got some Tricyclics?.

  14. R cohn

    Would a debt jubilee involve the government reneging on its debt.IS not cash a form of government debt.What would happen to creditors.Would not a debt jubilee just penalize the savers and reward the irresponsible.One thing that would happen if the government defaulted on its debt,the dollar would collapse,nobody would but US debt and imports might not be available unless paid for in hard money.The people who suggest a debt jubilee not thought through all of the unintended consequences of reneging of debt.It would be better to suffer through another decade of slow growth then to enter in a debt jubilee with all of its problems.The USA seems to closer to a Zimbabwe than I could ever imagine

    1. Hugh

      A debt jubilee, or repudiation, or default, however you wish to call it is not something casually suggested. It is about a controlled reduction of unsustainable debt through repudiation of part of that debt or an uncontrolled reduction of it through a general financial collapse. This is why arguments about fairness or rewarding the irresponsible or penalizing the frugal (all of which by the way oversimplify why many get into financial difficulties) have no place. The responsible and irresponsible, or more accurately the overly endebted and the manageably endebted, will be wiped out equally if the system implodes.

  15. reason

    I know I disagreed with Keen on his own site about this – I don’t think a debt jubilee is politically feasable and it doesn’t seem equitable to me.

    My own view is that we need to recognise that we have built a system where debt = money and wiping out debt wipes out money – and we need something to replace it with.

    Faced with debt deflation, I think we need more base money (yes I mean the government should borrow directly at 0 interest from the central bank – i.e. print money) and we need to spread it around. And at the same time we need to discourage new debt (higher interest rates).

    I’m a citizens basic income guy anyway, I want that money spread around and used to start reducing debt. Those without debt, get an income bonus – so we are rewarding the good guys, (we should up marginal interest rates a bit, so we aren’t giving billionaires money they don’t need). If we get into an inflationary environment, then we should start raising taxes, or (not my favourite) issuing more bonds.

    In a way, what I’m proposing is the exact opposite of what has become the default policy prescription that got us into this mess. Instead of tight fiscal policy and loose monetary policy, I’m suggesting in the short term loose fiscal policy and tight monetary policy.

    1. dogster

      ” My own view is that we need to recognise that we have built a system where debt = money and wiping out debt wipes out money – and we need something to replace it with. ”

      Ellen Brown argues that US treasury money, similar to Lincoln greenbacks, ought to be printed and spent into circulation. This would be money without debt. The government could spend it into circulation by simply sending, for example, me $1000 a month to pay off my credit cards

  16. But What do I Know?

    @mark m

    A Seventh Seal reference!! Nice!! Maybe instead of playing chess with Death, the modern version could feature a banker doing derivative trades with him.

  17. Siggy

    A debt jubilee? Why not convert those debts that cannot be serviced into equity. When that is done then go bankrupt and wipe out the equity position. For those debtors who cannot service their debt, they get to move out of the house, they get to give up the car. When we have everything tradable, they get to start over again. It’s like going to debtor prison except there’s no prison, just a shopping cart.

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