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Steve Keen’s manifesto put to work

The purpose of this post is to have a look through Steve Keen’s manifesto to see if there are any potential policy takeaways that can be applied to TTP. Professor Steve Keen (@ProfSteveKeen) was an economics lecturer at the University of Western Sydney and is the author of Debunking Economics and has been a weekly contributor to +Business Spectator. You can find his latest Business Spectator articles here.

There are two primary reasons why I am looking at the contribution Steve has made and how it may be applied to an improved policy position.

Reason 1: From what I can see, he is doing his best to be practical with his ideas. He is attempting to model the actual flow of money(debt) through our economy using tools from engineering. This increases the chance that his work will be useful in the real world.

Reason 2: He is prepared to argue for and defend his ideas. From what I can see with how he responds to comments on his articles, he doesn’t take the position of an aloof professor who is too important to respond to criticism. It’s all very well to be in academia trying to come up with new ideas to keep your annual quota of papers up, but if you want to leave a legacy, someone has to take responsibility and implement the idea, which may require a lot more work and modification to actually derive any benefit from it. Politicians crash and burn after every election partly because they completely screw up the implementation of their other peoples ideas.

Here is a quote from his manifesto that sets the scene:

Escaping from the debt trap we are now in will require either a “Lost Generation”, or policies that run counter to conventional economic thought and the short term-interests of the financial sector.

His three objectives are:

  1. To develop a realistic, empirically based, dynamic monetary approach to economic theory and policy;
  2. To develop and promote a “modern Jubilee” by which private debt can be reduced while doing the minimum possible harm to aggregate demand and social equity; and
  3. To develop and promote new definitions of shares and property ownership that will minimize the destructive instabilities of capitalism and promote its creative instabilities.

A 21st Century Jubilee

A Jubilee can have a few meanings these days depending on the context.

In terms of a debt jubilee, you will pick up the general drift from section 25:8-13 in Leviticus;

“…Then shalt thou cause the trumpet of the jubile to sound on the tenth day of the seventh month, in the day of atonement shall ye make the trumpet sound throughout all your land. And ye shall hallow the fiftieth year, and proclaim liberty throughout all the land unto all the inhabitants thereof: it shall be a jubile unto you; and ye shall return every man unto his possession, and ye shall return every man unto his family… In the year of this jubile ye shall return every man unto his possession”

Where a modern debt jubilee refers to cancelling or reducing an individuals debt.

In the video above at 1 minute in Steve says,

“So my suggestion is to use a particular power the federal reserve has which is section 13.3 of the Federal Reserve Act, lets them direct money directly into the bank accounts of individuals and companies and use that money, that capacity to create money into the economy in a way that QE does not do, put that money in peoples bank accounts and with the condition that if they are in debt they must pay the debt down but if they are not in debt they get a cash bonus and then use that to re-balance the economy to have more fiat based money, less credit based money, reduce the size of the financial sector, reduce the level of debt in the economy by that action and do it in such a way that debtors have more capacity to spend and savers don’t lose spending capacity because of the cash injection and then reverse the mistake of letting the private credit system create too much debt.”

To read section 13.3 of the Federal Reserve Act (which is for the USA, not Australia) click here.

From the way I read section 13.3, it does not give the US Federal Reserve the freedom to simply credit everyone’s bank accounts in a way that does not require being repaid like any other normal loan.

Provided, That before discounting any such note, draft, or bill of exchange, the Federal reserve bank shall obtain evidence that such participant in any program or facility with broad-based eligibility is unable to secure adequate credit accommodations from other banking institutions.

The above says a condition of its use is that individuals and companies applying for the program provide evidence that they are unable to take out a loan/credit card from any other banking institution.

The policies and procedures established by the Board shall require that a Federal reserve bank assign, consistent with sound risk management practices and to ensure protection for the taxpayer, a lend-able value to all collateral for a loan executed by a Federal reserve bank under this paragraph in determining whether the loan is secured satisfactorily for purposes of this paragraph.

The above says these loans that could be issued by the Federal Reserve will need to be backed by an appropriate level of collateral, which means the title for a house/land, bonds etc and that standard risk management needs to be applied.

And to make it clear that the intention of this program is providing emergency lending that requires repayment with interest & fees and is backed by collateral:

 once every 30 days, with respect to any outstanding loan or other financial assistance under this paragraph, written updates on–

  1. the value of collateral;

  2. the amount of interest, fees, and other revenue or items of value received in exchange for the assistance; and

  3. the expected or final cost to the taxpayers of such assistance.

Going back to the manifesto and to avoid trying to paraphrase everything he is saying, I am going to assume you have read his manifesto in full, which means I can simply point out any parts I disagree with and then organize the points I do agree with into some kind of actionable to-do list or goal for TTP.

I agree that some form of modern debt jubilee or quantitative easing for the public as he states, is both a necessary tool to have in place during a downturn and that it could be made into an effective mechanism to move toward full reserve banking.

The point at which I would differ with Steve is when he states,

A Mod­ern Jubilee would cre­ate fiat money in the same way as with Quan­ti­ta­tive Eas­ing, but would direct that money to the bank accounts of the pub­lic with the require­ment that the first use of this money would be to reduce debt.

While I agree that a cash injection (of fiat debt free money issued by the Government and not by selling bonds to the market) for all individuals during a downturn is a lot more effective than quantitative easing as the money will then be spent in the real economy, I wouldn’t want to prescribe that the money needs to be spent in a certain way, simply because it requires a lot more micro managing compared with doing it at a macro level and it doesn’t necessarily control the root of the problem. That is partly because I am not sure how you would enforce the rule that the cash injection will go to paying down debt if the person does have debt and partly because if it is effective in the short term, what would there be to stop a re-acceleration in debt uptake again?

You are hopefully already aware of the following, but if not, consider these two recent (2014 quarter 1) quotes from the Bank of England before we continue and please check the source for yourself.

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.


…the households and companies who receive the money created by new lending may take actions that affect the stock of money – they could quickly ‘destroy’ money by using it to repay their existing debt, for instance.

Reducing the Finance Sector

Here Steve Keen argues that employment in the finance sector needs to halve and that it should not be any more than 50% of its current size.

Since employment in the finance sector is dependent on the level of debt consumers and businesses have taken on (which he also states) I feel this section will be dealt with automatically by a debt jubilee that pulls us out of any downturn and leads us to full reserve banking.

Steve then states that he doesn’t believe regulation alone will be sufficient to tame the destructive force that ponzi finance has on capitalism because of Minsky’s proposition that “stability is destabalising” and because banks will always want to create more debt, any reductions attempting to restrain the banks will no doubt succumb to the banks within a few decades and the regulations will be watered down again.

I have little interest in “taming” or “restraining” the banks.

My interest is in completely removing the ability of the banking sector to be able to change the quantity of Australian dollars in the Australian economy.

That a bank is allowed to create the $600,000 on the spot that you need to buy the average priced home in Australia and you have to sell your time for 38 hours per week for the next 25+ years to pay that debt back plus interest is like allowing a local pedophile priest to play with your children behind closed doors each week after church.

Each time a bank issues a new mortgage in Australia, it’s like a priest taking a child into a closed room to play with them for an hour.

If your reaction is, “huh? There is nothing wrong with taking out a mortgage” then please re-read the two quotes above under “check the source”.


You can talk about reducing the quantity of children priests have access to each day. You can educate children about the dangers of spending time with priests or you can recognize, that you need to do whatever is within your power to remove the ability of priests to spend time alone with children.

Did the church use their own initiative to protect children from pedophile priests? No.

Did the church resist the outside pressure to reform? Yes.

Will the banks use their own initiative to only lend money they already have? No.

Will they resist the coming legal changes that will completely remove their ability to create Australian dollars? Probably.

What to do?

A quick method to pierce a pedophile priests bubble would be to show a video of the priest doing his immoral act/s to a full church congregation. 60 seconds of reality would be sufficient to remove that priests ability to access that congregations children each Sunday.

Likewise, a short Bill to put through parliament would state that before an Australian citizen can take out a mortgage, they must be fully informed by the bank that the money they are about to borrow and spend 25+ years repaying will be created by the bank, when the mortgage is activated.

The above Bill idea has been added to the Banking Policy to-do list.

Jubilee Shares

I don’t buy the proposition that there needs to be any change to the legal definition of shares.

His objective in changing the meaning of a share is to reduce the appeal of using debt to buy shares. If you want to change or reduce leveraged speculation on shares, you would start by reducing negative gearing for shares, as currently I can borrow $20,000 to buy some stock and claim the interest on the loan as a deduction. However, I am currently not convinced the ability to speculate on shares is necessarily a bad thing.

There is a big difference between speculating on houses and speculating on listed shares. The main difference being that when additional demand from speculators boosts the price of houses, they are directly changing the price of an essential component of living costs. In comparison, if speculators bid up the price of Woolworths shares or Google shares, it will have no impact on the price of food sold in Woolworths supermarkets or the cost of searching for “funny cats” on Google.

“The Pill”

Steve Keen proposes introducing a limit on the maximum that can be borrowed by an applicant for a property to be based on some multiple of the potential income of the property. He proposes a default ratio of 10, so if a property is returning $300 per week in rent ($15,600 per year) then the maximum amount that the property is allowed to be purchased for is $156,000.

He makes the valid observation that both the lender and the borrower have an incentive to increase the loan to value ratio. If a borrower has their heart set on a property, their desire will encourage them to take out the biggest loan they can possibly afford in order to be the winning bidder on the day of auction. Likewise, any bank has an incentive to be able to offer a borrower the largest loan possible that can be repaid.

While the idea to restrict lending based on the income of the asset may bypass the incentive of the borrower and the lender to increase the maximum that can be borrowed, it is not a proposal I am comfortable with.

Effectively it means setting a maximum price on housing assets and setting prices is not a path I wish to go down.

A better avenue is simply to progressively remove the many demand boosters and supply restrictions that make the housing market so unhealthy. If the housing market was operating as a market and not the Government backed ponzi scheme that it is now and the +Liberal Party went to enough DA meetings (Donations Anonymous) to ween themselves off property developer funded election campaigns, affordable housing would pretty much take care of itself.

Full Reserve Banking

Full reserve banking is where all the money in the economy is created by the government, not the banks as 95% of it is right now. Preferably, full reserve banking also means all the money in the economy was introduced into the economy debt free and no one has to pay any interest on that money, unlike now where the banks effectively earn their annual interest margin on all the money circulating around and around our economy each year.

Full reserve banking is something I support.

Steve Keen does support the idea of full reserve banking but has a reservation.

His reservation is that he does not see the ability of the fractional reserve banking system to create money as the immediate cause of banking crises. That the way in which the money is spent is a more important contributing factor to a financial crises. Based on the work he has done showing that the deceleration [link] of debt creation is a major contributing factor to a downturn, I would not doubt him on this point.

For me, one of my core values is that my time is important and therefore, your time is important, which is why I gave this blog the name it has. My support for full reserve banking has nothing to do with whether it can eliminate banking crises, it is because I believe that it is fundamentally wrong that a private institution has the capacity to create 1000’s of work hours as a debt that must be repaid for a quarter of a lifetime by any man attempting to live a normal life.

His second reservation is a doubt that any Government would be able to get the creation of money bit right.

This is a valid doubt and there is not much value trying to address it without specifics, which are not in place for Australia at the current time in terms of some concrete proposal / Bill of how we should move toward full reserve banking.

I also don’t see what difference it makes to the ability of investors to fund start-ups whether money is created by Government or private banks. If we have full reserve banking, banks will still lend money to investors funding start-ups, it will just always be money the banks have, not money they have created.

Right now I am putting together a start up with only a small amount of cash. I have been to a reverse pitch session in Melbourne where the main venture capitalists pitched to us what they would like to hear from a start-up wanting funding. The ability of my start-up to succeed rests squarely with how well it addresses the pain in the market, whether I am able to acquire new customers at a lower cost than what I spend to acquire them, the quality of my relationship with the other people who’s knowledge and experience is also required to make it work. And the desire of any venture capitalist to fund this start-up in the future, if funding becomes necessary, has a lot more to do with the above factors than whether he can take out a loan from a bank that is creating the money or using existing money.

Now for the meat.

Why worry about the change in quantity of money and debt in the Australian economy?

Well, Steve Keen gives us a good reason right here:

m3 change and unemployment

M3 is basically the total amount of money in the economy and from the graph above you can see that the rate of change of M3 explains about 72% (R2 at -0.72) of the change in unemployment.

debt change and unemployment

change in debt and unemployment

So from 1920 to 2013, the change in debt (as M3 is mainly debt entering the economy via mortgages, business loans and credit cards) has been a significant contributor to whether we, as workers, can put a roof over our head.

mortgage acceleration and house prices

The graphs above are from the paper, “Debunking Macroeconomics” by Steve Keen, which can be downloaded here:

Economic Analysis & Policy, Vol. 41, No. 3, December 2011.

The above also tells us that the rate of uptake of mortgages influences house prices.


For me, the relationship between M3 and both unemployment and house prices results in four things.

Firstly, the credit accelerator needs to become a regular indicator for Australia (the above graphs are from the USA) that is reported on regularly.

Secondly, any move toward full reserve banking or affordable housing needs to take the above into account.

Thirdly, the above is a strong reason to have some kind of facility in place that is capable of injecting fiat-debt-free-non-gold-backed hard cash into the economy on the ground during those periods when consumers and businesses decide, as a group, that they want to actually start paying back some of their debt to the banks, instead of increasing their total debt by billions of dollars each week.

Fourth, it has implications for fiscal policy and how any Government chooses to finance itself during a deficit.


Further development of the credit accelerator has been added to the fiscal-monetary-policy page under Economic Indicators.


I was intending to go through all the papers and articles Steve has produced but I simply don’t have the time right now. From the few articles I have read of his on Business Spectator, there are useful ideas there that could also be implemented which indicates there would be value in going through everything he has written.

The image for this post is from the US Department of Agriculture.