Seventy years ago, the great evolutionary economist Joseph Schumpeter argued that Walras Law was false in a credit economy, because credit gave entrepreneurs spending power that did not come from the sale of existing goods. (link)
...
The capacity for banks to create money endogenously—”out of nothing”—is crucial here. (link)
My, oh my. Define "existing goods" as contractual obligations to give away future income and assets in event of default, and there you have your "existing goods". How anyone can think of this as "out of nothing" is IMHO quite astonishing. Noone would equate "slavery" with "nothing".
The problem with the crisis was that institutions counterfeited money by knowingly giving away mortgages to people who could never pay it back. And then the banks and rating agencies laundered it on a massive scale while the FBI got no funds to go after it -- although they warned in 2004 of a massive and dangerous fraud in the mortgage sector. And yet, noone has gone to jail for that money counterfeiting and laundering because (as Geithner recently admitted!!) the corresponding institutions are too systemic.
And below the last two short-term bubbles is the underlying, global restructuring process allowed by the west and "exploited" by the east. The bubbles helped to avoid senseful decisions which now, it seems, must come at a later stage where it won't be as easy to adopt. The Feds allowed debt/money counterfeiting on a massive scale which again helped to sustain global imbalances displayable as negative savings in the US. Then, as the US housing market started to decline, Fannie Mae stopped insuring no-money-down mortgages while the Fed raised rates up to 5% all the while oil prices climbed to unexpected highs -- a triple-whammy demonstrating the unbelievable incompetence of global government in general and the US government and FED specificially.
I really have got the impression that economists nowadays just try to market themselves. For example, Keen shows us the chart "Figure 2: The Mortgage Acceleration and House Prices Change Relationship (R^2 = 0.54)" and tells us that this
confirm[s] that mortgage debt acceleration, and not “population pressure” etc., is the key determinant of house prices. (link)For me, that chart shows a correlation and nothing more. If there would be population pressure (which I doubt, but that is not the point here), then house prices would go up and *because of that* debt growth could accelerate. Of course, the causal relationship could also be the other way round. But that's one point why planned economies don't work: nothing is black and white, everything is in flow, and there is never a clear one-directional causation. One day, the pressure emanates from one side (speculation), the other day from the other side (supply side constraints). These corrective forces are essential. And that is why Europe is determined to fail: at the heart of the European idea lies the idea to eliminate all corrective forces: currency exchange rates, short sellers, speculators, good accounting rules, reserves for government debt...
Bubbles can be (and usually are?) excesses based on fundamental and non-bubble-developments: the internet is still in full motion and buying houses as long as hundreds of billions of US Dollars are being counterfeited makes a lot of sense. In my opinion, a bubble, in the end, is defined by its collapse. And to predict that collapse, you need to look for the part that is unsustainable. And even if you find that unsustainability, the question remains on what the unsustainability depends. And in the case of the housing bubble, the unsustainability critically depended on the arrogance of governments and the people itself who were brainwashed with thoughts of superior America where such a fraud could never be possible and where the market would correct it all. Well. It did. So much for "the markets don't work". In the end, reality bites.
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