You have just come from your annual medical checkup, where your doctor assures you that you are in robust health.

Walking jauntily down the street, you bump into a practitioner of alternative medicine. He takes one look at you and declares “You have a serious tumour! It must be removed or you will die”.

You ignore him as you always have and continue your merry way down the street. One day later, a stabbing pain suddenly cripples you and you collapse to the pavement.

In agony, your call your doctor, who initially refuses to send an ambulance because he knows you are well.

When you lapse into a coma and stop talking mid-sentence, your doctor concludes that perhaps something is wrong and sends an ambulance to take you to hospital.

Initially, the doctor waits for you to revive spontaneously, because he still knows there’s nothing really wrong with you. But as your pulse starts to weaken, he reluctantly calls a retired doctor who had experience of a similar inexplicable malady in the distant past.

She prescribes massive doses of tranquilisers, painkillers, vitamins and oxygen — all substances that had been removed from the medical panoply due to recent advances in medical theory. Reluctantly, your doctor follows his retired colleague’s advice — and miraculously, you start to revive.

After a year of expensive medical treatment, you return to the same robust health you displayed before your inexplicable illness. Triumphant, if somewhat puzzled, your doctor declares you well once more and releases you from intensive care.

As you stride confidently away from the hospital, you have the misfortune again to bump into the practitioner of alternative medicine.

“But they haven’t removed the tumour!” he declares.

…

One shouldn’t have to spell out the details of such an analogy, but in times of widespread denial, one has to:

  • You are the economy;
  • The tumour is a massive accumulation of private debt;
  • Your doctor is Neoclassical Economics, and the retired colleague is a so-called “Keynesian” Economist (who doesn’t know it — since his medical textbooks were poorly written — but he’s actually following another economist called Paul Samuelson, not Keynes);
  • The alternative medicine practitioner follows Hyman Minsky’s Financial Instability Hypothesis (which is based on what Keynes actually did say — as well as the wisdom of Joseph Schumpeter and, in whispers, Karl Marx);
  • The moment you hit the pavement is the beginning of the Subprime Crisis; The collapse of Lehman Brothers is the moment when you slip into a coma; and
  • The day the doctor takes you off life support and declares all is well … is next month.

The final reason for me being a bear is that I am that practitioner of alternative medicine. Minsky’s Financial Instability Hypothesis has been ignored by conventional economists for reasons that are both ideological and delusional. A small band of “post-Keynesian” economists, of whom I am one, have kept this theory alive.

According to Minsky’s theory:

Capitalist economies can and do periodically experience financial crises (something that believers in the dominant “Neoclassical” approach to economics vehemently denied until reality — in the form of the Global Financial Crisis — slapped them in the face last year);

These financial crises are caused by debt-financed speculation on asset prices, which leads to bubbles in asset prices;

These bubbles must eventually burst, because they add nothing to the economy’s productive capacity while simultaneously increasing the debt-servicing burden the economy faces;

When they burst, asset prices collapse but the debt remains; the attempts by borrowers and lenders to reduce leverage reduces aggregate demand, causing a recession;

If the economy survives such a crisis, it can go through the same process again, with another boom driving debt up even higher, followed by yet another crash; but

Ultimately this process has to lead to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt. Then a Depression ensues.

That is where we were … in 1987. The great tragedy of today is that naïve Neoclassical economists such as Alan Greenspan and Ben Bernanke allowed this process to continue for another three or more cycles than would have occurred without their rescues.

In 2008, they did it again — only with methods they would have disparaged a mere year earlier (“Rational Expectations Macroeconomics”, a modern neoclassical fad, preaches that government intervention can’t influence the level of economic activity at all — yet another belief that reality has recently crucified). This time, while the rescue has worked, the recovery they expect afterward can’t happen — because there’s almost no one left who will willingly take on any more debt.

This time, there’s no re-leveraging way out. The tumour of debt has to be removed.