Professor Steve: The 2026 Financial Crisis Is About to Begin, Let Me Explain!

The American people can remain confident in the soundness and the resilience of our financial system. The economy is stable, solid, strong. So they had no idea the crisis was coming. Meet Steve Keen, world's leading economist who predicted the 2008 global financial crisis. He explains how he saw the crash when no one saw it coming. Prediction of the FOMC was the growth would be between two and a half and two and three quarter percent. It was actually minus 2.5 percent. Now I saw that and thought, holy ----, we're in deep trouble. So this is the reason that I became well known I think around the world. My model of Minsky's financial instability hypothesis. The reason that I saw the global financial crisis coming, I understood Minsky's financial instability hypothesis and the difference between Minsky and the neoclassicals is basically the question they frame to try to understand the economy. They ask, can a market system reach equilibrium? Interesting question, okay. The trouble is, unfortunately, the answer is almost always no. And then like your worst dating night where they won't take no for an answer, they continue knocking on your door and hitting your window and so on. So they stick with equilibrium no matter what. Minsky's question was, can it, the Great Depression, happen again? And if it can happen, why didn't it occur in the years since World War II? He wrote this in 1982. He said, these questions naturally follow from the historical record and the comparative success of the past 35 years. And to do that, you must have an economic theory which makes Great Depression as one of the possible states in which it can occur. And that does not happen with the neoclassical theory. It cannot generate a Great Depression outcome. As measured by the record of history, to go more than 35 years without a severe and protracted depression is a striking success. Before World War II, serious depressions happened regularly. The Great Depression was just a bigger and better example of the hard times that occurred so frequently. But post-war success indicates something is right about the institutional structures and policy interventions that were created after the reforms of the 1930s. And then, can it happen again? This old expression there. You need to have a model which can identify the differences between the economy of the 1980s and the 1930s that's responsible for the success of the post-war era. That's not indigestible prose. That's quite compelling prose. Better than what Krugman writes, frankly. Now, my proxy of the financial instability hypothesis goes the following way. First of all, you consider an economy in historical time. And since you're working in historical time rather than discrete or logical time, which is the way that economic models are built, that means there's a previous crisis that you know has happened. So in our case, obviously, the previous crisis is either COVID or you might go back to the global financial crisis. And certainly there's a private debt-induced recession. That's the global financial crisis. Now, after the crisis, both sides of the borrowing equation, both firms and banks, become conservative about the amount of debt they'll accept. And therefore, in the aftermath of the approach to the crisis, only conservatively projects are put forward, so only conservative projects are actually assessed. Now, because the economy has survived the crisis, most of those projects succeed. And the impact is that firms and banks both revise their risk premiums downwards. They don't need as much of a buffer as they thought they did before the previous cycle. So the accepted ratio of debt to equity rises, and you start to revalue assets upwards. Well, if that's whetted your appetite to have a realistic approach to economics, then join me and learn realistic economics through stevekane.com. If you apply and get fully accepted, and then you can use my Ravel software that you've seen me using in this video, you can talk to me and ask me questions. It's a free book bundle that's available just this week. To apply, go to stevekane.com or scan the QR code. You think it's self-fulfilling expectations setting in because there's a decline in risk aversion, so there's more investment. Because there's more investment, the economy grows faster. Because it grows faster, those investments succeed, and asset prices start to rise as well. So you can make money by speculating on a rising market. You've got an increased willingness to lend, and that increases the money supply. That encourages riskier investments and even more asset speculation, and you get what Minsky called Ponzi financiers turning up. Now, just one little aside here. Neoclassical models have what they call the transversality condition. When you ask them what that means, they assume there's no Ponzi experiences, so they rule out a major part of what actually happens in real capitalism. So Ponzi investors are investors who purchase an asset which is rising in price, and they purchase it using borrowed money, and the cash flow from their investments is less than their debt servicing costs. So the only way they can profit is by selling assets on a rising market. And because they're actually losing money, they've paid so much money to buy an asset that the cash flow from the asset doesn't cover the interest cost. So they've got to have borrowed money coming in to be able to continue servicing their debts, or they're going to fall with their cash flow being insufficient until such time as they can sell that asset on the rising market. So it's either borrow or go bankrupt. So they've got a very interest rate insensitive demand for money. And my favorite example on that front was an Australian Ponzi merchant called Christopher Scase. He's a journalist who became a property developer. Property developer is always a bad sign. And he was financed by an Australian company, I've forgotten its name right now, it'll come to me in a moment, managed by a father and son, the Adler family, Rodney Adler, and I've forgotten the elder Adler's name. They used to play a game where they'd each meet Scase when he came in to ask for another loan, and they'd alternate who saw him, and each time they'd put up the interest rate by 1%, trying to see if they'd actually get to the point where he'd say no. He never did. The last loan he agreed to before he went bankrupt was a 25% interest per year. So he just needed money desperately. If he didn't get it, he was out of business. Now, what happens with people like this is that because assets are rising, becoming easier to make money on a rising market, you reduce the sensitivity to both debt and interest rates, and both the supply and demand for money rises. They're not independent, they will rise at the same time. Market rates might rise a bit, but generally speaking, you've got a boom economy with lots of money turning up, lots of borrowed finance enabling the economy and asset markets to expand. But the boom shifts the distribution of income. And this is the critical point that even Minsky didn't realise until I built my mathematical model. Because you have rising prices for raw materials, particularly energy, so that's going to mean money gets transferred from capitalists to the energy suppliers, and labour. So workers are getting higher wage demands, and that eats into the share left over for capitalists. You might also have rising interest rates, but that's not necessary. That can happen, but it isn't necessary for the Now, what this means is that a lot of investors that weren't Ponzi by nature, so they were trying to make money out of cash flow, are forced to sell their assets because they're trying to service their debts with those rising rates. And the entry of new sellers into the asset market floods the market, asset prices collapse, and therefore the Ponzi investors are trapped, because they can't sell on a rising market anymore, nor can they borrow more money. So they go bankrupt. And they are the most dramatic examples of that, because everybody thought they were rock solid, and suddenly they disappear. Back to Christopher Scase, he made a takeover bid for MGM. He offered $3 billion to buy it. The following week, Scase went bankrupt when he couldn't pay a $12 million loan installment. Now, if he'd got the $3 billion approved, he would have bought MGM, paid off the $12 million interest charge with it, with spare cash, and kept on going. So it's a classic case of a Ponzi falling over when nobody thought he was going to do it. Now, when they do, you suddenly prick the euphoric expectations that are built up in the entire market, and you have a collapse in asset prices, and that increases debt-to-equity ratios dramatically, because the reason you had low debt-to-equity ratios beforehand was taken as being not a sign of a bubble. But people don't realize the extent to which borrowed money drives up both asset prices and leverage at the same time. The expansion of the money supply goes into reverse. Of course, this is thinking in terms of endogenous money. Investment evaporates, economic growth slows or reverses, and you're back where you started from. You're back in a debt-induced recession. Minsky also said that—and I love this phrasing—capitalism is inherently flawed, being prone to booms, crises, and depressions. This instability is due to characteristics the financial system must possess if it's going to be consistent with a full-blown capitalism. In other words, you can't get rid of these characteristics. Minsky said, stable growth is inconsistent with the manner in which investment is determined in an economy in which debt-financed ownership of capital assets exists. He then says—and I love this—it follows the fundamental instability of a capitalist economy is upward, not downward. The tendency to transform doing well into a speculative investment boom is the basic instability in the capitalist economy. Then it started to bloody well happen in the data. I got the shock of my life in many ways. I really, again, didn't expect this to turn up so obviously. But here's the worker's share of GDP. You can see it rose from the 1930s and peaked in the 1970s. Then it's been on a downward trend ever since. This is a product of the high levels of debt we can see at the same time. The debt ratio was rising. That's what led me to expect a crisis to occur. I thought that exponential increase in the debt ratio can't go on forever. When it stops, we'll go in the opposite direction. We're going to have a crisis. The most significant thing in the data, to make it obvious that my model was turning up on the data, was neoclassical economists started to congratulate themselves on what they call the Great Moderation. They had lower inflation during booms, higher levels of growth during slumps, and they basically extrapolated it forward and thought we're going to reach nirvana in the future—low inflation, high growth. This is my favorite deadhead in neoclassical economics, Ben Bernanke. He said in the low inflation era has seen significant improvements and a marked reduction in economic volatility, a phenomenon that has been dubbed the Great Moderation. He said recessions are milder, volatility has declined, and he then said you can thank us for that improved control of inflation, which of course is central bank's responsibility. At the time, he was the central bank deputy governor, has contributed to this welcome change in the economy. I saw that and thought, holy ----, we're in deep trouble. Neoclassicals rejected the financial explanation for the global financial crisis. That's why they call it the Great Recession in America. Neoclassicals don't think that finance had anything to do with it. The title is The Economic Crisis from a Neoclassical Perspective, and the guy who wrote it is one of the guys who constructed the foundations of what I call dynamic stochastic general equilibrium models. So here is he looking at the recession and saying what caused it. He said the financial explanation says that a crisis became worse because of a significant contraction in intermediation services. In other words, they don't think banks create money, they think banks enable savers to lend to borrowers. He said that some measures have not declined substantially. Figure 4 shows that bank credit relative nominal GDP rose at the end of 2008 to an all-time high, and while it's declined, its bank credit is still higher now than at any time since before 2008. This is the chart. Can anybody see why it's full of ----? Is he mistaking credit and debt by any chance? Yes, absolutely. That's why I'm thinking of the facepalm guy is absolutely critical here. They literally looked at data for private debt. It happens to be labeled credit, which is the change in debt. They didn't say, hang on a sec, if this is credit, which is the annual change in debt, and that's telling us the annual change in debt is 200% of GDP, they mistook debt for credit. It's just insane that they do it. It wasn't just him. There were 20 economists he thanked bibliography to the paper, two of whom are Nobel Prize winners. There were two journal editors, the journal editor himself. They all missed this. Now, if credit had been 100% of GDP per year since 1978, and the debt was a mere 1% of GDP in 1978, then by 2010, debt would have been 43 million times GDP. That's the scale of mistake they're making. They didn't consider credit. They were looking at ways to dismiss it. That's all they're doing. They paid so little attention to the chart that they didn't even realize they were making numerically stupid claims about credit. If you take a look at the Great Depression and see the scale of deleveraging and compare that to today, the Great Depression debt level went from about 140% of GDP down to about 50%. That's a 65% reduction in the private debt burden, whereas after the global financial crisis, we've only reduced it by 15%. We've still got an overhang of too much private debt, which is constraining the economy.