Steve Keen on what caused the Great Depression and the 2008 Financial Crisis
Google AI Overview [1]
According to economist Steve Keen, both the Great Depression and the 2008 financial crisis were caused by massive, unsustainable buildups of private sector debt followed by a sudden, catastrophic collapse in credit. Keen draws heavily on the work of economists Hyman Minsky and Irving Fisher to explain these events.
The Root Cause: Private Debt and “Minsky Moments”
Unlike mainstream economists who focus largely on government deficits and inflation, Keen argues that it is the rate of change in private debt (also known as credit) that drives economic demand.
(a) The Boom: During economic expansions, banks create vast amounts of new money by issuing loans, primarily inflating asset prices (like real estate) rather than productive capacity.
(b) The Bust: When private debt reaches an unsustainably high percentage of GDP, borrowers can no longer service their debt. Once lending stops, the “credit engine” stalls, turning money creation into money destruction and causing a severe economic crash.
The Great Depression
In the 1920s, the US experienced a massive boom in private borrowing. By 1932, private debt peaked at an extreme 132% of GDP.
(a) Debt Deflation: When the bubble burst, the sudden stop in credit caused demand to plummet and turned inflation into severe deflation.
(b) According to Fisher’s debt-deflation theory, as prices fell, the real burden of the massive private debt load increased, forcing wide-spread bankruptcies, debt liquidation, and plunging the global economy into depression.
The 2008 Financial Crisis
Keen notes that the buildup of debt leading to the 2008 crisis was even worse than in 1929. Prior to 2008, US private debt spiked to around 160% to 170% of GDP.
(a) Asset Bubbles: This explosion of private credit was overwhelmingly channelled into housing and financial speculation (what Minsky called “Ponzi finance”, where borrowers rely on rising asset prices to pay interest) rather than the real economy.
(b) The Collapse: When the housing market stalled, this highly leveraged financial system collapsed. Because the underlying debt was vastly higher than it was during the Great Depression, the subsequent crisis required massive government intervention to prevent a full economic collapse. Keen heavily criticizes neoclassical economists for missing both of these crises. Because mainstream models traditionally ignored the role of private debt and treated banks as mere “intermediaries” instead of money creators, he argues they were blind to the structural instability building in the economy.
You can read more about Prof Steve Keen’s application of Minsky’s theories on his Substack or you can explore his recent research papers via the link patreon.com/ProfSteveKeen
1. Source:
https://www.google.com/search?q=what+caused+the+great+depression+and+the+ 2008+crisis%3F+-+steve+keen&rlz= 1C1GCEAen-GBAU1163AU1200&o
A list of references are available in the source article.
The following link is to Prof Steve Keen’s video presentation (22 Nov 2025) for this topic, entitled: Are you ready for this Once-in-a-Lifetime crash?
