1. Financial systems have a built-in tendency to euphoria. The financial market does not tend toward stability. The opposite is true. Bankers and other financial actors borrow more and more heavily, making the system increasingly vulnerable to panic. Lenders start after a scare by being conservative, hedging their bets. But eventually confidence returns and speculation takes hold again. Then investors get to the Ponzi phase – manic use of credit, a euphoria or bubble.That's from Open Economics, hitherto unknown to me. I see they're from Notre Dame. Do I detect the influence of this guy?
2. The credit cycle tends to manic, ends with panic. The Ponzi phase continues until some investors exit with their profits, or the central bank raises interest rates to reduce investor euphoria, and then a financial institution runs into difficulty. The failure causes a bankers’ panic. Turning points in the five stages of the cycle are called “Minsky moments”.
3. The system tends to instability and must be regulated. Fashions in monetary theory have moved from a belief that Keynesian sophisticates could “fine-tune” the economy, to fear that the Fed had lost control of the ability to contain inflation, to a belief that markets work best with minimal interference. Hy rejected all these ideas, preaching consistently about the need for regulation and the importance of leaning against the excesses of what Keynes called the animal spirits of investors.
Thursday, February 05, 2009
Back from the Dead: Minsky
Aside from John Maynard Keynes, another guy who is back from the dead in the current uproar is the late Hyman Minsky, student of bubbles and partisan of (money) market regulation. At least until lately, Minsky has seemed to function as a kind of crank shadow-figure in economics, in a class perhaps with Henry George. This morning I see that his book on Keynes is number 7 on Kindle for economic history, number 13 for economic theory. Stabilizing an Unstable Economy is number 3 in macro. Minsky's Keynes is, perhaps unsurprisingly, as much Minsky as Keynes, in the vein of "what Keynes really meant was..." or "what Keynes would have said if he was as smart as I am." But no matter: it's part of the job to extend and clarify the original, and heaven knows Keynes needs clarification. Here's a good back-of-the-envelope summary of why Minsky deserves a vogue: