Competent survey of the works of economist Hyman Minsky by his disciple L. Randall Wray.
The "need to know" material in this book is:
1) Minsky's Financial Instability Hypothesis (the notion that markets are never truly in equilibrium as assumed in academic economic models, rather that instability is a structural element of capitalism; see also Minsky's famous mantra "stability is destabilizing!");
2) How Minsky thought about using massive fiscal policy and monetary stimulus during economic downturns (to him, orthodox economic policymakers never went "big enough" in any recession, in fact you get the feeling Minsky never saw a government fiscal response he considered big enough);
3) Minsky's idea of using the government as an "employer of last resort." Minsky believed it wasn't enough to use stimulus alone to help the economy out of a downturn: the government should also act as a literal jobs buffer for the labor market, offering WPA-style jobs for any and all comers. Minsky argued this would reduce economic inequality across cycles and limit the inflationary impact of economic stimulus (because output would grow too).
Minsky's prudent banking policy ideas and his other notions for reforming society are "nice to know" but they never were as influential or relevant as the three key ideas above. Thus a time-constrained reader can read chapters 1-5 and pretty much skip the rest of the book.
A few other thoughts. Many economists and economic pundits whorishly put their political leanings before truth-seeking. Not only are their political views laughably predictable, but their economic policy ideas are too, typically the tandem ideas of "spend more money" and "print more money" (Paul Krugman is the standard example here). Occasionally, however, you stumble onto an economist who does not fit into a clean political box at all, and Minsky is a refreshing example. He is all over the spectrum: in some of his views he's a few inches short of hard socialism, in others (see his views on banking and properly capitalizing a country's economy) he's a pro-decentralization libertarian.
Also, parts of this book tilt toward the scriptural and exegetical, as author L. Randall Wray tries to both express and in some cases deduce "what Minsky would do" about, say, the 2008 financial crisis, or the 2000 crash in tech stocks. At times this book feels like an economist's version of "what would Jesus do."
Finally, Minsky was a notoriously incomprehensible writer, and Wray states outright that even trained economists "find his work difficult" and that Minsky "needs to be translated" (a phrase that made me laugh, but I'm guessing Wray wrote it ruefully). It makes you realize how important it is to make your work accessible, readable and understandable: otherwise you're at the mercy of your "translators" and disciples--if you're lucky enough to have any in the first place.
Notes:
Preface1) Minsky's writing style as "notoriously opaque" and, as a result, he "needs to be translated." :)))
Introduction
2) "Although there were a handful of economists who had warned as early as 2000 about the possibility of a crisis, Minsky's warnings actually began a half century earlier--with publications in 1957 that set out his vision of financial instability. Over the next 40 years, he refined and continually updated the theory. It is not simply that he was more prescient than others." [If you predict an event (like a market crash or a recession or a depression) 50 years in advance I'm sorry to say it but this is not a correct prediction. If you "call" a crisis 50 years in advance not only do you lose money, you go insane.]
3) "Stability is destabilizing." This is Minsky's famous quote referring to how stability causes behavior changes, policy changes and business over-enthusiasm that inevitably results in instability. Contrary to every other economist, Minsky believed there is no such thing as equilibrium.
4) Notable that as late as May 2009 Paul Krugman had not read any of Minsky's works, he was not conversant in Minsky at all. That's pretty embarrassing for such an "expert."
5) Minsky writing as early as 1987: "That which can be securitized will be securitized."
6) Overview of the book:
Chapter 1 summarizes Minsky's main areas of contribution.
Chapter 2 examines the post-war development of economic theory and policy and contrasts that with Keynes's revolution in theory and policy. Minsky always argued that the Keynesian Revolution was aborted and much of his work provided a reinterpretation of Keynes.
Chapter 3 examines Minsky's early work on his famous contribution: the financial instability hypothesis (FIH).
Chapter 4 looks at Minsky's view of banking and contrasts it with the view of orthodox economists.
Chapter 5 explores Minsky's contribution on employment and poverty.
Chapter 6 examines Minsky's later work after he had retired, involving extensions and revisions of his FIH, representing a return to his studies with his dissertation advisor Joseph Schumpeter.
Chapter 7 discusses prudent banking (how a good bank runs its business) and Minsky's proposals to promote prudent banking.
Chapter 8 presents Minsky's general reforms to promote stability, democracy, security, and equality.
Chapter 1: Overview of Minsky's Main Contributions
7) "...any formal analytical tool... explains but little of what happens in the world, and that to be useful, analytical tools have to be embedded in an understanding of the institutions, traditions and legalities of the market." --Minsky, basically bitching about pointy-headed economists theorizing about systems (like banking) they do not understand.
8) "While Minsky was a leftist who supported the goals [of the 1960s-era student movement], he did not always approve of the methods. He used to say that one of the reasons he left Berkeley for Washington University in St Louis was to get some peace and quiet."
9) Minsky as a "post-Keynesian" or a "financial Keynesian"
10) Influenced by Henry Simons and Oscar Lange, both from the University of Chicago; Simons was a free market guy and Lange was a socialist/communist. Also influenced by Frank Knight and Joseph Schumpeter.
11) Note also economics prior to the modern era was taught as part of economic history, political science, anthropology, sociology; economics wasn't taught in isolation like it is now. "If I had my way the standard American course in economics would be introduced in the context of social sciences and history. The current American way of teaching economics leads to American economists who are well-trained but poorly educated." --Minsky
12) See the works of Martin Mayer, a close friend of Minsky, and according to the author "the most astute historian of American postwar financial institutions."
13) Minsky is best known for the Financial Instability Hypothesis, FIH, but also known for work on money and banking, as well as his "employer of last resort" proposal, and his views on the long term evolution of the economy (see below for bullet points on each of these, then further elaboration in other chapters).
14) Minsky's famous quote about money and banking: "Everyone can create money; the problem is to get it accepted."
15) Good quote illustrating banking as procyclical: "Because bankers live in the same expectational climate as businessmen, profit-seeking bankers will find ways of accommodating their customers; this behavior by bankers reinforces disequilibrating pressures. Symmetrically, the processes that decrease the prices of capital assets will also decrease the willingness of bankers to finance business."
16) The FIH: "For Minsky, the modern business cycle is a financial cycle. Rising spending and asset purchases require finance... If everyone else is lending, your bank has to lend... We can think of the financial sector as an accelerator of the cycle--in both directions... it is the financing that generates structural fragility."
17) Minsky's famous classification for the fragility of financing positions:
* Hedge finance position: where income is sufficient to make all payments of interest and principle;
* Speculative position: where income is sufficient to make interest payments but principal must be rolled over; and
* Ponzi finance position: where even interest payments cannot be met, so the debtor must borrow to pay interest.
18) Minsky was skeptical that the central bank can constrain lending in a boom "since profit-seeking banks innovate around constraints."
19) The "employer of last resort" proposal: Minsky's work on poverty and unemployment is not well known; Minsky preferred focusing on employment rather than welfare alone; he criticized the Johnson War on Poverty because it lacked a job creation component and thus created a welfare-dependent and marginalized class. He only believed in a minimum wage for national government jobs, meaning the national government would set that wage and then hire all ready and willing workers at that wage. This would be an employer of last resort program in the sense that anyone with a better offer in the private sector or elsewhere in the government would take it. This would also create a sort of "reserve army of the employed" since employers could recruit out of this program by paying slightly higher compensation. Modeled after New Deal jobs programs.
20) On the long-term evolution of the economy: 19th century "commercial capitalism" was replaced in the early 20th century with "finance capitalism," followed after World War II by "managerial welfare state capitalism," which features large oligopolistic corporations; this generated large pool of savings, and encouraged ever greater risk-taking, leading to the current stage, which he called "money manager capitalism."
21) Note the financial crisis in 1966 in the municipal bond market, which began a pattern where crises came more frequently in the '70s and '80s, but the government saved the day each time: this validated ever more risky behavior, leading to the 2008 "Minsky moment."
22) Per this author, what crashed in 2007 was "money manager capitalism"--similar to the "finance capitalism" that crashed in 1929. But it was the tremendous government intervention during the 2008-2009 crisis that either prevented (or just delayed) another Great Depression. But the problem is that these interventionist policies are structurally destabilizing per Minsky's analysis. "...ironically, the success of the interventions encourages more risk-taking."
23) Minsky arguing that there are "57 varieties" of capitalism, so if "money manager capitalism" dies it'll be replaced by a new, more stable form.
24) On reforming capitalism, Minsky's policy recommendations:
* Government has to be large enough to offset swings in the private sector with swings of its budget, thus around 20% of GDP;
* Minsky believed taxes are inflationary, particularly social security tax paid by employers as well as corporate income tax, both of which end up as costs passed along in the form of higher prices. "He thus advocated elimination of the corporate income tax as well as the employer portion of the payroll tax" and instead supported a broad-based value added tax on consumption and also greater use of excise and sin taxes on things like gas or tobacco.
* He wanted to reduce wealth transfers like unemployment, welfare, food stamps, etc because he considered them inflationary;
* He favored policies favoring medium-sized banks because it would also favor medium-sized firms, since bank size determines the size of customers (and vice versa). Better to have a decentralized banking system with many small and independent banks.
Chapter 2: Where Did We Go Wrong? Macroeconomics and the Road Not Taken
25) Why mainstream economics failed to see the crisis (the GFC) coming, and how mainstream economic orthodoxy deviates from Keynes's own economic views.
26) A brief review of the mainstream economics that Minsky rejected before delving into Minsky's approach. Keep in mind that the term "Keynesian" used to describe most American economists is not the right term: they're actually "bastard Keynesians" where the mother was neoclassical economics but the father is unknown and certainly not Keynes. This is a hilarious phrase from economist Joan Robinson.
27) Are people "fooled" by rising wages and rising prices, or would they accept a reduction of wages if prices also declined? This debate about to what extent people are "fooled" was reflected in the policy implications of Monetarists versus Keynesians; the Monetarists just assumed you can't fool all the people all the time and assume that if you try to cause inflation in order to reduce unemployment, eventually you would just cause inflation. Hence the Monetarists wanted to impose rules on money growth in order to keep inflation low.
28) The 1970s stagflation ended the debate between Keynesians and Monetarists because Keynesians had no answer to the simultaneous problem of high inflation and high unemployment.
29) This was followed by a series of strange economic schools of thought like rational expectations theory, where people adjust to changes in policy behavior, thus fiscal and monetary policy does not matter at all. "Those who developed these theories actually got Nobels for this work."
30) Minsky called Keynes's theory of boom and bust "an investment theory of the cycle" Keynes had an endogenous theory of the cycle, basically that it was simply the nature of capitalism to have cycles.
31) Note also that neoclassical economic models don't incorporate uncertainty or bankruptcy, which is why no one would hold money in a neoclassical world per Keynes's famous remark.
32) Orthodox economics are too based on an imaginary world to grapple with animal spirits, cycles, risk and bankruptcy, etc.
33) On the Keynesian policy revolution, see Keynes's pamphlet "The End of Laissez-Faire" published in 1926, arguing against an invisible hand.
34) Minsky supported job-creating public infrastructure spending rather than fiscal "pump priming" typical of orthodox economic methods.
35) The "chartalist" view on money: that governments spend by crediting bank accounts, and it is essentially just a keystroke that creates an entry on someone's balance sheet, and governments can never run out of these keystrokes. Per Minsky: "For fiat money to be generally acceptable and valuable there must be a set of payments units must make for which this money will do.[*] Taxes are such payments, thus fiat money really should not be introduced without introducing a government with taxes and expenditures. Symmetrically money as a liability of a fractional reserve bank acquires value in the market because there exist units, the debtors to the banks, which have payments to make for which this credit money will be acceptable. The acceptability and value of a money depends upon the existence of payments denominated in that money: thus fiat money without a government that taxes and spends and credits money without debtors under constraint to meet payments commitments are quite meaningless concepts."
[*] Speaking of bad writing! That sentence is terrible. And the others are nearly as bad.
36) The implications of this stuff are pretty heavy because suddenly you don't have to worry about the affordability of anything, as long as you're a government with its own fiat currency! Although even a Minskyite would say that too much spending is inflationary and could cause currency depreciation.
Chapter 3: Minsky's Early Contributions: The Financial Instability Hypothesis
37) "...crisis-prone situations emerge out of the normal profit seeking activities of borrowers and lenders." --Minsky
38) "Mainstream economists believe that market forces are naturally stabilizing... In Minsky's view, this is precisely wrong. Market forces are destabilizing and must be constrained to create stability. However, there is no permanent solution to the problem of cycles because 'stability is destabilizing'! Markets will subvert the constraints and create instability that eventually results in yet another recession."
39) Note that Minsky believed that a lot of the New Deal institutions helped stabilize the system, he also considered the central bank likewise to be a stabilizer. Minsky believed both New Deal programs and the central bank important developments.
40) Note Minsky's response to Milton Friedman's proposal that the money supply should grow at a constant rate. "The only universal rule for Federal Reserve policy is that it cannot be dictated by any universal rule." A rule would cause behavior to change which would make the rule inapplicable. [On one level this makes some sense but also it's a really good piece of rhetoric that essentially justifies giving your central bank arbitrary and capricious powers!]
41) After a relatively crisis-free period from the end of World War II until the mid-60s, note the number of crises that came in rapid succession after: the 1966 municipal bond market crisis, 1970 run on commercial paper, 1974 failure of Franklin National Bank; each of these "was resolved through prompt central bank action." Essentially all of these stabilizing actions would ultimately generate greater risk-taking.
42) Minsky's two-price system which he borrowed from Keynes, a price system for goods and services in GDP and another price system for asset prices. Note how the price system for asset prices is skewed by lender's risk and borrower's risk, as well as by systemic optimism or pessimism. Also including a margin of safety, a presumption by buyers and sellers of capital assets and lenders and borrowers to have a cushion between their expenses and the revenues they intend to generate from those assets.
43) Recap here of Minsky's three stages of economic expansions: the hedge stage, the speculative stage, and the Ponzi stage (where your near-term revenues are insufficient to cover interest payments so debt increases as interest as capitalized into the principle, a status that is unsustainable unless interest rates fall or your income rises. Note in in the US housing market in 2007 homeowners had Ponzi positions but home prices had risen so quickly that some could sell out and repay mortgage debt or refinance on better terms. Note that over the course of an expansion cycle both firms and households will move through these three stages, thus increasing their vulnerability to a downcycle.
44) "The peculiar circularity of a capitalist economy" --Minsky
45) On Minsky recognizing the futility of The Fed's attempts to control the money supply because of the activity of the banking sector. "In Minsky's view, the central bank really cannot control the money supply." Banks simply "innovate around" attempts to constrain reserves; worse, these bank innovations tend to result in crises that require the central bank to act as a lender of last resort, of course this is what produces a chronic inflation bias.
46) Minsky disagreed with the standard narrative of Fed chairman Paul Volcker "breaking inflation." He claimed that Volcker's methods didn't work, that the US went into the deepest recession (at that time) since the Great Depression, and it also messed up the US thrift banking sector because of high interest rates (similar to what's happening right now). This was proof to Minsky that the Fed created unnecessary suffering and also showed that monetarist theory was wrong. Minsky believed that money growth by itself was not a good predictor either of income growth or of inflation.
47) Minsky believed that the US benefited after World War II because of FDR/Depression era programs and because the US had a large deficit. [This smells force-fit: he never mentions the fact that our industrial sector had tremendous advantages because it was the only industrial sector left standing after World War II for example! All the deficit and FDR programs could have been totally arbitrary and likely had nothing to do with economic policy.]
48) Per author/disciple Wray, the Great Financial Crisis unfolded consistent with Minsky's projections even though he had already been dead for more than a decade.
Chapter 4: Minsky's Views on Money and Banking
49) "A bank is not a money lender that first acquires and then places funds... a bank first lends or invests and then 'finds' the cash to cover whatever cash drains arise." --Minsky [This is sort of disturbing if you think about it...!]
50) Minsky argued we could analyze every economic unit (a firm, a household, or a government) as if it were a bank that issues liabilities and takes positions in assets. In the real world, money you "have" is actually someone else's liability. [This is not true of unencumbered assets like gold or BTC of course.]
51) Nope Paul Krugman's (embarrassing) failure to understand banking here, his standard orthodox money multiplier beliefs; see the contrast to Minsky's view.
52) What do banks do? Minsky always argued that anyone can create money, but the problem lies in it getting accepted. Banking is not money lending, and it is certainly not true that banks have to take money in first before landing it out. Note for one thing that there's no way this could be done with cash: there's less than a trillion dollars of cash (physical or electronic) in existence (?? is this true??) and well over half of that is outside the US, yet the banks have trillions and trillions of loans on their balance sheet.
53) "It is the Fed that brings the wheelbarrows of cash to the banks--not depositors. And the Fed supplies cash not so that banks can make loans. Rather, the cash is to cover withdrawals from deposits."
54) [The more I read from or about Paul Krugman (in various sources across many different media) the more it seems like this guy is a totally incompetent boob, a pointy-headed academic who has no idea how the real world works; his economic views are stale out of date, etc.]
55) An example of creating $5 out of thin air by writing your neighbor and IOU: you didn't need to have the cash first. But you do have to redeem your debt at some point. Thus you create money writing the IOU and then destroy money by paying it off and eliminating the debt. "This is what Minsky means when he says 'anyone can create money.'"
56) On the idea of "moneyness": bank deposits/cash is the highest quality of this form of money, but there is also "shadow banking" money as well as other types of money that can be created, each with different levels of desirability (like money market mutual funds for example).
57) Minsky rejected the simplistic deposit multiplier view still presented in economics textbooks, instead arguing that the banking industry "endogenously" creates money, and also that the Central Bank does not exogenously control money creation per the money multiplier view. "Over the past couple of decades, an entire literature developed that carried these views forward" and now the Minsky's endogenous money idea is dominant.
58) "If there is a willing bank and a willing borrower, deposits will be created through 'keystroke' entries to the borrower's deposit account. The corresponding entry is on the bank's asset side, as a loan is recorded." Banks do not obtain reserves and then make loans, it's the other way around: they create deposits first by granting advances and then get reserves after, for example by borrowing at the short-term Federal Funds market.
59) Minsky had six main views across many of his writings:
1) a capitalist economy is a financial system;
2) neoclassical (mainstream) economics is not useful because it denies that the financial system matters;
3) the financial structure has become much more fragile;
4) this fragility makes it likely that stagnation or even a deep depression is possible (this is the root of Minsky disciples' claim that Minsky "called the 2008 crisis");
5) a stagnant capitalist economy does not promote capital development;
6) however, this fragility can be avoided by apt reform of the financial structure in conjunction with apt use of fiscal powers of the government.
60) Nuances on margin of safety concepts: there's a cash flow cushion and also a net worth cushion as well as a liquidity cushion, during deflations the liquidity cushion and the cash flow cushion and the net worth cushion can all be eroded because everyone else is selling assets at the same time while the economy contracts. On top of this, banks and financial institutions are special in that they operate with very high leverage, perhaps $5 of capital for every $100 of assets.
61) A discussion here of types of banks/bank eras, ranging from the old "real bills" commercial banks (these were artifacts of the 19th and early 20th century of banks that only lent against goods already in production and distribution, thus these loans were not inflationary), then discussing modern commercial banks as well as investment banks, which arose in the latter part of the 19th century as investment goods and capital goods became far too expensive to be funded by the traditional commercial bank system or out of wealthy family money. Thus investment banks were created to handle or finance the purchase of entire companies, investments in large capital projects, etc., and in the late 19th century we saw the rise of Goldman Sachs, JP Morgan and other examples of "finance capitalism" (a term from Rudolph Hilferding).
62) The author (and Minsky) claims that the imposition of Glass-Steagall in 1933 as well as other rules put in place after the 1920s boom marked the end of finance capitalism; then the the repeal of Glass-Steagall in 1999 as well as other deregulation allowed the 1920s-era abuses to return, which led to the Great Financial Crisis of 2008.
Chapter 5: Minsky's Approach to Poverty and Unemployment
63) This chapter is repetitive and could be better organized, but essentially Minsky disagreed with all the post World War II "War on Poverty" programs because they didn't contain sufficient jobs components, he believed the government should be "the employer of last resort" just as it is "the lender of last resort."
64) Also interesting to hear how the author is "perplexed" by Minsky's opinions and attitude toward welfare, as if Minsky (an avowed leftist) sounds like a Reaganite! Minsky's view was that just giving money away created dependency and that you must accompany monetary aid with a New Deal-style jobs program so people can actually work, get on the job training, earn their own money, etc.
65) Minsky wrote just about as much on these topics as he did about the financial system, arguing in the the 60 and 70s that Johnson's War on Poverty absolutely would not work, that it would actually promote instability. It effectively keeps people on unemployment, it's a function of the economic system, etc., it's not a function of the shortcomings of its workers; also he disliked the idea of "jobs training" programs, arguing they train people for a job market that didn't have jobs for them in the first place; thus the government had a responsibility for creating "direct job creation programs for the structurally displaced."
66) A dynamic society and a dynamic labor market will always have a structural "skills mismatch" between labor supply and demand. The central idea behind an "employer of last resort" paradigm is that there would be a mechanism to accept "workers as they are" and develop them and train them while they work, rather than applying training outside of the labor market for labor market that will be different after they're trained. [Great points here!]
67) Kind of a funny pointy-headed academic economist situation here where Wray, in his research on the jobless and poverty universe, ends up "discovering" that employment was important to poverty reduction.
68) The author as well as Minsky are both pretty ruthless about what a total flop the Johnson War on Poverty was. Minsky claimed that it "would only redistribute poverty among the less fortunate." Ouch.
69) Minsky on encouraging growth through investment versus consumption, this tends to exacerbate income inequality within the labor force, it also increases the "size and surety of capital income" which increases business confidence; and this then takes you down the Minsky "hedge-->speculative-->Ponzi financial instability path, in other words it increases instability per Minsky's view. By using the public sector to increase spending this is actually is "stability increaser" rather than a "fragility increaser." Furthermore the entire system would be biased towards inflation because of the necessary policy to fight the inevitable later crisis that would come. [To support this claim, the author claims that the Clinton boom of the 1990s actually led to the 2008 GFC: this is likely arranging events to marshall imaginary proof.]
70) Consumption is the most stable component of aggregate demand as long as it's financed out of income rather than debt; thus a high consumption economy would be more stable, this is why Minsky preferred policy that favors high consumption rather than high investment.
71) The other thing you need in order to improve income distribution is to have "tight full employment" which is Minsky's phrase for a situation where employers would rather employ more workers than they in fact do or can (in other words job vacancies exceed the number of job seekers). [This is interesting because it's kind of like what we have right now post the COVID crisis, where we have high disability rates, low labor market participation, etc. Maybe you can make an argument that we're going to have kind of a renaissance in the fortunes of workers in the coming years?] "The achievement and sustaining of tight full employment could do almost all of the job of eliminating poverty." --Minsky
72) Another nuance: government employment is not undertaken to make a profit, while private firms must be profitable to survive. Thus "only the federal government can offer an infinitely elastic demand for workers"; this is yet another argument for the creation of a new WPA-type national jobs program; it would be essentially a job guarantee program. It would also set the (minimum) wage of unskilled labor and adjust the number of jobs to the number in need of work. [All quite interesting]
73) Job creation by government policy now is indirect and a function of "hope"; the only policy tools are to cut taxes or increase spending and "hope" that employers respond by hiring and creating jobs.
74) Also highly interesting how the author kind of mumbles here about Minsky claiming that profit and price constraints would have to be imposed on oligopolistic industries in order to constrain the inflationary results of his jobs program, here's where some of Minsky's views (at least their ultimate implications) get a little concerning. No also that the author argues inflation is "much less of a concern in today's global economy." Wrong!! This is precisely wrong right now, and it looks like it was a 9th inning (about to be wrong) misprediction even in 2016.
75) A quick review here: "Minsky's fundamental argument is simple: 1) poverty is largely an employment problem; 2) tight full employment improves income at the bottom of the wage spectrum; and 3) a program of direct job creation is necessary to sustain tight full employment." Essentially this program would create an employment buffer stock.
76) "This is the sort of alternative that Minsky had proposed back in the 1960s. A half century later, unemployment and poverty remain with us--just as he argued they would."
Chapter 6: Minsky and the Global Financial Crisis
77) The chapter opens with a couple of money quotes from Minsky:
"That which can be securitized will be securitized."
"The emergence of money manager capitalism means that the financing of the capital development of the economy has taken a backseat to the quest for short run total returns."
78) Interesting and borderline distressing example of logical incoherence here: "As Minsky insisted 'stability is destabilizing'--and this seemed to perfectly describe the last few decades of US experience, during which financial crises became more frequent and increasingly severe." Wray then goes on to list all the crises of the 80s, 90s and 2000s: the S&L crisis of the late 80s, the 1987 crash, the various developing country debt crises throughout the 80s and '90s, LTCM in 1998, Enron in 2001, the dot-com collapse of 2000, all of these he sees as precursors to the "big one": the great crash of 2008. But wait! Are we having stability or are we having instability? If the point of the phrase "stability is destabilizing" is to argue that a long period of stability would be destabilizing, this is about the opposite of a long period of stability. At first I thought this "stability is destabilizing" phrase was a good, albeit paradoxical economic koan, but now it seems like it falls apart and makes no sense the more you think about it. Perhaps the they are making here (both Wray and Minsky) that the US intervention in each of these crises gave everyone the impression of "stability" in the form of a US government "put option" essentially.
79) Minsky's later writing (in the 80s and 90s) focused on the long-term transformation of the financial system since the late 19th century. Commercial capitalism (again, banks doing more traditional lending and financing the production process itself, labor, materials needed for production, etc.) evolving to finance capitalism, evolving to "managerial welfare-state capitalism" (Minsky also called this "paternalistic capitalism" which was a more stable system dating from the end of World War II to the early 70s, with "big government, big bank (meaning: the Fed/the central bank) and big corporations" taking care of workers and families.
80) [Worth mentioning here that by definition every big corporation always has to have an ecosystem of small to tiny businesses servicing various needs the big companies have, thus even in the paternalistic "big corporation" era the vast majority of workers were not "taken care of" in the sense that Minsky suggests, it's not possible. This leads us to another category error: the error of assuming the current era is much worse than it actually is because you're comparing it to an idealized and incorrect impression of the prior era!]
81) After this [alleged!] golden era of "managerial welfare-state capitalism" Minsky claims (and Wray claims too) that conservative politicians were able to chip away at New Deal reforms, and "financial institutions were deregulated and de-supervised, and their power grew in a self-reinforcing manner"... This all eventually led to a long transformation to instability (with various expressions used to name this era, like "casino capitalism" or the era of financialization), leading to what Minsky called the stage of "money manager capitalism" (basically huge money managers running huge pools of funds with short-term time horizons, driving short-term focus on stock prices, which Wray characterizes as a pump and dump system).
82) On the idea of "military keynesianism": this is a pejorative referring to governments pumping economic spending through the defense sector in the hopes that it would create jobs in other sectors.
83) Also the other structural problem with Keynesian policies were per Minsky, was the stop go problem, the Keynesian pump priming would generate inflation long before it created full employment which would thus create a stop go policy with a government slowing growth and raising unemployment each time inflation increased.
84) [I'm actually pretty disappointed at the fact that in all this book's discussion of inequality, there's seemingly no discussion of the nature of that inequality: is it dynamic or static? (meaning: are the same 400 families rich for centuries like in Italy, or is the top 10% always churning?--the latter is what you actually want). You really get the impression that economists who rail against inequality have no idea at all about this aspect of it.]
85) [The author mentions the Clinton recovery and expansion which was considered a "Goldilocks economy" because the economy grew at non-inflationary rate: this is yet another widely held misconception (at least in my opinion). There just happened to be a range of price vectors in the 1990s--some inflationary (asset prices, healthcare, education costs, etc)--but these were massively outweighed by lucky deflationary vectors thanks to technology and the internet. It wasn't that the economy grew at below some imaginary non-inflationary rate, and it is typical economic oversimplification to think that way. Even the author himself admits there was tremendous growth in asset prices during that time which were not captured in inflation statistics.]
86) [Note also that fiscal stimulus is one of those things--kind of like communism or socialism--where the response is always "it works, it's just that all the examples we've seen so far haven't been done correctly!" This is basically the same argument Minsky and Wray make about the post-GFC fiscal stimulus: "It wasn't enough, if we had done more stimulus it would have worked." Hilarious.]
87) Another example of circular logic here: if you do fiscal stimulus correctly, the stimulus should come quickly enough in the teeth of the downturn such that it prevents unemployment; thus taxes never plummet and you don't really end up running deficits all that much after either, and it won't be inflationary. But a stimulus that is done incorrectly is one that isn't big enough for soon enough: if it's too small or too late then you have an even worse downturn. This just lead you to a kind of no true Scotsman fallacy (or at the least a circular argument).
Chapter 7: Minsky and Financial Reform
88) "The only universal rule for Federal Reserve policy is that it cannot be dictated by any universal rule." --Minsky
89) On the key aspects of "prudent banking": good underwriting, good relationships with borrowers so they can decide when it makes sense to work with a borrower in trouble, maintaining sufficient loss reserves as well as sufficient capital cushion, and holding a portion of the bank's capital in safe liquid assets that can be sold to cover withdrawals; finally, they should have access to the central bank along with depositors insurance.
90) Minsky considered the "too big to fail" denotation as the ultimate backstop, you know the government will backstop you for sure if you're TBTF: "It should go without saying that a too big to fail bank is not likely to be a well-run bank!"
91) Minsky's wish list for key qualities of what a financial system should provide:
1) a safe and sound payments system
2) short-term loans to households and firms, and possibly to state and local governments
3) a safe and sound housing finance system
4) a range of financial services, including insurance, brokerage, and retirement services
5) long-term funding of purchases of expensive capital assets
[Gosh, who in his right mind wouldn't want this?]
92) Minsky also favors smaller banks and wanted to return to relationship banking.
93) Minsky's four reforms to promote prudent banking:
* Improving underwriting (note that today we substitute credit ratings, credit scores, and credit default swaps for genuine underwriting)
* Increasing capital requirements (note that there are ways banks can game this system; also note Minksy claimed that forcing higher capital ratios doesn't necessarily make things safer, because it means banks will be less profitable--thus they might even choose a higher risk portfolio of loans to achieve a target ROE.)
* Examining banks at the discount window ("...as a potential lender of last resort, central banks have a right to knowledge about the balance sheet, income and competence of their clients, banks and bank managements." Also forcing banks to borrow from the discount window gives the Fed much more leverage over their activities.)
* Microprudential and macroprudential regulation (today banks have much more interdependence, especially with things like credit default swaps which link them much more than ever with counterparty risk, therefore microprudential regulation is not sufficient, you have to be aware of the macro/interdependent aspects of the system.
94) Note that even good macroprudential regulation is insufficient if it doesn't base itself on a theory recognizing the gradual evolution of the financial system towards instability.
Chapter 8: Conclusion: Reforms to Promote Stability, Democracy, Security, and Equality
95) Three fundamental faults of capitalism (note that Keyne's identified two of these flaws: chronic unemployment and excessive inequality) but Minsky added a third: instability.
96) [Most of this chapter is useless speculative parlorgamery on the order of "if I were dictator I would do this."]
97) What policy would be if we followed Minsky's suggestions:
* Instead of telegraphing rate hikes (or even using rate hikes at all) the banking regulation system should require higher down payments, higher collateral requirements, and impose cease and desist orders to prevent certain types of financing (this last one is a doozy).
* Also using automatic stabilizers: ramping of government spending during a slump and reducing it during a boom, and making this automatic rather than a function of the (always too slow) legislative system. [Is it possible Minsky and Wray do not understand separation of powers and other second-order effects of this stuff?]
* Also getting the government directly involved in finance so that it doesn't have to use the banking system (which might be unwilling to lend in a given period of great pessimism)
* Making the government the employer of last resort, a more dignified form of welfare that also would not be inflationary because it would increase output while increasing wages. Also it would likely improve productivity because the nature of these jobs would be focused on promoting the capital development and infrastructure of the economy (which admittedly in the USA today is looking more third world with every passing year).
* Also favoring small to medium sized banks, and (interestingly) creating what Minsky calls "narrow banks (or what I would call a money warehouse), a segment of the banking industry that simply offers deposits while holding only treasuries as collateral, this would carve off a portion of the financial system--an important part because it would hold people's deposits--and would make it perfectly safe. This would then segment the financial world into a safe segment and a risky one. One drawback here would be this would imply that a lot of capital would be held in this system and thus not used for lending to/financing of the capital development of the economy.
98) Minsky's community development bank proposal: this will help smaller communities, small startups and lower-income consumers have more access to financial services. These institutions would be public-private and kept small.
99) "Capitalism can be successful only if economists and policy makers recognize that people have a limited tolerance for uncertainty and insecurity." --Minsky
To Read:
Hyman Minsky: Stabilizing an Unstable Economy
Martin Mayer: The Bankers
Martin Mayer: The Fed
Martin Mayer: Madison Avenue, USA
Robert Skidelsky: Keynes: Return of the Master
Joan Robinson: The Accumulation of Capital
John Maynard Keynes: The General Theory of Employment, Interest, and Money (see especially chapter 17 which Minsky considered the most important)
Basil Moore: Horizontalists and Verticalists: The Macroeconomics of Credit Money
Rudolph Hillferding: Finance Capital: A Study in the Latest Phase of Capital Development
Susan strange: Casino Capitalism
***Walter Bagehot: Lombard Street: A Description of the Money Market