Perhaps I couldn’t get enough, but I decided to try another book from Hyman Minsky, this time Stabilizing An Unstable Economy (1986). In it, he attempts to expound on his Financial Instability Hypothesis which first saw itself contemplated in his earlier work on Keynes.
The gist is that capitalist economies are inherently unstable because of the liability structures that they engender. And in having quick response from governments and central banks to counter the risk of debt deflations when those structures get out of control and blow up, we are invariably left with a build-up of pressures for inflation and subsequent investment booms (that also must finally bust). Call it a vicious/virtuous cycle, but the idea is that in the aftermath of a bust, but as the economy remains stable over a prolonged period of time, and revenues and capital gains start to return, the risk tolerances of investors and bankers start to grow and more innovative and expansive investment opportunities appear and are pursued. Financing start outs as hedged, turns into speculative, and finally becomes ponzi in nature.
Part of the problem is that there are so many non-member financial institutions, that Federal Reserve policy only impacts behavior with a lag, since financing from alternate sources is still available. Another issue is that open market purchases, rather than use of the discount window, displaces the Fed from a real understanding of the business that member banks are conducting. Add to that, much of the lending is a function of the bank’s own endogenous money creation, not nearly as much tied to the growth of the money supply by the Fed. And when things implode for these banks, that the government stabilizes employment and revenues (allegedly) through fiscal policy, and that the Fed replaces crap assets on bank balance sheets with “safe” treasury securities, the banks (once they are back to their more profit-seeking ways, as “tranquility attenuates uncertainty”) are armed with the capital levels to finance all sorts of behavior. But, because there was no debt deflation in the middle, the price level from where this process begins again is higher each time. Ergo, inflation.
He deems all of this a foregone conclusion in capitalism and thinks certain institutional reforms are needed to try and avoid it. He has a whole list of ideas, but of course there are a few that stuck out to me. One, that debt deflation is painful, but will correct itself eventually, thereby leaving the economy without the overhang of inflationary pressures that come from bail outs and leave the threat of an even bigger next bust – but the preference is still for the inflationary route. Also, there is some component of nationalization of industry that is required. Blah, blah, blah…
Anyway, there is more, it’s just not that interesting to me. At this point, I’ve done my fair share of indulging the various economic theories and have come to one conclusion – most of these guys are full of it. I’ve wasted enough time. I’m much more interested in the people and ideas that are productive and profitable. So, going forward, that will be my focus. Farewell, pseudo-scientists.
