Minsky - Stabilizing an Unstable Economy

Copyright 2008 by Hyman Minsky. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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2. A DEEP RECESSION BUT NOT A DEPRESSION IN 1975:
THE IMPACT OF BIG GOVERNMENT

3. A DEEP RECESSION BUT NOT A DEPRESSION IN 1975:
THE IMPACT OF LENDER-OF-LAST-RESORT INTERVENTION

When Hyman Minskys book originally was published more than two decades ago, it was ahead of its time. This is often the case with economic thinkers. Joseph Schumpeter enjoys greater influence today than he did in his own time, and the seminal ideas of John Maynard Keynes gained broad influence well after they were published. So too with the indefatigable Minsky. Although he was a force to be reckoned with during the l970s and 1980s, his ideas never have been more salient than today. If Minsky were alive today, he could justly claim I told you so to those who have paid close attention to economics and finance in the last few decades. There is no better moment to reissue this Minsky classic.

Like Keynes (about whom Minsky published a biography in 1975) and Schumpeter, Minsky was centrally concerned with business cycles. The Keynesianism that became dominant following World War II focused chiefly on the politically popular aspects of Keynes writings. Too few recalled that Keynes recommended monetary action before fiscal activism and budget surpluses during periods of growth. For too many policymakers, Keynesianism meant deficit spending as an all-too-easy and automatic fix. There was a growing sense that Keynesianism had conquered the business cycle, as reflected in terminology like soft landing and mid-course correction.

Hyman Minsky forged a different and important connection with Keynes. He emphasized the volatility of investments, pointing out that the underlying uncertainty of the cash flow from investments has powerful repercussions on the balance sheets of business. It was an important insight that deserved much greater attention.

After monetarism eclipsed Keynesianism in the late 1970s and 1980s, Minskys insights again were not given their due. Even at its zenith in the early 1980s, monetarism failed to cope effectively with the changing structure of the financial system, which Minsky so eloquently dealt with in his broad analytical approach. Meanwhile, econometrics had become almost a religion among economists and financial analysts. But Hyman Minsky did not allow his analysis to be constrained by statistical models. He sagely understood that mathematical equations cannot properly account for significant crucial structural changes or shifts in behavioral patterns in economics and finance.

I was attracted to the work of Hyman Minsky early on in my career in the financial markets. In my own work, I became increasingly concerned by how debt continued to grow more rapidly than nominal gross national product. I attribute this unwholesome development to the rapid securitization of financial assets, the globalization of financial markets, and vast improvements in information technology that facilitated, among other things, the quantification of risk taking. The risks inherent in exploding debt have been heightened by the failure of official policymakers to put into place safeguards that encourage financial institutions to balance their entrepreneurial drive with their fiduciary responsibilities.

Hyman Minskys insights help us understand the key financial developments of recent decades. Few understood as well as Minsky the self-reinforcing dynamic of speculative corporate finance, decreasing debt quality, and economic volatility that has come to characterize our times. He called corporate borrowing for the purpose of repaying debt speculative finance, which in turn drives up investment and asset prices. He explained how the bullish rise in employment, investment, and profits tends to confirm, in the minds of business leaders and bankers, the soundness of an approach that ultimately fosters volatility and unacceptable risk. In a colorful phrase that could be the watchword for the Age of Enron, Minsky cautioned against balance-sheet adventuring.

What followed the original publication of this book, therefore, hardly would have surprised its authorfrom the savings and loan and banking crises in the late 1980s and early 1990s; to the Mexican and Korean debt travails, the Russian debt default, and the near hemorrhaging of the markets caused by the excessive leveraging of Long-Term Capital Management in the 1990s; to the bursting of the high-tech bubble in 2000.