A Minskian Explanation Of The Causes Of The Current Crisis

[girl gone mad]

A Minskian Explanation Of The Causes Of The Current Crisis
by L. Randall Wray
http://www.benzinga.com/life/politics/10/11/579310/a-minskian-explanation-of-the-causes-of-the-current-crisis">Benzinga

In recent weeks, the explanation for the financial and economic crisis that has gripped the world economy has shifted sharply from deregulation and lack of governmental oversight of financial institutions to fraud and criminal activity. In truth, the US Federal Bureau of Investigation began to warn of an “epidemic” of mortgage fraud back in 2004, and my colleague Bill Black has been pointing to the role played by fraud since the crisis began. (See our recent two part series at www.huffingtonpost.com.) To be sure, there was ample fraud in the “pump-and-dump” schemes during the dot-com bubble at the end of the 1990s, which was closely followed by the commodities market speculative boom and bust. (See my article at http://www.levyinstitute.org/publications/?docid=1094. ) And before those episodes we had in quick succession the developing country debt crisis of the early 1980s, the US Saving and Loan fiasco of mid 1980s (with bank crises in many other nations), the Japanese meltdown and the Asian crisis, the Mexican peso crisis, Long Term Capital Management and Russian default, and the Enron affair.

Seemingly, the crises have become more frequent and increasingly severe until almost the whole world was infected. It is obvious that there must be some link among these crises and that while fraud played a role in most or even all of them, it is not sufficient to lay blame on “bad apples”, bad policy, insufficient foresight, and outright stupidity. We must find a more comprehensive explanation.

When the crisis began in the US in 2007, many commentators called it a “Minsky moment” or even “Minsky crisis”, after the late economist Hyman Minsky who had developed what he called a “financial instability hypothesis” over the years after 1960 and to his death in 1996. Minsky was my PhD dissertation advisor and I had already used his approach to analyze the Saving and Loan crisis. Unlike the typical explanation that invokes Minsky's theories, I recognized that Minsky did not simply provide a “euphoric bubble” approach. Rather he argued that the transformation of the economy and especially its financial system from “robust” toward “fragility” took place over a very long span of time, indeed, over the entire postwar period. The increasingly frequent and severe crises, as well as the growth of fraud as practically normal business practice were a consequence of that transformation. Hence, we should not call this a Minsky moment or crisis but rather a Minsky half-century.

Much of the world emerged from the Great Depression and World War II with a combination of institutions, regulations, financial practices, and memories that together encouraged relatively rapid economic growth, high employment, growing incomes, and growing confidence in our future. Private debt was low (mostly wiped out in the bankruptcies of the 1930s), government debt was high (war finance), and the financial system had been “simplified” (in Minsky's terminology). Big Corporations mostly used retained profits to finance expenditures; Big Unions kept wages growing so that workers could spend out of income rather than relying on debt; Big Government had filled portfolios of banks and savers with safe government bonds. Finance was kept small, constrained, and relatively irrelevant. Besides, memories of the Great Depression discouraged lending as well as borrowing. Strict regulation—especially in the US—kept risky financial practices segregated outside commercial banking.

http://www.benzinga.com/life/politics/10/11/579310/a-minskian-explanation-of-the-causes-of-the-current-crisis">more...

[bemildred]

1. Yah. Been watching all of my adult life.

We really did bestride the world like a colossus after WWII, with lots of goodwill to boot, and all that has been frittered away.

What really blows my mind is that the suit-droids in Washington seem oblivious. Somebody in Washington has to know this cannot go on much longer. But they just keep patching things up and trying to keep the old game alive. I keep thinking of Britain and the collapse of their empire.

[truedelphi]

2. i forget which Wall Street guru stepped forward several months back

To announce that due to the "condition of world markets" the type of Crisis we faced in 2008 would of necessity be re-occurring every six to eight years from now on.

Yeah, of course - as long as Glass Steagall is not put back in place, as long as the Federal Government will continue to wipe out the Middle Class person's dollar with Bailouts to the Wall Street crowd, why wouldn't it?

[pscot]

3. Yesterday in another thread there was a brief discussion

of David Kennedy's book on the fall of empires. He argued, back in 1986, that we were in too deep to pull back from our global military and other imperial committments. An empire on the brink continues to live large long past the point where it can no longer afford it. This tends to hasten the decline. He layed out with amazing prescience what we're experiencing now. Our economy has been hollowed out. You get the feeling that the people in charge don't know what they're doing. Our future's behind us, as Yogi said.