Part 1: INTRODUCTION TO MINSKY Revisiting the Unstable Economy

Transcription

1 Part 1: INTRODUCTION TO MINSKY Revisiting the Unstable Economy L. Randall Wray, Levy Economics Institute and UMKC

2 MINSKY S Early Contributions Innovation is endogenous, responds to profit opportunity: fed funds mkt, endog Ms Innovation stretches liquidity, increases fragility Intervention validates innovations Multiplier-Accelerator with ceilings and floors: time path can be steady growth, cycles, booms, long depressions; depends on institutions Institutions of early post war economy promoted stability; but stability is destabilizing

3 Extensions: 1960s-1970s JMK: financial theory of investment 2 Price system Lender s and Borrower s risk Kalecki view of profits I today forthcoming only if I expected in future Financial Instability Hypothesis Apparent stability changes expectations and behavior in a way that generates fragility

4 Can It Happen Again? Anti-Laissez Faire Thm: in a world where the internal dynamics imply instability, a semblance of stability can be achieved or sustained by introducing conventions, constraints and interventions into the environment. To contain the evils that market systems can inflict, capitalist economies developed sets of institutions and authorities, which can be characterized as the equivalent of circuit breakers. These institutions in effect stop the economic processes that breed the incoherence and restart the economy with new initial conditions. The aptness of institutions and interventions will largely determine the extent to which the path of the economy through time is tranquil or turbulent: progressive, stagnant, or deteriorating.

5 The Policy Problem Stability cannot be achieved because it changes behavior in ways that make it likely The policy problem is to devise institutional structures and measures that attenuate the thrust to inflation, unemployment, and slower improvements in the standard of living without increasing the likelihood of a deep depression Relative stability of Post-War period led to development of Money Manager Capitalism a much more unstable version of the 57 Varieties of Capitalism

6 Part 2: The Minsky Crisis L. Randall Wray, Levy and UMKC

7 The rise and fall of Keynesian economics Old Neoclassical Synthesis developed slowly; deviated substantially from Keynes, retained key neoclassical concepts: utility, intertemporal optimization, equil = mkt clearing. Never adopted Keynes s uncertainty or unknowledge, LT expec s cannot rely on knowledge or even rational belief Accepted effectiveness of M policy; sticky W&P is the barrier Led to Phillips curve and fooling hypotheses Decimated by 1970s stagflation, debates with Friedman, and rationality of Lucas. Had no effective response

8 Developments after 1975 Skidelsky: Rarely in history can such powerful minds have devoted themselves to such strange ideas. New Keynesians adopted almost all of these strange ideas: Having swallowed the elephant of rational expectations, they strained at the gnat of the continuous full employment implied by it, and developed theories of mkt failure to allow a role for govt. In other words they reduced Keynes to a charlatan: nothing new just adds some frictions to mkts Exploded by recent events

9 The Great Moderation: It can t happen again World is now more stable, due to: Better monetary management: dampened inflation and business cycle swings Globalization, absorbs shocks Improvements in information technology Rising profits, declining corporate leverage Securitization risks mangd and allocated Derivatives ensure against risk A Radical Suspension of Disbelief

10 Money Manager Capitalism and the Real Estate Bubble Mngd Money needed returns when stock mkt tanked Fed low interest rate policy fueled mortgage market Affordability products substituted for income Banks, Mortgage Lenders had learned lessons from S&L fiasco: Securitize! Earn fee income and sell securitized mortgages

11 Stability Virtuous Cycle Innovation Competition Asset Prices Leverage Credit Availability

12 Macro Transformation of Economy Three Balances: trade imbalance = huge leakage that requires govt or private sector deficits to create offsetting injection Tighter Fiscal Stance Growing Inequality Willingness to leverage private debt-led expansion

13 Global crisis: The Minsky moment or Minsky Crisis Crisis represents an institutional failure (banks mutated from utilities to casinos); an intellectual failure (dangerous view of efficacy of mkts); and moral failure (system built on money values) Instinctive and quick return to Keynes With Minsky s insights on the transformation that led to the crisis

14 Discredited Notions Efficient Markets, Deregulation, Self regulation, Great Moderation New Classical, Real Business Cycle, Rational Expectations, Neutral Money New Monetary Consensus, Inflation Targets, Taylor Rule, Quantitative Easing Ricardian Equivalents, Impotent Fiscal Policy, Crowding Out

15 Policy Response Policy actions are directed at saving the system, not reforming it Too big to fail institutions even bigger today than they were before the crisis Few criminal prosecutions of those responsible for the current crisis Reliance on Wall Street to reform itself, belief that gov t only needs to get the incentives right for market discipline to work

16 Paulson/Geithner Plans: Trying to restore Money Manager Capitalism

17 Part 3: Minsky: Policy to Enhance Stability L. Randall Wray, Levy and UMKC

18 How did Consumption become Destabilizing? Investment theory of the cycle and financial theory of investment Kalecki: Profit = I + Def + NX Sw + Cp What if Sw < 0? Minsky 1963: private-sector led expansion inherently unstable Financed consumption drives the cycle?

19 Fragility Rises as wage share falls but consumption share rises Stagnant real wages, and falling wage share since early 1970s Low wage competition, union busting Debt-fueled consumption Rising share of financial sector

20 Wages and Salaries, %GDP

21 Profits Grow relative to GDP

22 Financial Liabilities Relative to GDP

23 Financialization of the US Economy

24 Minsky s policies to promote stability High consumption, high employment Greater equality, rely on income, not debt Favor small to medium size banks; CDBs, not predatory lending; debt relief Don t waste a crisis: De-financialize; downsize. Resolve Definancialize healthcare, retirement, education Enhanced oversight; strengthened regulation Nothing off-balance sheet Institutions and practices to favor stability Automatic stabilizers: countercyclical budget Institutional Circuit breakers No final solution to fundamental flaw of capitalism

25 Minsky s Agenda for Reform Big Government (size, spending, taxing) Employment strategy (ELR) Financial Reform Reduce Market Power

26 Levy Proposals: Institutions for modern capitalism Capitalism is dynamic and comes in many forms 1930s reforms not appropriate for Money Mngr Capitalism Free Mkt ideology is dangerous New policies are need to reduce insecurity, promote stability, and encourage democracy

27 Macro Challenges 1. Trade Deficit Leakage must be matched by Budget Deficit Injection, but Fiscal Stance is too tight 2. Unequal Distribution of Income 3. Continuing budget shift toward transfers (Social Security) 4. Barriers to Work

28 Toward a New Paradigm Government-Centered Approach Sovereign Currency Public Purpose of Monetary System: create and mobilize resources Analysis Disciplined with Balance Sheets Financial Assets = Financial Liabilities Stock-Flow Consistent Modeling Macro Sectoral Balances

29 Revised View of Monetary Policy Interest Rate Target Horizontal Reserves Reserves Are Nondiscretionary Reserves Are Not A Constraint Effects of Rate Change Indeterminant In usual circumstances, lower rate deflationary Central Bank Is Never Independent Best Practice: Pay 50bp on Reserves, Lend at 25bp, Operate Clearing for Treas & Banks

30 Revised View of Fiscal Policy Sovereign Issuer of Currency Spends by Crediting Accts, Taxes by Debiting Sovereign Cannot Borrow Bond Sales Are Part of Monetary Policy Sovereign Supplies Net Financial Saving Govt Deficit Nongovt Surplus Fiscal Policy Dominates Appropriate Goals: Full Employment with Price Stability; Rising Living Standard

31 Revised View of Finance Conventional View Confuses Paying For with Finance Saving don t finance nothing The Finance Is Created Simultaneously with the Spending (System of Credits and Debits) Financialization Is Not Finance; It is Leverage or Layering Securitized Mortgages, Life Settlements, Private Pensions, Health Care Reform = Financialization Finance is Not a Scarce Resource Wall St Became the Tail that Wags the Dog