Stabilizing an Unstable Economy

Stabilizing an Unstable Economy

“Mr. Minsky long argued markets were crisis prone. His ‘moment’ has arrived.” –The Wall Street Journal

In his seminal work, Minsky presents his groundbreaking financial theory of investment, one that is startlingly relevant today. He explains why the American economy has experienced periods of debilitating inflation, rising unemployment, and marked slowdowns-and why the economy is now undergoing a credit crisis that he foresaw. Stabilizing an Unstable Economy covers:

  • The natural inclination of complex, capitalist economies toward instability
  • Booms and busts as unavoidable results of high-risk lending practices
  • “Speculative finance” and its effect on investment and asset prices
  • Government’s role in bolstering consumption during times of high unemployment
  • The need to increase Federal Reserve oversight of banks

Henry Kaufman, president, Henry Kaufman & Company, Inc., places Minsky’s prescient ideas in the context of today’s financial markets and institutions in a fascinating new preface. Two of Minsky’s colleagues, Dimitri B. Papadimitriou, Ph.D. and president, The Levy Economics Institute of Bard College, and L. Randall Wray, Ph.D. and a senior scholar at the Institute, also weigh in on Minsky’s present relevance in today’s economic scene in a new introduction.

A surge of interest in and respect for Hyman Minsky’s ideas pervades Wall Street, as top economic thinkers and financial writers have started using the phrase “Minsky moment” to describe America’s turbulent economy. There has never been a more appropriate time to read this classic of economic theory.

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3 thoughts on “Stabilizing an Unstable Economy”

  1. William Podmore says:
    65 of 71 people found the following review helpful
    5.0 out of 5 stars
    Brilliant study of a failed system, April 29, 2009
    By 
    William Podmore (London United Kingdom) –

    This review is from: Stabilizing an Unstable Economy (Hardcover)
    This classic work of political economy, first published in 1986, has valuable lessons for us today. Minsky studies the recessions of 1975 and 1982, economic theory, institutions, particularly banks, and finally presents an agenda for reform.

    Financial traumas have led to ever-worse recessions, in 1970, 1975, 1979-80, 1982, 1987, 2002 and the present. As he notes, “the normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment, and poverty in the midst of what could be virtually universal affluence – in short, .. financially complex capitalism is inherently flawed.” Yet he believes, “the collapse of aggregate demand and profits, such as occasionally occurred and often threatened to occur in pre-1933 small government capitalism, is never a clear and present danger in a Big Government capitalism such as has ruled since World War Two.” Life is disproving this hope.

    What causes these recessions? Minsky writes, “the Wall Streets of the world are important; they generate destabilizing forces. … This instability is not due to external shocks or to the incompetence or ignorance of policy makers. Instability is due to the internal processes of our type of economy. The dynamics of a capitalist economy which has complex, sophisticated, and evolving financial structures leads to the development of conditions conducive to incoherence – to runaway inflations or deep depressions.” Strangely, capitalism can’t handle capital: “capitalism is flawed precisely because it cannot readily assimilate productive processes that use large-scale capital assets.”

    What is to be done? He warns, “Meaningful reforms cannot be put over by an advisory and administrative elite that is itself the architect of the existing situation.” Then he stresses, “The emphasis on investment and `economic growth’ rather than on employment as a policy objective is a mistake. A full-employment economy is bound to expand, whereas an economy that aims at accelerating growth through devices that induce capital-intensive private investment not only may not grow, but may be increasingly inequitable in its income distribution, inefficient in its choices of techniques and unstable in its overall performance.” But, as Minsky acknowledges, capitalism cannot deliver full employment: “Capitalist market mechanisms cannot lead to a sustained, stable-price, full-employment equilibrium.”

    He proposes, “Public control, if not out-and-out public ownership, of large-scale capital-intensive production units is essential.” He suggests nationalising the railroads and the nuclear power industry, as private enterprise runs both so poorly.

    He also notes capitalism’s other failures: “the market mechanism … cannot and should not be relied upon for important, big matters such as the distribution of income, the maintenance of economic stability, the capital development of the economy, and the education and training of the young.” It seems we can’t rely on capitalism for anything.

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  2. Larry R Frank Sr, MBA, CFP says:
    14 of 14 people found the following review helpful
    5.0 out of 5 stars
    Just what have we learned over the years (or not)?, August 23, 2010
    By 
    Larry R Frank Sr, MBA, CFP (Rocklin CA) –

    Verified Purchase(What’s this?)
    This review is from: Stabilizing an Unstable Economy (Hardcover)

    Unfortunately, economists seem to given more attention after they’re deceased and it appears Hyman P. Minsky (1919 -1986) is one in this category as well. As I read this book, originally published in 1986, I was amazed at not only one, but the many, parallels to today his synthesis of economic views, a blend of today’s camps including the behavioral, had.

    More valuable to you are his comments than mine, so I will quote Minsky as much as possible in this review and highly suggest its reading to fill in the gaps he so well articulates on his own. I decided to read this book because I’m not an economist and heard how his theories may better apply today than ever.

    Many years later, the preface to this edition provides an excellent summary of Minsky’s work. You do not need to be an expert to follow along. In the Introduction (8), Minsky points out that the institutional arrangements we have today in response to the Great Depression were set up pre-Keynes and with a pre-Keynesian understanding of the economy. ¨The evidence from 1975 indicates that, although the simple Keynesian model in which a large government deficit stabilizes and the helps the economy to expand is valid in a rough and ready way, the relevant economic relations are more complicated than the simple model allows. In particular, because what happens in our economy is so largely determined by financial considerations, economic theory can be relevant only if finance is integrated in the structure of the theory.¨

    Minsky discusses Big Government and lender-of-last-resort (Federal Reserve or Fed) which is enlightening is and of itself. The balance of Chapters two and three are devoted to how these two interventions may work in theory. ¨To understand how Big Government stopped the economy’s free fall, it is necessary to delve into the different impacts of government deficits on our economy …¨ (24) He proceeds to define and then discuss three impacts: income and employment effect; budget effect; and portfolio effect. The standard view only incorporates one impact while Minsky argues and expanded view must incorporate all three views. ¨As a result of the 1975 experience, the issues in economic theory and policy that we should have to face are not about the ability of prodigious government deficit spending to halt even a very sharp recession but about the relative efficiency of specific measures and the side and after effects associated with particular policy strategies.¨ (24-25) I would suggest this has not been done effectively in response to the 2007 recession (started in Dec 2007 and has not been declared over as of this review writing (google “nber recession dates” for start and finish dates for this recession) which to date has had a more blind application of Keynesian without much thought as Minsky suggested long ago. Of interest is his discussion how Big Government entitlement programs impart an inflationary bias into the economy. (29)

    Minsky’s lender-of-last-resort includes a discussion on the lack of understanding of the inflationary side effects affects of intervention (51) and explosive growth of speculative liability structures (52) are as applicable today as to then. ¨Unless a theory can define the conditions in which a phenomenon occurs, it offers no guide to the control or elimination of the phenomenon.¨ He discusses the open market and discount window functions of the Fed and is instructive as to how the FOMC loses its power to affect member bank behavior, thus the Fed is not acting on intimate knowledge of banking practices. (54) Wow! Wasn’t that also true this time! Minsky points out five causes of concern that the 1974 Chairman of the Federal Reserve System had appear as relevant today as to then as well: ¨first, the attenuation of the banking systems’ base of equity capital; second, greater reliance on funds of a potentially volatile character; third, heavy loan commitments in relation to resources; fourth, some deterioration in the quality of assets; fifth, increased exposure to the larger banks to risks entailed in foreign exchange transactions and other foreign operations.¨

    Minsky foresees how regulators (and politicians it seems) in imputing ¨…the difficulties he sees to either a laxness of regulatory zeal or, perhaps, some rather trivial mistake in how the regulatory bodies were organized, rather than to a fundamental behavioral characteristic of our economy.¨ (58) Even today, we see more shuffling of regulatory responsibilities and body creation rather than understand the behavior that causes the problems first in order to develop solutions.

    He also points out how real estate was a problem back then as well, as result from explosive speculation. ¨The need for lender-of-last-resort intervention follows from an explosive growth in speculative finance and the way in which speculative finance leads to a crisis-prone situation.¨ (59) ¨Inasmuch as the successful…

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  3. A. Menon says:
    15 of 16 people found the following review helpful
    5.0 out of 5 stars
    has always been and likely will always be a must read, October 20, 2009
    By 
    A. Menon (Hong Kong) –

    Verified Purchase(What’s this?)
    This review is from: Stabilizing an Unstable Economy (Hardcover)
    This is and has really re-emerged as a classic and prophetic book on the endogenous factors that drive instability. Again, the book is referred to a little too late and undoubtedly the same will happen in whatever next bubble next pops. To give a quick overview, most people study economic growth as as function of the economy’s factors of production (including human capital) and their dynamics (modern economists are updating methods and ideas but people are still taught the solow growth model as foundational). The “trajectory” of an economy is usually smooth and the stochastic growth drivers/detractors are technology and exogenous shocks, where exogenous are not known from a substance or timing perspective a priori. Minsky explores a form of instability that is not discussed in most growth models, he discusses the instability that is embedded in our economies resulting from the use of currency its fluctuation from being scarce to abundant.

    To me his insights as to the dynamics of what drives asset bubbles, in particular, banks propensity to lend as well as agents propensity to borrow against assets as a function of recent history was so spot on it makes you smile were it not so sad that it just happened. Minsky has identified a particularly dangerous form of the animal spirits that Keynes and more recently Schiller have written about, especially in a fiat currency environment in which we are separated from the pricing of money mechanism that the central bank is empowered to control. This book is worth reading for a multitude of reasons. Not only does it make one think about the worlds inherent instability, for which no obvious solution exists, it reminds us that we need to work on policy that tries to generate negative feedback to counteract the positive feedback to take us from hedge finance, to speculative finance, to ponzi finance.

    After reading this book, one is not an expert able to give a solution to endogenous money and asset price shock risks, but one can understand the problem much more deeply. Given the dynamics driving the instability isnt stationary and central bank measures often take a long time to filter through (obviousy example being raising rates yet continuation of property speculation) more time needs to be spent on what policy might induce counterbalancing feedback. After reading Minsky one can read policy recommendations and get a more complete sense of the influence and the merit in things like bank capital cushions being used to dampen multiyear volatility. This has always been a must read, but the recent and ongoing crisis is another re-affirmation to add this to ones cart.

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