dilluns, 1 de febrer de 2016

Hyman Minsky



He has been undoubtedly one of the most important economists of the second half of the last century. Now, one of his more brilliant disciples, L. Randall Wray has written a complete, clear and accessible introduction to the works of Minsky in the "Why Minsky Matters. An Introduction to the Work of a Maverick Economist".

The book is organized around the three main themes studied by Minsky: the financial system that is the essential base of the modern capitalist economy and its intrinsic and internal instability; his work on employment, inequality and poverty; the analysis of the last phase of the capitalist economy, the Money Manager Capitalism in Minsky's words.

In Minsky's view, "the 'money supply' expands and contracts as bankers accommodate the demands of their costumers in a procyclical manner: when business is good, loans are easy to get; when prospects are bad, banks do not want to lend". So, "if the central bank wants to influence bank lending, it must affect the decision of banks to lend and borrowers to borrow". Taking into account that "the procyclical behaviour of bank lending amplifies the business cycle, increasing the thrust toward instability". And consequently for Minsky "the modern business cycle is a financial cycle": the financial sector accelerates the cycle in both directions (boom and bust) and consequently "fragility rises, exposing the system to the possibility of a crisis coming from a variety of directions". For Minsky, it is possible to attenuate the consequences of the cycle through the "Big Government" (national treasury) acting with a countercyclical budget and the "Big Bank" (FED) acting as a lender of last resort.

One interesting view of Minsky, although probable much less known, is his believing that "reducing unemployment, poverty and inequality would help to promote financial stability". He thought that for fighting against poverty it was better "focusing on employment rather than welfare". He proposed that the government should set a program wage to hire all the people ready and willing to work at that wage: it was an "employer of last resort program". And he thought that this program would be a much more stabilizing alternative for the economy than the policy of stimulating the economic activity ("pump-priming") by investment plus welfare for those who fall behind, which was the predominant Keynesian approach that normally produced a "stop and go" destabilizing policy.

Minsky studied too the long term evolution of the capitalism which has evolved trough different stages, each one "marked by a different financial structure": the "commercial capitalism" in the nineteenth century; the "financial capitalism" (Rudolf Hilferding) at the beginning of the twentieth century that collapsed into the Great Depression; the "managerial welfare-state capitalism" from World War II with the "Big Government" and "Big Bank" regulators. However, "the relatively stable prosperity of the first few decades after World War II generated a large pool of savings and encouraged ever-greater risk-taking leading to "money manager capitalism"", the phase of capitalism at least until the GFC, that some people have called "financialization" or "casino capitalism".

In the "money manager capitalism", "the dominant financial players are 'managed money' -lightly regulated 'shadow banks' .... - with huge pools of funds in research of the highest returns". At the same time, in this stage of capitalism "innovations by financial engineers encouraged growth of private debt relative to income and increased reliance on volatile short-term finance"; there was an increasing predominance of "finance" over "industry", a rising concentration of income and wealth at the top classes, a reduction of government regulation in favour of "self-supervision" of the biggest financial institutions, rising debt ratios and increased layering of debt on debt, and dismantling of barriers to international trade and capital movements. Consequently, the possibility of a crisis in the financial system appears bigger and bigger and "finally, the entire global financial system crashed in 2007 -which many calling it the "Minsky moment" or "Minsky crisis". And this crisis produced an important recession that, at least in the US, it has not been bigger because of the very important economic policy actions of the "Big Government" and the "Big Bank" that saved private firms, banks and other financial institutions.

However, from Minsky's analysis "to the degree that these policies help to return the economy to stability, they are destabilizing! ... So ironically, the success of the interventions encourages more risk-taking". By now, we have many indicators of financial fragility (debt ratios or stock prices relative to sales revenue), some dangerous financial practices from before the GFC are once again flourishing. So Wray asks himself if "will we have another big financial crisis?". And his answer is that "we cannot be sure, but Minsky's theory tells us that is probable ... (that) there is no final once-for-all solution for the inherent tendency to instability of capitalism".

Probably, one of the reasons that makes Minsky "interesting right now, is that he saw the Global Financial Crisis coming". As Wray puts it, "Minsky work enables one to understand our most recent crash but also to recognize the forces that will bring on the next one". Undoubtedly some economists had warned about the possibilities of a crisis from the beginning of the year's 2000s but "Minsky's warnings actually began a half century earlier" from the publications that set out his vision of financial instability. On his view, "it is the stability that changes behaviours, policy making and business opportunities so the instability results". This view is summarized in his most famous phrase: "Stability is destabilizing".

Even the Financial Crisis Inquiry Report, an investigation of the US government, concluded that the crisis was foreseeable and avoidable and that "it was created by the biggest banks". The GFC was "a dramatic failure of corporate government and risk management, ..., the biggest banks were aided and abetted by government overseers who not only refused to do their jobs but also continually pushed for deregulation and desupervision in favour of self-regulation and self-supervision".

Following Minsky it can be said that "financial fragility had grown on trend from the 1960s to the latest crash, making 'it' (another 'Great Crash' like that of the 1930s) likely to 'happen again'". But there is an important difference among the two crisis: the existence of institutions that can organize a different response. We had a terrible recession and a great collapse of the financial system but the existence of the "Big Bank" (The FED- Federal Reserve) and the "Big Government" (US Treasury) had saved the US economy now from falling into a big depression. Because as Minsky argued "the only sensible response to a financial crisis is for the FED to act a s 'lender of last resort' to prevent ... a 'debt deflation'". In fact, "the FED played the critical role in saving the banks and preventing asset prices from a free fall".

Still, by now we have only saved the financial institutions that caused the crisis but the economy is in a very weak state, inequality has increased, the unemployment is high, the conditions in the labour market have worsened for the workers and our biggest banks are actually even bigger and more dangerous than they were on the eve of the GFC.

On the other side, "Minsky matters because his vision was different", he had an "alternative approach to economic theory and policy". Minsky had an important theoretical background but at the same time he knew very well "the real world of financial markets" because he thought that it was absolutely necessary "to understand 'high finance' in order to understand our modern economy" and that is a very important difference of Minsky in relation to the mainstream economists. Knowing very well the functioning of the financial markets, he was able  to identify "in 'real time' those financial innovations that would eventually create the conditions that led to the GFC (Great Financial Crisis) - such as securitization, rising debt ratios, layering debts on debts, and leveraged buyouts".

As Wray noticed, for Minsky the orthodox economists didn't actually understand the functioning of the modern financial system and particularly the consequences of the rise of shadow banks and were unable of adding this feature to their analysis. But, "Minsky's critique was much more fundamental than that: mainstream economics begins with the presumption that the economy is naturally stable. Market forces are supposed to move the economy back to "equilibrium" -where demand equals supply. This is precisely what Minsky rejected".

To summarize, for Minsky the mainstream vision is wrong because the market forces are not stabilizing. As Wray put it, for Minsky "the internal dynamics of our modern economics are not equilibrium-seeking. ... if you ever did achieve the mainstream's beloved equilibrium ... the system is not stable. And if by some miracle we were to get twice lucky -achieving an equilibrium that was stable- stability is destabilizing".

As Randall Wray put it "Keynes's General Theory (1936) identified two fundamental flaws of the capitalist system: chronic unemployment and excessive inequality. The two are linked: excessive inequality puts too much of the income into the hands of the rich, who prefer high rates of saving rather than spending. That depresses demand and keeps jobs scarce"

"Minsky added a third: instability is a normal feature of modern capitalism, which is a financial system. Furthermore, persistent stability cannot be achieved -even with apt policy- because it changes behaviour in ways that make "it" -a depression and debt deflation- likely". For Minsky "the system is fundamentally unstable but instability can be constrained by apt use of fiscal and monetary policy". But, this is not a simple matter because the uncertainty over the effectiveness of policies and because these policies will change the behaviour of the economic agents and that will make the stabilizing policy less effective: "stability is destabilizing!".

Moreover, as soon as in 1987 "Minsky had predicted the explosion of home mortgage securitization that eventually led to the financial meltdown in 2007". He understood the true potential of securitization that reflects, on one side, the globalization of finance and, on the other side, the relative decline of the importance of banks (the traditional financial institutions)  in favour of the "shadow banks" and of "financial markets" and the subsequent decline of the regulation and supervision of the financial system in favour of the self-regulation and self-supervision.

Minsky was not an anti-capitalist. He was not a revolutionary. He was a reformist  that provided some general economic policy proposals "to reform capitalism, to make it more stable as well as more equitable". He favoured "a capitalism with lower investment and higher consumption, one that maintains full employment and one that fosters smaller organizations. He wanted to shift the focus of policy away from transfers and toward employment. He was sceptical that anything close to full employment could be attained without direct job creation by government". Among his proposals we can point out the following.

First, he proposed a government large enough so that the swings of its budget should be sufficient to compensate swings of private investment, consequently the public spending should be approximately of the same order of magnitude as and probably even larger than investment, especially with the increasing importance of international trade and of swings of the trade deficit (as in the US economy) and with the increasing instability of consumption as households depend, more and more, on credit to finance spending. Regarding taxes, he proposed the elimination of the corporate income tax and of the employer portion of the payroll tax and he supported a broad-based value-added tax as an alternative.

Second, he wanted "to reorder spending priorities toward employment programs, child allowances and public infrastructure investment, and away from defence" and other transfers. He thought that an employment program could and should substitute most welfare transfers "because he was convinced that these transfers impart an inflationary bias to the economy". He thought that expenditures in public infrastructure and the job creation through an employer of last resort program -and not welfare- "would reduce inflation by increasing capacity to supply along with increasing demand". It must be remembered that Minsky "always included full employment, greater equality and stability as goals of policy" and that he used the term "capital development" in a very broad way including "public and private infrastructure investment, technological advance and development of human capacities (through education, training and improvements to health and welfare".

Third, he proposed policies to reduce the "instability-enhancing power of corporations" trough the elimination of the corporate income tax and with policies that favours the employment of labour (with the elimination of the payroll tax on employers) over investment in physical capital because "high employment is stabilizing as it induces growth based on consumption rather than on investment".

Fourth, Minsky thought that "Big Government's budget needs to help stabilize the economy" but at the same time "it is essential that individual firms and banks are allowed to fail; otherwise, there is no market discipline". Furthermore, he favoured policies for the development of medium size banks (Community Development Banks) that would also favour medium size firms; the elimination of the segmentation of activities between commercial and investment banking; the favouring of employment over capital-intensive production techniques in the industrial policies; the regulation and government intervention into specific markets with the aims of promote competition and to avoid the formation of trusts.

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