As the Federal Reserve meets today to decide how to communicate its messaging on future rate hikes and balance sheet reduction, financial stability will play a key role. The risk of overheating was real. So let’s put some framing around this issue and ask how the Fed reacts as the data come in down the line.
Tag: Hyman Minsky
The latest jobs number out of the US was a loss of 33,000 jobs in a hurricane-ravaged September. Despite the job losses, the unemployment rate ticked down to 4.2%. Viewed narrowly, this number puts the Fed on hold until December. But viewed more broadly, I believe now is the time […]
World views derived both from Austrian Economics and Post-Keynesian Economics suggest that so-called secular stagnation and the resulting political radicalization in Europe and the United States are here to stay. Here’s why.
By Michael Pettis Last week Derek Scissors, a think tank analysts at the American Enterprise Institute, published an article in which he referred to an October, 2014, studyby Credit Suisse that attempts to measure total household wealth by region and by country. Scissors argues that in the interminable debate about […]
Michael Pettis has a good piece on debt and credit that I ran on the blog this morning. His thoughts on loss socialization are important not just in the context of China but also of other markets like Europe, the US, Canada and Australia where private debt levels have increased […]
Burgeoning debt was not an unlucky accident. It is fundamental to the way the growth model works, and we have arrived at the stage, probably described most imaginatively by Hyman Minsky in his work on balance sheets, in which the system requires an acceleration in credit growth simply to maintain existing levels of economic activity. China’s debt problems, in other words, cannot be resolved administratively, by fixing the shadow banking system, by imposing discipline on borrowers, or indeed by eliminating financial repression (much of which, by the way, has already been squeezed out of the system by lower nominal GDP growth). Without a massive transfer of wealth from the state sector to the household sector it will be impossible, I would argue, for GDP growth rates of anything above 3-4% – and perhaps even less – to occur without a further unsustainable increase in debt, whether that increase occurs inside or outside the formal banking system and whether or not discipline has been imposed on borrowers.
From Minsky’s earliest work, he adopted what became known as the “endogenous money” approach that was revived by Post Keynesians in the 1980s. It is useful to return to Krugman’s critique of Minsky to compare Minsky’s early view of banking with the current view held by many macroeconomists. Minsky’s views over half a century ago are far more advanced than those held today by Krugman.
We need to abandon the Loanable Funds model of lending, which treats banks as “mere intermediaries” and therefore ignores them in macroeconomics. the Neoclassical belief in Loanable Funds is the biggest barrier there is to the development of a realistic, monetary macroeconomics. If Paul Krugman gives way on this belief, then maybe there’s hope that central banks and treasuries around the world will eventually do so too.
I don’t want to be too glib here. I recognize that policymakers are in an extremely difficult position and that there is no longer any easy solution, but railing at the markets rather than trying to understand why they are doing what they do (which anyway makes them far more rational than if they responded to the pronouncements coming out of Brussels) is counterproductive. In fact this kind of pouting is just a part of the self-reinforcing downward spiral that I have described many times before. Policymakers are complaining that economic agents are behaving in ways that reinforce the crisis, even as they do the very same thing.
I have a ton of links so I am going to break them up into groups. Here’s the first bunch from late last week. Three topics are most interesting.
Charles Kindleberger’s classic book on the Great Depression was originally published 40 years ago. In the preface to a new edition, two leading economists argue that the lessons are as relevant as ever.
Our brains are not calibrated to deal with the unexpected. Most of us believe we are good risk managers but in reality we are not. Most of us trust that risk can always be quantified and expressed through some fancy modelling whereas, often, it cannot. The world is not normal, yet universities continue to teach our young students the wisdom of Markowitz and Sharpe which brought us modern portfolio theory and, more specifically, the capital asset pricing model. Garbage In, Garbage Out, as they say. One of the fundamental assumptions behind modern portfolio theory is that asset returns are normally distributed random variables. The return profile of US equities fairly closely matches that of a normal distribution with the exception of large negative returns. They have come about more frequently than one would or should expect.