A Moment of Minsky, Redux

It’s been two years since my last major post on this issue. A lot has happened since then, much of which points out the truth of what I said.

If governments could be powerful enough to insure the security of individuals, and not harm the ability of the economy to grow, I would not be as strident on this point as I am. I agree with Minsky on description, but disagree on prescription. Minsky’s prescription was that of Keynes, but on steroids. Run a hyper-stimulative monetary and fiscal policy. Well, we have that now, and it is not helping much; it only balloons the national debt. The right answer is to do almost nothing, but provide for ways to expedite bankruptcy claims.

Why such a harsh prescription? We don’t want financial institutions, much less large ones, to rely on the idea that the Federal Government has their back. That leads to excessive risk-taking. We also should not want the US Government to be deeply involved in the financial sector for several reasons:

• The Treasury will be captured by financial interests (already done!)
• Fair pricing of loan yields versus marginal cost of taxation will get muddled.
• Political haggling will choke Capitol Hill.
• The blob will grow. No, not the Department of Education, a la William Bennett. I am talking about the Fed.
• Individuals and corporations will be more cautious about their finances, and will manage them more prudently.

Aside from constraining the total leverage of the economy, which I have suggested in the past, there is no way of escaping the pains of the boom-bust cycle. I would say to everyone, “Grow up. Our Government can’t control the economy in the long run, so accept that, and live with the boom-bust cycle. Eliminate government meddling, especially the Fed. All attempts to smooth the cycle lead to a bigger bust later. Would you rather take some pain now, or risk the creditworthiness of our nation?”

One reader has recently asked me about sovereign defaults. I need to think about that, and give you all a better piece later, but this is not a time to be careless about the US, unless the political mood so changes, that large tax increases would happen.

Comments

[history rep...:]

"Aside from constraining the total leverage of the economy, which I have suggested in the past, there is no way of escaping the pains of the boom-bust cycle."

that is exactly right. and i'm afraid that, whenever times are good, there's no way to avoid removing the constraints.

i don't know enough about dueling economists to know who said what, but it's obvious that weakly-regulated capitalism is unstable. if some models show the contrary, that's just "garbage in, garbage out".

Sep 15 10:59 AM

[Thomas J. G...:]

David's Aleph article on reducing total leverage is very good. I remember reading one of the Bear Stearns books and it said "JP Morgan with retaiil deposits had lent those SubPrime funds inside of Bear a billion dollars". (jpm seemed to manage the risk and came out of it ok) And I'm thinking, why is that bank lending depositor money to this extremely speculative enterprise. I think the two tier financial regulations is a good idea. Hedge funds, investment banks and anyone who deals with them is on their own. If they go bust, that's their problem. Banks that take retail depositor money have to have more risk management and stay away from the hedge fund/investment bank side.

Sep 15 01:45 PM

[Gregman2:]

Unfortunately, in a capitalist system there are many innocent victims. Not just in the investor class either. Your point suggests that the role of government should be that of a spectator in the stands...let things crumble as they may, regardless of outcome. It's not practical or sensible. Why is it that--for example--a renter, on time, in full compliance, should fall victim to a landlord or lender that's in default...often with scant notice and virtually zero recourse? Like you, I'm one to have said, "Let the insolvent banks crumble..." So to sooner allow for a Phoenix. But, it's not so simple, is it?;-)

Sep 16 01:02 AM