Minsky’s moment: He gets props for describing bubble

hyman-minskySPRINGFIELD, Ill. (Oct. 27) — Hyman P. Minsky died in 1996, but today the Chicago-born economist is getting credit for anticipating the current financial crisis. To be precise, Minsky’s “financial instability hypothesis,” refined in the ’70s, describes how bubbles form in capitalist economies, with potentially disastrous consequences.

For most of his career, Minsky taught economics at Washington University in St. Louis; when he retired in 1990, he joined the Jerome Levy Economics Institute of Bard College as a distinguished scholar.

Minsky’s financial-instability model has three stages.

At first, investors only borrow what they can repay based on anticipated cash flows. Then, as asset prices rise, they start to speculate, expecting to be able to refinance. By the third stage, optimism turns to recklessness, and borrowers engage in what Minsky called “Ponzi borrowing” — unable to pay either principal or interest, they gamble that ever-climbing asset prices will allow them to keep refinancing. Debts pile up faster than they can handle, and collapse becomes inevitable.

In the summer of 2007, Nouriel Roubini, professor of economics at New York University and author of RGE Monitor, invoked Minsky to describe the housing bubble that triggered the recent market crash.

Minsky’s name has since crept into the popular press — and he even got a mention in his old hometown paper, which had mostly ignored his work for most of his lifetime.

“A dozen years after his death, Hyman Minsky suddenly is famous,” the St. Louis Post-Dispatch editorialized on Feb. 17, 2008, taking note that the financial press, primarily in Europe, was crediting Minsky for being a spot-on prophet of doom.

In a sense, though, Minsky was already famous — just not with much of the press, which tended to turn to the free-market ideologues for macroeconomic analysis. For example, until the economy started coming apart, Minsky’s obituary was the last time Post-Dispatch readers saw his name.

The notion that capitalism is inherently unstable is hardly new, but Minsky broke ranks with the prevailing wisdom of the Milton Friedman school, which held that markets are self-regulating and efficient. Instead, Minsky argued for effective government regulation and intervention to curb irrational exuberance and delusional thinking, while, at the same time, promoting the values of a democratic society.

Minsky called for keeping government big enough to offset swings in private investment, removing barriers to labor-force participation, actively regulating markets, and eliminating incentives for firms to get too big. Some specifics, at first blush, would be a tough sell to populists: Minsky argued, for example, for the elimination of the corporate income tax, requiring employees to pay 100 percent of payroll taxes, and phasing out transfer payments, like AFDC. But his goal was a full-employment economy — the Alan Greenspan view, that there’s a “natural” rate of unemployment, didn’t square with Minsky’s values.

In essence, Minsky believed that people were the most important resources in any economy — that’s why, for example, he strongly promoted government investment in education.

In the early 1980s, Minsky wrote a column for the St. Louis Journalism Review, a monthly.

Here he is, in September 1985, writing about an economy’s most important resource:

Reaganomics is bad economics. Its practitioners and publicists do not understand the full richness of economic theory. They take one proposition from theory — that free markets can be an effective instrument for achieving cooperation and coordination — and apply it to all phenomena. They either do not know or, if they know, they find it politic to ignore the demonstrated weakness of markets as the coordination and control mechanism for the creation of resources. An investing economy is much more complex than a system in which only trading takes place. Every society uses and creates resources. Perhaps, most important is the creation of resources that will be available for use in the future — even the quite distant future. Physical resources — factories, farms, power plants, etc. — are important, but the overridingly important resources of an economy are its people. Births, bringing up children, and education are the ways we create human resources.

Many economists today see Minsky as a towering figure whose analysis of modern capitalism has proven more durable — and palatable — than that of the free-market ideologues who’ve held sway in Washington, D.C., for 30 years. — Roland Klose (rwklose@sbcglobal.net)

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