This chapter comes from Stabilizing an Unstable Economy, the seminal work by Hyman Minsky.It reveals his groundbreaking financial theory of investment, one that is startlingly relevant today. All they do is to increase incomes, but they don’t increase output and they don’t increase employment. Okay. Long-Term Capital Management did not finance the acquisition of any real physical capital assets. And the result is what? This basically gives you an idea of how Minsky used always this idea of looking at balance sheets, looking at the interconnectedness of balance sheets. 0000005897 00000 n And the households now discover that their income from these assets is reduced. Keynes said no. Your email address will not be published. Now, how was this different from the normal approach? trailer << /Size 128 /Prev 499722 /Root 97 0 R /Info 95 0 R /ID [ <82BEFF68BF6DC2A8980DB43929BC69D7> <87FEFA7A41FA281A1BAC82ACE384144B> ] >> startxref 0 %%EOF 97 0 obj <> endobj 98 0 obj <<>> endobj 99 0 obj <>/XObject<>/ProcSet[/PDF /Text/ImageC]>>/Annots[109 0 R 108 0 R 107 0 R 106 0 R 105 0 R 104 0 R 103 0 R 102 0 R 101 0 R 100 0 R]>> endobj 100 0 obj <>>> endobj 101 0 obj <>>> endobj 102 0 obj <>>> endobj 103 0 obj <>>> endobj 104 0 obj <>>> endobj 105 0 obj <>>> endobj 106 0 obj <>>> endobj 107 0 obj <>>> endobj 108 0 obj <>>> endobj 109 0 obj <>>> endobj 110 0 obj <> endobj 111 0 obj <> endobj 112 0 obj <> endobj 113 0 obj <> endobj 114 0 obj <>/W[1[190 302 405 405 204 286 204 455 476 476 476 476 476 476 269 840 613 573 673 709 558 532 748 322 550 853 746 546 612 483 705 555 406 489 405 497 420 262 438 495 238 448 231 753 500 492 490 324 345 294 487 421 639 431 387 1015 561]]/FontDescriptor 118 0 R>> endobj 115 0 obj <> endobj 116 0 obj <> endobj 117 0 obj <> endobj 118 0 obj <> endobj 119 0 obj <> stream And this basically became what he called money manager capitalism. All the investment managers or the money managers were then doing what? So that Hy’s basic idea was that if you look at these intersecting balance sheets and if you look at the balance between the cash inflows that you got from investment in capital assets relative to the cash commitments that you had in order to pay the liabilities, that is the debts that you had to issue in order to acquire those assets, there was a very high probability that the system would enter into frequent financial crises. Okay. You borrow money; you have to be able to pay it back. A very interesting historical fact in the 1930s when Britain was recovering from the recession, Keynes’ disciples argued very strongly to increase debt financed government expenditures. As we prepared this new edition of Hyman P. Minsky… And the same thing then extends to households. So he said government expenditures are useless. Indeed, in this book, first published inMinsky examined a number of financial crises in detail, several of which involved similar financial instruments, such as commercial paper, municipal bonds, and real estate and investment trusts. So that debt deflation process eventually ends up where? : And we talk now very much about the very rapid increase in income inequality and in terms of wealth inequality. Out of these cookies, the cookies that are categorized as necessary are stored on your browser as they are as essential for the working of basic functionalities of the website. Now there’s a very big difference between financing investments to produce real output and issuing financial assets simply in order to generate gains from basically what is mispricing in financial markets. One of them is the one which was put forward by Kalecki that argued that private sector manufacturers would be very hesitant to allow the economy to go to full employment. Prabhat Patnaik reflects on the COVID-19 shock that has worsened the crisis triggered by globalized finance. File Name: Stabilizing an Unstable Economy 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. Big Tech works to ensure technology and world trade operate for their benefit post-COVID and beyond. Maybe we shouldn’t place so much emphasis on the necessity of financing either accumulation in real assets or the generation of these financial assets that we have under money manager capitalism. And once you stop spending, then the economy goes into difficulty. And it’s also necessary to tailor that program so that it does support the ability of the economy to maximize the use of its particular resources. Those productive capital assets then provided employment and they provided output. Required fields are marked *. Well, it eventually ends up with widespread bankruptcies and the conditions that we saw in the 1930s in the Great Recession. And for this, he came up with what he called the Employer of Last Resort program or the Job Guarantee program. 0000037341 00000 n They’re all created not in order to finance the acquisition of physical capital assets that generate income. But that’s just the problem for the firms. Unlike other critical analyses of I’m Lynn Fries producer of Global Political Economy or GPEnewsdocs. 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. If you manage to have some technical progress at the same time, that is so that output per man is increasing, he said then by definition you know the economy is going to grow over time. If this becomes cumulative, you then end up with the possibility that Minsky called going into a debt depression or a debt servicing depression. Now was that a good thing or a bad thing? Why? He also holds the position of professor of development finance at Tallinn University of Technology. What did we do? So that if households have purchased say the bonds of IBM or AT&T and they’re unable to make those payments, now the households find that the value of their assets and their income is reduced. So that the increase in profits and the failure to achieve full employment are obviously one of the basic causes of the very sharp increase in the share of income which goes to the top 1% of the income distribution. They changed in a couple of different ways. And when you cannot make payments, what do you do? Like why just as the Federal Reserve acts as Lender of Last Resort to bail out too big and too interconnected to fail banks, the government should act as Employer of Last Resort to bail out households. So if you ask the next question and say, where do those liabilities end up? So he said, really what we have to look at is the primary objective. GPEnewsdocs. These cookies will be stored in your browser only with your consent. And Keynes said, no. This is just to give you an idea of two different financial structures that end up creating excessive financial liabilities relative to the possibility to service them. So if we look at this interaction which is determined by the intersecting balance sheets -that is the assets and liabilities being held across the balance sheets of the firms, the banks, and the households -if it turns out that there is I would call this an excessive emphasis on investment in order to satisfy the conditions of employment and output growth, you have an increasing risk that firms will be unable to make those debt service payments. 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. Now he had a very simple explanation for why this was important. Jan Kregel is director of research at the Levy Economics Institute, director of the Levy Institute master’s program in economic theory and policy, and head of the Institute’s Monetary Policy and Financial Structure program. Hyman P. Minsky. Minsky said maybe we shouldn’t place so much emphasis on borrowing. 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. So that if the system requires a very rapid increase in investment that means that it requires a very rapid increase in the issue of liabilities by the firms in order to finance those assets. Stabilizing an Unstable Economy, Part 1 - Introduction, Stabilizing an Unstable Economy, Part 2 - Economic Experience, Stabilizing an Unstable Economy, Part 5 - Policy, Stabilizing an Unstable Economy, Part 4 - Institutional Dynamics, Stabilizing an Unstable Economy, Part 3 - Economic Theory. Because he said: look, if you’re an economy that has a normal size and has a normal population, it will normally have a positive rate of population growth. Your email address will not be published. 0000014362 00000 n Stabilizing an Unstable Economy. 0000003113 00000 n So that if you’re going to make money doing this, what do you have to do? So you borrow from the banks, the capital in order to invest in these strategies of price differentials. And from Geneva, Switzerland thank you for joining us in this episode of GPEnewsdocs featuring a commentary of the work of Hyman Minsky by his colleague and friend, Jan Kregel. 0000001904 00000 n ?�� ] �!��x'6P����� ���U��@(���V�`��]4�m��෵غH��klU��k�uat��v.���^��z��l��o\�Q�L So that it’s always the way the borrowing takes place in the system and the way the liabilities that are issued, in order to finance the acquisition of capital, [that] are crucial components of the ability of the system to produce full employment and to produce maximal well-being for the population.