Wednesday, July 3, 2013

Minsky's crises

Last week I taught a couple of classes on financial crises, including Minsky's ideas. Lance Taylor's paper (with Stephen O'Connell; subscription required) is probably one of the few discussions of Minsky in a mainstream journal (in the Quarterly Journal of Economics, the working paper series of Harvard and MIT), and one of the last heterodox papers published on any topic, by the way. Lance's paper, as he admits leaves out a lot of the institutional richness of Minsky's ideas.

In Lance's model the crisis is fundamentally based on expectations about future profits, and the determination of economic growth is demand determined, but based on a Cambridge equation model in which profits determine investment. It's fundamentally a profit-led regime (for a critique of these kind of closures see here). In this view, the crisis is brought by a sudden decline in confidence (although a hike in the rate of interest would work too), which leads to a contraction of growth, and even lower expectations of future profits. Eventually, if the central bank continues to 'lean against the wind,' in this simple version by expanding money supply, the expected profits would pick up and the economy would recover.

The paper lacks the Minskian notion of firms and individuals getting increasingly indebted, with ever higher leverage ratios, as a result of competition, or worsening income distribution. Note that Godley's framework [Godley arrived at the Levy Institute, if I'm not wrong, right before Minsky passed away, so for a while they were both there] suggests that private debt accumulation was one, and the crucial, unsustainable process in the US economy. Keen provides a more recent formalization of Minsky's ideas worth looking, suggesting that is essential for understanding the Great Recession. Palley, on the other hand, suggests that while important Minsky's model does not provide the whole picture.

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