Download Working Paper No. 51 - Levy Economics Institute of Bard College

Financial Crises:
Systemic or Idiosyncratic
bY
Hyman P. Minsky*
Working Paper No. 51
April 1991
Prepared for presentation at “The Crisis in Finance,” a Conference of
The Jerome Levy Economics Institute
Bard College
*The Jerome Levy Economics Institute of Bard College
INTRODUCTION.
I.
The presentations at this conference are by economists
from Academies
and economists who professionally
confront
real world problems, either in private finance or in public
As economists we accept that the remarks made by
policy.
Keynes
of The
in the closing passage
General
Theory
are
true:
and political
ideas of economists
the
philosophers, both when they are right and when
they are wrong, are more powerful than is commonly
Indeed the world is ruled by little
understood.
else. Practical men, who believe themselves to be
quite exempt from any intellectual influences, are
usually the slaves of some defunct economist.
....I am sure the power of vested interests is
vastly exaggerated compared with the gradual
encroachment of ideas. . . . Soon or late it is
ideas, not vested interests, which are dangerous
for good or evil."l
II
We
like
.
.
.
this
assertion
not
only
because
it
makes
us
important but also because it makes good sense.
The ideas that Keynes refers to are theories.
of
system
behavior
is a
prior
for
rational
A theory
action.
A
proposed action, whether by individual agents in households
or firms, a bank, a government agency or a legislative body
is appropriate action only as a theory connects the action
1 J. M. Keynes, The General Theorv of Emlslovment Interest
and Money, 1936 pp. 383, 384.
3
to the desired
deposit
number
well
insurance,
during
the
savings
private
first
and
banks,
two
loan
that
industry,
served
generations
such as
and
a
the economy
after
the
great
seem to have broken down, the need to reform and
reconstitute
legislative
Because some institutions,
the
of the great
depression,
to
result.2
the
financial
structure
is
now
on
the
agenda.
As we try to fix the financial
system
three
questions
should be asked of the pushers of a policy proposal:
1. "What is it that is taken to be broke?",
2. "What theory
about
how our economy
works
underlies
the
proposal?11
3. What are the dire
consequences
of not fixing
that which
you assert is broke?
In what follows I will take up three points
1.
Two views of the results of the economic process
2.
Systemic and idiosyncratic
3.
Some
ideas
about
the
sources of financial crises
scope
for policy
in the present
"crisistl.
II.
TWO VIEWS OF THE RESULTS OF MARKET PROCESSES
2. The essence of the rational expectation revolution in
economic theory can be summed up in the proposition that the
actions economic agents take reflects their understanding,
i.e. theory, of how the economy functions.
4
There
results
are two
fundamentally
that a market
economy
different
achieves.
views
about
One, as stated
the
by
Adam Smith, is
"As every individual, therefore, endeavors as much
as he can both to employ his capital
in the
support of domestic industry, and so to direct
that industry that its produce may be of the
greatest
value:
every
individual
necessarily
labours to render the annual
revenues
of the
society as great as he can. He generally, indeed,
neither intends to promote the public interest,
nor knows how much he is promoting it . . . and by
directing that industry in such a manner as its
produce may be of the greatest value, he. intends
only his own gain, and he is in this, as in many
other cases, led by an invisible hand to promote
an end which was no part of his intention."
The second, as stated by John Maynard
Keynes,
is:
#IIf I may be allowed to appropriate
the term
speculation for the activity of forecasting the
psychology of the market and enterprise for the
activity of forecasting the prospective yield of
assets over their whole life, it is by no means
always the case that speculation predominates over
As the organization
of investment
enterprise.
markets improves, the risk of the predominance of
however,
speculation
does,
increase.
. . .
Speculators may do no harm as bubbles on a steady
But the position is serious
stream of enterprise.
when enterprise becomes a bubble on a whirlpool of
speculation.
When the capital development of a
country becomes a by-product of the activit'es of
a casino, the job is likely to be ill-done.tli
When
practical
theory
public
designing
men
that
and advocating
alike
markets
welfare,
and
have
always
the
to
policies
choose
lead
to
Keynesian
between
the
economists
the
promotion
theory
that
and
Smithian
of
the
market
3 A. Smith. 1776, An Incuirv into the Nature and Causes of
the Wealth of Nations, book 4, chapter 2. italics added
4.
Keynes, op tit p. 158-9 italics re casino added
5
processes
being
may lead to the capital development
ill-done,
other
than
the
promotion
intervention
or regulation
can only
do mischief.
the theory that takes the capital development
.
regulation
then
if
Furthermore,
the
poorly
development
to
and intervention
are
create
serious,
and
apply
doing
then
works
is
can be beneficial.
of
consequences
If
of the country
may be ill done as a guide to the way the economy
necessary
the
as a guide to the way the economy. works is valid,
conjecture
valid,
of
If the theory that takes the invisible hand
public welfare.
then
to
i.e.
of the economy
it
the' capital
is
appropriate
politically
regulations
and
interventions.
Smithian
The
financial
non-essential
market
intervention
scoundrels
economy.
from
the
natural
the
its
proposition
arise
that
from one of the
flaws
wonders, 5
which
the
prevent
system
of
contains openings which allow some dirty rotten
to
operate
or
Thus the current
Keynesian
external
both
shocks
crisis is reduced
of deposit
restrictions,
lines of business,
The
to
institutional
working
of the exploitation
to
leads
crises and deep depressions
following:
the
view
insurance
geographic
dislodge
to the problem
by managements
and
the
with
respect
and
to
imposed on banks.
view
leads
laws of development
to the proposition
of capitalist
5. Henry Simons, Rules versus Authorities
Policy.
JPE, 1935?
economies
that
the
leads to
in Monetary
6
the
emergence
of
conditions
instability.
Law
institutional
evolution
contain
the
and
potential
deflationary
characteristic,
serious
disruptions
makers
and
for
disruptions.
system
instruments
policy
conducive
to
of
to
be
surges
instability
instability
investment
aware
instruments
,inflationary
Potential
and as
need
develop
both
financial
to
may
and
of
to
and
is a basic
well
lead to
profit
.
flows,
to support profit flows and asset prices
need to
be developed.
In the
Keynesian
Loans
and the banking
over
protracted
indebtedness
validate
view
the
system
periods
crisis
of the
is the
result
good
times,
of
Savings
and
of a tendency,
for
sectoral
to outrun the ability of sectoral cash flows to
the contracts.
bail out the deposit
The current
institutions
problem
is not how to
but how to sustain
asset
values and profit flows so that investment does not collapse
and usher in a deep and long depression.
a program
is to prevent the dumping of assets by the failing
institutions,
will
play
for such a dumping,
havoc
Congress
makes
institutions
deposits
One aspect of such
new
investment.
available
for
Thus
asset values,
the
off
paying
funds
that
deposits
in
with negative net worth are not only validating
but
to attempt
with
by lowering
are also preventing
to make position
would be disastrous
the need
by selling
to asset values.
for
institutions
out position,
which
-7
The
there
sophisticated
is
performing
a
need
to
Keynesian
intervene
in a satisfactory
to
is
a
keep
a
that
market
especially
value
Furthermore
to
while
economy
when they are not
by a theory which helps us understand
positive
harm.
accepts
manner or to prevent disasters,
actual systems of intervention,
enlightened
view
intenrention,
can
do
why there
substantial
the Keynesian view recognizes-that
agents
.
learn and adapt,
apt under
so that a system
of intervention
one set of circumstances
can become
that was
inept as the
economy evolves.
Theoretical
economists
and
practical
service to the invisible hand proposition
world, where
Central banks are taken
comes to shove intenrention
poorlylV
proposition
monetarist
is
is
a
that
markets
of this view.
the
the
view
that
forthcoming
regulation,
behavior
6.
bank
savings
crisis
including
are
the
when push
"Markets
One
long
money
is
can do
standing
poorly:
the
Bank should see to it that
of money grows at an appropriate
is a reflection
lip
Actual behavior
in which
manage
rule that the Central
the quantity
for granted,
proposition.
pay
but, in the modern
takes place.
guided by an often implicit theory
persons
The Smithian
and
loan
results
of
regulations
of the learned professions
constant
view
leads
debacle
and
a
down
break
that
rate
guide
to
the
of
the
of law and accounting,6
Martin Mayer "The World's Greatest
Bank Robbery"
rather than
as a consequence
of the dynamics
of successful
capitalism.
The dominant
1950's
the
-
associated
hand
is so even though
equilibrium
theory
rather
a
like
premisesgl.
are under
the
in
economic
general
conjecture
conform
from
policy.
modern
Smith's
they
to
contemporary
proofs
conclusions
a guide
to
which
the
I
the
are
dictum
draw
my
Even so all that has been proven, and the proofs
tight
that conforms
conditions,
is that
a general
to the Smith rule exists:
stability of equilibrium
Beyond
as
validate
brief:
theory
- -is used to support
Smith
the
since the early
equilibrium
sophisticated
which
lawyer's
are
"These
of
that
recognizes
thinking
that
and Debreau
conjecture
theory
general
mathematical
with Arrow
invisible
This
strain in economic
this
equilibrium
the uniqueness
and
are not proven.7
it is acknowledged
that
this
theory
does
not allow any room for money.8
Keynes
"..capital
. . .
is
likely to be ill-done." proposition
implies that markets
can
get the
as measured
the
investment
development
decisions
wrong
of
a
country
by both
7. B. Ingrao and G Israel, The Invisible Hand, Economic
Ecuilibrium in the Historv of Science, 1990
8. "The most serious challenge that the existence of money
poses to the theorist is this: the best developed model of
the economy cannot find room for it." F.H. Hahn, Money and
Inflation, Cambridge Mass. MIT Press 1985, p. 1.
9
amount, too little or too much, or by the distribution
types of investments.
among
As Keynes remarked
"The measure of success attained by Wall Street,
regarded as an institution of which the proper
social purpose is to direct new investment into
the most profitable channels in terms of future
yield,
cannot
be
regarded
as
one
of
the
outs anding triumphs of laissez faire capitalism
8
. . . II
Keynes
stock
of
pointed
assets,
cash payment
of
the
out
both
that
real
constraints
holders
of
the
and
prices
of
financial,
capital
assets,
leads
excessively
financing
of
excessive
high
investment
demand
and
and inflation
results are liability
structures
cash
price
flows
collapse.
then
the
A sharp break
the institutional
failures
in
volume
the
aggregate
activities
cycles,
identified
including
the
rather than equilibrium
as well
with
to
ratio
and
in
are likely
to occur:
an
assets,
debt
then
if the
that cannot be serviced
of
assets
follow will
Wall
occasional
by
likely
of assets
to
and
lead to a fall
Speculation,
Street,
deep
is
level
investment.
seeking
structure
positions
in the price
of
the
If speculation
investment
level
that
as
lead
may
amount or type of investment.
an
existing
imposed by the liability
inappropriate
to
the
make
depression
and sustaining
the
business
cycles,
behavior
the
normal result of economic pr0cesses.l'
9.
Keynes op. tit pp159
10.
H.P. Minsky, John Maynard Kevnes, New York, Columbia
University Press, 1975 interpreted Keynes as putting forth
an investment theory of business cycles and a financial
theory of investment.
10
In the Keynes
credit
therefor
and
between
interaction
.of a
view
better
introduced
term,
at
the monetary
to
the
where
This
some
the
can
transform
to
call
beginning
asymmetry
order
activity.
we
in
the
contrast
the
in the
an
of
production
of
system
equilibrium
when
some
is
seeking
system
of money,
and the pricing
of capital
assets
Keynes
History
the
United
crisis,
crises
shows
that
every
States
has
been
although
that have
The potential
be great
all
that
in
not
followed
deep
and
associated
history
led to a deep
loss to society
if it leads
redistribution
recent
from the Smithian
we
and
long
have
a
credit
theory
is
theory.
depression
with
in
into
The centrality
the Keynesian
theory
introduced
system.ll
what differentiates
the
assumed
cycle generating
in the
is
are "on the
Smithian
perceptions
monetary
The
for want
argument,
to the
to
system
and investment programs
is in sharp
change
of
system and what,
the
exogenous
financing
is tied
the financial
financing of enterprises
table".
mechanism
in
a
financial
had
financial
long
depression.12
crisis
will
into a deep and long depression.
If
from
of the wealth
a
from a financial
financial
or a shift
crisis
is
some
of production
from
11.
Robert E. Lucas Jr. "Expectations and the Neutrality
Money" reprinted in Robert E. Lucas "Studies in Business
Cycle Theory I1MIT Press 1981.
of
12. The deep depression cycles in M. Friedman and A.
Schwartz, A Monetarv Historv of the United States, 18671960, Princeton, National Bureau of Economic Research, 1963
are all associated with episodes of financial instability if
not financial crises.
See also M. Friedman and A Schwartz,
"Money and Business Cycles," Review of Economics and
Statistics Sunnlement, February, 1963.
11
investment
to
goods
consumption
within
a
full
employment
economy, then some concerns about equity and the impact upon
the
losers
in this
process
may
arise.
would not lead to the same willingness
possible
efficiency
is motivated
by the possibility
guide
free market
concerns
to intervene
and take
follows once policy
that the history,
are associated with financial.
to the
consequences
Intenrention
our time.
such
losses as that which
serious depressions
a good
But
resolution
crises, is
of a financial
is ordained
in which
crises
if it is believed
of a financial
crisis
in
that a
requires
doing
time in a deep depression.
III. SYSTEMIC CONDITIONS
A
capitalist
interrelated
liabilities
payments
economy
sheets
balance
of
the
either
balance
dates.
Assets
financial
or
and
is fulfilled,
generates
balance
real
incomes,
sheet
economy results
balance
sheet
committed,
-
or
and
described
income
are
by
on
a
commitments
balance
yield
a
sheet
receipts
productive
as they
sold
or pledged.
way
of
statement
to
make
or at
are
either
of
The
occurs
as some underlying
are
set
statements.
when a contingency
they
income
either
as
the
process
looking
This
at
an
in a need to focus on how the prices on the
and
the
all measured
the economy,
be
sheet
on demand,
specified
contract
can
cash
flows
that
are
in a common denominator
are determined.
Capital
assets
generated
and
the money of
generate
cash
12
for their
as compensation
process,
financial assets generate
financial
assets,
For pledging
pledged.
in the
production
cash as the maker is able
In addition
to fulfill commitments.
as
participation
capital assets, as well
by
being
can. yield
cash
or selling
to be an option
sold
or
either
a
broker or a dealer market in assets needs to exist.13
.
A fundamental
the
existence
upon various
cash
flows
of
property
a system
margins
over
the
of
borrowing
ownership
flows
cash
or the pledge value
the market
lending
is
based
of anticipated
in income
committed
liability
by
of assets
the
The excess
of
over the value
of
of safety.
which can require the payment
liabilities
economies
or participation
is one class of margins
structure
and
The excess
of safety.
from asset
production
of all capitalist
of some principle
amount is another class of margins of safety.
A debt
be
made
equity
instrument
on
account
liability
has
payments,
dividends
declared,
and
principle.
of
both
only
interest
a contingent
need
to
is
no
be
paid
and
for payments
to
principle.
An
commitment
only
contractual
to make
if
earned
need
to
For any given cash flow, from operations
the fulfillment
equity
there
or a lease provides
financing
of owned contracts,
in a balance
and
repay
or from
the greater the share of
sheet the greater
the margin
Financial Crisis, Financial Systems
13. See H. P. Minsky
and the Performance of the Economy, in Private Canital
Markets, Commission of Money and Credit Research Study,
Prentice Hall, 1964, Englewood Cliffs New Jersey
~~173-380
.
13
of
safety
that
protects
the
owners
of
the
non-equity
liabilities.
In addition
of the economy,
and
issue
to the basic household
there
are a variety
financial
the
fulfillment
terms
on
the
sale
of
liabilities,
or
organizations
having
have
longer
in
organizations
various
markets,
the
usual
"too" expensive.
refinancing
The
assets
the
flow
is
contracts,
or
the
the
pledging
llplaclnglU of
new
assets:
cash flow out.
These
each
type
Among
these
are those which have assets that are
than
need
their
to
depend
liabilities:
refinance
upon
the
including
dependable
refinancing
chanels
their
normal
positions.
functioning
fall-back
break
these
of
markets
down
or
in
become
fall-back
market.
operation
If
for
some
of
the
economy
results
by a firm yielding
reason
a cash
an organization
in
the
flow to
needs
more
by its assets would
then it needs to be able to force a cash flow in its
either
by borrowing
ability of an organization
by
the
liabilities,
cash than the normal cash flow generated
favor
of
of
result
expected
owned or operated
permit,
financial
The Central bank is the ultimate
normal
firm.
to
such
of
duration
always
For
variety
organizations
organizations
case
a
its distinctive
financial
Such
cash
structure
of firms that both own
assets.
intermediaries
and firm
borrowing
or
selling
or by
selling
assets.
But
the
to force a cash flow in its favor
assets
requires
that
there
be
a
14
market
in which
lending
or
buying
of
such
assets
takes
to meet
their
place.
The
ability
commitments
refinance
of
financial
to make payments
or
refinancing
to
sell
out
or selling
transaction
doesn't
commitments.
often
out positions
yield
the ability
the
But
may
enough
be
to
organization
for
that
the
such
fulfill
payment
assets.
can become
commitments.
have
low to
Central
yield
Bank
enough
Limited
prior
work
I
and Ponzi
price
funds
interventions
some set of financial institutions
speculative
a
As a result the market
too
in a
or selling out is necessary:
may
have
the
capacity
to
of the assets
to meet
protect
payment
at
least
from this contingency.
distinguished
financial
to
terms
This would occur if there are many units
refinancing
In
requires
positions.
situation where refinancing
absorb
organizations
postures.
between
Hedge
hedge,
financing
has the normal cash flow large enough to meet both principle
and
interest
has
the
interest
that
income
but
are due
of
the
on debts,
debtor
not the principle
speculative
large
payments
takes place when not enough
is earned
due
finance
on
debts
debts.
and
Ponzi
Specualtive
finance
enough
involves
and
to meet
involves
the
to
financing
meet
Ponzi
the
the
finance
interest
rolling
capitalization
over
of
interest.14
14. H.P. Minsky, "Finance and Profits, the Changing Nature
of Business Cyclestl, The Business Cvcle and Public Policv
1929-1980,
Joint Economic Committee, Congress of the United
15
A fundamental
conjecture
of a model of the economy that
supports the Keynes view is that when hedge financing
dominant
the
to
increase
inducements
proportion
rate
structure
indebtedness
and
offers
increase
the
of short term financing that requires the rolling
over of outstanding
short
interest
posture
is the
term
debts
debts.
Once there is a large volume
outstanding,
which
finance
-longer
of
term
,
and
positions,
debts
are
regularly
a shortfall
rates,
cash
can
flows
financing
of
to
the
where
then
or an optimism
emergence
Ponzi
dominates,
of
financing,
investment
involves
all
investment
the margins
increasing
to acquire
except
projects
interest
profits
finance,
when
decrease
in equity,
future
financing
there
the
for
is a
normal
even where
the folding of interest
on the project.
of
involves
is capitalized,
enhanced
it is not construction
for debts
about
Ponzi
long
by
gestation
the erosion
The payment commitments
is not
term
in ,interest
projects,
financing
Ponzi financing
of safety.
as
the
short
out that
on early on costs into the indebtedness
In
such
a rise
also be pointed
of long gestation
financing
over,
of earnings
lead
type
respectable
exist
rolled
It should
relations.
hedge
institutions
of
on debts are
even as the
ability
investment.
Ponzi
financing,
increase without
implies
a
any increase
in assets.
States, United States Government Printing Office, Washington
D.C. 1980. Reprinted in Hyman P. Minsky, Can IIIttlHannen
Acrain?", M.E. Sharpe & Co, Armonk N.Y. 1982.
16
As a result
of the erosion of equity
in the ratio of cash
finance
also
leads
flow in to payment
to
rating so that a unit's
rates
available
commitments
relations
a deterioration
interest rates rise relative
to the
credits.
faster
situation
in
Ponzi
credit
rise
in a Ponzi
commitments,
a unit's
to the best
on debt
and the decrease
As
than
a result
debts.
tend to make
The
payment
internal
the conditions
,
that
led to Ponzi
financing
in the
first
place
worse,
not
better.15
There therefor
satisfied
for
structure
needs
a
are systemic conditions
financial
to be
crisis
heavily
to
that need to be
occur:
indebted,
the
involving
element of either Ponzi finance or speculative
can become Ponzi.
which
is
We can characterize
predominantly
hedge
a financial
financing
The
instability
evolves
fundamental
hypothesis
is
assertion
as
that
the
of
a
large
finance which
structure
robust
financial structure that is heavily speculative
fragile.
financial
and
a
and Ponzi as
the
financial
financial
structure
from being robust to being fragile
over a period
which the economy does we11.16
15. Some leveraged buy outs include Payment in Kind
provisions for some of the indebtedness.
Payment in kind
financing is Ponzi financing.
16. In a number of papers Mauro Galligatti and Dominic0
Dela Gatti have shown that once the IS-LM structure is
recast in terms of the price of assets and the profit cash
flow. configurations in which the economy is stable and
others in which the system is unstable can be identified.
Further, under reasonable assumptions, the system migrates
from financial relations which imply system stability to
others which imply system instability.
See
in
17
The systemic element underlying
evolution
being
of the
fragile,
finance
to
financial
from
having
finance increase.
structure
being
the
financial
mainly
weight
from being
robust
characterized
of
This structural
crises is the
speculative
to
by
hedge
and
Ponzi
change occurs because the
market sets the prices of capital assets in the context of a
specific
to
the
institutional
likelihood
of
Successful
operation
in
no
which
depression
The
defined
crisis
to
way
known:
as an interval
that
no
serious
the
current
is less crisis and depression
of earlier times.
that
markets
are
prone
The view develops
conducive
price
propositions
can be derived
as
probability
to
if
it
often treat uncertain
is
crises
that
and
debt
a
with uncertainty
becomes
fundamentally
once
from
expectations
is
likely
to
lead
well
can
defined
assets
as if they were amenable to
the
manifest,
in a world
a
can
uncertain
for controlling
randomness
the values
this financing strategy become inappropriate.
portfolios
assets
that what happens
sample
Strategies
But
financial
that the unknowable
about
situations
analysis.
and
by assuming
distribution.
probability
capital
an heroic assumption
that
viewed
to adjust
environments.
and
imply
as
are not likely to emerge.
situations
be
taken
structure
often reflects
be
contingent
financial
is
environments
deflations
*
of the economy,
occur,
than the structure
and a set of judgements
alternative
serious
institutional
those
structure
which
to
the
does
associated
sustained
by
The necessity
not
collapse
conform
of
to
asset
18
values.
IDIOSYNCRATIC
IV.
The
crisis
the
extent
occurs
system
of
to
has
is
commitments
ELEMENTS
which
indebtedness
changed
not
IN THE CURRENT SITUATION.
through
solely
can
time.
determined
rise
The
fragility
by
the
on debts relative to cash receipts.
increased
indebtedness
transformation
depression
of
a downturn
structure
unique
from
depends
cycle
institutional
has
a
upon
and
the
before
'Each period
recession
The
cycle
details
pattern
of
payment
elements.
the
a
and
to
of
a
the
efficacy
of
interventions.
Innovation,
just
a
financial
have
to
and
capitalist
development
phenomena:
product
is not
Financial
and usages are also subject to innovation.
institutions
impact
also
key
technique
institutions
an
the
upon
an
the
and practices
asset
impact
economy.
Each
financial
fragility
and
upon
period
of
has
are introduced
liability
the
rapid
unique
overall
financial
and
and have
structures.
stability
change
often
New
They
of
and
the
of
interesting
characteristics. 17
It is tempting
crop
up
evolution
17.
to allow the colorful
in financial
affairs
to dominate
personalities
the
of the financial system and emergence
Joseph Schumpeter.
story
who
of the
of financial
19
stress
and
possess
One
to do
for our
did
for the
1920's
Crash18.
Today's
good job introducing
of
whom
finance
would
to try
Galbraith
Great
crises.
seem
as
fit
their
need
present
financial
be
added
illustrious
courage
situation
30's
and
us to today's
to
more
in his
journalists
than
what
J.K.
classic
are
The
doing
cast of characters,
to
the
rogue's
predecessors
I
many
gallery
in our
a
of
colorful
financial history."
I want to go beyond the heroic and pitiful
individuals
who form part the fabric of the current
crisis
special
I want to emphasize
features of the current crisis.
several historical
and institutional
features
in detailing
that form the
fabric of the current crisis and which will have to be taken
into account
anything
todays
and
but
and
The
crisis
idiosyncratic
include the legacy of policy
refers
the
misspecifies
to the current
superficial.
situation
therefor
action
if the response
to the question
consequences
the underlying
of what
if
the
elements
war
situation
episodes
crisis
in
depression
of
theory
guiding
the
structure
it different
J.K. Galbraith,
19.
Martin Mayer,
theory
tautness.
of
banking,
of the
from earlier
post
These
three
are
the
the
legacy
of
the
of the 1980's and the emergence
18.
guides
reality.
that make
financial
in
interventions
I want to take up three special characteristics
present
is to be
of money manager
20
capitalism
IV A The crisis in the structure
At least
of bankina and finance
in part the situation
in banking
in 1991 is a delayed response to the experiment
monetarism
and
finance
in practical
that took place in 1979-1982.
.
Monetarist
result
of
too
theory
much
equally
simplistic
control
inflation
defined
as currency
holds
money
idea.
that
inflation
chasing
too
Monetarism
the growth
few
or
goods,
instructs
of the money
plus deposits
is always
us
supply,
subject
to be
controlled.
This
to
which
is
to check
is achieved
by
(Ml) or
at a rate corresponding
Monetarism
economy.
up any pretense
the Federal
of controlling
the
Reserve
interest
the
call HPM,
to the target rate of growth
instructs
(M2),
setting
growth rate of bank reserves, what the monetarists
some
that
as currency plus total quickly available bank deposits
needs
the
rate:
of the
to give
whatever
the market sets is to be accepted.
The effect of monetarism
credit through
cost
of
credit
purveyors
financing.
normal banking
to borrowers
of alternative
was to constrain the supply of
channels,
and
sources
Profit opportunities
non bank institutions
which
increased
increased
the
price
of credit could charge
the
that
for
in supplying credit through
and through mark&s
improved.20
This
20. H.P. Minsky Central Banking and Money Market Changes,
QJE 1957 (Reprinted in Can It Hannen Again)
21
led to the development
of new instruments
institutions,
financial
as
well
as
by banks and other
new
market
based
financing techniques.
Banks
loan
which
associations
business
Both
position.
relative
portfolios
and
focused
portfolios
are both
have
The
to
cost
meet
of
the
savings
their
market
position
of banks
a
small
and
in the
period
of high interest
financing
thrill rise
Given the highly
loss
lead to a large loss of equity.
protracted
ih
liabilities
to the income their assets earn.
leveraged
will
with
complex
of lending for a longer term than the term of their
liabilities.
their
have
on
total
assets
The implication
of a
rates is that banks will
reach for yield, will accept greater
risks,
in an effort to
improve earnings.
When the market situation
for yield
Bank
alert
regulators
examination
functions
during
institutionalization
Depression:
in
consequence
practical
funds
flows
of
will
deposit
and
the
first
fact
they
monetarism
was
and
institutions.
the
fifty
or
rate pattern
strip
they
had
The situation
so
largely
to
positive
their
insurance
were
interest
protection
tighten
insurance
of deposit
of the
the
implies that banks will reach
net
the
been
had
easy
years
after
during
the Great
the
redundant.
of the
deposit
from
the
worth
of
called
supervision.
One
period
insurance
positive
for tighter
of
the
cash
insured
regulation,
22
however
the
regulation
The
Reagan
administration
was
committed
growth
of the
path
alternatives
to the constraining
the competetive
position
The growth
weakened.
to bank
of regulation
opposite
upon banks.
did
The money supply
inflation
of alternatives
implied
that
markets
to banks'was
One standard
was
an out
critique
soon becomes an 'advocate
In the case of Central banking and banks
happened
attempt to control
in
the
monetarist
period
inflation by controlling
for
room
financing
in financing
is that the regulator
for the regulated.
provided
of
of banks
growth of the constraint
the
looser
and the regulatory bodies followed the elections.
not occur because of purely market forces.
control
to
the
growth
and
as
the
bank liabilities
prosperity
of
non-bank
institutions.
IVB
The Reaaan depression
In mid
nigh
the
1982
simultaneously:
crash
Mexican
also
year
of the
collapse
was
a
was
of
collapse
was
the
portfolio
the
in
not
to
just
their
the
the
a collapse
of
booming
peso
of
.
well
Peso
and
City.
of the
banks,
The
peso,
many
of
private
by Mexicans
came
of
The
indebtedness
Mexico
and
of
some
who took advantage
from
oil
it
whom
internationally.
north
that
occurred
in Oklahoma
position
result
shocks
of the Mexican
bank
collapse
diversification
support
financial
Square
wholesale
some
enterprises
two
the collapse
Penn
financed
of the 1980's and its lesacv
of
revenues.
23
International
forced
the
pressure
Mexican
and domestic political
government
considerations
to nationalize
the
debts
of
the banks: de facto deposit insurance occurred.
The
Penn
origination
position
Square
of
loans
of these
that
is necessary
quasi
independent
structure.
by
Continental
and
the
banks:
a financial
be
is
to
the
usage
local
placements
in a wide
and
variety
in exploring
1982, and helped
being
of banks over the next several years,
for
down a
including
Bank in Chicago.
Federal
Reserve's
practical
administration
had
lowering taxes,
to
monetarism.
entered
upon
not as a response
disciplining
this
response
the
twin
Meanwhile
great
collapses
the Reagan
experiment
to the recession
spending,
radical
the
and
expansionary
raising
fiscal
collapsing
banks
and the
Latin
defense
posture
America
of
but as a
adopted just as the economy received a sharp downside
from the
into
dominant .~financial
a piece of the action
in mid
the
taking
banks
was to abandon
spending:
bank
around
of decentralized
The Penn Square's
wide variety
of
one
centered
if a system
oil and gas collapsed
means
crisis
loans by other
of banks that wanted
The
Bank
was
thrust
financial
crisis.
The fiscal posture
the
financial
business:
available
collapse
certainly
the
offset the recessionary
by
making
military
to the specialized
profits
build
up
firms that were
thrust
available
made
from
to
profits
in a position
24
to take advantage
of imports
of a vast
international
meant
that
fiscal
deficit
in
emerge
in
in the
the
the
1980's
United
However
spending.
array of consumer
deficit
deficit
countries
of the defense
products
States
saw a huge
1980's.
profits
a burst
This
induced
were
earned
trade
by
the
in those
that had a surplus in their trade account with the
United States.21
the American
In the competition
firms lost to Japanese
among firms- for profits
and other
firms
in the
1980's.
As a result of the siphoning
deficit
the
off of profits
spending to other economies,
the massive
1980's did not lead to a commensurate
profits
and
therefor
did
investment
enough
to
prosperity
in
improvement
not
and
trigger
domestic
reduce
or
domestic
a
sufficient
profits
eliminatet
of the 1980's
so
the
rested upon
that
In
prior
investment
deficits,
their
sheets.
levels without
was
which
financial
post
war
first
sheets.
deficit.
The
a fiscal
recessions
the
enable businesses
commitments
and
fall
increasing
and households
clean
up
After a short interval of dependence
It
domestic
rose
by
ahlting
deficit,
high
deficits.
by
in
income
substantial
offset
of
in domestic
rise
economy was never strong enough to generate
employment
deficits
rise
balance
induced by
the
income and
in
private
government
to fulfill
their
balance
of profits
21. This view of profits reflects what I now call the KLM
or Dutch airline theory of profits.
See Mica1 Kalicki, S
jay and David Levy, and Hyman p. Minsky.
on
.._...._ _...____. ---
.---
..-A*-----
.^I.
_.___.__
._.~ .__.. . -..
-.--.---a--
--
.
_.
25
government
private
economy
and
investment
deficits,
increased,
tended
which
in
the
eliminate
the
employment
to
deficit.
era, and to date in the Bush Presidency,
In the Reagan
the buoyancy of the American
to
the
reduce
government
may well
as
be
impossible
of the
far now
consider
an
as
experience
in the
though
international
As a result
as
the United
financial
to sustain
the
well
United
trading
a
cannot
necessary
to
upon
flows
and profit
in the
a
numbers
of
enters
reduced.
the
the
profit
partners
Action
flows may
adjust
United
1990's
and the deficits
outstanding
shift
in
States.
with
to
the
it's
contain
that are needed
not be effective
their
posture.
The emercence
profits
dependent
fundamental
position
greatly
States
increase
States
crises
length
profit
of
it
is happening.
as
indebtedness
independence
potential
IVC
where
era
of the
be
is
the employment
era saw a vast
debt
government
which
maintenance
do not indicate a depression
The Reagan
because
It may
past.
performance
the
for
lldepressionl'even
unless
the
to have a depression
1929-33
economic
government
fiscal
In
deficits.
spending is in excess of 25% of totallspending
and depth
fall
for
need
Economy has not been sufficient
of monev manaser canitalism
international
_.- .,_--.------
___-_-. I
. ..-
__..
-
26
Over
the
the United
widely
take
post
States
war
the
distributed
the
form
beneficial
of
ownership
in pension
has
but this
various
been
in
more
ownership
mutual
These
has
funds
and
funds
need to
funds presumably
operate
funds.
of these
of the owners
capitalism
of property
in
positions
The mangers
interest
of successful
than henceforth,
interest
be managed.
in the
period
or the beneficial
interests,
but they also have interests of their own.
pension
These
stocks
quality
and
for
monies
bond
portfolio.
They
became
a
securitized
They also play a key role in the emergence
of leveraged
for
mortgages
instruments
specialized
and the phenomena
known
known aspect of the leveraged
out
such
and credit card receivables.
buy outs
funds
that
each
of
as junk bonds.
for the equity position
completely
A little
buy out game is the leveraged
the
main
The source of the money
controls.
V.
have
as
market
buy
funds
The soon outgrew the orthodox
on a regular basis.
placement
high
mutual
and
players
in
in these pools
the
game
available
in the buy out is largely though not
the various managed money pools.
Policv urooosals
In recent years we have seen that ideas, forcefully
forward as propositions
affected
economic
derived from economic analysis,
policy even though,
within
economics,
put
have
the
27
ideas had a limited sectarian
standing was questionable.
supply
side
economics
framework
the
financial
crises
outcomes
Monetarism
is
classical
Within
economics,
must
be
the
some
system
well
be
in
systemic
monetarism,
the
my
in
monetarist
title,
that
that
they
of market economies,
and
the
even -broader
are
is a
neo
financial crises, almost by'definition,
result
that
Within
proposition
of the normal functioning
non-starter.
and their scientific
is one such doctrine,
another.
implicit
may
following
of
shocks
imposed
is in an essential
upon
sense
the
economy
outside
by
of
the
to address
the
economy.
The main
emerging
thrust
crisis
programs
to
in
address
in the recommendations
the
banking
the
Savings
system,as
and
Loan
are due to specific
weaknesses
system
flaw
in market
system
with
expected
economies
robust
finance
done,
make
reflect
institutional
than a fundamental
the transition
to one with
the
fragile
from
finance
a
an
result of profit seeking activity.
Within the framework
process
which
rather
as
debacle,
the view that the problems
in the banking
well
of the Keynesian
need not lead to the capital
the
structure
development
main
policy
in place which
well.
objective
development
is
is conducive
view that market
to
put
to doing
being well
a
financial
the
capital
28
A quick
be needed
and dirty
if the
list of some policies
response
anything but superficial
Development
1.
bonds when
a major
phenomena
debts
in
change
a
protection
refinancing
part
of
the present
a
was
for
early
in the financial
is to be
The junk bond
takes place.
transfer
of
outstanding
value
from
or the initial: equity
right
to
put
bonds
structure
The ctrine
in a refinancing.
cricis
follows.
of
to the new debts
development
to
that may well
otiners.
whenever
of the debtor
of conveyance
existing
a
The
serious
takes place
has to made to
conform to current practices.
Need to question
2.
policy
induce
a
Should pensions
shift
the pension
to
defined
be attenuated
taxed except
taxed,
contribution
by having
withdrawals
(No limit to contributions,
all withdrawals
fund system.
interest
and
as they are spent.)
Should
schemes?
an open ended
without
dividend
Opening
IRA's
penalty
but
accruals
not
up the IRA's may
well require a thorough overhaul of the income tax.
Perhaps
the income tax should be transformed
tax.
3.
The
organization
debts.
government
in
that
is
it
no
into a spending
different
needs
revenues
This means that the government
conditions
balanced
budget,
recessions
and depressions
government
that
conducive
spends
to
16
to
to the normal functioning
any
other
validate
its
should have a normal
allowing
and major
some
than
for
wars.
20
%
deficits
inasmuch
of
GNP
is
in
as a
more
of a market economy than
29
a government
that spends dome 3 to 9% of GNP, the tax system
must be such that it yields
to full employment
approximation
4.
designed
force.
and
16 to 20 % of GNP when a close
Furthermore
the
to be an automatic
Indexing
government
is achieved.
government
macroeconomic
as a mechanical
pensions
directed
Government
towards
the creation
of
spending
is
sustain
profit
impact
of
conditions
that
government
conducive
in social
should
so
to resource creation
I
be
and the creation
macroeconomic,
should
that
increasingly
can exploit.
spending
security
abolished,
flows.
be
anti inflationary
of resources
that enterprise
conditions
be
should
budget surplus.
spending
of opportunities
government
device
should
inflation leads to a substantial
5.
budget
The
aim
The main role
to
promote
microeconomic
to
create
and to enterprise.