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September 17, 2008
In his book Stabilizing an Unstable Economy the post Keynesian economist Hyman Minsky argued that a long period of rapid growth, low inflation, low interest rates and macroeconomic stability bred complacency and increased willingness to take risk. Stability led to instability. Innovation – securitisation, off-balance-sheet financing and the rest – has, as always, proved a big part of the story. As Minsky warned, undue faith in unregulated markets proved a snare.
Hyman Minsky argued that the major flaw of modem capitalism is that it is unstable. His “financial-instability hypothesis,” held that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen. If neo-liberals stress the efficiency of markets, then Minsky puts the stress on their tendency toward excess and upheaval.
Even the Wall Street Journal has taken note of Minsky:
Indeed, the Minsky moment has become a fashionable catch phrase on Wall Street. It refers to the time when over-indebted investors are forced to sell even their solid investments to make good on their loans, sparking sharp declines in financial markets and demand for cash that can force central bankers to lend a hand.
Central bankers forced to lend a hand indicates market failure. Therefore capitalism requires built-in fiscal-policy stabilizers because business cycles are an inherent feature of capitalist economies.
In Stabilizing an Unstable Economy Minsky stressed that undoing Big Government threatens economic stability.
Government is frequently disparaged as an inefficient bureaucratic maze serving the interests of officeholders and time-servers rather than of the public...political and intellectual resources must be invested in the creation and maintenance of an effective government apparatus because Big Government is here to stay if we are to avoid great depressions.
Minsky insisted that the existence of automatic fiscal stabilizers meant the difference between failed and successful capitalism. His was a historical perspective: At the end of the first third of the twentieth century, capitalism was "a failed economic order," Minsky often wrote. In the decades that followed, Big Government capitalism turned out to be much more successful
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