KPC BFF Der-zoo sends this link, a paean to absent friends.
One friend in particular, Hyman "Hy" Minsky. Check the abstract:
Recently, national newspapers all over the world have suggested that we should reread John Maynard Keynes, and that Hyman P. Minsky provides a valuable framework for understanding the world in which we live. While rereading Keynes and discovering Minsky are noble goals, one should also remember the mistakes that were made in the past. The mainstream interpretation and implementation of Keynes's ideas have been very different from what Keynes proposed, and they have been reduced to simple "fiscal activism." This led to the 1950s and 1960s "Keynesian" era, during which fine-tuning was supposed to be a straightforward way to fix economic problems. We know today that this is not the case: just playing around with taxes and government expenditures will not do. On the contrary, problems may worsen. If one wants to get serious about Keynes and Minsky, one should understand that the theoretical and policy implications are far-reaching. This paper compares and contrasts Minsky's views of the capitalist system to the tenets of the New Consensus, and argues that there never has been any true Keynesian revolution. This is illustrated by studying the Roosevelt and Kennedy/Johnson eras, as well as Keynes's reaction to the former and Minsky's critique of the latter. Overall, it is argued that the theoretical framework and policy prescriptions of Irving Fisher, not Keynes, have been much more consistent with past and current government policies.
Some thoughts:
1. Minsky's "model" predicted 11 of the last 3 recessions.
2. Angus and I used to mimic what we called the "Minsky Curve." Let's just say it hangs down rather limply, and is only policy-exploitable in the EXTREMELY short run. Ten seconds, max.
3. From the abstract: "If one wants to get serious about Keynes and Minsky...."? I don't, actually.
4. There's a Cal State Fresno? Really? Are Cal States like Circle K's; you can just buy a franchise, and put it up on a vacant corner lot? Ah, I see it is also called Fresno State. Okay, THAT I have heard of.
5. From the abstract: "Just playing around with taxes and government expenditures will not do." Amen.
6. There is such a thing as a "Minsky moment,"* apparently. I had a class from Hy, in grad school. For me, "Minsky moments" were times when I thought he was actually going to lecture, and say something about economics. Minsky moments of that sort were EXTREMELY rare. But this is an interesting article; have to give ol' Hy some credit, I think.
*A Minsky moment is the point in a credit cycle or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments. At this point, a major selloff begins due to the fact that no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in market clearing asset prices and a sharp drop in market liquidity.
(Nod to Art)
Showing posts sorted by relevance for query minsky. Sort by date Show all posts
Showing posts sorted by relevance for query minsky. Sort by date Show all posts
Tuesday, November 25, 2008
Friday, December 03, 2004
Budget Deficits: K. Grease Plays Chicken Little
(NOTE: IF THERE IS ANY COHERENCE IN THIS ESSAY, IT COMES FROM TALKING TO KEVIN GRIER. BUT DON'T BLAME HIM...)
The old post-Keynesians, such as Hyman Minsky, made much of the increased financial interdependence, and consequent fragility, of our banking and credit system (see, for details, Minsky, 1971, 1982, 1995. For more than anyone could want to know, see Bellofiore and Ferri, 2001). Here was how Minsky put the problem, which he called “the economics of euphoria,” and which sounds familiar to anyone who lived through the 1990s:
The confident expectation of a steady stream of prosperity [creates a] …willingness...to take what would have been considered in earlier times undesirable chances in order to finance the acquisition of additional capital goods...Those that supply financial resources live in the same expectational climate as those that demand them...An essential aspect of a euphoric economy is the construction of liability structures which imply payments that are closely articulated...to cash flows due to income production...Withdrawals on the supply side of financial markets may force demanding units that were under no special strain and were not directly affected by financial stringencies to look for new financing connections. An initial disturbance can cumulate through such third- party or innocent-party bystanders...Financial instability occurs whenever a large number of units resort to extraordinary sources for cash [at the same time]. (Minsky, 1971; cited in Mayer, 1998).
I was lucky enough to take classes from Hy Minsky in the early 1980s, and I have to admit that at the time I thought he was paranoid. But looking at the quote above (and remember, this was from the early 1970s!), I am much more persuaded that the idea of fragility, and increased speed and power of transmission of economic crises, is plausible, though it may be hard to express rigorously.
Nonetheless, several scholars have recently taken the idea of financial fragility, or the increased susceptibility of an economic system to shocks, very seriously. One mechanism through which contagion can spread is the cross-market “rebalancing" of portfolios, much as Minsky was describing in the long quotation above. The key insight is that investors transmit idiosyncratic shocks from one market to others (either sectoral markets, within a nation, or in financial markets, across nations) by adjusting their exposures to macroeconomic risks.
But the attempted portfolio adjustments are by no means independent; again, as Minsky pointed out, “Those that supply financial resources live in the same expectational climate as those that demand them.” For present purposes, one of the most interesting contributions is the paper by Leung (2003). Leung claims that the external debt owed by less developed nations has increased the amplitude, as well as the duration, of cyclic fluctuations in aggregate economic activity. Using simulations, Leung shows how increased external debt may directly increase risk of ruinous and unpredictable business cycles.
But is “external” debt really a problem for the U.S.? Certainly the amount of debt (in the U.S. case, Treasury securities) in foreign hands has been increasing, but is it a problem? The answer is “probably not,” or “at least not yet.” The value of Treasury securities in foreign hands recently exceeded $1.3 trillion, with the plurality of that amount ($450 billion) held by the Japanese. While some of the foreign holdings can be explained by attempts to prevent other currencies (particularly, in this case, the yen) from appreciating too much against the dollar, there is the dangerous possibility that some tipping point can be reached.
The more general problem is that a financial crisis, even if it were to start with, or simply involve, the U.S., might propagate in ways that international monetary and financial institutions could not control. As two recent papers, by Lagunoff and Schreft (2001) and Kodres and Pritsker (2002) point out, the very fact that rational agents hold diversified portfolios means that financial positions are linked. If a shock, in financial, energy, or some other key global markets, causes some losses, there will be consequent separate-but-not-independent attempts at portfolio rebalancing. But the aggregate consequence of individual attempts to realize small changes in financial position, if the information that caused the readjustment is common knowledge, could well be a disastrous decline in entire sectors and their asset values. These cascades in values can cause other losses which cause additional reallocations by other investors, so that even isolated shocks might quickly metastasize throughout the financial system.
There is an element of Chicken Little here, I should admit. There is no specific prediction that U.S. deficits, at some particular point or for any particular reason, will cause disaster. Still, the increase in deficits “as far as the eye can see,” combined with the unrelated but potentially menacing private debt in the U.S., leads to an important question: Why is it that we have deficits? Why did the surplus disappear so quickly, and sink so rapidly?
References
Bellofiore, Riccardo, and Piero Ferri (eds). 2001. Financial Keynesianism and Market Instability: The Economic Legacy of Hyman Minsky (two volumes). Cheltenham, UK: Northampton, MA : Edward Elgar
Kodres, Laura and Matthew Pritsker. 2002. "A rational expectations model of financial contagion." Journal of Finance 57: 769-99.
Lagunoff, Roger, and S. Schreft. 2001. "A Model of Financial Fragility." Journal of Economic Theory, 99: 220-224.
Leung, Hing-man. 2003. “External Debt and Worsening Business Cycles in Less Developed Countries.” Journal of Economic Studies 30: 155-68
Mayer, Martin. 1998. “The Asian Disease: Plausible Diagnoses, Possible Remedies.” Economics Working Paper Archive—WUSTL (http://econwpa.wustl.edu), Macroeconomics Series, # 9805015.
Minsky, Hyman P. (1971), “Financial Instability Revisited,” in Reappraisal of the Federal Reserve Discount Mechanism. Washington, DC: Federal Reserve System, pp. 100-105.
Minsky, Hyman P. (1982). Can "It" Happen Again? Essays on instability and finance. Armonk, NY: M.E. Sharpe.
Minsky, Hyman P. (1995), Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions II, in Journal of Economic Issues, vol. 29, no. 1, March, pp. 83-96.
The old post-Keynesians, such as Hyman Minsky, made much of the increased financial interdependence, and consequent fragility, of our banking and credit system (see, for details, Minsky, 1971, 1982, 1995. For more than anyone could want to know, see Bellofiore and Ferri, 2001). Here was how Minsky put the problem, which he called “the economics of euphoria,” and which sounds familiar to anyone who lived through the 1990s:
The confident expectation of a steady stream of prosperity [creates a] …willingness...to take what would have been considered in earlier times undesirable chances in order to finance the acquisition of additional capital goods...Those that supply financial resources live in the same expectational climate as those that demand them...An essential aspect of a euphoric economy is the construction of liability structures which imply payments that are closely articulated...to cash flows due to income production...Withdrawals on the supply side of financial markets may force demanding units that were under no special strain and were not directly affected by financial stringencies to look for new financing connections. An initial disturbance can cumulate through such third- party or innocent-party bystanders...Financial instability occurs whenever a large number of units resort to extraordinary sources for cash [at the same time]. (Minsky, 1971; cited in Mayer, 1998).
I was lucky enough to take classes from Hy Minsky in the early 1980s, and I have to admit that at the time I thought he was paranoid. But looking at the quote above (and remember, this was from the early 1970s!), I am much more persuaded that the idea of fragility, and increased speed and power of transmission of economic crises, is plausible, though it may be hard to express rigorously.
Nonetheless, several scholars have recently taken the idea of financial fragility, or the increased susceptibility of an economic system to shocks, very seriously. One mechanism through which contagion can spread is the cross-market “rebalancing" of portfolios, much as Minsky was describing in the long quotation above. The key insight is that investors transmit idiosyncratic shocks from one market to others (either sectoral markets, within a nation, or in financial markets, across nations) by adjusting their exposures to macroeconomic risks.
But the attempted portfolio adjustments are by no means independent; again, as Minsky pointed out, “Those that supply financial resources live in the same expectational climate as those that demand them.” For present purposes, one of the most interesting contributions is the paper by Leung (2003). Leung claims that the external debt owed by less developed nations has increased the amplitude, as well as the duration, of cyclic fluctuations in aggregate economic activity. Using simulations, Leung shows how increased external debt may directly increase risk of ruinous and unpredictable business cycles.
But is “external” debt really a problem for the U.S.? Certainly the amount of debt (in the U.S. case, Treasury securities) in foreign hands has been increasing, but is it a problem? The answer is “probably not,” or “at least not yet.” The value of Treasury securities in foreign hands recently exceeded $1.3 trillion, with the plurality of that amount ($450 billion) held by the Japanese. While some of the foreign holdings can be explained by attempts to prevent other currencies (particularly, in this case, the yen) from appreciating too much against the dollar, there is the dangerous possibility that some tipping point can be reached.
The more general problem is that a financial crisis, even if it were to start with, or simply involve, the U.S., might propagate in ways that international monetary and financial institutions could not control. As two recent papers, by Lagunoff and Schreft (2001) and Kodres and Pritsker (2002) point out, the very fact that rational agents hold diversified portfolios means that financial positions are linked. If a shock, in financial, energy, or some other key global markets, causes some losses, there will be consequent separate-but-not-independent attempts at portfolio rebalancing. But the aggregate consequence of individual attempts to realize small changes in financial position, if the information that caused the readjustment is common knowledge, could well be a disastrous decline in entire sectors and their asset values. These cascades in values can cause other losses which cause additional reallocations by other investors, so that even isolated shocks might quickly metastasize throughout the financial system.
There is an element of Chicken Little here, I should admit. There is no specific prediction that U.S. deficits, at some particular point or for any particular reason, will cause disaster. Still, the increase in deficits “as far as the eye can see,” combined with the unrelated but potentially menacing private debt in the U.S., leads to an important question: Why is it that we have deficits? Why did the surplus disappear so quickly, and sink so rapidly?
References
Bellofiore, Riccardo, and Piero Ferri (eds). 2001. Financial Keynesianism and Market Instability: The Economic Legacy of Hyman Minsky (two volumes). Cheltenham, UK: Northampton, MA : Edward Elgar
Kodres, Laura and Matthew Pritsker. 2002. "A rational expectations model of financial contagion." Journal of Finance 57: 769-99.
Lagunoff, Roger, and S. Schreft. 2001. "A Model of Financial Fragility." Journal of Economic Theory, 99: 220-224.
Leung, Hing-man. 2003. “External Debt and Worsening Business Cycles in Less Developed Countries.” Journal of Economic Studies 30: 155-68
Mayer, Martin. 1998. “The Asian Disease: Plausible Diagnoses, Possible Remedies.” Economics Working Paper Archive—WUSTL (http://econwpa.wustl.edu), Macroeconomics Series, # 9805015.
Minsky, Hyman P. (1971), “Financial Instability Revisited,” in Reappraisal of the Federal Reserve Discount Mechanism. Washington, DC: Federal Reserve System, pp. 100-105.
Minsky, Hyman P. (1982). Can "It" Happen Again? Essays on instability and finance. Armonk, NY: M.E. Sharpe.
Minsky, Hyman P. (1995), Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions II, in Journal of Economic Issues, vol. 29, no. 1, March, pp. 83-96.
Monday, December 08, 2008
Minsky and me
Mungowitz and I were in grad school at Wash U during the Minsky era. I was doing a field in money so that meant I had to take Minksy's grad class. He was big in Europe, especially in Italy. The resident PhD students (myself included) were not real interested in his stuff, but people did come from all over the world to sit at his feet. These people came in two main flavors: Ones who wanted to talk about Pierro Sraffa (to this day I have no idea why) and those who felt they had found a way to "test" Minsky's hypothesis.
Minsky despised both of these groups of people. To him Sraffa was a worm (to this day I have no idea why), and there was no need to test his theory (alas to Minsky, his theory could explain any outcome, and was thus in reality untestable and more religious than scientific in its nature).
In his class, for some unknown reason, he tacitly appointed me to be his hitman. Some visitor would start talking away, getting more and more excited about his/her chance to impress the great man. Minsky would start slowly shaking his head, then start holding his head in his hands, then he'd extend an arm and slowly shake his finger at the visitor until they stopped (this could take quite a while at times). Then he'd point to me and I would sphincter the speaker, invoking some semi-relevant Minsky-ism I'd picked up over the years. Then Minsky would restore himself to his full height and carriage and beam approvingly my way.
There are, I believe, a small group of middle aged Italians who hate me to this day.
Minsky despised both of these groups of people. To him Sraffa was a worm (to this day I have no idea why), and there was no need to test his theory (alas to Minsky, his theory could explain any outcome, and was thus in reality untestable and more religious than scientific in its nature).
In his class, for some unknown reason, he tacitly appointed me to be his hitman. Some visitor would start talking away, getting more and more excited about his/her chance to impress the great man. Minsky would start slowly shaking his head, then start holding his head in his hands, then he'd extend an arm and slowly shake his finger at the visitor until they stopped (this could take quite a while at times). Then he'd point to me and I would sphincter the speaker, invoking some semi-relevant Minsky-ism I'd picked up over the years. Then Minsky would restore himself to his full height and carriage and beam approvingly my way.
There are, I believe, a small group of middle aged Italians who hate me to this day.
Thursday, August 16, 2012
Our Debt is Overhung
And we are in deep Minsky Koo, it appears.
Public Debt Overhangs: Advanced-Economy Episodes since 1800
Carmen Reinhart, Vincent Reinhart & Kenneth Rogoff
Journal of Economic Perspectives, Summer 2012, Pages 69–86
Abstract:
We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90 percent for at least five years. Consistent with Reinhart and Rogoff (2010) and most of the more recent research, we find that public debt overhang episodes are associated with lower growth than during other periods. The duration of the average debt overhang episode is perhaps its most striking feature. Among the 26 episodes we identify, 20 lasted more than a decade. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that the cumulative shortfall in output from debt overhang is potentially massive. These growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates, as in eleven of the episodes, interest rates are not materially higher.
----------------------
Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach
Gauti Eggertsson & Paul Krugman
Quarterly Journal of Economics, forthcoming
Abstract:
In this article we present a simple new Keynesian–style model of debt-driven slumps — that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption. Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift and toil, a Keynesian-type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan’s lost decade (now in its 18th year) and the Great Depression itself.
With thanks to Kevin Lewis
Tuesday, May 19, 2009
PK gets one right!!
When he says:
"So I’m actually reading Hyman Minsky’s magnum opus,... And I have to say that the Platonic ideal of Minsky is a lot better than the reality."
Mungowitz and I can attest to this from personal experience, but let's let PK elaborate:
"The rest is a long slog through turgid writing, Kaleckian income distribution theory (which I don’t think has anything to do with the fundamental point), and more."
Hyman P. had one of the best 15 minutes of wisdom ever, but that was pretty much it.
"So I’m actually reading Hyman Minsky’s magnum opus,... And I have to say that the Platonic ideal of Minsky is a lot better than the reality."
Mungowitz and I can attest to this from personal experience, but let's let PK elaborate:
"The rest is a long slog through turgid writing, Kaleckian income distribution theory (which I don’t think has anything to do with the fundamental point), and more."
Hyman P. had one of the best 15 minutes of wisdom ever, but that was pretty much it.
Monday, December 08, 2008
Can't Get Enough of the Minsky Stuff
For those who want the entire history of Minsky Commentary on this blog....this will take you to the list of posts (including this one, which is confusing; just scroll down.
Monday, December 12, 2011
The (Minsky) Empire Strikes Back!
Hyman Minsky is like the monster in a horror movie. You think it is gone... but no. It keeps coming back, over and over...
When Credit Bites Back: Leverage, Business Cycles, and Crises
Òscar Jordà, Moritz HP. Schularick, and Alan M. Taylor
NBER Working Paper No. 17621
November 2011
JEL No. C14,C52,E51,F32,F42,N10,N20
ABSTRACT This paper studies the role of leverage in the business cycle. Based on a study of nearly 200 recession episodes in 14 advanced countries between 1870 and 2008, we document a new stylized fact of the modern business cycle: more credit-intensive booms tend to be followed by deeper recessions and slower recoveries. We find a close relationship between the rate of credit growth relative to GDP in the expansion phase and the severity of the subsequent recession. We use local projection methods to study how leverage impacts the behavior of key macroeconomic variables such as investment, lending, interest rates, and inflation. The effects of leverage are particularly pronounced in recessions that coincide with financial crises, but are also distinctly present in normal cycles. The stylized facts we uncover lend support to the idea that financial factors play an important role in the modern business cycle.
(Nod to A-Denz, who knows things)
When Credit Bites Back: Leverage, Business Cycles, and Crises
Òscar Jordà, Moritz HP. Schularick, and Alan M. Taylor
NBER Working Paper No. 17621
November 2011
JEL No. C14,C52,E51,F32,F42,N10,N20
ABSTRACT This paper studies the role of leverage in the business cycle. Based on a study of nearly 200 recession episodes in 14 advanced countries between 1870 and 2008, we document a new stylized fact of the modern business cycle: more credit-intensive booms tend to be followed by deeper recessions and slower recoveries. We find a close relationship between the rate of credit growth relative to GDP in the expansion phase and the severity of the subsequent recession. We use local projection methods to study how leverage impacts the behavior of key macroeconomic variables such as investment, lending, interest rates, and inflation. The effects of leverage are particularly pronounced in recessions that coincide with financial crises, but are also distinctly present in normal cycles. The stylized facts we uncover lend support to the idea that financial factors play an important role in the modern business cycle.
(Nod to A-Denz, who knows things)
Monday, October 10, 2011
P-Kroog!
Always the critic, always with the details...P-kroog objects to this graph.
Some background on the upward sloping aggregate demand argument. Proving once again that P-kroog is just not that good a macro-economist. ("Minsky moment?" Have Angus draw you his famous "Minsky curve" sometime. It's downward drooping.)
Nod to Kevin Lewis
Some background on the upward sloping aggregate demand argument. Proving once again that P-kroog is just not that good a macro-economist. ("Minsky moment?" Have Angus draw you his famous "Minsky curve" sometime. It's downward drooping.)
Nod to Kevin Lewis
Monday, June 04, 2007
Hehheh, Heh, Heh: He said "Minsky"
TC invokes my old friend (really, Angus' old friend is more accurate) Hyman Minsky. (Hy and I had the same birthday, by the way).
The heterodox, orthodox, boat-ran-into-the-docks, thing has me a little loopy.
Look, if it is published in a journal, it is safe and traditional, almost certainly. There are two sorts of things that get turned down in journals:
(a) Things that are wrong, not well thought out, incomplete, just not very good.
(b) Things that threaten the status quo. The SQ has defense mechanisms. That is why it IS the status quo.
People who get stuff turned down ALWAYS think it is because their paper is in class (b). At best, it is probably an element of BOTH class (a) and class (b) (they are hardly disjoint sets). But most people who see themselves as heterodox are just undisciplined and shallow. Still, it is true that anything revolutionary will NOT, almost be definition, be published (at least not published FIRST) in refereed journals.
All that said, notice that I am in Political Science. The straitjacket of economic techniques, and the restrictions on questions you are allowed to ask....not good for me.
Finally, let me note that the Perestroikan movement in Poli Sci has been a disaster for the 'Stroikans themselves. Before, they could say that the APSR didn't publish their work out of APSR bias. Now, it is clear that most people don't publish in APSR because their papers suck.
The heterodox, orthodox, boat-ran-into-the-docks, thing has me a little loopy.
Look, if it is published in a journal, it is safe and traditional, almost certainly. There are two sorts of things that get turned down in journals:
(a) Things that are wrong, not well thought out, incomplete, just not very good.
(b) Things that threaten the status quo. The SQ has defense mechanisms. That is why it IS the status quo.
People who get stuff turned down ALWAYS think it is because their paper is in class (b). At best, it is probably an element of BOTH class (a) and class (b) (they are hardly disjoint sets). But most people who see themselves as heterodox are just undisciplined and shallow. Still, it is true that anything revolutionary will NOT, almost be definition, be published (at least not published FIRST) in refereed journals.
All that said, notice that I am in Political Science. The straitjacket of economic techniques, and the restrictions on questions you are allowed to ask....not good for me.
Finally, let me note that the Perestroikan movement in Poli Sci has been a disaster for the 'Stroikans themselves. Before, they could say that the APSR didn't publish their work out of APSR bias. Now, it is clear that most people don't publish in APSR because their papers suck.
Subscribe to:
Posts (Atom)