Carrying Hyman Minsky's Torch
By Arnold Kling
Robert J. Barbera’s new book is called The Cost of Capitalism. On p. 182-183, he writes,
For Minsky, government activism, to thwart the deflationary effects of banking crises, is the cost of capitalism,
In the preface, he writes,
Minsky’s thesis can be explained in two sentences:
- A long period of health growth convinces people to take bigger and bigger risks
- When a great many people have made risky bets, small disappointments can have devastating consequences.
He keeps referring to the S&L crisis of the 1990’s. In my view, the S&L situation was in cleanup mode by then. The crisis was launched when S&L’s were caught holding fixed-rate mortgages when inflation took off in the 1970’s and especially when interest rates soared in 1980. The crisis entered a second phase after the Garn-St.Germain act of 1982, which freed S&L’s to gamble on other investments, without addressing the fact that most of them no longer had capital. But Barbera wants to portray the recession that helped elect Bill Clinton over the first George Bush as caused by the S&L crisis, which strikes me as a stretch.
On p. 39, he writes,
Financiers, we are supposing, recognize that their economy has an unmistakable boom and bust cycle. Armed with this enlightening view, money men and women would try to protect themselves from this boom and bust pattern. How? They would step back from risky lending when an expansion had been going for some years–with the knowledge that recession was sooner or later inevitable. Conversely, early in recoveries the would recommit to risky finance, with the confidence that the next recession was quite a few years down the road.
His point is that we seem to observe the opposite sort of behavior, with financiers destabilizing rather than stabilizing the cycle. As I read this paragraph, I wanted to add “and regulators” when he said “financiers.”
Will government do a better job of countercyclical investment than private investors? I guess we are going to find out.
I would describe The Cost of Capitalism as being aimed more at an audience that knows nothing of Hyman Minsky’s work. I would hope that readers of this blog would already have acquired some familiarity with Minsky’s relevance to the financial crisis.