After Reading Hyman Minksy's "Stabilizing an Unstable Economy".

I made my way through Hyman Minsky's "Stabilizing an Unstable Economy". While I don't 100% agree with Minsky--or rather I dont think Minsky 100% applied to the current Recession--I have to say the book is astoundingly prescient and much of what Minsky says seems more appropriate now than it did in 1986 when the book was published.

Anyway, I go a couple of things from Minksy:

First, I obviously got a better fleshed out version of the Minsky business cycle.

Second, is that he has "complete" theory of post-war stability (in the US) which is something I have been looking for since I had read Rogoff and Reinhart's "This Time is Different" which has some really interesting contrasts between the first 30 years of the post war era and the secon 30 years. I also have been wondering about this because Charles Calomiris dismissed the post-war stability. Gary Gorton has also dismissed the stability of the whole FDIC period from it's creation to 2007 as an accident of history.

Anyway, Minsky seems to agree with with Gorton and Calomiris in that FDIC essentially existed as something to be innovated around. I also thing Calomiris is right about the problems with FDIC though I think Gorton's "21st Century bank run" in repo markets story--which has nothing to do with FDIC is more relevent to the Great Recession. Anyway, Minsky places the stability of the post-war era not in how banks were operating but in the fact that corporations were not terribly reliant on banks. Minsky's basic claim is that it took about 20 years for the corporate sector to work through the savings it had accumulated in the 40s. It was only when corporations had in increase demand for external finance that innovation and instability started to set in. Minsky also places the beginning of post-war financial instability in 1966 with the Credit Crunch. I'm betraying my ignorance here, but I would have named the S&L crisis as the start of modern era of financial instability.

Third, Minsky also pretty clearly articulated what I believe is the Keynesian theory of finance. In a nutshell the Minskian/Keynesian theory of finance is a demand side theory of finance. The financial system will come up with the funds the investment sector asks for provided it can earn a positive return. I find this interesting because it is essentially the opposite way of thinking about savings/investment as the baseline "General Equilibrium Model" in the GE model the infinitely forward looking household makes all of the decision for the economy based on it intertemporal consumption preferences. This is a strictly supply side model in which investment is passive warehouse for future consumption. GE models also lead to Ricardian equivelence--the indifference between financing government with taxes and debt--because financing government spending through debt simply cause the supply side to adjust their savings behavior 1 to 1 in anticipation of a future decline in consumption brought on by the eventually higher taxes needed to pay back the debt.

On the other hand a more holistic was of looking at savings/investment is by using the simple "loanable funds" simple supply and demand. The problem with the simple supply and demand model is that--as Keynes points out in the "General Theory"--there is no phenomenon that will only shift one curve. If your econ 101 professor was responsible he would have hammered into your brain the limitations of using supply and demand to make predictions when both curves shift. Depending on the direction of the shifts, either the price (the interest rate) or the quantity of loanable funds will be indeterminate. Usually shocks to the loanable funds market shift both supply and demand in the same direction, which makes the direction of the change in the interest rate indeterminate.

So one either gets a holistic model or opposing models that you can make predictions with because one curve is either constant, vertical, horizontal or irrelevant (or some combination of the 4). I don't have a lot to say about this except to say that this seems like the central empirical issue of what kind of influence government can have over the economy.

Finally--and I'm burring this-- I started reading Minsky because my search for a good explanation of Keynes' "General Theory" because I was completely confused about what Keynes was talking about. Turns out the reason I didn't understand was because I was looking for the Aggregate Supply/Demand and the IS/LM models that I teach to undergraduates. Minsky has a great chapter about the intellectual history of my confusion and so I could go back to reading "The General Theory" without wondering where the hell the sticky wages and the self correcting mechanims were.