Minsky Minimum Wages, After the "Minsky Moment"
Steven Mihm, the Boston Globe's econ correspondent, has posted a relatively long appreciation of the economist Hyman Minsky, also recently celebrated by Paul Krugman and Joseph Stiglitz for predicting the "Minsky moment" when capitalism more or less melted down after Wall Street's fourth biggest investment bank, Lehman Brothers, collapsed in September, 2008.
Minsky charted a progression of financial markets beginning with predominantly conservative borrowers, who can cover the interest on their loans and pay down the principal out of income.
These solid citizens are succeeded by speculative borrowers whose income only covers interest, and then by Ponzi schemers, who can only pay the interest on their loans by borrowing more money.
When financial markets were dominated by Ponzi borrowers, Minsky predicted that the failure of one big player could bring down the whole system, and that's exactly what happened when Lehman failed in September 2008: a Minsky moment.
So Hyman Minsky predicted the mess we're in more accurately than anybody else, and you might think that his prescription for fixing this mess would enjoy more respect than the prescriptions of boneheads like Larry Summers and Tim Geithner and Ben Bernanke, who never saw it coming.
But Minsky's influence is still minimal, and intelligent readers can probably figure out why from Steven Mihm's excellent summary in the Boston Globe...
The preferred mainstream tactic for pulling the economy out of a crisis was - and is - based on the Keynesian notion of "priming the pump" by sending money that will employ lots of high-skilled, unionized labor - by building a new high-speed train line, for example.Minsky, however, argued for a "bubble-up" approach, sending money to the poor and unskilled first. The government - or what he liked to call "Big Government" - should become the "employer of last resort," he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars.
Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else's wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.
"Sending money to the poor and unskilled first!" But the boneheads who made this mess put Goldman Sachs at the front of the line, and the poor and unskilled nowhere.
Yes, indeed. Wealth comes from the bottom.
September 19, 2009 3:12 AM | Reply | Permalink
That's an interesting idea.
In fact, if you use the stimulus money for that exact purpose, we would probably see very different statistics on rate of employment.
However, there are various explanations of how we got to the financial crisis, including those who roughly follow Minksy's outline.
And what I'd like to understand is: apart from the fact that Minsky struck gold with his prediction, how do we know he didn't simply just get lucky? Does a one-time success of a prediction make all his suggestions infallible?
I ask because, "priming the pump" is a sacred recipe straight from the Gospel According to the New Deal. And it would take more, much more, to persuade the Left to abanodn the status quo and opt for change.
September 19, 2009 10:33 AM | Reply | Permalink
Minsky's prediction could have been lucky, but his description of the "Ponzi economy" makes it much more impressive.
His "bottom up" stimulus plan has the added benefit that it almost can't fail to produce an immediate increase in demand. All those minimal but living wages fall directly into the economic flow, and nobody claims that anything else enjoys a higher "multiplyer," especially not middle-class tax-cuts thriftily tucked away into savings and tax-breaks for billionaires, which can easily disappear into offshore accounts without ever circulating anywhere except Singapore.
September 19, 2009 2:57 PM | Reply | Permalink
The stimulus bill was what, 25% for jobs and infrastructure? Allegedly "shovel ready"? The highest percentage i've heard to date of the allocated money having been spen is 15%. It turns out states also have loads of red-tape and oodles of paperwork.
Remember the "wack jobs" who also recommended paying off some of those under-water mortgages? Or college loans? So few people have gotten any mortgage relief, but the scam artists are raking it in. Ads on teevee hint that their companies are part of "Obama's stimulus plan." They're not; and the G ain't running ads to blow the whistles on those ads. Maybe they would have, but the US Chameber of Commercelobbied against them?
Some peopple are claiming that Nouriel Roubini, who was also celebrated at predicting the meltdown, had in fact predicted it three times before.
As for New Deal Pump Priming, lalo, perhaps it worked better then; perhaps the layers and layers of bureaucracy didn't exist. I can see where the idea of the Government as the employer of last resort had merit; at least there would be projects accomplished. It is said more cops and teachers got to stay hired.
If something akin to Minsky's approach had been suggested, and maybe it was, who would have opposed it?
September 19, 2009 11:14 AM | Reply | Permalink
Minsky was right to identify credit bubbles as the principal cause of economic crises but wrong to conclude that capitalism causes credit bubbles.
Credit bubbles are caused by financiers who operate with Other People's Money and who violate their fiduciary responsibilities. They are men such as Citigroup's chief executive, Charles O. Prince, who famously said, “As long as the music is playing, you've got to get up and dance.” As late as July 9, 2007 he could still say, “We're still dancing."
Why?
Because as Keynes said, “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional way along with his fellows, so that no one can really blame him."
And to Keynes' bankers of yore we can add today's private equity general partners, hedge fund managers, private and government pension fund managers, mutual fund managers, etc. To keep up with the returns of the most ambitious among them, all will dance to the edge of the cliff and watch their partners fall off the edge. "It's my nature," the scorpion said.
It happened in 1837; it happened in 1929; and it happened in 2008.
The only possible solution is to closely align the fiduciary's incentives with those of his or her principals -- and that means delayed compensation and/or clawbacks.
But how do we do that in a free market-free labor economy?
Anybody?
September 19, 2009 11:43 AM | Reply | Permalink
"The only possible solution is to closely align the fiduciary's incentives with those of his or her principals."
There's the principal-agent issue, but also the de facto fed/treasury put. You can deal with the latter by expanding the FDIC model - ensure that (most of) the bailout is paid for by contributions from the finance industry as a whole, proportional to the losses incurred by the bailing institution. I.e. incentivize banks to self-regulate and avoid systemic risk. Or automatic triggers for equitization of debt to hold creditors responsible. Among other things...
September 19, 2009 12:04 PM | Reply | Permalink
Yes; "only possible" was over the top, but --
The Minsky Moment is, IMO, a moral issue, and the "fed/treasury put" is hazardous to our society's moral health.
How to insure that fiduciaries who violate their duties (no better than Chas. Ponzi in my view) are punished for their defalcations (legal -- given our free market -- though they may be).
September 19, 2009 1:35 PM | Reply | Permalink
Yes, it is a moral issue. And goes far beyond FIRE, imo. The whole idea of
agency without responsibility
when taken to its logical conclusion in the current Corporatist economic setup really needs changing. But I don't think reorganizing pay-regs is much more than the equivalent of putting a patch on a severed head...
September 19, 2009 1:56 PM | Reply | Permalink
It seems to me that maybe Minsky's pessimism was even deeper than the usual account, since he doesn't make much provision for regulating leverage, collateral, bank reserves, and requiring borrowers to present a reasonable plan for repayment out of income... even if estimates of income may include a speculative component.
Beginning at the bottom, there was never even a shadow of an argument that the income of ARM borrowers would increase proportionately to increases in interest rates, and just like the rest of the system, ARM loans could only be repaid if prices continued to rise.
So a Ponzi pyramid was built into the system from the ground up, and in a finite world, all those pyramids always fall down.
Ellen, I can't see why regulation of leverage, collateral, and reserves can't control unrealistic bubbles before they get "too big to pop," but that's where I read a little more pessimism into Minsky than most people see, because he apparently takes regulatory structures as just another element of the system which will also be swept along with the general enthusiasm.
But I also agree with your assessment of the moral component of this disaster, and...
I can (almost) see the long and lanky ghost of Ken Galbraith lounging in the shadows of your economics, with his famous one-word description of what caused the Great Crash...
Greed.
September 19, 2009 2:25 PM | Reply | Permalink
So my guess about Ellen's "moral econ" was confirmed while I was posting... but it didn't take much of a leap of insight to detect it anyway.
And I also agree.
September 19, 2009 2:29 PM | Reply | Permalink
Your comment to me sums up Minsky's point in a nutshell. It seems you are saying that his analysis is off base because if you can eliminate human nature from a human economy there would be no problems. Communism appears to fail for the exact same reason. All theoretical models are built around the idealized "honorable human" that simply doesn't exist.
I agree that clawbacks are a good thing (deferred compensation simply doesn't work - emotional accounting views this as money in the bank). However, after the economy is wrecked, isn't that more an issue of justice ("ruined in a conventional way along with his fellows, so that no one can really blame him")? How does that build stability into a model that systemically provides rewards in direct proportion to the amount of risk incurred - with memory of the last time it screwed us being the (only?) leavening factor? If the way to increase profit is taking on more risk, doesn't that logically always lead to a high-risk environment?
I think the answer is to stop worshiping at the alter of any specific economic ideology. The free market isn't the only, nor necessarily the best solution to every economic question. Sort of seems like we're bending into pretzels to force a bolt to work where a nail might do a better job. Maybe we need a more diverse ideological financial toolbox.
American capitalism appears to be a solution that allows the powerful to build bubbles with the only constraint being how many suckers have money in their pockets to play the shell game. The insiders are able to profit on the up and down swings regardless of how it effects the "real" economy in which most of us reside where real labor is used to create real value. It almost seems finance should not be a free market industry ... problem solved.
Since that's unlikely to fly, we should at least regulate derivative products heavily and create a mechanism to put every instrument through the same level of vetting as a pharmaceutical. The equation must stop being simply if a product creates an "economic efficiency" instead analyzing in terms of overall effect - including long term impact - on all sectors of the economy. And *all* financial products should be traded on a controlled exchange and subject to stringent reporting. We should also regulate commodities traders along with the other segments of the finance community.
As for getting us out of a capitalistic economic catastrophe, trickle up solutions make a lot more sense than trickle down. IMO, Minsky seems to have a better understanding of the forces at work here than, say, Greenspan.
September 19, 2009 2:48 PM | Reply | Permalink
In my opinion, economists today are the alchemists of yesterday. Their is always a moral philosophy at the core of their theories, so their ideas fit their pre-conceived notions. I would even say that as of now there is no captain at the helm of our global economic ship. All appearances indicate that economics mimic collective patterns of psychic urges and economists are forced to justify and project upon the mass mind. They give a veneer of reason upon an unreasonable concatenation of desire.
September 19, 2009 3:14 PM | Reply | Permalink
economists today are the alchemists of yesterday
No just the Central bankers among them. The rest are simply trying to divine how the alchemy works with the political economists trying to figure out what it means. What is money anyways- simply an article of faith used for accounting purposes.
Incidentally, Have you read Neil Stephanson's Baroque Cycle? Your writing sometimes reminds me of his. He has great fun with Newton the alchemist running the mint as Chancellor of the Exchequer.
September 19, 2009 6:34 PM | Reply | Permalink
. . . suckers . . . insiders . . . derivative products . . . .
Since I want to convince folks to see things my way -- arrogant ain't I -- let's cross swords and get it on.
Firstly: As conventionally defined, "suckers" are investors with or beneficiaries of money managers -- owners of stock in FIRE companies, limited partners in private equity firms and hedge funds, mutual fund investors, now and future pensioners -- and especially, the general public (taxpayers, the ultimate "suckers") who in the end are called upon to make these so-called "suckers" money-good. That definition is inadequate.
Those "suckers" aren't "suckers"; they're only savers. And under the rules of our system they are, almost without exception, compelled to hand over their savings and their agency to the "insiders" -- that is, to money managers.
It does us no good to call savers "suckers," unless we believe they have agency. I don't believe that they do.
Secondly: "Derivative products" (principally, CDSs) and off-balance sheet "enterprises" such as SIVs were conceived for the purpose of allowing banks to create "money" -- that is, credit (the source of a credit bubble). Ex. A bank would loan a hedge fund 100% of the cost of buying GM bonds if the hedge fund bought insurance in the form of CDSs issued by AIG. A billion dollar loan and the money supply goes up a billion dollars. And the bank could do the same deal with itself employing a SIV it had earlier created.
Only an excess of optimism permits us to believe that we (through the good offices of our regulators) will be able to identify the financing devices banks will employ in the future to generate the Ponzi stage of Minsky's credit growth scenario.
Given that in a complex economic system savers must hand over their savings to managers to invest them, we have got to find a method to compel the agents to treat those savings as if they were their own -- and not just Other People's Money.
Social opprobrium? No magazine covers? What?
September 19, 2009 9:45 PM | Reply | Permalink
align the fiduciary's incentives with those of his or her principals
Pausing briefly to confess that my first take on a "minsky moment" involved a different sort of naked reality, (which may date me horribly...) I am amused by the question raised.
There cannot be the slightest deviation between the fid. & princ.--Disclaimer:what follows is the answer of a guy with a hammer to whom all problems are nails.
"Simply" extend the reach of my friend R.I.C.O. (Suave). Make a statutary definition of "bad faith" and mandate punitive damages. Then subsidize Law Schools & Students who promise to specialze in plaintiff's Rico. (I will go back into harness as Dean if properly incentivized...)
This bit of "conduct guidance" is guaranteed to give second thoughts to Ken Lewis et al.
September 19, 2009 7:44 PM | Reply | Permalink
But -- and I know you've thought of the downside -- wouldn't your solution take us back to the days of the buttoned-down mind of the overly cautious "prudent" banker -- of Brooks Brothers three-button suits at nine and pink LaCostes and lime green pants at three?
September 19, 2009 8:37 PM | Reply | Permalink
the downside -- wouldn't your solution take us back to the days of the buttoned-down mind of the overly cautious "prudent" banker
And your point is?
Hell, they are bankers. By the precious blood of the Sweet Baby Jesus! If they wanted a life of fun and plunder and rapine, they could'a signed up with ME
September 19, 2009 8:43 PM | Reply | Permalink
Is it impossible under current law to charge somebody with fraudulent misrepresentation of what some of the outstanding $500 trillion in financial derivatives actually represent, or what some of the derivative packages which have already collapsed supposedly represented?
September 19, 2009 8:54 PM | Reply | Permalink
Bearing in mind this is the legal opinion of a stripper, and pulling from my ass the thumbnail analysis that follows, I would have to say, not economically, or my brethren of the plaintiffs' bar would be migrating like lemmings to the Southern District of NY (Manhattan) to file their RICO actions.
That's why I recommend shifting the balance of risk/reward, and also re-defining what, at present, seems to be an arms-length relationship (derivative writer to creditor) into a fiduciary one where certain levels of transparancy are mandated, in the absence of which drastic dollar damages are encouraged.
September 19, 2009 9:07 PM | Reply | Permalink
And your point is?
That we may not wish to give up poles if it means returning to fans -- and in the realm of finance that may be what you're recommending.
September 19, 2009 10:08 PM | Reply | Permalink
When you put it that way, it does take on a certain poignancy...
September 19, 2009 10:17 PM | Reply | Permalink
BTW: good highlight root ... read the Globe article last night and it really made me think. Glad you picked it up.
September 19, 2009 2:52 PM | Reply | Permalink
Minksy wasn't alone in his forecasting. And someone who correctly forecasts is not necessarily correct in solving what they forecast: in this instance, money directly to the poor would serve the best interests of China because our consumer baseline is flooded with their imports.
My opinion years ago was to retool defunct auto factories to produce solar panels and equipment. That would reinvigorate the poor and middle class by providing jobs and getting commercial and residential properties off the grid. The initial enterprise would be public, and then converted to private enterprise where employees get the first opportunity to purchase the stock.
I admit that I am stuck on manufacturing. But every economic model relies on manufacturing and resource cultivation as central to stability. The elephant in the living room is that American capitalism is primarily a speculative enterprise built on margin loan bubbles. Our nation peddles Tono Bungay.
The fact is that there is no economic model right now. Our economic decisions are founded in short-term pragmatism and long-term deception. We do what it takes to make money now and lie about the consequences.
And that is why Geithner and Summers run the show. Our leadership and our moral core has become too corrupt and greedy to make the big and correct decisions. So let the wizards of speculation craft the Next Big Thing. And that is health insurance derivatives.
I honestly don't see a way out. Our political system and national mythology won't allow for dynamic structural change. Instead we are like the Winchester Mansion, adding on creative but useless ideas to an antique foundation.
September 19, 2009 3:04 PM | Reply | Permalink
Tono-Bungay! That's the ticket! Pour some Tono-Bungay on the deficit and watch it go away! Cures the flu! Outperforms Viagra! Sells battleships! Extracts nuclear power from sea-weed! No limits! No tomorrow!
It's the American Way!
September 19, 2009 3:34 PM | Reply | Permalink
HG Wells' best novel, IMO.
In my mind's eye, I see the next avatar of Vishnu with the visage of an hyena (his eyes cascading blue flame) telling the world:
I condemn this Kali Yuga to death by salesmen.
And humanity finds themselves enthralled by any idea that conforms to their prejudice regardless of consequence. Anyone who peddles these ideas is granted platform. So the only difference between Billy Mays, Barack Obama and L. Ron Hubbard is demographics.
But this is a Kali Yuga we earned. Every Galileo, Dr. King, and Socrates we sacrifice. Every village and tribe we raze. We have brought this gullibility upon ourselves.
September 19, 2009 4:11 PM | Reply | Permalink
Ignorance is bliss?
September 19, 2009 4:25 PM | Reply | Permalink
Don't forget carbon credit derivatives (or the extra special terminal-patient life insurance derivatives). They are certainly priming *A* pump! Sadly I don't think it's a pump that will deliver much water to most inhabitants of a very thirsty nation.
But dayum the rich are looking pretty - and as we all know the definition of a good economy is if financial portfolios grow. Here's what I know: if one guy makes $1,000,000,000 and 1000 of us make $10 each ... the average wage is $1,000,010. Sure looks like we're all doing well on paper. Interesting how it's the guy making a billion that gets to choose how we do accounting.
September 19, 2009 4:20 PM | Reply | Permalink
terminal-patient life insurance
Although I, of course, will never die, I always thought the rest of you were all terminal patients--the only quesion being the embarkation bottleneck transit time...
September 19, 2009 9:33 PM | Reply | Permalink