Page 1 of 2 BOOK REVIEW
Too late to learn? The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our Economic
Future, by Robert Barbera
Reviewed by Julian Delasantellis
Just for a moment, pretend this is the 1967 movie The Graduate. You,
readers, are poor, confused liberal arts graduate Benjamin Braddock. I'm the
older gentleman who, at the graduation party thrown by Ben's parents at the
family home, takes the younger man aside to give some advice derived from the
labors and pains of the years.
"I just want to say one word to you. Just one word."
"Yes, sir?"
"Are you listening?"
"Yes sir."
"Minsky. Hyman Minsky. Lot of future in Hyman Minsky"
Actually, the line was that the future was in plastics. But in so
many ways, the actual history of the past 40 years has been the story of Hyman
Minsky.
A few weeks ago, I wrote about the competition between the followers of John
Maynard Keynes and Milton Friedman for the title of the most influential
economist of the twentieth century, (see
Off with their blinkered heads, Asia Times Online, October 1, 2009). I
noted how, even with the followers of the two 20th century greats locked in a
death struggle among dead ideologies, there is no question of who the 21st
century's most influential economist is, even with the century barely 10% done.
"His name is Hyman Minsky."
Even among the economic literati the name of Hyman Minsky is not well known,
and that is unfortunate. Born in 1919 and raised in the time of Keynes, he was
never a doctrinaire Keynesian; by late in his life, economic fashion had
flipped to be the time of Friedman; yet, once again more in tune to history's
different drummer, nor was Minsky a Friedmanite monetarist. Out of place in the
20th century, he would have found himself at the central fulcrum of economic
ideology in the 21st, had he not died in 1996.
Keynes' burden to bear was the unemployment spurred by the Great Depression in
the middle of the last century, and the great inflation that followed the over
application of Keynes at the end of the century. The situation that faced
Minsky was none, or perhaps all, of both wrapped together - the problem of the
financial market bubble.
The rescue of the Great Depression economy by Keynes was, by the 1960s, so
comprehensive and thorough that one of the depression's acknowledged causes,
destructive financial market bubbles whose dolorous impact spreads out of
finance to negatively impact the general economy, was something only remembered
by old timers.
The world economy essentially went more than 50 years, from the Wall Street
crash of 1929 to at least the gold/silver bubble of 1980, before experiencing
another such bubble. With the 1970s' threat of inflation then controlled by
monetarism and its strict control of the money supply, interest in studying or
even considering financial market bubbles began to be seen as the quick way for
young economists to kill their careers.
Economists found tools to smooth out the shooting ascents and crashing descents
of the previous decades; the fact that they could, with inflation falling
towards zero and recessions becoming few and mild, only confirmed the name of
the period given to the era right up until the recent crashes as "the Great
Moderation".
The reign of former US Federal Reserve Board chairman, Alan Greenspan, of more
than 20 years of mostly prosperity was monetarism seizing the king's throne;
during his tenure he was famed and feted for his obsession with drawing meaning
from the most obscure economic statistics; from truck tire retreadings to rat
turds left on freight rail cars, Greenspan was known for his interpretive
artistry with the arcana of everyday economic life.
As for his studying gyrations in the financial markets, and their effect on the
everyday, outside, real economy, Greenspan cared little. Sometimes financial
markets would be going up, sometimes down, but, as long as government did not
intervene, it all would work itself out in the end.
Exactly the opposite to what Hyman Minsky believed.
Like a plant dormant for 20 years instead of for just one season, an explosion
of interest in Hyman Minsky emerged last spring. He was favorably mentioned by
all the right economic commentators in the New York Times and Financial Times;
Paul Krugman titled a blog post "The night they re-read Minsky", after the
bawdy 1968 musical comedy, The Night They Raided Minsky's. Much of
Minsky's core canon is being republished, including his 1975 biography of
Keynes, and his Stabilizing an Unstable Economy, from 1986.
Demonstrating the cojones that have allowed them to rise to the summit of the
greasy pole of world retail, Amazon.com is even charging US$5 for a download of
a boilerplate academic article written about Minsky in 2005, something
available for free to anybody with access to academic databases.
But all these are chock-full of the obtuse jargon of academic economics, and
were written before one could see how the current economic crisis was in many
ways foretold by Minsky. For this we must look at Wall Street economist Robert
Barbera's The Cost of Capitalism: Understanding Market Mayhem and Stabilizing
our Economic Future . If you're still looking for a holiday gift for
that always difficult to please neo-Schumpeterian, I'd look no further than
here.
The springtime fascination with Minsky was short-lived and superficial, and
it's now mostly passed. Neither of the two, recent forest-leveling bruisers
meant to be the sources of record for the entire crisis, Andrew Ross Sorkin's Too
Big To Fail, and Charles Gasparino's The Sellout, carried any
mention of Minsky. That leaves it to Barbera as one of the few commentators
actually saying something interesting and innovative about the crisis.
In the church of Friedman, inflation was the ol' devil tempting the good folk;
the 1980s seemed to prove that, let loose, it would cause untold havoc on the
populace. But, as Barbera notes:
The last five major global cyclical
events were the early 1990s recession - largely occasioned by the US Savings
& Loan crisis, the collapse of Japan Inc after the stock market crash of
1990, the Asian crisis of the mid-1990s, the fabulous technology boom/bust
cycle at the turn of the millennium, and the unprecedented rise and then
collapse for US residential real estate in 2007-2008. All five episodes
delivered recessions, either global or regional. In no case was there a
significant prior acceleration of wages and general prices. In each case, an
investment boom and an associated asset market ran to improbable heights and
then collapsed. From 1945 to 1985, there was no recession caused by the
instability of investment prompted by financial speculation - and since 1985
there has been no recession that has not been caused by these factors.
Thus, meet the devil in Minsky's paradise - "an investment boom and an
associated asset market [that] ran to improbable heights and then collapsed".
According the Barbera, "Minsky's financial instability hypothesis depends
critically on what amounts to a sociological insight. People change their minds
about taking risks. They don't make a one-time rational judgment about debt use
and stock market exposure and stick to it. Instead, they change their minds
over time. And history is quite clear about how they change their minds. The
longer the good times endure, the more people begin to see wisdom in risky
strategies."
In 1985, the rock band Starship, a rump group of leftovers from the 1960s'
Jefferson Aiplane and the 1980s Jefferson Starship, released the video for
their single We Built This City; in it, a sleepy rural settlement is
transformed into modern San Francisco just by the power of rock and roll music.
In Hyman Minsky's world, modern metropolises are built not with rock, but with
investment capital.
In the early, first stages of an investment boom, things can be pretty well
signified by Starship's sleepy rural outpost.
Something bad happened within the memory of the participants in the capital
markets of this place, namely, the blow-off, destructive phase of the previous
boom cycle. Therefore, economic and investment decisions now tend towards the
conservative side. The investments are usually made with old-fashioned,
fixed-rate financings, and, most importantly, the savings cushion of the
borrowers is always enough to be able to cover the payback of both principal
and interest of any loans should they come due and have not produced a
sufficient revenue stream yet.
This is a very safe investment environment, also, a very boring one. Therefore,
like in any evolutionary process, somebody decides to push the envelope in what
is then generally accepted as "progress".
Investors start to borrow more, to ramp up both leverage and risk. Borrowing
expands, and is no longer solely financed by predictable fixed long-term rates
but by much more volatile short-term flexible rates. Most important, it is no
longer considered all that necessary to carry as savings sufficient principal
and interest needed to pay back the loans. The income-producing investments are
up and running; they're producing a cash flow; and, as long as that continues
to be reliable, there should be enough to fund the loans.
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Even among the economic literati the name of Hyman Minsky is not well known,
and that is unfortunate. Born in 1919 and raised in the time of Keynes, he was
never a doctrinaire Keynesian; by late in his life, economic fashion had
flipped to be the time of Friedman; yet, once again more in tune to history's
different drummer, nor was Minsky a Friedmanite monetarist. Out of place in the
20th century, he would have found himself at the central fulcrum of economic
ideology in the 21st, had he not died in 1996.
