Minsky and economic policy: safeguarding against instability in capitalist economies - ResearchOnline@JCU

Minsky
and
Economic
Policy:



Safeguarding
against
instability
in
 capitalist
economies


Janet
Dzator¹
and
Siqiwen
Li^1,2

1Faculty
of
Business
and
Law,
University
 of
Newcastle,
NSW,
Australia


2La
Trobe
University,

Australia


Minsky
and
Macroeconomic 
stability


Outline



Focus
on
two
macroeconomic
stabilising
goals
 
proposed
by
Minsky
and
their
relevance
for 
today
and
beyond



•  Stable
prices


– monetary
policy,
financial
innova>ons 
(securi>za>on)
and
stability


•  Full
employment


– ELR
programs



Financial
and
macroeconomic
stability


•  Keynes
proposed
the
use
of
both
monetary
policy 
with
fiscal
policy
to
promote
stability


•  Current
financial
crisis
exposed
the
inadequacies 
of
over
reliance
on
monetary
policy
since
the


1970s.



•  Blanchard
et
al.
(2010
)
conceded
that


macroeconomic
policy
as
they

(IIMF
and


neoliberal
policy
advocates
since
1970s)
knew
it 
need
a
rethink


•  
But
Minsky
has
been
calling
for
such
a
rethink 
throughout
his
work.


Minsky’s
stabilising
ideas 


•  Minsky’s
FIH
showed
how
unstable
financial 
system
can
be.



•  Kalecki’s
profit
equa>on
provide
useful 
insights
about
how
interac>on
between


financial
variables
and
profit
expecta>on
can 
generate
instability
in
capitalist
economies.


•  Minsky
argued
for
Investment
to
be


socialised
(socializa>on
of
inefficiency)


SocialisaKon
of
Investment
to 
control
instability


SocialisaKon
 inefficiency


Resource
use


Plan
investment
 Diminish
mkt
power


Direct
credit
control


ELR


‘Tight
full
 employment’


Resource
 creaKon


Direct
credit
control
 in
banking
system


Capitalist economies

unable to use all resources created

InsKtuKons
are
important



•  Role
and
sharpness
of
ins>tu>ons
is
important 
in
achieving
stability,
but
focus
on
stability
can 
lead
to
instability.


•  Financial
crisis
caused
by
complex
web
of
factors


– De‐regula>on
 – Innova>ons


– Reliance
on
private
sector
debt
to
lead
growth
in
the 
sectoral
accoun>ng
iden>ty


•  Stability
could
be
fixed
through
re‐regula>on 
and
the
use
of
both
fiscal
and
monetary
policy


If
G‐T=S‐I
+(X‐M),

holds
and
G
takes
the
backstage
 then
something
will
have
to
give



‐5.0
 0.0
 5.0
 10.0
 15.0
 20.0


Jan‐1964
 Jan‐1966
 Jan‐1968
 Jan‐1970
 Jan‐1972
 Jan‐1974
 Jan‐1976
 Jan‐1978
 Jan‐1980
 Jan‐1982
 Jan‐1984
 Jan‐1986
 Jan‐1988
 Jan‐1990
 Jan‐1992
 Jan‐1994
 Jan‐1996
 Jan‐1998
 Jan‐2000
 Jan‐2002
 Jan‐2004
 Jan‐2006
 Jan‐2008
 Jan‐2010
 Jan‐2012


Household
saving
ra>o:
Ra>o


Household
saving
raKo:
RaKo


InnovaKons
led
to
securiKsaKon
making
life
easier
for
 both
cash
strap
consumers
and
bankers

wanKng


leverage,
flexibility
from
reserve
requirements


0
 50000
 100000
 150000
 200000
 250000
 300000


Dec‐1992
 Oct‐1993
 Aug‐1994
 Jun‐1995
 Apr‐1996
 Feb‐1997
 Dec‐1997
 Oct‐1998
 Aug‐1999
 Jun‐2000
 Apr‐2001
 Feb‐2002
 Dec‐2002
 Oct‐2003
 Aug‐2004
 Jun‐2005
 Apr‐2006
 Feb‐2007
 Dec‐2007
 Oct‐2008
 Aug‐2009
 Jun‐2010
 Apr‐2011
 Feb‐2012
 Dec‐2012
 Oct‐2013


$
Millions



Asset
back
mortgage
securi>es
in
Australia



Long
term
securiKes
issued
in
Australia,
;
 
Short
term
securiKes
issued
in
Australia,
 SsecuriKes,
issued
overseas



Some
qualita>ve
insights
from
interviews 
of
bank
prac>>oners
and
supervisors


•  Will
regulatory
measures
such
as
Basel
II 
reduce
arbitrage
opportuni>es
associated 
with
risk
management
[under


securi>sa>on]?


•  No, it cannot get rid of regulatory arbitrage,  especially the existence of securi7sa7on.

 Securi7sa7on is becoming complicated and  diversified. Basel II just has the ability to

 possibly reduce it, not resolve it (Interview  No.4)  

Vigilance
and
good
ins>tu>onal
arrangement
 
needed
to
enforce
rules

as
shown
in
this


response:


•  But I just think that the nature of

 securi7sa7on market will probably (be) more  cri7cal... Lack of securi7sa7on now means

 that someone within the regulatory space  needs to revisit all the securi7sa7on

 requirements... I think securi7sa7on risk is  changing now anyway [Interview 10]. 

Good
ins>tu>ons
and
vigilance

 
needed
to
enforce
rules 


•  We are opera7ng under the rules (Basel I),

 (so) is (

there

 any) incen7ve to share low risk  coun7ng loan?... You (are) going to have a

 low risk weight, but probably not as low as it  should be. You can get capital relief from

 securi7sing them (Interview No 15)  

•  In
today’s
globalised
world
cross
border


supervision
also
poses
its
own
challenges
to 
bank
supervisors
and
regulatory
authori>es.


As
shown
in
the
following
two
responses:


•  I think it is an issue or lots of banks. For

 example we a standard bank in the UK and  we are an advanced Bank in Australia...FSA  requirements are quite basic compared to  our requirement here in Australia. But yes, I  think that’s a material issue for lots of banks  to process the rela7onship (interview No.

 11) 

•  Similar
response
was
given
by
another 
bank
supervisor
who
has
branches
in 
Australia
and
New
Zealand


•  From
the
above
interviews
Basel
II
will 
make
some
impact
in
reducing


arbitrage
opportuni>es
but
it
is
not
a


sufficient
to
prevent
it.
Banks
will
s>ll


innovate
based
on
their
commercial


strategic
interests.



Full
employment
for
stability


•  Governments
as
employer
of
last
resort 
(ELR)
for
full
employment


•  Hyman
Minsky
(1986)
argued
that


governments
can
stabilize
their
economy 
by
developing
a
full
employment
strategy
 
that
creates
an
infinitely
elasKc
demand 
for
labor
at
a
floor
or
a
minimum
wage 
independent
of
business
profit


expectaKons


Full
employment
for
stability 


•  Governments

who
issue
their
own
sovereign 
money
can
use
the
ELR
to
achieve
full


employment
and
stabilise
their
economies

but 
why
aren’t
they
adop>ng
the
ELR?



•  The
details
of
ELR
program
including
its
costs, 
financing,
benefits
in
addiKon
to
its
stabilising 
effects
have
been
discussed
by
Levy
scholars 
including
(
Forstater
1999,2002,
Wray
1998,



CoFFEE
scholars
in
Australia
(Mitchell
and
Wajs 
1997,
Mitchell
2000,
2001)
and
others
(Harvey 
2003)


Full
employment
for
stability 


•  Financing



– The
theory
of
modern
money
,Abba
Lenner’s


Func>onal
finance
theory
and
empirical
evidence 
from
post
WWII
deficit
spending
showed
that
it
is 
possible
for
government’s
to
take
advantage



•  ELR
is
non‐infla>onary
–provides
anchor
for 
value
of
money


•  ERL‐beder
stabiliser
of
business
cycle
than 
income
support
(works
produce
and


consume)


Full
employment
for
stability 


•  Government
can
consider
bodom
up
approaches



– Communi>es,
states
iden>fy
own
jobs


– Provision
for
people
to
walk
into
ELR
offices
to 
request
jobs


– Fed
build
in
incen>ves
for
local
/state
governments 
to
provide
jobs
(build
register
of
jobs‐green
jobs, 
caring
jobs,
construc>on,
repair,
finance
skills
and 
trade
learning
posi>ons,
provide
supervision
to 
avoid
injury
and
death,
etc.



Long
term
use
of
ELR
programs
builds
experience
ands 
minimises
fatal
mistakes
during
large
scale


deployments
during
downturns
in
economy.



Conclusion


•  Keynes
provided
the
tools
(MP
and
FP)
for
more 
efficient
managing
the
economy
towards


stability.


•  Minsky
went
beyond
Keynes
and
provided 
insight
on
the
instability
of
financial
systems 
and
how
to
manage
that.


•  The
‘Great
recession’
has
given
the
opportunity 
for
the
world
to
pause
and
consider.


•  Jobs
through
ELR
is
non‐infla>onary,
feasible
for 
governments
to
implement
and
can
stabilise


unstable
economy


Will
regula>ons
change
innova>on
and 
financial
system
behaviour?
To
a
limit


Perhaps
economists
who
support
Keynes 
and
Minsky
ideas
of
stabilisa>on
should 
consider
other
approaches
of
reaching 
government
and
the
public




Persuading
philanthropists
to
start
ELR 
programs


Conclusion

Thank
you