Just after the election, economist L. Randall Wray posted an article at the Levy Institute's blog, "Minskian Explanation of the Causes of the Current Crisis". I want to go over it, because I think it provides an invaluable perspective on the problems we confront, and is a natural extension of the concise overview offered by Wray in my Wednesday video posting, "Crash course on Hyman Minsky by L. Randall Wray". But this diary also ties into Mike's previous post, The Mystical Center, since a law & order crackdown on all the financial gambling, scheming and fraud goes hand-in-hand with a commitment to rebuild America as an agenda that appeals strongly to both the left and the center.
Wray begins by noting that attention has recently begun to shift to the role of fraud in the financial crisis, then points out that warnings to this effect had actually predated the crash itself, and furthermore that fraud had played a role in a whole series of episodes, going back at least to the Savings & Loans debacle of the mid-80s.
Seemingly, the crises have become more frequent and increasingly severe until almost the whole world was infected. It is obvious that there must be some link among these crises and that while fraud played a role in most or even all of them, it is not sufficient to lay blame on "bad apples", bad policy, insufficient foresight, and outright stupidity. We must find a more comprehensive explanation.
Which is to say, bad apples, bad policy, insufficient foresight and outright stupidity did not suddenly appear out of nowhere overnight. They have been with us always to varying degrees. What changed to make them so much more pernicious and synergistic with one another? That is what Minsky's persceptive helps explain:
Much of the world emerged from the Great Depression and World War II with a combination of institutions, regulations, financial practices, and memories that together encouraged relatively rapid economic growth, high employment, growing incomes, and growing confidence in our future. Private debt was low (mostly wiped out in the bankruptcies of the 1930s), government debt was high (war finance), and the financial system had been "simplified" (in Minsky's terminology). Big Corporations mostly used retained profits to finance expenditures; Big Unions kept wages growing so that workers could spend out of income rather than relying on debt; Big Government had filled portfolios of banks and savers with safe government bonds. Finance was kept small, constrained, and relatively irrelevant. Besides, memories of the Great Depression discouraged lending as well as borrowing. Strict regulation--especially in the US--kept risky financial practices segregated outside commercial banking.
Life was good in the golden post-war age. Heck, conservatives are forever celebrating how wonderful life was in the world that Keynes built. But, then...
Since I brought up Hyman Minsky again earlier today, I thought it would be a good idea to share this concise video introduction to a grand overview of his work:
Of course, what this means is frighteningly clear: If, as Minsky warned, we wouldn't learn from the little crises, because we were able to weather them too easily, we're now in the position where we can't even learn from the enormous crisis, because those who could weather it by hook or by crook now hold all the reins of power.
And thus we're headed to an even worse crisis, by the same logic that Minsky was able to foresee the last one over 50 years in advance.
This chart only includes economic issues (health care registers at 14%--more than twice the level of taxes and the deficit combined). As Eskow says:
Only 6% of Americans think Congress should concentrate on reducing the deficit or changing the tax code, according to the latest CBS News poll. Nearly ten times as many people, 56%, want it to focus on creating jobs and fixing the economy. Guess which set of policies is the center of attention in Washington right now?
Americans overwhelmingly say that the midterm election results that gave Republicans control of the House represented a rejection of the Democrats and not a mandate for the GOP, according to a CNN/Opinion Research poll conducted Nov. 11-14. (Story; Poll data). Seventy percent of those surveyed said the results were a rejection of Democratic rule in the House while 17 percent called it a mandate for Republicans. Eight percent answered "neither" and 5 percent had no opinion.
The Democrats lost because they didn't address the people's number one concern. How hard is that to understand? Of course, they did address it sporadically and inadequately--which only makes matters worse, actually. It shows that Democrats know the problem exists, they just don't care enough to actually take it seriously. For all the GOP lies about Democrats "not sharing your values", this truth is far more devastating.
Only 6% of the public is concerned about the deficit. The only thing Washington elites are concerned about is the deficit. The rest of us live on the other side of the planet from the people in DC who make the policies. Maybe the other side of the solar system.
You can see how this divide affects policy. There is a "deficit commission" but no jobs commission. There are millions of people needing jobs and millions of jobs that need doing, but Washington won't "spend," even on badly-needed infrastructure investment. People over 50 (laid off because they were paid more or their health care was expensive) can't find jobs but the DC elite discuss raising the retirement age to 70. The deficit commission proposes cutting back the already-meager "safety net" while cutting tax rates for the really rich even more.
And while all of this goes on the rest of the people in the country are worried about jobs, foreclosures, bills, jobs, wages, jobs, and jobs - the things that matter to regular people. And they are feeling the consequences of the DC/rest-of-us divide.
In 2008, we expected the Democrats to recognize the obvious, side with the vast majority of the American people, and thereby cement long-term majority support. It was no-brainer. Unfortunately, the Democrats showed us they have no brains.
There is, of course, an explanation for this: the elite dominance of American politics, as described and explained, for example, by Thomas Ferguson's investment theory of political parties. In fact, the complete ignoring of the people's overwhelming #1 priority is about the most striking bit of evidence one could ask for proving such elite dominance. The question is, however, why that elite dominance has turned so short-sighted and self-destructive.
If you want to understand the financial crisis, there are a number of different levels you can approach it on. But if you want to understand why capitalist financial systems repeatedly tend to crisis, you basically have two choices: Karl Marx and Hyman Minsky. Marx's explanation is the falling rate of profit as technologies mature and competition intensifies. Minsky's explanation is less well-known, but it deserves wider recognition. There's surprisingly little online I've been able to find that can serve as an introduction to his basic insight, but it really only takes one good presentation, and fortunately I've found one-a presentation paper by Paul McCulley, "The Shadow Banking System and Hyman Minsky's Economic Journey". As you can tell from the title, the paper actually does more than introduce Minsky's explanation, but the part of it that does introduce Minsky's insight is relatively self-contained, and the heart of it quotes directly from Minsky's own words. The shadow banking system did not exist as we know it when Minsky developed his ideas, which are far more general in how they describe how financial markets change over time.
First, McCulley does a very brief, capsule setup of Minsky's work by way of Keynes. He doesn't get into any of the details of Keynesian economics, but he nails the essence at one level--the difference between the micro and the macro, which then leads to a succinct statement of what Minsky did, followed by Minsky's own words, taking us to the very heart of his insight--the different sorts of of financing units, whose balance shifts over time, moving the economy from stability to instability. Let's take this one piece at a time. First the introductory nod to Keynes, and the nature of macro- vs. micro-economics:
In Part One of this diary, I visually presented data showing that the bottom 99% of the American people, in terms of income, have barely seen any income growth since 1973--even with the 90th to the 99th decile of income earners included. Just taking those those earners from the 90th to the 95th and the 95th to the 99th decile, we find that their incomes grew significantly less they had during the 1945-1973 era. Here's a graph of the entire era, as a an overview reminder of what that diary showed:
The questions now is why. To answer that, I will turn to a paper co-authored by the later Hyman Minsky, the man who saw the current financial meltdown coming in 1986. Later on this weekend I'll be writing about his Financial Instabiity Hypothesis, but for now I just mention this work to whet your appetites, and give you the sense that we're talking about a really major dude here.
The paper is "Economic Insecurity and the Institutional Prerecquisites for Successful Capitalism" by Hyman P. Minsky and Charles J. Whalen, Working Paper No. 165 from the Levy Economics Institute of Bard College. To repeat what I said in Part One, I'm going to quote from paper at some length because it helps set up some other topics I'll be discussing this weekend--topics that I think are very important for understanding the economic crisis we're in, and why the measures being taken are so inadequate. Above all, it establishes the viewpoint that (a) finance matters enormously as a explicit sector of the economy, (b) a related point--money is an endogenous (internal) factor in the economy, not just an external counting device, (c) capitalism changes form over time, particularly forms of finance, and economic theory must change to reflect such changes, and (d) an ahistorical reduction of economics to eternal micro-level basics misses maters of fundamental importance.
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