NICK MASSEY
EDMOND — Alexis de Tocqueville wrote in 1848, “The French have heads not for economics but for politics.” As Bill Bonner points out, “Along with this lack of interest in economics, the French tend to be anticapitalist and friendly to government intervention. So for them, and for others annoyed by economics, and even more for those who can’t stand the free market, the recession does have an upside … it’s open season on economists. How could economists have failed to predict the crisis?” Someone once joked that economists were put on this earth to make weather forecasters look good.
Are you as confused as most people with all the conflicting pieces of data and advice from economists and other forecasters? Who do you believe? On one hand, some say the economy is still shrinking and there should be no inflation. But maybe not. On the other hand, maybe the economy shrinks with falling prices and that should be bad for gold. But maybe not. Or maybe if the economy improves it should be good for gold and cause inflation. But maybe not. On the one hand this, on the other hand that. Which is it? My head hurts. To paraphrase Harry Truman, “Somebody please find me a one-armed economist!”
One such economist was Hyman Minsky, a relatively unknown macroeconomist who died in 1996. Minsky was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises. Minsky was sometimes described as a post-Keynesian economist, because, in the Keynesian tradition, he supported some government intervention in financial markets and opposed some of the popular deregulation policies in the 1980s.
For those who don’t know the significance of Sir John Maynard Keynes, he was the “big deal” economist in the 1920s and 1930s. Keynes effectively invented the field of macroeconomics, which is founded on the proposition that what is good for the individual is not necessarily good for a collection of individuals operating as an economic system. For example, we can see the effect of this with savings. While it’s a good idea for someone to save money and spend less, if everyone does it the effect on the economy can be devastating.
Minsky’s own theories headed off in a new direction and his research was finally noticed by Wall Street in recent years. His theories about debt accumulation, which emphasized the macroeconomic dangers of speculative bubbles in assets prices, received new attention in the media during the recent subprime mortgage crisis. Long before we ever heard the word subprime, he was one of the first to warn of the dangers of excess debt and speculation and he attempted to quantify what can happen. What a concept! Who would have thought that artificially low interest rates and out-of-control borrowing could be a problem?
Many economists had never heard of Minsky when the recent financial crisis struck. But lately he has begun emerging as perhaps one of the most accurate big-picture thinkers of his time. Minsky was one economist who saw what was coming. He predicted, decades ago, almost exactly the type of meltdown that recently hammered the global economy. Too bad former Fed Chairman Alan Greenspan never studied Minsky.
In talking about capitalism, it was Minsky who pointed out that capitalism is inherently unstable. It proceeds in booms and busts instead of steady, incremental growth. Of course, that is just the way it works — like nature herself. And that may be why some people don’t like capitalism. They can’t control it. So whenever a bust comes along, they imagine that capitalism has failed or broken down. They then propose ways to fix something that wasn’t broken to begin with. As Winston Churchill once said, “Capitalism is the worst economic system, except for all the others.”
Since the global economy started unraveling so incredibly in the past two years, many economists have suffered a crisis of their own. Those who hailed the dawn of a new era of stability are scrambling to explain how they failed to foresee the worst financial crisis since the Great Depression. Some economic commentators have even started to talk about the arrival of a “Minsky moment” and a few are beginning to warn of a coming “Minsky meltdown.”
In the meantime, we’ve got a problem. We are experiencing what we might call a “reverse Minsky” moment. Instead of increasing debt and spending, individuals and businesses are trying to pay down debt and want to shrink and reduce risk on their balance sheets. However, if they do that, someone has to take the other side of the trade to try and avoid a depression. That would be the government coming to the rescue. That’s why they are trying so desperately to spend money and run deficits to re-create the spending that the private sector is not doing. It’s classic Keynesian economics from the 1930s playbook. In my opinion, it didn’t work then and it’s not going to work now.
Come to think of it, doesn’t a “reverse Minsky” sound like some fancy dive that someone would do in Olympic diving competition? Time will tell what type of score the judges will give us on this one. Thanks for reading.
NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. He also is a guest analyst on CNBC and Bloomberg. Massey may be reached at www.nickmassey.com.
