[lbo-talk] FOMC

Mike Beggs M.Beggs at econ.usyd.edu.au
Tue Mar 18 17:23:09 PDT 2008


Doug Henwood posted the Fed statement:


>>Inflation has been elevated, and some indicators of inflation
>>expectations have risen. The Committee expects inflation to moderate
>>in coming quarters, reflecting a projected leveling-out of energy and
>>other commodity prices and an easing of pressures on resource
>>utilization. Still, uncertainty about the inflation outlook has
>>increased. It will be necessary to continue to monitor inflation
>>developments carefully.

This is quite interesting and reminds me again of Minsky. After all, his main point in 'Stabilising an Unstable Economy' was the conflict between the Fed's role as lender of last resort and as inflation fighter. Yet not many people are picking up on the inflation possibility. Different environment from the early 1980s, sure, but the parallel is interesting.

It seems to me that what's been happening is very similar to the interventions of 1966 (certificates of deposit), 1970 (commercial paper) and 1974 (Franklin National), according to Minsky:

"In the years following 1965, at least four serious runs occurred on financial markets or banks. In each case, an instrument or an institution that had grown rapidly over the preceding boom was the focal point of the disturbance, and each time, the Federal Reserve intervened to facilitate the refinancing of the threatened position...

"Every time the Federal Reserve protects a financial instrument it legitimises the use of this instrument to finance activity. This means that not only does Federal Reserve action abort an incipient crisis, but it sets the stage for a resumption in the process of increasing indebtedness - and makes possible the introduction of new instruments. In effect, the Federal Reserve prepares the way for the restoration of the type of financing that is a necessary, but not a sufficient condition, for an investment boom that is brought to a halt by financial crises.

"The deficits of Big Government are the sufficient condition. By sustaining aggregate demand, they sustain corporate profits and feed secure assets into portfolios. These effects of Big Government mean that an investment boom generates the demand for finance that leads to another bout of inflation and crisis.

"What we seem to have is a system that sustains instability even as it prevents the deep depressions of the past. Instead of a financial crisis and a deep depression being separated by decades, threats of crisis and deep depression occur every few years; instead of a realised deep depression, we now have chronic inflation..."

Minsky [1986]: Stabilising an Unstable Economy: pp 94-95



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