> Countdown to the next crisis is already under way
> By Wolfgang Munchau
> Financial Times
> Monday Oct 19 2009
...
> While, according to Minsky, these are the deep causes of instability, the
> mechanism through which instability comes about is the way governments and
> central banks respond to crises. The state has potent means to end a
> recession, but the policies it uses give rise to the next phase of
> instability. Minsky made that observation on the basis of data mostly from
> the 1970s and early 1980s, but his theory describes very well what has been
> happening to the global economy ever since, especially in the past decade.
> The world has witnessed a proliferation of financial bubbles and extreme
> economic instability that cannot be explained by any of the established
> macroeconomic models. Minsky is about all we have.
This is one of the few accurate presentations of Minsky's argument I've seen in the press - the ultimate outcome is not necessarily a financial collapse; monetary policy stuck in a dilemma; continued upward instability in asset and commodity prices. He's right that the situation has some analogies to the early 1980s. The big difference is that then commodity price inflation was still recent history, and although the Fed had been rescuing financial institutions, it was also raising interest rates sky-high in pursuit of a monetary target. Now it's not. And ultimately Minsky's prediction circa 1980, that the Fed would be forced to drop its monetary targets and inflation would resume, was only half right. The swapping of dodgy assets for safe Federal securities on bank balance sheets is classic Minsky, but like SA says, it's hard to see how it could flow into commodity prices at this point - though assets are going back up.
One problem with this piece is the assumption that the long-run average price-earnings ratio is also a centre of gravity for asset prices. I'm not sure that's true.
Cheers, Mike scandalum.wordpress.com