Friday, November 30, 2007

Minsky moments: a reply to fg (amv)

To my recent post the co-owner fg has posted a comment:

[...] well you [that's me!] may have a point when trying to divide Minsky's view of the inherent capitalism and the neoclassical and Austrian view of a stable market system. However, what is not true is that you blame Minsky to send credit to Covertry. You write, "The Minsky approach blinds out the fact that the economy can only generate booms and bubbles by means of credit expansion!" As far as I read Minsky and those economists favoring the Minskian boom and bust cycle, they emphasize the need of credit expansion and the evolution of a credit cycle. [...] In a fractional reserve system, financial innovation and loosening of credit standards just promote effects.
Minsky certainly put emphasis on credit expansion. My own formulation seems to blind this fact out and fg is right to correct me here. But while my formulation was unclear on this point, I still believe that I am right in general. For if credit expansion is due to the fractional reserve system with financial innovations simply accelerating the process, why did Minsky not suggest - like Rothbard - that the source of the credit cycle and instability stems from the institutional setting of current banking systems which can be overcomed by abolishing the fractional reserve in favor of a full-backed standard? And if it is possible to stop the creation of money out of thin air, why does Minsky still promote a solution (regulation of the financial market), which still renders money endogenous? Why not abandoning the cause of instability instead of focusing on symptoms? If it is only the institutional setting of the banking system, that is, the outcome of human design and volition and not the spontanous outcome of the market process, why does Minsky employs his infamous "Financial Instability Hypothesis" to proclaim the inherent instability of capitalism as such? If the problem is fractional reserve banking, why does Minsky not promote its abolishment instead of calling for regulation on financial markets and for control over the supply of financial innovations which are - according to fg - only of secondary importance?

fg is absolutely right in claiming that "in a fractional reserve system, financial innovation and loosening of credit standards just promote effects." But this is a Misesian view and not the most apparent interpretation of Minsky. I guess it will clarify matters if we remember that those who promote Minsky's vision of credit expansion see themselves and Minsky as Postkeynesian! How can a school of thought that starts from affluence and idleness ever come to the same judgement on credit expansion as the Austrians, who start from relative scarcity and build their theory on the allocation problem (over time)?