Tuesday, September 15, 2009

Why Capitalism fails: Minsky edition

Via "the big picture" a link to the Boston Globe. The article focuses on Minsky as the "coqueluche" amongst economists. He is so hot right now.

Minsky is now all the rage. A year ago, an influential Financial Times columnist confided to readers that rereading Minsky’s 1986 “masterpiece” - “Stabilizing an Unstable Economy” - “helped clear my mind on this crisis.” Others joined the chorus. Earlier this year, two economic heavyweights - Paul Krugman and Brad DeLong - both tipped their hats to him in public forums. Indeed, the Nobel Prize-winning Krugman titled one of the Robbins lectures at the London School of Economics “The Night They Re-read Minsky.”

Today most economists, it’s safe to say, are probably reading Minsky for the first time, trying to fit his unconventional insights into the theoretical scaffolding of their profession. If Minsky were alive today, he would no doubt applaud this belated acknowledgment, even if it has come at a terrible cost. As he once wryly observed, “There is nothing wrong with macroeconomics that another depression [won’t] cure.

Funny. The Minsky financial hypothesis goes a little something like this

  1. Crisis
  2. keynesian magic
  3. out of crisis
  4. lending is risk averse
  5. so lending works
  6. so those that lever on top show better return
  7. so more lever comes
  8. so more risk is taken on
  9. generalized monetary inflation ensues
  10. risk quality deteriorates
  11. there are speculators, ponzi investors and crooks
  12. the system is then very fragile, a little asset price variation will trigger a generalized run on assets as people deleverage.
  13. go to step 1

Interestingly the solution to number 2, the keynes part did not involve sending money to highly skilled unionized workers but sending money to the very poor and unskilled. The article then points out that most neo-cons would get sick at the thought of reversing trickle down economics in a bubble-up economics. But again, instead of giving made up money to guys like me, give it to the poor! to someone who really needs it! So straight-forward! Obama! do it! do it! do it, dollface! do it!

I have been studying this field since Aug 2007 (has it been 2 years already? sheesh) on a semi serious basis. It is hard for me to do anything seriously these days. Retro-fitting the FIH in some models is something that has been in the back of my mind for the past few months. It has to be a flow of funds, the levels of debt need to be computed with something that incorporates the FIH, probably somewhere in the expected volatility of returns. But enough bla bla bla, probably the time for some math...


Roy Russo said...

"From each according to his ability, to each according to his need."

If liberals would like to share their money with poor people, they should go adopt a family, pay for their health care, and their rent. I would pat you on the back, if you did that, Marc.

OR... they can have the government take my money with the threat of imprisonment. All, of course, in the land of liberty. ;-)

Marcf said...

I MUCH prefer the second option.

Todd said...

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."
-- Alexis de Tocqueville

chunkyIPA said...

I strongly agree with the original post regarding the benefit of lending to the poor/unskilled. The act of investing in the poor is analogous to the purchasing of a stock whose value is low, but may rise as a result of minimal investment. Unlike a penny stock, it is very difficult for the value of a human being to fall to zero.

There is clearly a competing philosophy that resources should only be given to those who have proven ability to manage them (i.e. a track record). According to the other posts, it would seem that the prior wealth of this "able manager" should not be a determining factor. The problem here is that the perceived value of money decreases with increasing supply. Call it market economy applied to personal finance, or simply call it comfort.

I feel that this is one of the greatest problems with the Venture Capital system - Investments are increasing in size (due in part to the difficulty of closely managing large portfolios and the expectation of increasing fund size with each subsequent outing) thereby increasingly excluding early-stage investment. Angels are too amorphous and disconnected for entrepreneurs to efficiently engage, and accessible debt is too punitive. We would do well to make far more micro investments (with lower equity stake) in inexperienced entrepreneurs with the desire to start businesses and ramp up that investment as progress is made. If an individual fails, the risk is limited to the small size of the investment, and as we probably all know, failures (as long as the penalty is not too great) do not preclude one from future success.

This model has been tested, and proven to succeed - See Muhammad Yunus and the associated 2006 Nobel Peace Prize for his work with microcredit at Grameen Bank in Bangladesh (http://bit.ly/KcTg7). It is also worth noting that the his Nobel Prize was given for "Peace" and not "Economics", but the two are clearly inextricably linked.