Milton Friedman defined monetarism as the proposition that “inflation is everywhere and always a monetary phenomenon.” This meant that money and prices are tied together, money is a policy variable, and free and unfettered markets are intrinsically stable. According to Senior Scholar James K. Galbraith, Friedman and the “new monetary consensus” are not only wrong but also irrelevant to the problems faced by monetary policy today. Rather, the relevant economics are associated with John Maynard Keynes, John Kenneth Galbraith, and Hyman P. Minsky.

Galbraith observes that there was nothing in monetarism and the new monetary consensus that anticipated the extraordinary financial crisis that broke over the housing sector, the banking system, and the world economy in August 2007. The danger today is that the intrinsic flaws in the financial, corporate, and social structure that, in combination with bad policy, caused the Great Depression could again happen. Therefore, Federal Reserve Chairman Ben Bernanke should acknowledge the instability of capitalism, the irresponsibility of speculators, the necessity of regulation, and the imperative of intervention.

“At the annual banking structure and competition conference of the Federal Reserve Bank of Chicago in May 1987, the buzzword heard in the corridors and used by many of the speakers was ‘that which can be securitized, will be securitized.’” So notes Hyman Minsky in a prescient memo on the nature and implications of securitization, written 20 years before an explosion in the securitization of home mortgages helped create the current financial crisis. This memo, which served as the basis for a lecture in Minsky’s monetary theory class at Washington University, has not been widely circulated. It is published here in its entirety, with a preface and an afterword by Senior Scholar L. Randall Wray that places Minsky’s work in context.

Minsky argued that the New Deal reforms related to home finance had been spurred by a common belief that short-term mortgages, typically with large balloon payments, had contributed to the Great Depression. Ironically, says Wray, the “innovations” in home mortgage finance leading up to the speculative boom (including securitization) have largely re-created those conditions. We might justifiably wonder whether “It” (another debt deflation) could happen again.

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See also:
Public Policy Brief No. 93, Minsky’s Cushions of Safety: Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market, by Jan Kregel
Public Policy Brief No. 94, Financial Markets Meltdown: What Can We Learn from Minsky? by L. Randall Wray
Working Paper No. 530, Changes in the U.S. Financial System and the Subprime Crisis, by Jan Kregel

Given current economic events, there has been a lot of talk about the “Minsky moment” in reference to the 2007 credit crunch. Hyman Minsky was a distinguished scholar at the Levy Institute from 1990 to 1996 and the foremost expert on such crunches. At the Institute’s annual conference named in his honor, top policymakers, economists, and analysts from government, industry, and academia presented their insights about the U.S. economy and the financial sector in the context of Minsky’s economic theories.

Conference sessions focused on the historical precedent and solutions to the mortgage market crisis, Minsky and the (financial) crisis, the impact of the crisis on the economic outlook, and financial market regulation-reregulation. Guest speakers included Paul A. McCulley (PIMCO), Edward Chancellor (Grantham, Mayo, van Otterloo, LLC), James K. Galbraith (Levy Institute and University of Texas at Austin), Robert J. Barbera (ITG), and Maurice D. Hinchey (U.S. House of Representatives, D-NY).

Participants discussed Minsky’s financial instability hypothesis and the ability of monetary policy to stabilize financial markets and the economy, as well as the role of the Fed and its ability to function as a systemic lender of last resort. Speakers frequently compared events in the 1930s (the New Deal era) with the present, and they considered the prospect of another debt deflation rivaling the Great Depression. They also examined today’s complex and fragile financial system (e.g., the advent of securitization) and potential solutions to the mortgage crisis. Other related topics included the timing, cause, and length of recession; the nature and effectiveness of proposed economic stimulus packages; regulatory failures and the reformulation of policy; and the deleveraging process and potential financial losses.

Conference audio also available at www.levy.org.