The Levy Economics Institute, with support from the Ford Foundation, held its annual Hyman P. Minsky conference at the Foundation’s headquarters in New York City on April 14–16. This year’s conference focused upon many Minskyan themes, including reconstituting the financial structure; the reregulation and supervision of financial institutions; the relevance of the Glass-Steagall Act; the roles of the Federal Reserve, Federal Deposit Insurance Corporation, and Treasury; the moral hazard of the “too big to fail” doctrine; debt deflation; and the economics of the “big bank” and “big government.” In addition, participants at the conference considered both national and international central bank exit strategies.

Presenters at the conference were top policymakers, economists, and analysts from government, industry, and academia who offered their insights into and policy guidelines for the extraordinary challenges posed by the global financial crisis.

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Senior Scholar James K. Galbraith addresses the nature of the financial crisis in the United States and its relationship to the role played over the last generation by the economics profession. The prevailing views about the global abatement of inflation supported the notion of self-stabilizing free markets and hands-off policymakers motivated by doing the right thing (“the grand illusion of the Great Moderation”), and the notion that an impending crisis would result in a rejection of U.S. financial hegemony and a crash of the dollar.

Galbraith discusses the approaches and influence of two former distinguished scholars at the Levy Institute: Wynne Godley’s correlation of government surpluses and private debt accumulation, and Hyman P. Minsky’s financial stability hypothesis. He concludes that even though we have managed to sidestep a second Great Depression, that success is marked by extreme limitations. Although the banks have been effectively rescued, the economies have not, and the price is paid by relentless rounds of fiscal austerity—with the possibility that the U.S. and European economies may be unable to move back to a pattern of constructive growth.

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Using Minsky’s evolutionary framework of financial fragility (i.e., a crisis is endogenous to an economic system rather than the result of exogenous shocks), Research Associate Éric Tymoigne outlines an approach to detect Ponzi finance. His paper shows that it is possible to extract information about financial fragility using macroeconomic data. He develops an index of Ponzi finance for residential housing in the U.S. private sector, and concludes that Ponzi processes can be detected well in advance of crisis when bank balance sheets look strong, net worth of households and businesses is rising, and unemployment is declining.

Tymoigne finds that the quality rather than the quantity of leverage plays a central role in the growth of financial fragility, and that quality is unrelated to capital equity or profitability. Ponzi finance involves collateral-based lending, so reform leading to financial stability requires a return to sound underwriting practices based on income.

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According to the author, now is an opportune moment to reshape the banking systems in the Americas. However, we face three major barriers: (1) the lack of an alternative vision; (2) the system’s limited ability to be more productive and functional due to regional economic compacts such as the North American Free Trade Association and the World Trade Organization; and (3) the operational and regulatory disparities between Wall Street and community banks in the United States.

Dymski sets out three different futures for Latin America. A new financial structure to serve the social and economic needs of national and regional development would require modifying regional compact rules that establish rights of market access for nondomestic financial firms. Reaching this objective would also require giving equal consideration to understanding how the financial system malfunctioned and led to the crisis.

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This Time Is Different: Eight Centuries of Financial Folly (2009) provides empirical evidence of the relations between debt, financial crises, inflation, currency and stock market crashes, sovereign government defaults, and long-run economic growth. Yeva Nersisyan and Senior Scholar L. Randall Wray find that the book’s authors do not understand fundamental monetary operations and the conditions that make sovereign governments “default proof,” nor do they understand the correct way to analyze government finances. Therefore, they do not agree that Reinhart and Rogoff’s broad-brush approach toward the current crisis is better than previous detailed narratives.

Nersisyan and Wray maintain that the belief that a sovereign country should balance its budget over a given time period is a myth. And the true limit to government spending should be based on inflation rather than a lack of financing. Thus, Reinhart and Rogoff’s conclusions and policy prescriptions are not relevant for the United States.

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The U.S. deficit and debt are currently in the midrange of postwar experience. Nevertheless, popular opinion is divided about the merits of the government’s stimulus policies, which have provided a floor under the potential collapse of income and employment.

Senior Scholar Jan Kregel observes that the best policies would have affected both balance sheets and the flow of funds, so that household mortgage liabilities could have been written down at the same time as the banks’ housing assets, and households could have had a minimum credit position by means of a government-guaranteed employment program. These measures would have cost less than the Obama administration’s stimulus package. Kregel believes that it would be irresponsible for the government to reduce its outstanding indebtedness when households, firms, and institutions are attempting to increase their savings.

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