Hyman Minsky

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pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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bank run, banking crisis, banks create money, Basel III, Bretton Woods, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land reform, London Interbank Offered Rate, market bubble, market clearing, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, seigniorage, shareholder value, short selling, South Sea Bubble, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

Chiefly, the long-run dynamic implications of credit creation were ignored, such as the self-reinforcing nature of asset price bubbles, the long run implications of increasing debt, the speculative behaviour of individuals and businesses, and the potential for recessions, depressions, financial crises and debt deflations. This section corrects that omission by outlining Hyman Minsky’s Financial Instability Hypothesis. Minsky’s Financial Instability Hypothesis Hyman Minsky developed the ‘financial instability hypothesis’ as an explanation of how financial crises are endogenously created by a modern capitalist economy. Minsky’s fundamental insight was that periods of stability led to greater risk taking and debt – that is, that stability was itself destabilising. Furthermore this instability tended to be upwards – capitalism tended towards booms.

This book explores how the monetary system could be changed to work better for businesses, households, society and the environment, and lays out a workable, detailed and effective plan for such a reform. Our proposed reforms We have little hope of living in a stable and prosperous economy while the money supply depends entirely on the lending activities of banks chasing short-term profits. Attempt to regulate the current monetary system are unlikely to be successful – as economist Hyman Minsky argued, stability itself is destabilising. Indeed, financial crises are a common feature of financial history, regardless of the country, government, or economic policies in place: Crises have occurred in rich and poor countries, under fixed and flexible exchange rate regimes, gold standards and pure fiat money systems, as well as a huge variety of regulatory regimes. Pretty much the only common denominator in all these systems is that the banks have been the creators of the money supply.

Instead, they make loans by increasing their liabilities and assets in tandem, creating a new liability (the bank deposit i.e. the numbers that appear in the borrower’s account) and a new asset (the loan contract, signed by the borrower, promising to repay the same amount). This process will be described in detail later in the chapter. This is not however lending in the common sense of the word, as the act of lending implies that the lender gives up access to what is being lent for the duration of the loan. As economist Hyman Minsky puts it: “Banking is not money lending; to lend, a money lender must have money. The fundamental banking activity is accepting, that is, guaranteeing that some party is creditworthy. A bank, by accepting a debt instrument, agrees to make specified payments if the debtor will not or cannot.” (1986, p. 256) Because bank ‘lending’ increases the balance of the borrower’s bank account without decreasing the value of anyone else’s account, it increases the level of purchasing power in the economy.


pages: 309 words: 95,495

Foolproof: Why Safety Can Be Dangerous and How Danger Makes Us Safe by Greg Ip

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Affordable Care Act / Obamacare, Air France Flight 447, air freight, airport security, Asian financial crisis, asset-backed security, bank run, banking crisis, break the buck, Bretton Woods, capital controls, central bank independence, cloud computing, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, Daniel Kahneman / Amos Tversky, diversified portfolio, double helix, endowment effect, Exxon Valdez, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, global supply chain, hindsight bias, Hyman Minsky, Joseph Schumpeter, Kenneth Rogoff, London Whale, Long Term Capital Management, market bubble, money market fund, moral hazard, Myron Scholes, Network effects, new economy, offshore financial centre, paradox of thrift, pets.com, Ponzi scheme, quantitative easing, Ralph Nader, Richard Thaler, risk tolerance, Ronald Reagan, savings glut, technology bubble, The Great Moderation, too big to fail, transaction costs, union organizing, Unsafe at Any Speed, value at risk, William Langewiesche, zero-sum game

Edmund Phelps had the same insight as Milton Friedman on the relationship between inflation and employment around the same time. 25 Hyman Minsky was born in: For details of Minsky’s life and work I have drawn on Minsky’s own writings, in particular Stabilizing an Unstable Economy (New Haven: Yale University Press, 1986); Dimitri Papadimitrou’s Essays in Memory of Hyman Minsky (Palgrave Macmillan), in particular Steven Fazzari’s “Conversations with Minsky” and Papadimitrou’s “Minsky on Himself”; Papadimitrou and Randall Wray, “The Economic Contributions of Hyman Minsky: Varieties of Capitalism and Institutional Reform,” in Review of Political Economy 10, no. 2 (1998), 13. 26 Because the financial system: From Hyman Minsky, “Central Banking and Money Market Changes,” in The Quarterly Journal of Economics 71, no. 2 (1957), 171–187. 27 Eric Falkenstein: Falkenstein gave his recollections in his blog post “Minsky a Keynesian Sock Puppet,” September 14, 1999, http://falkenblog.blogspot.com/2009/09/minsky-keynesian-sockpuppet.html, and in an interview with the author. 28 He predicted the crash: From Hyman Minsky, “Why 1987 Is Not 1929,” available at http://digitalcommons.bard.edu/hm_archive/217/. 29 yet the economy had chugged along: Paul Krugman, C.

Still, he concluded, since the Great Depression, the federal government had erected firewalls between the financial system and the real economy where ordinary people worked and invested: the vast federal budget, deposit insurance, and, most important, an activist Federal Reserve: “It is now nearly inconceivable that there would be no active lender of last resort in time of crisis.” The next panelist, Hyman Minsky, a professor at Washington University in St. Louis, for decades had flogged an iconoclastic theory of business cycles that fellow scholars had largely ignored. Since the 1960s, he said, the authorities had staved off another depression by reacting to every crisis with some combination of government borrowing and Federal Reserve lending. But each success, he warned, simply compounded the behavior that made the system crisis-prone.

For twenty-five years, unemployment and inflation steadily fell, and recessions became less frequent. This was no small thing. Every year not spent in recession, every percentage point less of unemployment, represented hundreds of billions of dollars of added income and wealth. Was there a downside? Most economists couldn’t see one. One did, though, and he was not a disciple of Hayek but of Keynes. Hyman Minsky was born in Chicago in 1919 to two devout socialists who had met at a party celebrating the hundredth birthday of Karl Marx. Minsky, too, started out as a socialist. He was involved with the youth wing of the American Socialist Party, and during his army service in the 1940s, he helped occupied West Germany’s Social Democrats keep their independence from the Communist Party. As a graduate student at Harvard he worked closely with both Schumpeter, a leading scholar of the Austrian school, and Alvin Hansen, Keynes’s most influential disciple.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

And if ‘It’ can happen why didn’t ‘It’ occur in the years since World War II? These are questions that naturally follow from both the historical record and the comparative success of the past thirty-five years. To answer these questions it is necessary to have an economic theory which makes great depressions one of the possible states in which our type of capitalist economy can find itself. Hyman Minsky, 19821 This book is about the way in which the financial and economic crises that hit the high-income countries after August 2007 have altered our world. But its analysis is rooted in how these shocks originated in prior shifts – the interactions between changes in the global economy and the financial system. It asks how these disturbing events will – and should – change the ways we think about economics.

I was guilty of working with a mental model of the economy that did not allow for the possibility of another Great Depression or even a ‘Great Recession’ in the world’s most advanced economies. I believed that such an event was possible only as a consequence of inconceivably huge errors by bankers and regulators. My personal perspective on economics had failed the test set by the late and almost universally ignored Hyman Minsky. This book aims to learn from that mistake. One of its goals is to ask whether Minsky’s demand for a theory that generates the possibility of great depressions is reasonable and, if so, how economists should respond. I believe it is quite reasonable. Many mainstream economists react by arguing that crises are impossible to forecast: if they were not, they would either already have happened or been forestalled by rational agents.

But the institutions its agents seek to regulate work hard to evade restraints on their ability to exploit the opportunities they enjoy.17 One way in which policymakers try to respond is to distinguish between a generalized panic (when they will intervene) and the failure of a particular institution (when they will not): that is, between general and idiosyncratic risk. But such a distinction is difficult to draw in practice – indeed, it emerges only after the consequences of failure become clear. Financial systems also generate credit booms and busts: this is the chief reason for the instability of market economies. The late and, until recently, disregarded Hyman Minsky, with whom this book began, described the broad features of such booms and busts.18 ‘A fundamental characteristic of our economy,’ wrote Minsky, ‘is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles.’19 Minsky identified five stages in a bubble: ‘displacement’ – a trigger event, such as a new technology or falling interest rates; ‘boom’ – when asset prices start rising; ‘euphoria’ – when investors’ caution is thrown to the wind; ‘profit-taking’ – when intelligent investors start taking profits; and ‘panic’ – a period of collapsing asset prices and mass bankruptcy.20 Displacement is an event that raises optimism, such as an innovation, access to new economic resources, or maybe a decline in the cost of funds.


pages: 545 words: 137,789

How Markets Fail: The Logic of Economic Calamities by John Cassidy

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Albert Einstein, Andrei Shleifer, anti-communist, asset allocation, asset-backed security, availability heuristic, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Black-Scholes formula, Bretton Woods, British Empire, capital asset pricing model, centralized clearinghouse, collateralized debt obligation, Columbine, conceptual framework, Corn Laws, corporate raider, correlation coefficient, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Daniel Kahneman / Amos Tversky, debt deflation, diversification, Elliott wave, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, George Akerlof, global supply chain, Gunnar Myrdal, Haight Ashbury, hiring and firing, Hyman Minsky, income per capita, incomplete markets, index fund, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invisible hand, John Nash: game theory, John von Neumann, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, Landlord’s Game, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, margin call, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, Naomi Klein, negative equity, Network effects, Nick Leeson, Northern Rock, paradox of thrift, Pareto efficiency, Paul Samuelson, Ponzi scheme, price discrimination, price stability, principal–agent problem, profit maximization, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, RAND corporation, random walk, Renaissance Technologies, rent control, Richard Thaler, risk tolerance, risk-adjusted returns, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, statistical model, technology bubble, The Chicago School, The Great Moderation, The Market for Lemons, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, unorthodox policies, value at risk, Vanguard fund, Vilfredo Pareto, wealth creators, zero-sum game

., 37. 16. HYMAN MINSKY AND PONZI FINANCE 205 “The recent market turmoil . . .”: Justin Lahart, “In Time of Tumult, Obscure Economist Gains Currency,” Wall Street Journal, August 18, 2007. 206 “To businessmen . . .”: Quoted in “Hyman P. Minsky,” in Philip Arestis and Malcolm C. Sawyer, eds., A Biographical Dictionary of Dissenting Economists (Cheltenham, UK: Edward Elgar Publishing, 2001), 412. Author’s note: Minsky wrote his own biographical entry. 207 “[T]he Wall Streets of the world . . .”: Hyman Minsky, Stabilizing an Unstable Economy (New York: McGraw-Hill, 2008), 4. 208 “leads to an expansion . . .”: Ibid., 199. 209 “Such loans impart . . .”: Ibid., 261. 209 “a spiral of declining investment . . .”: Ibid., 239. 209 “The first theorem . . .”: Hyman Minsky, “The Financial Instability Hypothesis,” Working Paper no. 74, Jerome Levy Economics Institute of Bard College, May 1992, 7–8. 210 “In a world with capitalist . . .”: Minsky, Stabilizing an Unstable Economy, 280. 212 “was part of the process that . . .”: Ibid., 265. 212 “Like all entrepreneurs . . .”: Minsky, “Financial Instability Hypothesis,” 6. 214 “The downside aspect . . .”: Paul Davidson, Financial Markets, Money and the Real World (Cheltenham, UK: Edward Elgar, 2002), 115–16. 215 “For a new era . . .”: Minsky, Stabilizing an Unstable Economy, 6. 216 Sweezy’s introduction to Marxist economics: Paul M.

And if a homeowner with some spare cash sees the chance to make a quick killing by buying and flipping a condo in a new building that just went up across the street, he’ll be around there tomorrow morning to see the Realtor handling sales. 16. HYMAN MINSKY AND PONZI FINANCE In August 2007, shortly after the beginning of the subprime crisis, a story on the front page of The Wall Street Journal said, “The recent market turmoil is rocking investors around the globe. But it is raising the stock of one person: a little-known economist whose views have suddenly become very popular.” The economist concerned was Hyman Minsky, an avowed Keynesian who taught for many years at Washington University in St. Louis. From the early 1960s until shortly before his death in 1996, Minsky advanced the view that free market capitalism is inherently unstable, and that the primary source of this instability is the irresponsible actions of bankers, traders, and other financial types.

The Mathematics of Bliss 6. The Evangelist 7. The Coin-Tossing View of Finance 8. The Triumph of Utopian Economics PART TWO: REALITY-BASED ECONOMICS 9. The Prof and the Polar Bears 10. A Taxonomy of Failure 11. The Prisoner’s Dilemma and Rational Irrationality 12. Hidden Information and the Market for Lemons 13. Keynes’s Beauty Contest 14. The Rational Herd 15. Psychology Returns to Economics 16. Hyman Minsky and Ponzi Finance PART THREE: THE GREAT CRUNCH 17. Greenspan Shrugs 18. The Lure of Real Estate 19. The Subprime Chain 20. In the Alphabet Soup 21. A Matter of Incentives 22. London Bridge Is Falling Down 23. Socialism in Our Time Conclusion Notes Acknowledgments Index Also by the Author INTRODUCTION “I am shocked, shocked, to find that gambling is going on in here!”


pages: 823 words: 220,581

Debunking Economics - Revised, Expanded and Integrated Edition: The Naked Emperor Dethroned? by Steve Keen

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accounting loophole / creative accounting, banking crisis, banks create money, barriers to entry, Benoit Mandelbrot, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, butterfly effect, capital asset pricing model, cellular automata, central bank independence, citizen journalism, clockwork universe, collective bargaining, complexity theory, correlation coefficient, creative destruction, credit crunch, David Ricardo: comparative advantage, debt deflation, diversification, double entry bookkeeping, en.wikipedia.org, Eugene Fama: efficient market hypothesis, experimental subject, Financial Instability Hypothesis, fixed income, Fractional reserve banking, full employment, Henri Poincaré, housing crisis, Hyman Minsky, income inequality, information asymmetry, invisible hand, iterative process, John von Neumann, laissez-faire capitalism, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market microstructure, means of production, minimum wage unemployment, money market fund, open economy, Pareto efficiency, Paul Samuelson, place-making, Ponzi scheme, profit maximization, quantitative easing, RAND corporation, random walk, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Coase, Schrödinger's Cat, scientific mainstream, seigniorage, six sigma, South Sea Bubble, stochastic process, The Great Moderation, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, total factor productivity, tulip mania, wage slave, zero-sum game

In particular, why didn’t the ‘normal’ stabilizing mechanisms of the economy, such as the adjustment of wages and prices to changes in demand, limit the real economic impact of the fall in aggregate demand (the ‘aggregate supply puzzle’). (Ibid.: ix) However, from this point on, his neoclassical priors excluded both salient data and rival intellectual perspectives on the data. His treatment of Hyman Minsky’s ‘Financial Instability Hypothesis’ – which is outlined in Chapter 13 – is particularly reprehensible. In the entire volume, there is a single, utterly dismissive reference to Minsky: Hyman Minsky (1977) and Charles Kindleberger […] have in several places argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behavior. [A footnote adds:] I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.

The defense of having models for good times would be valid only if there were also models for bad times – but neoclassical economics has no such models. The quaint belief that the conditions prior to the crisis – the so-called Great Moderation – had no connection with the events that followed shows that he has no idea as to what caused the Great Recession. Ultimately, the most apposite critique of Bernanke’s defense of the indefensible is to compare his position with that of the post-Keynesian economist Hyman Minsky. Minsky argued that, since crises like the Great Depression have occurred, a crucial test for the validity of an economic theory is that it must be able to generate a depression as one of its possible states: Can ‘It’ – a Great Depression – happen again? And if ‘It’ can happen, why didn’t ‘It’ occur in the years since World War II? These are questions that naturally follow from both the historical record and the comparative success of the past thirty-five years.

Chapter 12 (‘Misunderstanding the Great Depression and the Great Recession’) returns to macroeconomics, and considers the dominant neoclassical explanation of the Great Depression – that it was all the fault of the Federal Reserve. The great irony of today’s crisis is that the person most responsible for promoting this view is himself now chairman of the Federal Reserve. Part 3, ‘Alternatives,’ considers alternative approaches to economics. It has six chapters: Chapter 13 (‘Why I did see “It” coming’) outlines Hyman Minsky’s ‘Financial Instability Hypothesis,’ and my nonlinear and monetary models of it, which were the reason I anticipated this crisis, and why I went public with my warnings in late 2005. Chapter 14 (‘A monetary model of capitalism’) shows how a strictly monetary model of capitalism can be built remarkably simply, once all the factors that neoclassical theory ignores are incorporated: time and disequilibrium, and the institutional and social structure of capitalism.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

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bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, creative destruction, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, Fractional reserve banking, full employment, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Plutocrats, plutocrats, private military company, Republic of Letters, Richard Feynman, Richard Feynman, Robert Shiller, Robert Shiller, Scientific racism, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

But, Summers said, there had been other traditions—much less heralded ones—that had come to his assistance. As the American financial system had teetered on the edge of oblivion in late 2008 and early 2009, Summers nominated a trio of economists as his chief guides during the desperate policy-making in the White House: Walter Bagehot, Hyman Minsky, and Charles Kindleberger.8 This was a selection of economic thinkers, he admitted, from well beyond the pale of orthodox economics and from some time ago. Hyman Minsky was a economist whose unconventional theories of how a monetary economy functions were largely spurned by the core of the profession, and who died in 1996. Charles Kindleberger was an economic historian—economic history being widely considered the poor cousin of theory by most academic economists—whose best known work was published in 1978.

It was true that reality kept butting in. Everyday experience continued to suggest that money and banking were important independent factors in the economy, rather than things that could be blithely ignored. Heretics continued to appear and preach the need to repent and heed alternative visions that took money seriously. But most were marginal figures—dismissed by the mainstream as eccentric cranks like Hyman Minsky, or safely defused as mere purveyors of historical colour like Charles Kindleberger. Once in a while, a savvy operator such as Milton Friedman would emerge and go straight to the policy-makers or even the public to champion the importance of money in economic analysis. But Arrow and Debreu’s tonic proved a potent one: their recasting of the classical framework proved almost limitlessly flexible.

As the Chairman of the U.K.’s Financial Services Authority admitted bluntly in 2012, central banks had “a flawed theory of economic stability … which believed that achieving low and stable current inflation was sufficient to ensure economic and financial stability, and which failed to identify that credit and asset price cycles are key drivers of instability.”27 Indeed, the fruits of a decade’s devoted worship at the shrine of monetary stability were more damaging even than this. The single-minded pursuit of low and stable inflation not only drew attention away from the other monetary and financial factors that were to bring the global economy to its knees in 2008—it exacerbated them. The heretical Cassandra Hyman Minsky had warned of this baleful possibility many years before.28 The more successful a central bank is in mitigating one type of risk by achieving low and stable inflation, the more confident investors will become, and the more they will willingly assume other types of risk by investing in uncertain and illiquid securities. Squeezing the balloon in one place—eliminating high and volatile inflation—will simply reinflate it in another—causing catastrophic instability in asset markets.


pages: 346 words: 90,371

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane, John Muellbauer

agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, Bretton Woods, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land reform, land tenure, land value tax, Landlord’s Game, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Second Machine Age, secular stagnation, shareholder value, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

A key cause was the relaxation of credit controls on real estate lending by the banking sector – known as ‘window guidance’ – by the Japanese central bank (Kindleberger and Aliber, 2005, p. 151; Werner, 2002, 2003). The Bank of Japan maintained double-digit year-on-year credit growth quotas for banks to meet even as demand from the real economy subsided, fuelling an asset price spiral with investors eventually borrowing to meet the interest payments on outstanding loans – so-called ‘Ponzi financing’ (see Box 5.5). Box 5.6 Hyman Minsky: stability is destabilising Hyman Minsky was an American economist whose research focused on the origins of financial cycles and crises in capitalist economies.12 Minsky disagreed with neoclassical economics’ assumption that the economy was best understood as being in a state of long-run equilibrium, buffeted by short-term ‘shocks’ created by business cycles, with finance, credit and asset prices playing a largely insignificant role.

1.3 Landownership and economic rent 1.4 Summary of chapters 2 Landownership and property 2.1 Introduction 2.2 Landownership: origins of the theory and forms 2.3 Landownership as freedom: secure title and economic growth 2.4 Landownership as theft: power and economic rent 2.5 Hypothesis: property is liberty, property is theft 2.6 Responses to the ownership paradox 2.7 Conclusion 3 The missing factor: land in production and distribution 3.1 Introduction 3.2 Classical political economy: land and economic rent 3.3 Land tax or separation as a solution to the problem of economic rent 3.4 Neoclassical economics and the conflation of land with capital 3.5 Problems with the neoclassical account: fundamental differences between land and capital 3.6 Political reasons for the disappearance of land from economic theory 3.7 Land and socialism 3.8 Consequences of the conflation of land and capital today 3.9 Conclusion 4 Land for housing: land economics in the modern era 4.1 Introduction 4.2 The Industrial Revolution and the growth of cities 4.3 1900–1970: world wars and the golden age of capitalism 4.4 1970 onwards: the emergence of ‘residential capitalism’ 4.5 The new political economy of housing 4.6 Conclusion 5 The financialisation of land and housing 5.1 Introduction 5.2 House and land prices, income and bank credit 5.3 Mortgage finance, the ‘lifecycle’ model and the role of collateral 5.4 The history of mortgage and real estate finance in the UK 5.5 Macroeconomic effects of the liberalisation of mortgage credit 5.6 The property–credit nexus and financial fragility 5.7 Conclusion 6 Land, wealth and inequality 6.1 Introduction 6.2 Trends in economic inequality 6.3 Traditional explanations for increasing inequality 6.4 The role of land and economic rent in increasing inequality 6.5 Why inequality matters 6.6 Conclusion 7 Putting land back into economics and policy 7.1 Introduction 7.2 Ownership 7.3 Tax reform 7.4 Financial reform 7.5 Reforms to tenure 7.6 Planning reform 7.7 Changes to economics and national accounting 7.8 Conclusion Bibliography Index FIGURES, TABLES AND BOXES Figures 1.1 Real land and house price indices UK 1945–2008 1.2 Residential property wealth as a % of GDP in advanced economies 4.1 New houses built by tenure 4.2 Trends in tenure type from 1918 to 2013 4.3 Ratio of house prices to gross average earnings 4.4 Homeownership and a ‘low supply equilibrium’ 4.5 Tenure change in England, 1971–2015 5.1 Index of house price to disposable income ratios in five advanced economies 5.2 House prices and mortgage debt compared to income in the UK 5.3 Disaggregated nominal credit stocks (loans outstanding) as % of GDP in the UK since 1963 5.4 Share of bank lending by industry sector, 1986–2014 5.5 The house price-credit feedback cycle 5.6 The role of mortgage credit conditions in affecting consumption in the UK 5.7 Home equity withdrawal in the UK, 1970–2015 6.1 Distribution of total UK household wealth: July 2012 to June 2014 6.2 Trends in growth in average wages and labour productivity in developed economies, 1999–2013 6.3 National wealth to national income ratio 1700–2010 6.4 National wealth to national income ratio 1970–2010, excluding capital gains 6.5 Breakdown of net property wealth: Great Britain, 2008/10–2012/14 6.6 Average net property wealth in the UK 6.7 Percentage of income spent on housing costs by tenure type 6.8 Income inequality from 1961 to 2013–14 before and after housing costs 6.9 Change in average house price to earnings across UK regions, 1983–2014 Tables 5.1 Mortgage market structure across sample of ten economies 6.1 Change in net property wealth between 1985 and 1991 6.2 Net property wealth between 1995 and 2005 6.3 Household net property wealth, individuals by age Boxes 1.1 Neoclassical economics 3.1 Other forms of economic rent 3.2 The secret origins of the Monopoly board game 4.1 Sir Ebenezer Howard’s garden cities 4.2 The New Towns programme 4.3 Keynesian economics 4.4 Monetarism 4.5 The Right to Buy 4.6 The speculative house builder model 4.7 Residual land valuation 4.8 Taxes affecting residential property in the UK 5.1 Credit and money creation by the banking system 5.2 What is financialisation? 5.3 How banks and building societies ‘fund’ mortgages 5.4 The parable of Northern Rock 5.5 What is securitisation? 5.6 Hyman Minsky: stability is destabilising 7.1 Hong Kong’s Mass Transit Railway 7.2 Examples of LVT and split-rate property taxes ACKNOWLEDGEMENTS The authors are most grateful to the following individuals for reviewing initial drafts and chapters of the book and providing invaluable suggestions: John Muellbauer, Kate Barker, Alison Wallace, Howard Reed, James Bruges, Allana Yurko, Steve Keen, Michael Kumhof, Nicholas Tideman, Ken Gibb, Bob Colenutt, Duncan Bowie, Paul Gilbert and Giorgos Galanis.

The build-up of mortgage debt smoothed the business cycle but encouraged excessive leverage in both the banking and household sector which eventually resulted in fragilities that led to financial collapse (Barwell and Burrows, 2011). The smoothing of the cycle enabled by mortgage lending was simply disguising the build-up of much larger, longer and more dangerous ‘credit’ or ‘financial cycles’ that macroeconomics had neglected for much of the post-war period (Borio, 2014). Such developments fit perfectly the ideas of the late American economist Hyman Minsky (1986), who argued that ‘stability is destabilizing’ in capitalist, finance-driven markets. Economic models which incorporated asset prices, stocks of debt and flows of credit and household and bank balance sheets successfully predicted the crisis (Keen, 1995, 2013; Bezemer, 2009); standard neoclassical models that ignored such attributes did not. In the aftermath of the 2008 financial crisis, however, many central banks have begun targeting the growth, or restriction, of credit to particular economic uses in the economy.


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Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips

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algorithmic trading, asset-backed security, bank run, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, collateralized debt obligation, computer age, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency peg, diversification, Doha Development Round, energy security, financial deregulation, financial innovation, fixed income, Francis Fukuyama: the end of history, George Gilder, housing crisis, Hyman Minsky, imperial preference, income inequality, index arbitrage, index fund, interest rate derivative, interest rate swap, Joseph Schumpeter, Kenneth Rogoff, large denomination, Long Term Capital Management, market bubble, Martin Wolf, Menlo Park, mobile money, money market fund, Monroe Doctrine, moral hazard, mortgage debt, Myron Scholes, new economy, oil shale / tar sands, oil shock, old-boy network, peak oil, Plutocrats, plutocrats, Ponzi scheme, profit maximization, Renaissance Technologies, reserve currency, risk tolerance, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, shareholder value, short selling, sovereign wealth fund, The Chicago School, Thomas Malthus, too big to fail, trade route

But the pattern occurs sufficiently frequently and with sufficient uniformity to merit renewed study.”26 The Austrian School of economics, for its part, taught that booms brought about by credit expansion must ultimately collapse. Basically, these economists concentrate on economic booms and what distorts them. Every boom, they say, comes from extraordinary credit expansion out of proportion to real economic growth. One Austrian School acolyte, Kurt Richebächer, had predicted just that unhappy fate for the U.S. housing bubble several years before his death during the summer of 2007. Hyman Minsky (1919-96), part Keynesian, part disciple of Joseph Schumpeter, became so well known for preaching the financial system’s vulnerability to speculation and risk that admirers labeled the August panic a “Minsky Moment.” Certainly the Austrian-Minsky fusion, so specific in its finger pointing, will rise or fall on the economic outcome of the next several years. Parallel inflections have been suggested for energy: the insistence that fossil-fuel history has also had dramatic break points that prompted government, commerce, and society to redirect how energy was used and to recast the global structure of its production and consumption.

FIGURE 2.3 The Evolution of Critical Derivatives, 1972-2005 Source: Chase Manhattan; 1993-2005 discussions from various sources. Back in 1977, Time had titled a lengthy essay on credit card issuers “Merchants of Debt” but had examined none of the bolder new financial products. Perhaps unknowingly, the magazine had adopted a phrase used in the 1930s by Joseph Schumpeter, an economist of the Austrian School, and then in the 1970s by Hyman Minsky. Both men argued that downturns evolved from financial and credit excesses. “Merchants of debt” was their epithet for banks and other financial entities that strove to market debt in as many (innovative) forms and to as many buyers as possible. The longer good times persisted—a description most of the last quarter century would fit—the more likely the financial sector was to be marketing unwise or risky products.6 The omissions and fallibilities of U.S. census and economic data are not a principal concern of this book.

The bank dismissed financial cheerleaders, recalling that “virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a ‘new era’ had arrived.”25 Economists tied to the Austrian School or admirers of the iconoclastic Hyman Minsky were almost beside themselves. In January 2007, Kurt Richebächer wrote that “measured by its level of indebtedness, today’s U.S. economy is the worst bubble economy in history.”26 Speaking to his shareholders in May, money manager David Tice, a Minskyite, deplored “the massive expansion of credit instruments—large swathes of which have little or no transparency but have nonetheless evolved into the speculative instruments of choice for a monstrous global leveraged speculator community.


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End This Depression Now! by Paul Krugman

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airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

One of those past economists is, of course, John Maynard Keynes: we are recognizably living in the kind of world Keynes described. But two other dead economists have also made strong and justified comebacks: a contemporary of Keynes’s, the American economist Irving Fisher, and a more recent entrant, the late Hyman Minsky. What’s especially interesting about Minsky’s new prominence is that he was very much out of the economic mainstream when he was alive. Why, then, are so many economists—including, as we saw at the beginning of this chapter, top officials at the Federal Reserve—now invoking his name? The Night They Reread Minsky Long before the crisis of 2008, Hyman Minsky was warning—to a largely indifferent economics profession—not just that something like that crisis could happen but that it would happen. Few listened at the time. Minsky, who taught at Washington University in St.

Sure enough, what Mian and Sufi find is that counties with high levels of debt have cut back drastically on both auto sales and home construction, while those with low debt have not; but the low-debt counties are buying only about as much as they were before the crisis, so there has a been a large fall in overall demand. The consequence of this fall in overall demand is, as we saw in chapter 2, a depressed economy and high unemployment. But why is this happening now, as opposed to five or six years ago? And how did debtors get that deep into debt in the first place? That’s where Hyman Minsky comes in. As Minsky pointed out, leverage—rising debt compared with income or assets—feels good until it feels terrible. In an expanding economy with rising prices, especially prices of assets like houses, borrowers are generally winners. You buy a house with almost no money down, and a few years later you have a substantial equity stake, simply because home prices have risen. A speculator buys stocks on margin, stock prices rise, and the more he borrowed the bigger his profit.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

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“Rational bubble riding” became acceptable, and the incentive to do so was turbocharged by an industry that has become more short-term focused in assessing both absolute and relative performance, and in which capital can move quite quickly given that few end investors are willing to revise down their return expectations. To some, the behavior of financial markets once again showed insufficient heed paid to the important insights of Hyman Minsky, the American economist. Known for his “financial instability hypothesis,”7 Minsky argued that, in capitalist economies, periods of financial stability give rise to subsequent periods of great financial instability. The extent of underlying moral hazard became more and more notable. I remember being bemused in October 2014 by the extent to which the return of some modest market volatility caused some respected market participants to call for the Fed to come up with “QE4”—that is, yet another program of large-scale asset purchases in order to repress market volatility and artificially boost asset prices again.

It is an operating environment that has sucked in many market participants, reminding us of John Maynard Keynes’s observations about how herd behaviors can take over markets. After all, “worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” And the longer the herd behavior continues and builds on itself, the greater the validity of a hypothesis put forward by Hyman Minsky—that is, the risk that the resulting “stability” proves temporary as, behind the scenes, it is breeding instability. The explanation for this unusual “vol” behavior lies in a combination of factors—from growth having been stuck in a low-level equilibrium to investors seeking “carry” income and other investment gains as a means of meeting ambitious return targets that are resistant to any meaningful downward revisions regardless of how much asset prices have already risen.

El-Erian, “Parsing Draghi’s QE Gambit,” Bloomberg View, January 23, 2015, http://www.bloombergview.com/articles/2015-01-23/parsing-draghi-s-qe-gambit. See also Mohamed A. El-Erian, “The ECB Can Only Buy Time for Europe’s Politicians,” Financial Times, January 22, 2015, http://www.ft.com/intl/cms/s/0/957b9ddc-a241-11e4-bbb8-00144feab7de.html. 6. Tracy Alloway, “Markets’ Misplaced Faith in Central Banks,” Financial Times, January 23, 2015, http://www.ft.com/intl/cms/s/0/2ad516fa-a2d4-11e4-ac1c-00144feab7de.html. 7. Hyman Minsky, “The Financial Instability Hypothesis,” Working Paper No. 74, Levy Economics Institute of Bard College, 1992. 8. Mohamed A. El-Erian, “Beware of Calls for QE4,” Financial Times, October 17, 2014, http://blogs.ft.com/the-a-list/2014/10/17/beware-of-calls-for-qe4/. 9. Chris Giles, “Carney Warns on Low Interest Rates,” Financial Times, January 24, 2015, http://www.ft.com/intl/cms/s/0/c20266fe-a3fb-11e4-b90d-00144feab7de.html. 10.


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Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown by Philip Mirowski

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Alvin Roth, Andrei Shleifer, asset-backed security, bank run, barriers to entry, Basel III, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Swan, blue-collar work, Bretton Woods, Brownian motion, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, complexity theory, constrained optimization, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, dark matter, David Brooks, David Graeber, debt deflation, deindustrialization, Edward Glaeser, Eugene Fama: efficient market hypothesis, experimental economics, facts on the ground, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, full employment, George Akerlof, Goldman Sachs: Vampire Squid, Hernando de Soto, housing crisis, Hyman Minsky, illegal immigration, income inequality, incomplete markets, information asymmetry, invisible hand, Jean Tirole, joint-stock company, Kenneth Arrow, Kenneth Rogoff, knowledge economy, l'esprit de l'escalier, labor-force participation, liberal capitalism, liquidity trap, loose coupling, manufacturing employment, market clearing, market design, market fundamentalism, Martin Wolf, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Naomi Klein, Nash equilibrium, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, oil shock, Pareto efficiency, Paul Samuelson, payday loans, Philip Mirowski, Ponzi scheme, precariat, prediction markets, price mechanism, profit motive, quantitative easing, race to the bottom, random walk, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, savings glut, school choice, sealed-bid auction, Silicon Valley, South Sea Bubble, Steven Levy, technoutopianism, The Chicago School, The Great Moderation, the map is not the territory, The Myth of the Rational Market, the scientific method, The Wisdom of Crowds, theory of mind, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, Tobin tax, too big to fail, transaction costs, Vilfredo Pareto, War on Poverty, Washington Consensus, We are the 99%, working poor

How this encouraged students to become acquainted with the economy was a bit of a mystery—or maybe it telegraphed the neoclassical lesson that you didn’t need to attend to the specifics of actual existing economies.19 It was brainwashing, pure and simple, carried out under the banner of rigor. Then, by the 1990s, by construction there was no longer any call for offering courses in philosophy or history of doctrine, since there were no economists left with sufficient training (not to mention interest) in order to staff the courses.20 Economists would periodically be sounding off in the most illiterate registers concerning Karl Marx, Vilfredo Pareto, Hyman Minsky, Adam Smith, or even John Maynard Keynes, because they were confident no one would ever call them to task on their shallow pretenses. Consequently, once the Great Mortification followed in the wake of the collapse of the Great Moderation, those occupying the commanding heights of the profession were bereft of any sophisticated resources to understand their predicament. In a pinch, many fell back on the most superficial of personal recollections, or else the last refuge of scoundrels, the proposition that “we” already knew how to handle the seemingly anomalous phenomena, but had unaccountably neglected to incorporate these crucial ideas into pedagogy and cutting-edge research.

Panglossian exercises of this nature were ill-suited to reassure the keening populace, so the more proactive journalists went about seeking to construct a provisionary consensus. The Economist decided to ask roughly fifty handpicked economists to identify which economist had been most influential over the past decade, and which had proposed the most important ideas for a postcrisis world. The “most influential” list they compiled was Ben Bernanke, John Maynard Keynes, Jeffrey Sachs, Hyman Minsky, and Paul Krugman; the “most important ideas” roster was Raghuram Rajan, Robert Shiller, Kenneth Rogoff, Barry Eichengreen, and Nouriel Roubini.78 If you were a member of the orthodoxy back then, it is hard to see how these lists could be anything other than profoundly unsettling; if you are someone reading this book right now, then perhaps you will gaze upon them with existential nausea. That list counts at least three open neoliberals, Bernanke, Rajan, and Rogoff, and one maverick neoliberal, Shiller.

(Again we observe the tight coupling of finance and the commanding heights of the economic profession described in chapter 4.) Ellington Capital is a hedge fund that specialized in mortgage-backed securities, so it seems safe to say Geanakoplos had a ringside seat at the grand defalcation that led to the current crisis. And indeed, when he talks in the vernacular about what has gone wrong in the financial industry, he tends to sound a bit like Hyman Minsky, which means he makes a fair bit of sense.104 However, his academic persona is one of the elite among general-equilibrium theorists of the purest water: so the aspect of his personality that draws our attention is—how does he manage to reconcile the two? Geanakoplos had a leg up on other economists because he did notice some pathologies of the mortgage market earlier on, and therefore had begun to concoct models well before the debacle of Bear Stearns and Lehman.


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Capitalism: Money, Morals and Markets by John Plender

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activist fund / activist shareholder / activist investor, Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, God and Mammon, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, labour market flexibility, liberal capitalism, light touch regulation, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, mass immigration, means of production, Menlo Park, money market fund, moral hazard, moveable type in China, Myron Scholes, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, Veblen good, We are the 99%, Wolfgang Streeck, zero-sum game

Indeed, financial crises have been normal, regular events since the invention of modern banking. And Nassim Nicholas Taleb was himself immensely prescient about the crisis. Those black swans, if the reader will excuse a solecism, were a canard. With financial crises the problem of prediction, as we saw earlier, is about timing and scale rather than the probability of them happening. A much better rationale for the crisis is to be found in the work of the economist Hyman Minsky, who had an acute sense of history. He recognised that the modern economy is fundamentally unstable and that one of the lessons of economic history is that there have always been big discontinuities in economic performance and policymaking. Minsky argued in the 1980s in his book Stabilising an Unstable Economy that long periods of stability and prosperity breed complacency and encourage risk taking, which is precisely what the so-called Great Moderation was all about.93 The moderation was, in fact, thoroughly immoderate.

For Germans, this passage brings back ingrained memories of the chaos wrought by the Weimar inflation in the 1920s, as well as the turbulent monetary conditions that prevailed after 1945. That underlines a deep-seated problem with the workings of market capitalism. In contrast with the feudal period, when economic fluctuations were driven chiefly by the forces of nature, war or plague, capitalism introduced regular boom-and-bust cycles. The system is inherently unstable and has become more so as a result of the deregulation of finance since the 1960s. The economist Hyman Minsky provided the best explanation of the dynamics of this instability in the 1980s, arguing that long periods of stability and prosperity breed complacency and encourage risk taking, as outlined in Chapter Five.202 Also implicit in Goethe’s tale, and a natural consequence of the instability described by Minsky, is what Marx and Engels called the ‘eternal insecurity’ of capitalism: The bourgeoisie cannot exist without constantly revolutionising the instruments of production, and thereby the relations of production, and therefore social relations as a whole.

Chilton 1 railway mania (Britain 1840s) 1 Rajan, Raghuram 1, 2, 3, 4 Rand, Ayn 1, 2 Raphael 1 Reading, Brian 1, 2, 3, 4 Reagan, Ronald 1, 2, 3, 4, 5 Reformation 1, 2 regulators 1 regulatory arbitrage 1 Renaissance 1, 2, 3 Republic (Plato) 1, 2 retail banking 1 Reynolds, Joshua 1, 2 Ricardo, David 1 Richelieu, Cardinal 1 Ring of the Nibelung (Wagner) 1, 2, 3 Ritblat, John 1 Roaring Twenties 1, 2 robber barons 1, 2, 3 Robinson Crusoe (Daniel Defoe) 1 Rockefeller, John D. 1, 2 rogue traders 1 Rolls-Royce 1 Roman republic 1 Roosevelt, Franklin 1 Rosenberg, Harold 1 Roseveare, Henry 1 Roubini, Nouriel 1 Rousseau, Jean-Jacques 1, 2 de Rouvroy, Claude-Henri 1 Royal Exchange (London) 1 Rubens, Peter Paul 1, 2 rural exodus 1 Ruskin, John 1, 2, 3 Saatchi, Maurice 1, 2 Samuelson, Paul 1 Sandel, Michael 1 sarakin banks (Japan) 1 Sarkozy, Nicolas 1 Sassoon, Donald 1 Satyricon (Petronius) 1 Savage, Richard 1, 2 Schama, Simon 1, 2 Schiller, Friedrich 1 Scholes, Myron 1 Schopenhauer 1 Schuman, Robert 1 Schumpeter, Joseph 1, 2, 3, 4, 5, 6, 7 Schwed, Fred 1, 2 second industrial revolution (1920s) 1 Sen, Amartya 1 separation of powers 1 Shakespeare 1, 2, 3, 4, 5, 6 shareholder activists 1 shareholder value 1 shareholders 1 Shaw, George Bernard 1 Sherman Antitrust Act (US 1890) 1 Shiller, Robert 1, 2, 3, 4 Shleifer, Andrei 1 short selling 1, 2 Siemens 1 von Siemens, Werner 1 Sinclair, Upton 1 Skidelsky, Robert 1, 2 Smith, Adam 1, 2, 3, 4, 5, 6, 7, 8 Smith, Sidney 1 Smithers, Andrew 1, 2 Smollett, Tobias 1 social democratic model 1, 2 Société Générale 1 Socrates 1 Solon 1 Sombart, Werner 1, 2 Soros, George 1, 2 Sotheby’s 1 South Sea Bubble 1, 2, 3, 4, 5, 6, 7 sovereign debt 1 sovereign debt crisis (2009) 1 Spain 1, 2, 3, 4, 5, 6 speculation 1 Spenser, Edmund 1 Stabilising an Unstable Economy (Hyman Minsky) 1 Steed, Wickham 1 Stephenson, George 1 Stevens, Wallace 1 Streeck, Wolfgang 1 subprime mortgages 1, 2, 3, 4 Sutter, John 1 Sutton, Willie 1 swarf 1 Sweden 1 Swift, Jonathan 1, 2, 3 Tale of Two Cities (Charles Dickens) 1 Taleb, Nassim Nicholas 1, 2 Talleyrand, Charles Maurice de 1 Taoism 1 tax farming 1 tax havens 1 tax revolts 1 taxation 1 Taylor, John 1 Tea Party movement 1 Tennyson, Alfred 1 Thaler, Richard 1 Thatcher, Margaret 1, 2, 3, 4, 5, 6 Theory of Moral Sentiments (Adam Smith) 1 ‘thingism’ 1 Thomas Aquinas 1, 2 Thompson, E.


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Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

They left just enough animal spirits to yield a Least-Common-Denominator theory that minimized the intellectual distance between The General Theory and the standard classical economics of the day. In this standard economic theory there are no animal spirits. People act only for economic motives, and they act only rationally. Keynes’ followers adopted this “banality” (as it has been described by Hyman Minsky) for two good reasons.8 The first was that the Depression was still raging, and they wished to make converts as rapidly as possible to his message about the role of fiscal policy. They would make the maximum number of converts by coming as close as possible to the existing theory. And such minimal deviation was useful for another reason. It enabled the economists of the time to understand the new theory in terms of the old.

Most of all, this book tells us that the solutions to our economic problems can only be reached if we pay due respect in our thinking and in our policies to the animal spirits. Notes * * * PREFACE TO THE PAPERBACK EDITION 1. Bagehot (1920 [1873], pp. 144, 119). 2. Nakamoto and Wighton (2007). 3. See Federal Reserve (2008a). 4. Geisel (1958). PREFACE 1. James (1983 [1904], p. 341). For Akerlof’s use of this image in a different context, see Warsh (2006). 2. In 1982 Hyman Minsky wrote Can “It” Happen Again? Minsky’s It was of course the Great Depression. He, like us, was especially concerned with the psychology of speculative bubbles. Our line of thinking in this book parallels that of Minsky. 3. One source estimates the death toll at 52,199,262. See http://www.historyplace.com/worldwar2/timeline/statistics.htm. 4. Friedman was quoted in the December 31, 1965, issue of Time, which featured Keynes on the cover.

CHAPTER SEVEN WHY DO CENTRAL BANKERS HAVE POWER OVER THE ECONOMY (INSOFAR AS THEY DO)? 1. Federal Reserve (2008a). 2. http://www.federalreserve.gov/releases/h41/Current/. This number should only be used as an indicator of order of magnitude. In the current financial crisis it is changing constantly. 3. But despite the appeal of this story to theoreticians, it misses something fundamental to the mission of the central bank. Hyman Minsky (1982, p. 250) remarked that central bankers who think that this is the central story are putting on “money supply blinders.” 4. Goldfeld (1976). 5. See Bernanke and Blinder (1988, 1992) for a discussion of the loanable funds theory. 6. The exact percentage varies depending on the size and type of a bank’s liabilities; see Federal Reserve (2008b). 7. An account is given by Friedman and Schwartz (1963, pp. 156–68). 8.


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Aftershock: The Next Economy and America's Future by Robert B. Reich

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Berlin Wall, declining real wages, delayed gratification, Doha Development Round, endowment effect, full employment, George Akerlof, Home mortgage interest deduction, Hyman Minsky, illegal immigration, income inequality, invisible hand, job automation, labor-force participation, Long Term Capital Management, loss aversion, mortgage debt, new economy, offshore financial centre, Ralph Nader, Ronald Reagan, school vouchers, sovereign wealth fund, Thorstein Veblen, too big to fail, World Values Survey

WHY POLICYMAKERS OBSESS ABOUT THE FINANCIAL ECONOMY INSTEAD OF ABOUT THE REAL ONE 1 “Without this rescue plan”: See “White House Written Statement of President George W. Bush,” September 28, 2009 (http://thepage.time.com/statement-by-president-bush/). 2 “If we do not do this”: Senator Judd Gregg to the Associated Press, September 28, 2008. 3 The relative calm of preceding decades: The theoretical underpinnings of this occurrence had been developed by economist Hyman Minsky. See Hyman Minsky, Stabilizing an Unstable Economy (New York: McGraw-Hill, 2008). 6. THE GREAT PROSPERITY: 1947–1975 1 During this quarter century: See U.S. Census Bureau, Current Population Reports, Measuring 50 Years of Economic Change Using the March Current Population Survey (U.S. Government Printing Office, Washington, D.C., 1998), pp. 7–8. 2 Labor productivity: U.S. Bureau of Labor Statistics, Historical SIC Industry Labor and Cost Indexes, 1947–1977. 3 Expressed in 2007 dollars: See U.S.


pages: 182 words: 53,802

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, light touch regulation, London Interbank Offered Rate, market fundamentalism, Martin Wolf, mobile money, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

But money is not like a commodity, and to define it as such is to create a ‘false commodity’ as Karl Polanyi argued.1 On the contrary, with the development of sound monetary systems in developed economies, there is never a shortage of money for society’s most important needs. Instead the relevant question is: who controls the creation of money? And to what end is money created? The gap between the orthodox or neoclassical understanding of the nature of money and interest, and for example, the modern Keynesian or Minskyian (American economist Hyman Minsky [1919–96]) understanding of money and interest, is as wide and profound as that between sixteenth-century Ptolemaic and Copernican concepts of the heavens. Closing the gap in knowledge is almost impossible because ‘classical’ economists are, and have long been, dominant within universities. They are particularly influential in financial institutions, where their theories are both welcomed and encouraged.

And with his policies, went his theory and, once more, the understanding of money. Classical economics and its flawed theory of money was revived. The understanding of bank money and credit shared by those in the ‘underworld’ lived on only through Keynes’s closest colleagues in Cambridge, who were subsequently cast out of the profession. His theory was revived as post-Keynesian economics in the US under Sidney Weintraub, Hyman Minsky and Paul Davidson, and in the UK by Victoria Chick, among others. Geoffrey Ingham in the UK has revived the tradition within sociology. This revival has been echoed by the accessible and popular account in the New Economics Foundation book Where Does Money Come From?11 Given the pressure of class interests that shape today’s economic ideas, the long-standing neglect of his theory and policies, particularly at his alma mater Cambridge University, does not come as a surprise.


pages: 741 words: 179,454

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

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affirmative action, Albert Einstein, algorithmic trading, Andy Kessler, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, capital asset pricing model, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, financial independence, financial innovation, financial thriller, fixed income, full employment, global reserve currency, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, happiness index / gross national happiness, haute cuisine, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, job automation, Johann Wolfgang von Goethe, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, labour market flexibility, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, margin call, market bubble, market fundamentalism, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Mikhail Gorbachev, Milgram experiment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, negative equity, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Plutocrats, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, Richard Thaler, Right to Buy, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, survivorship bias, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Intervention, he argued, is dangerous, rejecting the economic prescriptions of both the Keynesian and Friedman schools. Knight’s criticism of Friedman’s Second Chicago School was typically wry: “the emotional pronouncement of value judgements condemning emotion and value judgements which seems to [me] a symptom of a defective sense of humor.”32 In his 1986 book Stabilizing an Unstable Economy, Hyman Minsky, an American economist, outlined a hypothesis as to why modern economies are liable to fluctuate and how obvious instability can be masked for a time. Minsky’s thesis was that stability in financial markets engenders instability as a result of inherent tendencies in the financial system—stability is itself destabilizing. Minsky viewed modern financial markets as “conditionally coherent” and characterized by “periods of tranquility.”

That is very rewarding because superfluous things cannot be replaced by even more superfluous things.”27 Superfluous things had come to be dominated by the ultimate superfluity, extreme money. One investor thought that Porsche would: “struggle to sell 911s to hedge-fund managers for years and years to come.”28 Wiedeking showed no Schadenfreude at the losses of the hedge funds: “We all have to get used to the fact that quick money is not a healthy business. Values played no role in what happened.”29 Children of Privilege The economist Hyman Minsky theorized that in the early stages of a business cycle money is only available to creditworthy borrowers, known ironically as hedge finance. As the cycle develops, financial conditions look rosy and competing lenders extend money to marginal borrowers, a phase known as speculative finance and ultimately Ponzi finance. The cycle ends in a Minsky moment when the supply of money slows or shuts off.

As William White, chief economist of the BIS, remarked: “In the field of economics, American academics have such a high reputation that they sweep all before them. If you add to that the personal reputation of the ‘Maestro,’ it was very difficult for anybody else to come in and say the problems building.”34 Free markets and deregulation were conventional wisdom—everyone was paid to agree with the broad consensus. As Hyman Minsky wrote: “As a previous crisis recedes in time, it’s quite natural...to believe that a new era has arrived. Cassandra-like warnings that nothing has changed, that there is a financial breaking point that will lead to a deep depression, are naturally ignored in these circumstances.”35 Noneofuscouldanode On October 22, 2008, as the global economy and financial system dissolved into crisis, Alan Greenspan appeared before the U.S.


Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages by Carlota Pérez

agricultural Revolution, Big bang: deregulation of the City of London, Bob Noyce, Bretton Woods, capital controls, commoditize, Corn Laws, creative destruction, David Ricardo: comparative advantage, deindustrialization, distributed generation, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, full employment, Hyman Minsky, informal economy, joint-stock company, Joseph Schumpeter, knowledge economy, late capitalism, market fundamentalism, new economy, nuclear winter, offshore financial centre, post-industrial society, profit motive, railway mania, Robert Shiller, Robert Shiller, Sand Hill Road, Silicon Valley, Simon Kuznets, South Sea Bubble, Thomas Kuhn: the structure of scientific revolutions, Thorstein Veblen, trade route, tulip mania, Upton Sinclair, Washington Consensus

No leaf ever wholly equals another, and the concept ‘leaf’ is formed through an arbitrary abstraction from the individual differences, through forgetting the distinctions; and now it gives rise to the idea that in nature there might be something besides the leaves which would be ‘leaf’ – some kind of original form after which all leaves have been woven, marked, copied, coloured, curled, and painted, but by unskilled hands, so that no copy turned out to be a correct, reliable, and faithful image of the original form … Friedrich Nietzsche, 1873 A theory that denies that what is happening can happen, that sees unfavorable events as the work of outside forces (such as the oil crisis) rather than as the result of characteristics of the economic mechanism, may satisfy the politicians’ need for a villain or scapegoat, but such a theory offers no useful guide to the solution of a problem. Hyman Minsky, 1986, p. 4. xv xvi Technological Revolutions and Financial Capital chapter title xvii Introduction: An Interpretation The last quarter of the twentieth century witnessed the apparently boundless rise of two forces: the information revolution and financial markets. Many have chanted the virtues of the one for increasing productivity and of the other for unleashing the drive for wealth that moves the economy forward.

And this has been so, though Schumpeter himself was very clear about the two roles, that of the entrepreneur and that of the financier as the interdependent wheels turning innovation forward.1 On the other hand, those who have studied finance – and in particular financial crises – have seldom given attention to the real economy of the production of goods and services (or what Schumpeter called ‘Güterwelt’), nor have they dealt much with technology and its relation with investment opportunities. Using the framework to be presented here, one could suggest that this neglect stems from the fact that the biggest bubbles tend to occur when financial capital has practically decoupled from the real economy and taken off on its own. Nevertheless, an economist like Hyman Minsky, who does put innovation in financial services at the core of his explanation of crises, does not make any links between the types of financial innovation made and the specific technologies of the period in question.2 This book attempts to weave these two issues together within a wider interdisciplinary perspective, beyond the boundaries of economics. 1. 2. Schumpeter (1939) p. 104. Minsky (1975 and 1982).


pages: 586 words: 159,901

Wall Street: How It Works And for Whom by Doug Henwood

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, affirmative action, Andrei Shleifer, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, borderless world, Bretton Woods, British Empire, capital asset pricing model, capital controls, central bank independence, computerized trading, corporate governance, corporate raider, correlation coefficient, correlation does not imply causation, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, dematerialisation, diversification, diversified portfolio, Donald Trump, equity premium, Eugene Fama: efficient market hypothesis, experimental subject, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, George Gilder, hiring and firing, Hyman Minsky, implied volatility, index arbitrage, index fund, information asymmetry, interest rate swap, Internet Archive, invisible hand, Irwin Jacobs, Isaac Newton, joint-stock company, Joseph Schumpeter, kremlinology, labor-force participation, late capitalism, law of one price, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, London Interbank Offered Rate, Louis Bachelier, market bubble, Mexican peso crisis / tequila crisis, microcredit, minimum wage unemployment, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, oil shock, Paul Samuelson, payday loans, pension reform, Plutocrats, plutocrats, price mechanism, price stability, prisoner's dilemma, profit maximization, publication bias, Ralph Nader, random walk, reserve currency, Richard Thaler, risk tolerance, Robert Gordon, Robert Shiller, Robert Shiller, selection bias, shareholder value, short selling, Slavoj Žižek, South Sea Bubble, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Nature of the Firm, The Predators' Ball, The Wealth of Nations by Adam Smith, transaction costs, transcontinental railway, women in the workforce, yield curve, zero-coupon bond

In these senses, bastard Keynesianism did the trick — of, to paraphrase Claus Offe, regulating the system politically without materially politicizing it. The establishment took what it needed from Keynes and left the rest. posties Though I've mentioned post-Keynesian economics several times in this chapter, I've barely fleshed out the mentions. But two matters deserve closer attention — theories of monetary endogeneity, and the work of Hyman Minsky. Both are barely acknowledged, much less known, in the mainstream. money emerges from within In conventional economics, of both the monetarist and the eclectically mainstream varieties, the money supply (not always precisely defined) is determined from "outside" the system of private exchange by the central bank; these are exogenous theories of money. The Fed or any of its siblings around the world injects money into the system, and banks, households, and firms do their business accordingly.

They're not only concerned with the state of the macroeconomy, conventionally defined, they're also concerned with the state of the class struggle, to use the old-fashioned language. When things look too bubbly for the Fed's satisfaction, it tightens policy, by lowering its targets for money supply growth and raising its target for the fed funds rate. In doing so, it hopes to slow down the economy, but there's often many a slip between tightening and slowdown. The reason for this gap was explored nearly 40 years ago by Hyman Minsky (1957) in a classic paper modestly titled "Central Bank and Money Market Changes." Minsky pointed to two innovations of that relatively sleepy time, the federal funds market, which allows aggressive banks to transcend the limits of their own reserves by borrowing from surplus banks, and the growing presence of nonfinancial corporations, eager to make money on spare cash, as providers as well as users of credit.

This was true even under a gold standard; these spontaneous contracts make the line between money and credit a porous one, and that explains why the modern money supply is so flexible. Of course, in Marx's view, these extensions of credit become worthless in a crisis, as everyone scrambles for gold; this kind of crisis hasn't been seen in this century, as central banks have learned how to contain crisis and make short-term government paper seem as good as gold. Minsky Of all the modern theorists in the Keynesian tradition, one of the most interesting is Hyman Minsky, who devoted his career to exploring the relations between finance and the real world. ^"^ We've already looked at his contribution to theories of monetary endogeneity; the rest of his work deserves a few more pages. Following the lead of Keynes's Treatise, with its separate industrial and financial spheres, Minsky developed a two-sphere theory of a modern capitalist economy, one of current output and one for capital assets, which jointly determine the level of economic activity.


pages: 504 words: 126,835

The Innovation Illusion: How So Little Is Created by So Many Working So Hard by Fredrik Erixon, Bjorn Weigel

Airbnb, Albert Einstein, asset allocation, autonomous vehicles, barriers to entry, Basel III, Bernie Madoff, bitcoin, Black Swan, blockchain, BRICs, Burning Man, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, Clayton Christensen, Colonization of Mars, commoditize, corporate governance, corporate social responsibility, creative destruction, crony capitalism, dark matter, David Graeber, David Ricardo: comparative advantage, discounted cash flows, distributed ledger, Donald Trump, Elon Musk, Erik Brynjolfsson, fear of failure, first square of the chessboard / second half of the chessboard, Francis Fukuyama: the end of history, George Gilder, global supply chain, global value chain, Google Glasses, Google X / Alphabet X, Gordon Gekko, high net worth, hiring and firing, Hyman Minsky, income inequality, income per capita, index fund, industrial robot, Internet of things, Jeff Bezos, job automation, job satisfaction, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, joint-stock company, Joseph Schumpeter, Just-in-time delivery, Kevin Kelly, knowledge economy, labour market flexibility, laissez-faire capitalism, lump of labour, Lyft, manufacturing employment, Mark Zuckerberg, market design, Martin Wolf, mass affluent, means of production, Mont Pelerin Society, Network effects, new economy, offshore financial centre, pensions crisis, Peter Thiel, Potemkin village, price mechanism, principal–agent problem, Productivity paradox, QWERTY keyboard, RAND corporation, Ray Kurzweil, rent-seeking, risk tolerance, risk/return, Robert Gordon, Ronald Coase, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, Steve Ballmer, Steve Jobs, Steve Wozniak, technological singularity, telemarketer, The Chicago School, The Future of Employment, The Nature of the Firm, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, transaction costs, transportation-network company, tulip mania, Tyler Cowen: Great Stagnation, University of East Anglia, unpaid internship, Vanguard fund, Yogi Berra

We know, however, that savers largely define ownership and that the size and complexity of public markets force savers, institutions, and retail investors alike to rely on third parties for their investments. It is this development that has created the “financialization” of the economy in the past four decades, or the unparalleled growth of the financial economy in relation to the real economy. The late US economist Hyman Minsky called it “money manager capitalism.”7 It is not a new phenomenon. “I would rather see Finance less proud and Industry more content,” argued Winston Churchill in 1925. But the economic gods did not heed that wish, nor to repeated warnings about the instability of financial growth that is supported by state guarantees. In Churchill’s homeland, the United Kingdom, the daily transactions of foreign exchange now exceed trade in goods and services by almost 100 times.

Chance character (i), (ii) Belgium profit margins (i) taxi services and regulation (i) Bell, Alexander Graham (i), (ii) Bell Labs (AT&T) (i) Bellamy, Edward (i) Bellman, Richard (i) benchmarking (i), (ii) benefits, and incomes (i) Benz, Karl (i) Bergman, Ingmar (i) Berkshire Hathaway (i) Berle, Adolf (i) Berra, Yogi (i) Bezos, Jeff (i) Bhide, Amar (i) big firms big firm market dominance (i) and investment allocation for innovation (i) and private standards (i) relative importance of in European countries (i) reputation of (i) see also firm boundaries; firms; multinational (global) companies “big swinging dicks” (i) big-data business models (i) biofuels and EU regulation (i) see also energy sector biotechnological sector, and EU regulation (i) Bismarck, Otto von (i) bitcoin (i) BlackBerry (i) blackboard economics (i) Blackrock (i) blockchain (mutual distributed ledger) technology (i) Blue Ribbon Commission (US) (i) The Blues Brothers (movie) (i) boom and bust cycles (i), (ii), (iii) boomer (or baby boomer) generation (i), (ii), (iii), (iv) Boston Consulting Group index of complicatedness (i) on performance imperatives (i) on working time of managing teams (i) branding (i), (ii) Brazil and BRIC concept (i), (ii) taxi services and regulation (i) BRIC as a Bloody Ridiculous Investment Concept (i) countries (Brazil, India, Russia, and China) (i), (ii) Bridgewater (i) Brin, Sergey (i) Britain see United Kingdom (UK) British managerialism (i) Brockovich, Erin (i) Brookings (i) Brown, Gordon (i) Brynjolfsson, Erik, The Second Machine Age (Brynjolfsson and McAfee) (i), (ii) budget process, and compliance officers (i) Buffett, Warren (i), (ii) bureaucracy and capitalism (i), (ii) and competition (i) and compliance officers (i) and globalization (i), (ii), (iii), (iv) and IBM (i) and index of complicatedness (Boston Consulting Group) (i) and Indian economy (i) and managerialism (i), (ii), (iii) and organizational diversification (i) and principal–agent debate (i) and socialism (i) see also bureaucracy brake; bureaucrats; corporate managerialism; managerialism bureaucracy brake, and regulation (Germany) (i) bureaucrats vs. entrepreneurs (i), (ii) see also bureaucracy; bureaucracy brake Burning Man festival (Nevada) (i) Burns, Scott, The Clash of Generations (Kotlikoff and Burns) (i) business-building skills, vs. financial skills (i) business cycles, and productivity (i) business development, and strategy (i), (ii) business information technology (IT) services (i) business investment and cash hoarding (i) and corporate net lending (i), (ii) declining trend (i) explanations for decline (i) and financial regulation (i), (ii) and gray capitalism (i) investment allocation for innovation and big firms (i) low investment growth vs. fast corporate borrowing growth (i) measuring issues (i) and mergers and acquisitions (i) and policy uncertainty (i), (ii) and shareholders (i), (ii), (iii) UK business investment (i), (ii) US business investment (i), (ii) see also asset managers; investment; R&D business management (i), (ii) see also corporate managerialism business productivity growth (i) Business Week, on Peter Drucker (i) CAC 40 index (France) (i) cadmium (i), (ii) Canada diffusion of innovations (i) GDP figures (i) North American Free Trade Agreement (i) cancer research, and innovation (i), (ii) capital accumulation, and capitalism (i) capital expenditure (capex) (i), (ii), (iii), (iv)n39 capital markets (external) (i), (ii), (iii), (iv), (v) capitalism and agency (i) and asset bubbles (i) and bureaucracy (i), (ii) and capital accumulation (i) “complex by design” capitalism (i) criticism of Western capitalism (i) crony capitalism (i) death of capitalism utopia and socialism (i) decline of Western capitalism (i) and digital age (i) and dissent (i), (ii), (iii) and eccentricity (i), (ii), (iii), (iv), (v) and economic dynamism (i), (ii), (iii) and Enlightenment (i), (ii) and entrepreneurship (i), (ii) financial capitalism (i), (ii), (iii), (iv) free-market capitalism (i) and individual freedom (i), (ii), (iii) and innovation (i), (ii), (iii), (iv), (v) joint-stock capitalism (i), (ii) and labor vs. work (i) vs. the market (i), (ii) Marxist monopolistic theory of (i) “middle-aged” capitalism (i), (ii), (iii) “money manager capitalism” (Hyman Minsky) (i) and organization (i) and planning machines (i) rentier capitalism (i), (ii), (iii), (iv), (v), (vi) and Swedish hybrid economy (i) and technology (i) see also capitalist ownership; corporate managerialism; entrepreneurs; entrepreneurship; the future (and how to prevent it); globalization; gray capitalism; regulation; rich people capitalist ownership and corporate globalism (i) and diversification (i) and gray capitalism: case of Harley-Davidson Motor Company (HD) (i); decline/obituary of capitalist ownership (i); dispersed ownership (i); gray ownership (i), (ii), (iii), (iv), (v), (vi); severing gray capital–corporate ownership link (i) ownership structure reforms (i) and pensions (i) and principal–agent problem (i) and uncertainty (i) car industry car sales and regulation (i) driverless vehicles (i), (ii), (iii), (iv) German car production and value chains (i) lean production (i) US environment-related regulations (i) Carew, Diana G.

(i), (ii), (iii) Lewis, Michael, Liar’s Poker (i) liberalism classical market liberalism (i) economic liberalism and technology (i) embedded liberalism (i) vs. government intervention (i) neoliberalism (i) License Raj (India) (i), (ii) Lidl (i) Life Magazine, on Milwaukee-Matic (i) life-or-death competition (i), (ii), (iii), (iv) Linaburg Maduell Transparency Index (LMTI) (i) Lindgren, Astrid (i) listed companies and mergers and acquisitions (i) and ownership (i) and predictability (i) Litan, Robert (i) LMTI (Linaburg Maduell Transparency Index) (i) lobbying (i), (ii), (iii), (iv), (v) Locke, John (i) logistics hubs (i), (ii) logistics industry, and lean production (i) London Stock Exchange, and sovereign wealth funds (i) LoopPay (i) Lord Voldemort (Harry Potter books character) (i), (ii) Lyft (i) M&As (mergers and acquisitions) (i), (ii), (iii), (iv) McAfee, Andrew, The Second Machine Age (Brynjolfsson and McAfee) (i), (ii) McCloskey, Deirdre (i) McKinsey (i), (ii) McKinsey Global Institute (i) McLaughlin, Patrick (i) Maddison, Angus (i) Madoff, Bernie (i) Mainelli, Michael (blockchain study) (i) make-or-buy question (i), (ii), (iii) Malkin, Michelle (i) The Man in the Gray Flannel Suit (Sloan Wilson) (i) “man of system” (Adam Smith) (i) managerialism see corporate managerialism Mandel, Michael (i) Mannering, Fred (transportation expert) (i), (ii)n21 Mansfield, Edwin (i) manufacturing (i), (ii), (iii), (iv), (v), (vi) Marconi, Guglielmo (i) market vs. capitalism (i), (ii) complexity (i) concentration (i), (ii), (iii), (iv), (v) dominance by big firms (i) failure and firms (i) liberalization (i), (ii), (iii) and modern portfolio theory (i) uncertainty (i), (ii) see also deregulation; external capital markets; firm boundaries; labor markets; market contestability; public markets; regulation; stock markets market contestability boosting contestability, ways of (i) and deregulation (i) and economic dynamism (i), (ii) and global trade (i) and globalist worldview (i) and globalization (2nd phase) (i), (ii) and innovation (i), (ii), (iii), (iv), (v), (vi) and lean production in car industry (i) and managerialism (i), (ii) vs. market concentration (i) and multinationals (i) and occupational licenses (i), (ii) and oligopolistic (or monopolistic) competition (i) and performance imperatives (i) and performance tools and methods (i) and productivity (i), (ii) and regulation (i), (ii) and services sector (i), (ii) and strategy (i) and telecom network services (i) market socialism (i) marketing (i) Markowitz, Harry (i) Marris, Robin (i) Mars (company) (i) Mars (planet) (i) Marx, Karl (i), (ii), (iii), (iv), (v), (vi) Communist Manifesto (Marx and Engels) (i), (ii) Mason, Paul (i) mass affluent (i) Mauborgne, Renée (i) Blue Ocean Strategy (Kim and Mauborgne) (i) Means, Gardiner (i) mechanistic cognition (i) medical/healthcare sector and regulation (i), (ii), (iii), (iv) and robotics (i) see also corporate medical research; pharmaceutical sector meetings (i), (ii), (iii) MelaFind (i), (ii) Memphis International Airport, Federal Express (FedEx) hub (i) mercantilism (i), (ii), (iii), (iv), (v) Mercedes-Benz cars, French ban on (i) mergers and acquisitions (M&As) (i), (ii), (iii), (iv) MetLife (i) metrics (i), (ii) “Mexican standoff” metaphor (i) Mexico, North American Free Trade Agreement (i) Michaels, Guy (i) Microsoft (i), (ii), (iii), (iv), (v), (vi) Middle Ages, economy and innovation (i) “middle-aged” capitalism (i), (ii), (iii) Mill, John Stuart (i) Millennials (i) Milne, Alistair (blockchain study) (i) Milwaukee-Matic (i) Minsky, Hyman, “money manager capitalism” (i) MIT Media Lab (i) MIT Technology Review, Graylin on e-wallets (i) mobile banking, in Africa (i) mobile phones/technology (i), (ii), (iii), (iv), (v), (vi) see also Nokia mobile subscription market, and globalization (i) modern portfolio theory (i) Modi, Narendra (i) Mokyr, Joel (i), (ii), (iii)n41 “money manager capitalism” (Hyman Minsky) (i) monopolistic (or oligopolistic) competition (i) monopoly, theory of (John Hicks) (i) Monsanto (i) Mont Pelerin Society (i) Moody’s (i) Moore, Wilbert, The Conduct of the Corporation (i) Morieux, Yves (i) Morrison, William (i) Motorola (i), (ii) Mouchot, Augustin (i) moving-target regulations (i) Mr. Chance (Being There character) (i), (ii) multinational (global) companies characteristics of (i), (ii) and competition (i) and corporate cash savings (i) and dispersed ownership (i) and firm boundaries (i), (ii) and foreign direct investment (FDI) (i), (ii) and global trade (i), (ii) vs. home-market firms (i) and innovation (i) as logistics hubs (i) and market concentration (i), (ii) and market contestability (i) and private standards (i) and productivity (i), (ii) and R&D (i) and regionalization of Asia’s trade growth (i) and regulation (i) reputation of (i) and “slicing up” of value chains (i) and specialization (i), (ii) and supply chains (i) and transaction costs (i) see also big firms; globalization; globalization (overview) Musk, Elon (i), (ii), (iii) mutual funds (i), (ii) nanotechnology (i), (ii), (iii) NASA (i) Nasdaq, and sovereign wealth funds (i) national accounts (recorded data), vs. real value of improvements (i), (ii) National Science Foundation (US) (i) neoconservatism (i) neoliberalism (i) nepotism (i) net lending see corporate net lending Netherlands exports to China (i) taxi services and regulation (i) “new economy” (i) New England Journal of Medicine, medical devices study (i) New Machine Age thesis background: economic realities vs. technological blitz vision (i), (ii), (iii), (iv), (v), (vi), (vii); historical perspective (i) criticism of thesis: cyclical effects on productivity argument (i); jobs and technology issue (i); productivity/income decoupling issue (i), (ii); recorded data vs. real improvements argument (i), (ii); summary (i) and fear of artificial intelligence (i) and planning machine economic philosophy (i) and Robert Gordon on US labor productivity growth (i) see also The Second Machine Age (Brynjolfsson and McAfee) New York City dockers and containerization (i) taxi services and regulation (i), (ii) New York Stock Exchange (i), (ii), (iii), (iv), (v) see also Wall Street New York Times, on Bell’s telephone invention (i) NICs (newly industrialized countries) (i) Nietzsche, Friedrich (i), (ii) nimby (not-in-my-backyard) attitude (i) NM Electronics (Intel) (i), (ii), (iii) Nobel Peace Prize, and Twitter (i) “noise” (at work) (i) Nokia and corporate managerialism (i), (ii), (iii), (iv), (v), (vi) and Foxconn (i) and specialization (i) and tablet market (i) non-entrepreneurial planning (i) North American Free Trade Agreement (i) Norway, sovereign wealth fund (i), (ii), (iii) not-in-my-backyard (nimby) attitude (i) Obama, Barack (i), (ii) obsolescence see knowledge obsolescence occupational licenses (i), (ii), (iii), (iv) OECD (Organisation for Economic Co-operation and Development) on aging firms and innovation (i) on corporate savings (i) on “diffusion machine” and productivity (i) GDP forecasts (i) on intermediaries and shareholders’ income (i) on pension funds and PPRFs (i) on R&D skill deficiencies (i) on regulatory administration costs (i) on sovereign wealth funds (i) on taxi services (i) OECD countries product market regulation (PMR) indicators (i), (ii) R&D spending (i) start-ups (i) total assets by types of institutional investors (2001–13) (i), (ii) “off-license” sectors (i) “offshore” pattern of innovation (i) oligopolistic (or monopolistic) competition (i) Ollila, Jorma (i), (ii) Olson, Mancur (i) “one percent” (wealthiest group) (i) online services and diffusion of innovations (i), (ii) and recorded economic data (i) and regulation (i) see also internet open source technology, and socialism (i) organic cognition (i) Organisation for Economic Co-operation and Development see OECD; OECD countries organization industrial organization (i), (ii) vs. managerialism/technostructure (i) and multinationals (i) and specialization (i) Organization Man (i), (ii) organizational diversification (i), (ii) Osborne, Michael (i) outsourcing (i) ownership see capitalist ownership; institutional owners Palo Alto Research Center (PARC, Xerox) (i) “Panama Papers” story (i) Parisian taxis, and regulation (i) patents, and knowledge obsolescence (i) pay see incomes payment cycles (i) payment technologies (i) pensions and asset management industry (i) and gray capitalism (i), (ii), (iii), (iv) need for reform (i) pension crisis (i) pensioners vs. working-age households incomes (i) and principal–agent debate (i) private pensions (i), (ii) public/state pensions (i), (ii), (iii), (iv), (v); public pension funds and reserve funds (OECD, 2001–13) (i), (ii); public pension return funds (PPRFs) (i) see also retirement Pepsi (i) performance imperatives (i) performance measurements (i) performance tools (i), (ii) permission-based regulatory culture (i), (ii) permissionless innovation (i) pessimism, and capitalist decline (i) Pessoa, João Paolo (i) Pfleiderer, Paul (i) pharmaceutical sector and price regulations (i)n28 R&D investment (i), (ii) and regulation (i), (ii) Phelps, Edmund (i)n41 Mass Flourishing (i), (ii) Piketty, Thomas (i), (ii) PillCam digestive tract sensor (i) Pippi Longstocking (i) planning and corporate managerialism: planning machines (i), (ii), (iii); strategy (i); uncertainty and risk (i) Cybersyn project (i) and failing companies (i) and globalization (i) non-entrepreneurial planning (i) and regulation (i) and “scientific civilization” thinking (i) and spirit of bureaucracy (i) and Swedish economy (i) plastic cards (i) Pliny the Elder, Naturalis Historia (i) Plouffe, David (i) PMR (product market regulation) indicators (i), (ii) policy uncertainty, and investment (i), (ii) political romanticism (i) political world and capitalism as borderless space (i) cronyism , (i), (ii), (iii), (iv) dirigisme (France) (i) government intervention vs. liberalism (i) governments and globalization (i) governments and mobile technology (i) gray-haired voters (i) lobbying (i), (ii), (iii), (iv), (v) and regulation: 1980s–1990s policy changes (i); case of taxi services and Uber (i); political romanticism (i); social regulation (i); trend on the rise (i) and sovereign wealth funds (i), (ii), (iii) see also policy uncertainty; politics politics corporate politics (i), (ii), (iii), (iv) end of and digital age (i) populism (i), (ii), (iii), (iv), (v) see also political world populations aging (i), (ii), (iii) decline (i) populism (i), (ii), (iii), (iv) Porter, Michael (i), (ii) portfolio theory (i) Portugal, lesser dependence on larger enterprises (i) positioning (i), (ii), (iii), (iv) poverty, and globalization (i) PPRFs (public pension return funds) (i) see also pensions precautionary regulations (i), (ii), (iii), (iv) predictability (i), (ii), (iii), (iv), (v), (vi), (vii) see also uncertainty; volatility premature scaling (i), (ii) price index bias (i) Pricewaterhouse Coopers (PwC) on asset management industry (i) on compliance officers in US (i) productivity growth survey (i) on sovereign wealth funds (i) principal–agent problem (i) principal–agent theory (i) prioritizing, and strategy (i) private standards (i) probabilistic decision-making (i), (ii) product market regulation (PMR) indicators (i), (ii) production and computer technology (i) geography of production (i) lean production (i), (ii) and multinationals (i) production costs (i), (ii), (iii) unbundling of: first (i); second (i), (ii), (iii), (iv) see also specialization; supply chains; value chains productivity and containerization (of global trade) (i) and cyclical effects (i) and data economy (i) downward trend (i), (ii) and employment (i) and financial sector growth (i) and foreign operations (i)n46 and globalization (i), (ii), (iii) and ICT intensity (i), (ii) and incomes (decoupling thesis) (i), (ii) key to prosperity (i) low productivity and innovation diffusion problems (i) and market contestability (i), (ii) and multinationals (i), (ii) and regulation (i) and robots (i) total factor productivity (TFP) growth (i), (ii), (iii) and transaction costs (i) UK productivity puzzle (i) professional investment/investors (i), (ii), (iii) see also asset managers professions regulation of (i), (ii) see also occupational licenses profit margins and decoupling (productivity/incomes) thesis (i) and globalization (i), (ii) protectionism (i), (ii), (iii), (iv), (v) public markets and financialization of the economy (i) and mergers and acquisitions (i) public pension return funds (PPRFs) (i) see also pensions public relations campaigns (i), (ii) “put option” (i) PwC see Pricewaterhouse Coopers (PwC) quantitative valuation methods (i) quantum dots (QD) technology (i) R&D (research and development) and corporate net lending (i) and firm boundaries (i), (ii) and multinationals (i) and pharmaceutical products (i), (ii) and policy uncertainty (i) and productivity (i) R&D scoreboards (European Commission) (i), (ii) and regulation (i), (ii), (iii) vs. share buybacks at IBM (i) spending issues (i), (ii), (iii) and sunk costs (i) US R&D investment (i), (ii), (iii) and vertical specialization (i) see also incremental development Rajan, Raghuram (i) rating agencies (i), (ii), (iii) rationalism and globalist worldview (i), (ii) and societal change (i) Reagan, Ronald (i), (ii) real economy, vs. financial economy (i), (ii), (iii), (iv) reallocation of business, and deregulation (i) recorded data (national accounts) vs. real value of improvements (i), (ii) regulation after 1980s–1990s deregulation wave (i), (ii) and bureaucracy brake (Germany) (i) and compliance officers (i) and costs and time lags (i) and decline of capitalism (i), (ii) economic regulation (i), (ii) financial regulations (i), (ii), (iii), (iv) and globalization (i) and gray capitalism (i) and healthcare sector (i), (ii), (iii), (iv) index of regulatory freedom (i), (ii) and industrial policy (i), (ii) and innovation (i), (ii), (iii), (iv), (v), (vi) and labor (i), (ii), (iii), (iv), (v) and lobbying (i) and managerialism (i), (ii) and market contestability (i), (ii) moving-target regulations (i) and multinationals (i) and pensions (i) permission-based regulatory culture (i), (ii) and permissionless innovation (i) and planning (i) and political romanticism (i) and political world (i), (ii) prescriptive vs. proscriptive (i), (ii) private standards (i) and R&D (i), (ii), (iii) and size of companies (i) social regulation (i), (ii) and trade (i), (ii), (iii) see also deregulation; legislation; regulatory complexity/uncertainty regulatory accumulation (i) regulatory bodies (i) regulatory complexity/uncertainty cadmium example (i), (ii) energy sector case (i), (ii) impact on economic growth (i) impact on innovation (i), (ii), (iii), (iv), (v) precautionary regulations (i), (ii), (iii), (iv) regulatory conflicts (i) regulatory/policy uncertainty and investment allocation (i), (ii) rise of regulatory uncertainty (i) see also deregulation; regulation renewable energy see green/renewable energy rent-seeking (i), (ii), (iii) rentier capitalism (i), (ii), (iii), (iv), (v), (vi) rentier formula, resource allocation according to (i) rentiers (i), (ii) reputation management (i) research concept of in corporate world (i), (ii) scientific research (i) see also cancer research; incremental development; R&D Research in Motion (RiM) (i), (ii) retail, and globalization (i) retirement age of (i) savings (i), (ii), (iii), (iv), (v), (vi), (vii) see also pensions Ricardo, David, wine-for-cloth thesis (i) rich people vs. capitalists (i), (ii) high-net-worth individuals (i) mass affluent (i) “one percent” (wealthiest group) (i) risk banks’ proneness to (i) and globalist worldview (i), (ii) and uncertainty (i), (ii) Robertson, Dennis (i) Robinson, James (i) robotics/robots and Asimov/science fiction (i) impact of on society (i) and labor (i), (ii), (iii), (iv), (v); Foxconn example (i) and technology-frustrated generation (i) see also artificial intelligence; automation; driverless vehicles; New Machine Age thesis; technology Rodman, Dennis (i) Rolling Stone (magazine), “Why Isn’t Wall Street in Jail?”


pages: 430 words: 109,064

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown by Simon Johnson, James Kwak

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Andrei Shleifer, Asian financial crisis, asset-backed security, bank run, banking crisis, Bernie Madoff, Bonfire of the Vanities, bonus culture, break the buck, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, Edward Glaeser, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, financial intermediation, financial repression, fixed income, George Akerlof, Gordon Gekko, greed is good, Home mortgage interest deduction, Hyman Minsky, income per capita, information asymmetry, interest rate derivative, interest rate swap, Kenneth Rogoff, laissez-faire capitalism, late fees, light touch regulation, Long Term Capital Management, market bubble, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage tax deduction, Myron Scholes, Paul Samuelson, Ponzi scheme, price stability, profit maximization, race to the bottom, regulatory arbitrage, rent-seeking, Robert Bork, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, Satyajit Das, sovereign wealth fund, The Myth of the Rational Market, too big to fail, transaction costs, value at risk, yield curve

Warren Buffett famously labeled derivatives “financial weapons of mass destruction” in the Berkshire Hathaway 2002 annual report.51 In his 2001 book Fooled by Randomness, Nassim Taleb argued that modern financial technology underestimated the likelihood of extreme events, with potentially catastrophic implications.52 Janet Tavakoli’s 2003 book, Collateralized Debt Obligations and Structured Finance, discussed the potential problems involved in securitization, including the risk of fraud.53 And decades before, Hyman Minsky had pointed out the role of innovation in enabling financiers to increase their profits at the risk of destabilizing the economy.54 They could all be ignored as long as market conditions remained benign. But the Merton-Greenspan “risk unbundling” story was proven horribly wrong by the financial crisis that began in 2007—caused in part by innovative products that made it possible for financial institutions and investors to take on massive amounts of risk hidden inside AAA-rated securities that later plummeted in value.

At the height of the boom, over half of the mortgages made by Lennar, a national housing developer, were interest-only mortgages or optional-payment mortgages whose principal went up each month; in 2006, almost one in three had a piggyback second mortgage.28 Between 1998 and 2005, the number of subprime loans tripled, and the number that were securitized (as measured by First American LoanPerformance) increased by 600 percent.29 In 2005, a consortium of Wall Street banks created standard contracts for credit derivatives based on subprime mortgages, making it even easier to create synthetic subprime CDOs.30 These developments all confirmed the predictions of economist Hyman Minsky, who had warned that “speculative finance” would eventually turn into “Ponzi finance.”31 The end result was a gigantic housing bubble propped up by a mountain of debt—debt that could not be repaid if housing prices started to fall, since many borrowers could not make their payments out of their ordinary income. Before the crisis hit, however, the mortgage lenders and Wall Street banks fed off a giant moneymaking machine in which mortgages were originated by mortgage brokers and passed along an assembly line through lenders, investment banks, and CDOs to investors, with each intermediate entity taking out fees along the way and no one thinking he bore any of the risk.32 GREENSPAN TRIUMPHANT An emerging market oligarchy uses its political power and connections to make money through such means as buying national assets at below-market prices, getting cheap loans from state-controlled banks, or selling products to the government at inflated prices.


pages: 223 words: 10,010

The Cost of Inequality: Why Economic Equality Is Essential for Recovery by Stewart Lansley

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banking crisis, Basel III, Big bang: deregulation of the City of London, Bonfire of the Vanities, borderless world, Branko Milanovic, Bretton Woods, British Empire, business process, call centre, capital controls, collective bargaining, corporate governance, corporate raider, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, deindustrialization, Edward Glaeser, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, Goldman Sachs: Vampire Squid, high net worth, hiring and firing, Hyman Minsky, income inequality, James Dyson, Jeff Bezos, job automation, John Meriwether, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, laissez-faire capitalism, light touch regulation, Long Term Capital Management, low skilled workers, manufacturing employment, market bubble, Martin Wolf, mittelstand, mobile money, Mont Pelerin Society, Myron Scholes, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, Plutocrats, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, The Great Moderation, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, Tyler Cowen: Great Stagnation, Washington Consensus, Winter of Discontent, working-age population

224 The slowing of growth and productivity since 1980 amongst the world’s leading economies has also been a central factor in the onset of domestic and global instability. The downturn of 2008-2009 was merely the most acute of a series of global crises. For the generation after the Second World War, active intervention to moderate the business cycle was largely successful. As the American economist Hyman Minsky observed in 1982, ‘The most significant economic event of the era since World War II is something that has not happened: there has not been a deep and long-lasting depression’.225 Despite claims that the injection of market forces would reduce the capitalist tendency towards instability, the world became a more turbulent place in the next three decades than in the immediate post-war period. The IMF has generally been reluctant to use the word recession, but when forced, its chief economists have defined a ‘global recession’ informally as a year with less than 3 per cent growth.

‘The search for yield and acceptance of higher risk was in part driven by banks’ compensation packages for their staff that in effect rewarded undue risk taking.’388 Simon Johnson, former chief economist at the IMF and now at MIT, put it a little more bluntly. The chiefs were more ‘knaves than fools’.389 Two decades earlier, long before the tsunami of new financial instruments, the American economist, Hyman Minsky—who died in 1996—had warned that deregulated financial markets would intensify the tendency of market economies to speculation and instability. Minsky was a post-Keynesian economist and critic of the free-market school who developed what he called the ‘financial instability hypothesis’ that integrated the role of finance into the Keynesian framework. In Stabilizing an Unstable Economy, published in 1986, he argued that Wall Street and other financial centres would generate destabilizing forces, making the behaviour of the economy incoherent and subjecting economies to serious threats of financial and economic instability.


pages: 382 words: 92,138

The Entrepreneurial State: Debunking Public vs. Private Sector Myths by Mariana Mazzucato

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Apple II, banking crisis, barriers to entry, Bretton Woods, California gold rush, call centre, carbon footprint, Carmen Reinhart, cleantech, computer age, creative destruction, credit crunch, David Ricardo: comparative advantage, demand response, deskilling, endogenous growth, energy security, energy transition, eurozone crisis, everywhere but in the productivity statistics, Financial Instability Hypothesis, full employment, G4S, Growth in a Time of Debt, Hyman Minsky, incomplete markets, information retrieval, intangible asset, invisible hand, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, natural language processing, new economy, offshore financial centre, Philip Mirowski, popular electronics, profit maximization, Ralph Nader, renewable energy credits, rent-seeking, ride hailing / ride sharing, risk tolerance, shareholder value, Silicon Valley, Silicon Valley ideology, smart grid, Steve Jobs, Steve Wozniak, The Wealth of Nations by Adam Smith, Tim Cook: Apple, too big to fail, total factor productivity, trickle-down economics, Washington Consensus, William Shockley: the traitorous eight

A grant from the Ford Foundation’s Reforming Global Finance initiative, led by Leonardo Burlamaqui, was not only helpful but useful due to Leonardo’s own work on understanding ways in which ‘knowledge governance’ can ‘shape’ markets. It was indeed Leonardo’s work with Ford that inspired the first meetings and work that led to another research project, funded by the Institute for New Economic Thinking (INET), in which Randy Wray and I are today banging heads: a project on how to bring together the thinking of Joseph Schumpeter on innovation and Hyman Minsky on finance, to understand the degree to which finance can be turned into a vehicle for creative destruction rather than its current obsession with Ponzi-like destructive creation. Amongst other friends and colleagues who have provided inspiration through interaction and feedback, I want to mention Fred Block, Michael Jacobs, Paul Nightingale and Andy Stirling, the latter two from SPRU, my new academic home.

However, the point of this book is to highlight how the State has, even in the boom periods such as the 1990s, provided important directionality in its spending, increasing the animal spirits of the private sector by investing in areas that the private sector fears. 3 Indeed, the application of Keynesian analysis to the theory of economic crises, with a proper understanding of finance in this dynamic, was developed by Hyman Minsky. Minsky (1992) focused on the financial fragility of capitalism by highlighting the way that financial markets cause crises to occur. Financial bubbles followed cycles of credit expansion, and exaggerated growth expectations were followed by retraction, causing bubbles to burst and asset prices to collapse. Like Keynes, he believed that the State had a crucial role in preventing this vicious cycle and stabilizing growth. 4 The emphasis on heterogeneity and multiple equilibria requires this branch of theory to rely less on assumptions of representative agents (the average company) and unique equilibria, so dear to neoclassical economics.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, Kenneth Rogoff, labour market flexibility, light touch regulation, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

Again, the more prices are rising, the easier it is to speculate (which is what buying with borrowed money involves). Law’s system, described in Chapter 1, fits the template perfectly. He printed bank notes and lent money so investors could buy shares in the Mississippi Company. While the share price was rising, the system worked perfectly; bank notes and shares were both perceived to have value. But when investors lost confidence, prices fell as quickly as they rose. THE MINSKY EFFECT Hyman Minsky, an American economist who died in 1996, thought these debt-fuelled spirals were inherent to financial markets. During the early stages of the boom, a typical borrower is a ‘hedge borrower’: he is able to meet both interest and capital repayments on the loan from his income. In the second stage, there are ‘speculative’ borrowers who can meet the interest on the loan but will be unable to repay the capital.

Second, because in that event the authorities would have to step in anyway to save a bank and others suffering a similar plight. Another issue was that the figures in the VAR models also tended to be heavily influenced by recent observations. So a long period of low volatility tended to reduce the potential loss generated by the model, thereby persuading banks to take more risk (just as Hyman Minsky predicted). As Taleb points out, this creates a very dangerous mindset. His ‘black swan’ example dates back to the philosopher David Hume; just because you see a thousand white swans does not mean there cannot be a black swan (as there are in Australia). But another example of his reasoning is even more illuminating. Turkeys are fed by the farmer for 364 days, and must presume the farmer to be a benign caregiver; they have no way of anticipating that, on the 365th day, the same farmer will slaughter them for our Thanksgiving or Christmas meal.


pages: 370 words: 102,823

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

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3D printing, balance sheet recession, banking crisis, basic income, Bernie Sanders, Bretton Woods, business climate, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, transaction costs, trickle-down economics, universal basic income, very high income

This idea lies at the heart of the ‘classical dichotomy’ in macroeconomics, where monetary variables are seen as independent of real variables. In the orthodox view an excess growth of this exogenously determined money supply relative to the growth in real output causes a rise in the general price level; for this reason, controlling the money supply is central to the control of inflation. Endogenous money and modern money theory But this view of money does not actually accord with the facts. As Hyman Minsky pointed out, money is not created simply by the central authorities.8 It is effectively created whenever commercial banks lend money, since such lending increases the purchasing power of those who borrow. It is therefore the demand for loans by businesses and households in the economy which determines the money supply. Money, in other words, is endogenous to the real economy, and is not independent of the production of goods and services at all.

Schumpeter, who put innovation at the centre of his understanding of capitalism, called the banker the ‘ephor’ of the exchange economy (a Latin term for the magistrates that supervised the Spartan kings) because he recognised that innovation must be financed.56 And he thought that it was the banks that had to bring such finance into the ‘circular flow’ of existing capital. What he did not foresee, however, was that in reality the banking system—indeed the entire private financial system—would find ways to make money simply from speculation rather than from financing the productive economy. That is, finance is financing itself—banks financing mortgage backed securities, which use credit default swaps, for example—rather than what Hyman Minsky called the ‘capital development’ of the economy.57 The speculative and short-term character of the financial system means that the banker is now more the problem than the solution Schumpeter assumed.58 Even when finance does pay attention to the real economy, the relationship is not always beneficial. This is because finance is not neutral: the kind of finance received by companies may affect their future investment patterns.59 For example, venture capital (VC) was initially created to allow innovative companies to receive finance in their early-stage, high-risk phases.


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Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth

3D printing, Asian financial crisis, bank run, basic income, battle of ideas, Berlin Wall, bitcoin, blockchain, Branko Milanovic, Bretton Woods, Buckminster Fuller, call centre, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, choice architecture, clean water, cognitive bias, collapse of Lehman Brothers, complexity theory, creative destruction, crowdsourcing, cryptocurrency, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, dematerialisation, Douglas Engelbart, Douglas Engelbart, en.wikipedia.org, energy transition, Erik Brynjolfsson, ethereum blockchain, Eugene Fama: efficient market hypothesis, experimental economics, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, Financial Instability Hypothesis, full employment, global supply chain, global village, Henri Poincaré, hiring and firing, Howard Zinn, Hyman Minsky, income inequality, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, land reform, land value tax, Landlord’s Game, loss aversion, low skilled workers, M-Pesa, Mahatma Gandhi, market fundamentalism, Martin Wolf, means of production, megacity, mobile money, Mont Pelerin Society, Myron Scholes, neoliberal agenda, Network effects, Occupy movement, off grid, offshore financial centre, oil shale / tar sands, out of africa, Paul Samuelson, peer-to-peer, planetary scale, price mechanism, quantitative easing, randomized controlled trial, Richard Thaler, Ronald Reagan, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Simon Kuznets, smart cities, smart meter, South Sea Bubble, statistical model, Steve Ballmer, The Chicago School, The Great Moderation, the map is not the territory, the market place, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, Torches of Freedom, trickle-down economics, ultimatum game, universal basic income, Upton Sinclair, Vilfredo Pareto, wikimedia commons

Thanks to financial deregulation, said US Federal Reserve Chair Alan Greenspan in 2004, ‘not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.’45 Four years later, the financial crash disproved that claim in a fairly decisive way. At the same time, Eugene Fama’s efficient-market hypothesis – that financial markets are inherently efficient – lost credibility and has been countered by Hyman Minsky’s financial-instability hypothesis – that financial markets are inherently volatile – as we will see in Chapter 4. Lastly, far from playing a supporting role to the productive economy, finance has come to dominate it. In many countries, a small financial elite – based in just a handful of banking and financial firms – controls the public good of money creation and profits handsomely from it, while too often destabilising much of the wider economy in the process.

Good luck.’25 Thanks to the dominance of equilibrium thinking, most economic policymakers eschewed the idea that instability could arise from the dynamics at play within the economy itself. In the decade running up to the crash, and oblivious to the build-up of systemic risk, the UK’s chancellor, Gordon Brown, hailed the end of boom and bust,26 while Ben Bernanke, Governor of the Federal Reserve Board welcomed what he called ‘the Great Moderation’.27 After 2008, when the boom went very bust, many started to search for insights in the long-ignored work of the economist Hyman Minsky, especially his 1975 financial-instability hypothesis, which put dynamic analysis at the heart of macroeconomics. Minsky had realised that – counter-intuitive though it sounds – when it comes to finance, stability breeds instability. Why? Because of reinforcing feedback loops, of course. During good economic times, banks, firms and borrowers all gain in confidence and start to take on greater risks, which pushes up the price of housing and other assets.


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The Social Life of Money by Nigel Dodd

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accounting loophole / creative accounting, bank run, banking crisis, banks create money, Bernie Madoff, bitcoin, blockchain, borderless world, Bretton Woods, BRICs, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, commoditize, computer age, conceptual framework, credit crunch, cross-subsidies, David Graeber, debt deflation, dematerialisation, disintermediation, eurozone crisis, fiat currency, financial exclusion, financial innovation, Financial Instability Hypothesis, financial repression, floating exchange rates, Fractional reserve banking, German hyperinflation, Goldman Sachs: Vampire Squid, Hyman Minsky, illegal immigration, informal economy, interest rate swap, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, Kula ring, laissez-faire capitalism, land reform, late capitalism, liberal capitalism, liquidity trap, litecoin, London Interbank Offered Rate, M-Pesa, Marshall McLuhan, means of production, mental accounting, microcredit, mobile money, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, negative equity, new economy, Nixon shock, Occupy movement, offshore financial centre, paradox of thrift, payday loans, Peace of Westphalia, peer-to-peer, peer-to-peer lending, Ponzi scheme, post scarcity, postnationalism / post nation state, predatory finance, price mechanism, price stability, quantitative easing, quantitative trading / quantitative finance, remote working, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Satoshi Nakamoto, Scientific racism, seigniorage, Skype, Slavoj Žižek, South Sea Bubble, sovereign wealth fund, special drawing rights, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, Veblen good, Wave and Pay, Westphalian system, WikiLeaks, Wolfgang Streeck, yield curve, zero-coupon bond

Although the gap has closed since then, with the 2011 figures at around $15 trillion and $14 trillion, respectively, there are still substantial institutional “cash pools” outside the banking system (Pozsar, Adrian, et al. 2012). Whereas the traditional image of a bank is as a crucial intermediary between lenders and borrowers, banks today operate not simply as issuers of debt but also as repositories of risk. To grasp the significance of this difference for money, I want to turn to the arguments of Hyman Minsky and Susan Strange. MINSKY’S HALF-CENTURY Hyman Minsky was a doctoral student of Joseph Schumpeter and Wassily Leontief at Harvard during the 1940s. Whereas Schumpeter had drawn attention to banks’ importance in the business cycle, Minsky’s main focus was on the effect of financial markets on the wider economy (Minsky 1993a, 1993b). During the 1970s, Minsky developed the financial instability hypothesis, in which he argued that speculative bubbles and spells of financial market instability are part of the normal life cycle of the economy (Minsky 1992).

When reading through these steps, it is not difficult to see how one could imagine Marx saying, “I told you so.” In the 2007–8 crisis, we saw a sudden credit depreciation trigger a flight from risk, whereby investors sought to offload financial instruments in a rush for the safe haven of money, or at the very least, the higher rated sovereign bonds, such as U.S. Treasury bills. Foreshadowing Hyman Minsky’s theory of Ponzi finance (see Chapter 3), Marx portrays the monetary and credit system as a pyramid with the riskiest and most speculative instruments (fictitious capital) at the top, credit money in the middle, and “real” money (or hard cash) at the bottom. The crucial point is that this hierarchy grows more top heavy with each credit inflation, as increasingly confident (and reckless) financial capitalists lend money purely though speculation, not as capital for production.


pages: 484 words: 136,735

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

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bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Black Swan, bonus culture, Bretton Woods, BRICs, Carmen Reinhart, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, Edward Glaeser, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, George Akerlof, global rebalancing, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, Long Term Capital Management, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

Thus, although the upswing of the cycle is ultimately self-correcting, the decline may not be. At this point, government spending and borrowing, plus direct action to push credit into the economy, may be needed to prevent a prolonged slump. This was essentially what the G20 governments concluded in April 2009 when they took various measures to boost economic growth and try to force their banks to expand credit. Cycles Driven by Investor Psychology and Uncertainty Hyman Minsky, a great American economist based at Washington University in St. Louis, argued in the 1960s that long periods of economic stability would lead to conditions of financial overconfidence that would, in turn, promote leverage and exaggerate risk-taking and increase debt burdens throughout society. Minsky’s theories were ignored by the academic establishment from the 1980s onward but came back into prominence during the 2007 crisis and received widespread attention not only in the media but also in central banks and finance ministries around the world.

Morgan Kahn, Richard Kahneman, Daniel Kaldor, Nicholas Kalecki, Michal Keynes/Keynesian economics “animal spirits,” biography of Keynes boom-bust cycles explanation Capitalism and Golden Age ideas/policies mathematics and See also Economics eras/second; Macroeconomics Khrushchev, Nikita King, Mervyn Knight, Frank Krugman, Paul Kuhn, Thomas Labor unions stagflation and unemployment and Lagarde, Christine Laissez-faire philosophy Lehman Brothers capitalism transition and saving scenario/effects Lehman Brothers collapse chain reaction from confidence collapse and effects GSE seizure and share price plunge Limits to growth/physical resources Lloyds Lockhart, James MacDonald, Ramsay Macroeconomics economics eras/second new classical school and recovery from financial crisis See also Capitalism 4.0/economic policy; Keynes/Keynesian economics Mad Max (movie) Mad Max Paradox Mahbubani, Kishore Mandela, Nelson Mandelbrot, Benoit Mark-to-market accounting/effects Market fundamentalism description economic recovery and failed states and financial crisis of 2007-09 and flaws/dangers of imaginary world of oil prices/shock (2008) and progressive taxation and term See also Economics eras/third; Monetarism; specific individuals; Thatcher-Reagan revolution Marris, Robin Marx, Karl on capitalism social problems and Masters, Michael Mathematics in economics normal distribution use oversimplification and “science” and McCarthy, Joe Meade, James Medicare/Medicaid, U.S. Megatrends overview summary Mellon, Andrew Merkel, Angela Merrill Lynch Mexican government bankruptcy Micawber, Mr./Principle Microeconomics Mill, John Stuart Minsky, Hyman Minsky Moment (Mis)behavior of Markets (Mandelbrot) Mises, Ludwig von Mississippi Company, Paris Mixed economy adaptability and energy policy example of future government-market relationship Monetarism demand management and description end of government role/inflation and outside U.S. See also Market fundamentalism; specific individuals; Thatcher-Reagan revolution Morgan, J.P. Morgan Stanley Morris, Charles Mortgage market reform Mudd, Daniel Myths burdening grandchildren national bankruptcy Naisbitt, John National Association of Realtors’ monthly index of home resale prices New Asian Hemisphere, The (Mahbubani) New Deal New Normal New Paradigm for Financial Markets, The (Soros) Newton, Sir Isaac Nixon, Richard Northern Rock collapse/response, Britain Obama, Barack/administration Capitalism 4.0 and critics of economic policies economic recovery and fiscal stimulus plan health care reform and hope and See also Economic recovery/2009 government response OECD (Organisation for Economic Co-operation and Development) Oil use/industry dependence on oil and environment and government role in reduction oil shock (2008) OPEC reduction taxes and theory of peak oil true costs/benefits and unearned rent and See also Energy issues Opinions/polls O’Rourke, P.


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The Ascent of Money: A Financial History of the World by Niall Ferguson

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Admiral Zheng, Andrei Shleifer, Asian financial crisis, asset allocation, asset-backed security, Atahualpa, bank run, banking crisis, banks create money, Black Swan, Black-Scholes formula, Bonfire of the Vanities, Bretton Woods, BRICs, British Empire, capital asset pricing model, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collateralized debt obligation, colonial exploitation, commoditize, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, deglobalization, diversification, diversified portfolio, double entry bookkeeping, Edmond Halley, Edward Glaeser, Edward Lloyd's coffeehouse, financial innovation, financial intermediation, fixed income, floating exchange rates, Fractional reserve banking, Francisco Pizarro, full employment, German hyperinflation, Hernando de Soto, high net worth, hindsight bias, Home mortgage interest deduction, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Isaac Newton, iterative process, John Meriwether, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour mobility, Landlord’s Game, liberal capitalism, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, means of production, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, Naomi Klein, negative equity, Nick Leeson, Northern Rock, Parag Khanna, pension reform, price anchoring, price stability, principal–agent problem, probability theory / Blaise Pascal / Pierre de Fermat, profit motive, quantitative hedge fund, RAND corporation, random walk, rent control, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, seigniorage, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, spice trade, structural adjustment programs, technology bubble, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Bayes, Thomas Malthus, Thorstein Veblen, too big to fail, transaction costs, value at risk, Washington Consensus, Yom Kippur War

More recently, it has been argued that the inter-war gold standard itself was the problem, in that it transmitted crises (like the 1931 European bank and currency crises) around the world.92 A second lesson of history would therefore seem to be that the benefits of a stable exchange rate are not so great as to exceed the costs of domestic deflation. Anyone who today doubts that there are lessons to be learned from history needs do no more than compare the academic writings and recent actions of the current chairman of the Federal Reserve System.93 A Tale of Fat Tails Sometimes the most important historical events are the non-events: the things that did not occur. The economist Hyman Minsky put it well when he observed: ‘The most significant economic event of the era since World War II is something that has not happened: there has not been a deep and long-lasting depression’.94 This is indeed surprising, since the world has not been short of ‘Black Days’. If movements in stock market indices were statistically distributed like human heights there would hardly be any such days.

Lamoreaux, and Jean-Laurent Rosenthal, ‘Putting the Corporation in its Place’, NBER Working Paper 13109 (May 2007). 2 See especially Robert J. Shiller, Irrational Exuberance (2nd edn., Princeton, 2005). 3 See Charles P. Kindleberger, Manias, Panics and Crashes: A History of Financial Crises (3rd edn., New York / Chichester / Brisbane / Toronto / Singapore, 1996), pp. 12-16. Kindleberger owed a debt to the pioneering work of Hyman Minsky. For two of his key essays, see Hyman P. Minsky, ‘Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions’, American Economic Review, 54, 3 (May 1964), pp. 324-35; idem, ‘Financial Instability Revisited: The Economics of Disaster’, in idem (ed.), Inflation, Recession and Economic Policy (Brighton, 1982), pp. 117-61. 4 Kindleberger, Manias, p. 14. 5 ‘The Death of Equities’, Business Week, 13 August 1979. 6 ‘Dow 36,000’, Business Week, 27 September 1999. 7 William N.


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Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, liberal capitalism, light touch regulation, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, Mikhail Gorbachev, millennium bug, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, working poor, zero-sum game, éminence grise

At the hearings that looked into Born’s proposals, she warned that LTCM’s demise should serve as a warning to the rest of the financial services sector, but there were still no takers. Ex-President Bill Clinton now regrets succumbing to the lobbying, and President Barack Obama has proposed and secured a version of the central clearing exchange for derivative trading that the previous Democratic administration stifled at birth in 1999 – but still the bankers are resisting, creating loopholes and exemptions. American economist Hyman Minsky, sadly not alive to witness what he predicted about the banking collapse, argued that, as booms progress, bankers naturally become less risk averse and borrowers become more reckless.19 He even devised terms to describe the various stages in the process: financing moves from ‘hedged’ (anticipated revenues exactly repay debt) to ‘speculative’ (revenues fall short, so refinancing is a certainty) to ‘Ponzi’ (revenues are inadequate and any loan will be repaid only if there are capital gains).

The evidence and literature are reviewed in Martin Wolf (2008) Fixing Global Finance, Johns Hopkins University Press. 17 Claudio Borio and William White (2003) ‘Whither Monetary and Financial Stability? The Implications of Evolving Policy Regimes’, paper presented at a symposium sponsored by the Federal Reserve Bank of Kansas City. 18 Manuel Roig-Franzia, ‘Credit Crisis Cassandra’, Washington Post, 26 May 2009, at http://www.washingtonpost.com/wp-dyn/content/article/2009/05/25/AR2009052502108.html. 19 Hyman Minsky (2008) Stabilizing an Unstable Economy, McGraw-Hill Professional. See also George Cooper (2008) The Origin of Financial Crises: Central Banks, Credit Bubbles and the Efficient Market Fallacy, Harriman House. 20 Charles Kindleberger (2005) Manias, Panics, and Crashes: A History of Financial Crises, Wiley Investment Classics, p. 19. 21 Vernon Smith, Gerry Suchanek and Arlington Williams (1988) ‘Bubbles, Crashes, and Endogenous Expectations in Experimental Spot Asset Markets’, Econometrica 56: 1119–51. 22 William White (2009) ‘Should Monetary Policy Be “Lean or Clean”?’


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After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, break the buck, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra

Some goes to economists who believed and extolled the efficient markets hypothesis—and taught it to their students, many of whom wound up as financial engineers on Wall Street. Another part almost certainly came from people’s collective tendency to forget the past. When times are good, asset values are rising, and loan defaults are rare, it is all too easy to forget one of the laws of financial gravity: What goes up too fast usually comes crashing down. The late Hyman Minsky, an important but neglected economist, emphasized the forgetfulness factor in his theory of recurrent financial crises. In recent years, many Wall Streeters have taken to calling the 2007–2009 crisis a “Minsky moment.”* It was quite a moment. Too bad traders didn’t remember their Minsky before the debacle. Too bad regulators didn’t, either. THE EFFICIENT MARKETS HYPOTHESIS The adjective “efficient” in “efficient markets” refers to how investors use information.

Let me instead try to encapsulate the major financial lessons from the crisis into ten commandments for the future of finance. 1. Thou Shalt Remember That People Forget Looking back, Tim Geithner attributed the crisis, in part, to collective amnesia: “There was no memory of extreme crisis, no memory of what can happen when a nation allows huge amounts of risk to build up.” Evidence of forgetting is all around us: in markets, in Congress, and in our nation’s vaunted financial institutions. Hyman Minsky, the renegade economist who argued against market efficiency, taught us, or rather should have taught us, that it is normal for speculative markets to go to extremes. That’s what they do. One key reason, according to Minsky, is that, unlike elephants, people forget. When the good times roll, investors expect them to roll indefinitely. But they don’t. And when bubbles burst, investors are always surprised.


pages: 461 words: 128,421

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox

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activist fund / activist shareholder / activist investor, Albert Einstein, Andrei Shleifer, asset allocation, asset-backed security, bank run, beat the dealer, Benoit Mandelbrot, Black-Scholes formula, Bretton Woods, Brownian motion, capital asset pricing model, card file, Cass Sunstein, collateralized debt obligation, complexity theory, corporate governance, corporate raider, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, discovery of the americas, diversification, diversified portfolio, Edward Glaeser, Edward Thorp, endowment effect, Eugene Fama: efficient market hypothesis, experimental economics, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, George Akerlof, Henri Poincaré, Hyman Minsky, implied volatility, impulse control, index arbitrage, index card, index fund, information asymmetry, invisible hand, Isaac Newton, John Meriwether, John Nash: game theory, John von Neumann, joint-stock company, Joseph Schumpeter, Kenneth Arrow, libertarian paternalism, linear programming, Long Term Capital Management, Louis Bachelier, mandelbrot fractal, market bubble, market design, Myron Scholes, New Journalism, Nikolai Kondratiev, Paul Lévy, Paul Samuelson, pension reform, performance metric, Ponzi scheme, prediction markets, pushing on a string, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Richard Thaler, risk/return, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, shareholder value, Sharpe ratio, short selling, side project, Silicon Valley, South Sea Bubble, statistical model, The Chicago School, The Myth of the Rational Market, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, Thorstein Veblen, Tobin tax, transaction costs, tulip mania, value at risk, Vanguard fund, Vilfredo Pareto, volatility smile, Yogi Berra

It is apparent, though, that something important is lost when Mills’s observation about fluctuating attitudes toward risk is removed from the analysis of the market. Keynes tried to incorporate it with talk of “animal spirits” that affected economic activity, but the Keynesian economics that arose in his wake busied itself with more mechanistic, less psychological explanations for downturns. Starting in the 1960s, economist Hyman Minsky began a long, lonely effort to bring the animal-spirits side of Keynesianism back into focus. Minsky was a product of Chicago (undergrad) and Harvard (doctorate), and taught at respectable places like UC–Berkeley and Washington University in St. Louis. But he operated far out of the mainstream. A few Wall Street thinkers were fascinated by his theories, but most academic economists ignored him.7 The most important theme of Minsky’s work was similar to that of John Mills: Stability breeds instability.

In a dismissive nod to Shiller, they admonished those who argued that “high price growth” was “evidence per se that housing is overvalued.”11 It was true that Shiller’s price history didn’t prove anything, but his data did seem to indicate that using recent data to judge risk—because it’s the best, most reliable data available—could be misleading. And it put Shiller yet again in the Roger Babson–like position of arguing that what goes up must come down—which it did. AS CREDIT MARKETS BEGAN TO unravel in the latter half of 2007, the once-obscure Hyman Minsky—who had died in 1996—suddenly became a star. He was cited incessantly by Wall Street strategists. His books returned to print. Mainstream economists began to acknowledge that there might be something to his ideas.12 Even before then, in one of his valedictory speeches as Fed chairman in August 2005, Alan Greenspan struck a distinctly Minskyan tone: [The] vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

They recommended ending the system of ‘fractional reserve banking’, under which banks create deposits to finance risky lending and so have insufficient safe cash reserves to back their deposits.12 The elimination of fractional reserve banking was a proposal put forward in 1933 as the ‘Chicago Plan’.13 The proponents of the plan included the brilliant American monetary theorist Irving Fisher and a distinguished group of economists at Chicago such as Frank Knight, Henry Simons and Paul Douglas; later support came from right across the spectrum of post-war economists, ranging from Milton Friedman to James Tobin and Hyman Minsky.14 Interestingly, John Maynard Keynes was not part of this group, largely because Britain did not experience a banking crisis in the 1930s and his focus was on restoring output and employment.15 More recently, a number of economists have proposed variations on the same theme: John Cochrane from Chicago, Jaromir Benes and Michael Kumhof from the IMF, the British economists Andrew Jackson, Ben Dyson and John Kay, Laurence Kotlikoff from Boston and the distinguished FT commentator Martin Wolf.16 There are two ways of looking at these radical approaches to banking reform, one by focusing on the banks’ assets and the other on their liabilities.

They represent not the random shocks of the forecasters’ models but the realisation of radical uncertainty.15 The intellectual framework of the neoclassical model, as implemented empirically in New Keynesian models, appeared the best on offer, but it was inadequate to explain the build-up of a disequilibrium that resulted in the crisis.16 To sum up, neither Keynesian nor neoclassical theories provide an adequate explanation of booms and depressions. After the recent crisis there was a resurgence of interest in theories that purported to explain the transition from periods of boom to periods of slump. Foremost among these was the theory of Hyman Minsky, an American economist who tried to reinterpret Keynes, that market economies inevitably exhibit financial instability.17 Long periods of stability would, he argued, create excessive confidence in the future, leading to the underpricing of risk and overpricing of assets, a boom in spending and activity, and excessive accumulation of debt, ending in a financial crash which, because of high debt burdens, would lead to a deep recession.


pages: 142 words: 45,733

Utopia or Bust: A Guide to the Present Crisis by Benjamin Kunkel

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anti-communist, Bretton Woods, capital controls, Carmen Reinhart, creative destruction, David Graeber, declining real wages, full employment, Hyman Minsky, income inequality, late capitalism, liberal capitalism, liquidity trap, means of production, money: store of value / unit of account / medium of exchange, mortgage debt, Occupy movement, peak oil, price stability, profit motive, savings glut, Slavoj Žižek, The Wealth of Nations by Adam Smith, transatlantic slave trade, War on Poverty, We are the 99%, women in the workforce, Works Progress Administration, zero-sum game

John Maynard Keynes’s classic General Theory of Employment, Interest and Money (1936) offers not just a diagnosis of capitalist crisis—“The outstanding faults of the economic society in which we live are its failure to provide for full employment and its arbitrary and inequitable distribution of wealth and incomes”—but a partial remedy for it. One Keynesian medicine is “a substantial socialization of investment.” The General Theory is also a masterpiece of tone, by turns sarcastic, sweetly reasonable, wistful, haughty, and impassioned: proof, in all, that economists needn’t write deadly prose. The works of Keynes’s follower Hyman Minsky, particularly John Maynard Keynes (1975) and Stabilizing an Unstable Economy (1986), can’t be recommended on their literary merits but do suggest, in their advocacy of large-scale public investment, how Keynesian and socialist responses to the present crisis might converge. Keynesianism, however, possesses no explanation for the reluctance of governments to adopt economic policies favoring the common good—which is after all not the object of capitalist societies.


pages: 278 words: 82,069

Meltdown: How Greed and Corruption Shattered Our Financial System and How We Can Recover by Katrina Vanden Heuvel, William Greider

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Asian financial crisis, banking crisis, Bretton Woods, capital controls, carried interest, central bank independence, centre right, collateralized debt obligation, conceptual framework, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, declining real wages, deindustrialization, Exxon Valdez, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, floating exchange rates, full employment, housing crisis, Howard Zinn, Hyman Minsky, income inequality, information asymmetry, John Meriwether, kremlinology, Long Term Capital Management, margin call, market bubble, market fundamentalism, McMansion, money market fund, mortgage debt, Naomi Klein, new economy, offshore financial centre, payday loans, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, pushing on a string, race to the bottom, Ralph Nader, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, sovereign wealth fund, structural adjustment programs, The Great Moderation, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, wage slave, Washington Consensus, women in the workforce, working poor, Y2K

Neither Mildred nor the captains of industry and the masters of the financial universe are spending, let alone lending. If this freeze continues there is no avoiding it—Great Depression II will begin to resemble Great Depression I, when one-third of a nation was out of work and on the dole. We’re All Minskyites Now R O B E R T P O L L I N November 17, 2008 As the most severe financial crisis since the 1930s Depression has unfolded over the past eighteen months, the ideas of the late economist Hyman Minsky have suddenly come into fashion. In the summer of 2007, the Wall Street Journal ran a front-page article describing the emerging crisis as the financial market’s “Minsky moment.” His ideas have since been featured in the Financial Times, BusinessWeek and the New Yorker, among many other outlets. Minsky, who spent most of his academic career at Washington University in St. Louis and remained professionally active until his death in 1996, deserves the recognition.


pages: 322 words: 77,341

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

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asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black-Scholes formula, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, George Akerlof, greed is good, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, South Sea Bubble, statistical model, The Great Moderation, the payments system, too big to fail, tulip mania, value at risk

The stock market had undergone a spectacular bubble in Internet and new-economy stocks. Some of what was happening seemed to belong to a classic hysteria equal to that of the great historical bubbles such as the Dutch tulip mania, the South Sea bubble, or the nineteenth-century bubble in railway stocks. The broad rules of these bubbles and implosions are well known. They were first systematized by the economist Hyman Minsky, and their best-known popular formulation is in the classic text by Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises. The basic pattern of these manias is that a real phenomenon comes along (overseas exploration, railways, the Internet), is latched onto by investors, is blown out of all proportion, and continues surging upward anyway, so more investors pile in on the basis of what’s now called “greater fool theory.”


pages: 330 words: 77,729

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

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Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, means of production, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies, Vilfredo Pareto, zero-sum game

Keynes applauded "all sorts of policies for increasing the propensity to consume," including confiscatory inheritance taxes and the redistribution of wealth in favor of lower-income groups, who consume a higher percentage of their income than the wealthy (1973a [1936], 325). Canadian economist Lorie Tarshis, the first to write a Keynesian textbook, warned that a high rate of saving is "one of the main sources of our difficulty," and one of the goals of the federal government should be "reducing incentives to thrift" (Tarshis 1947, 521-12). Keynesian economist Hyman Minsky confirmed this unorthodox approach when he said, "The policy emphasis should shift from the encouragement of growth through investment to the achievement of full employment through consumption production" (Minsky 1982,113). Of course, all of this Keynesian theory goes counter to traditional classical growth theory that a high level of saving is a key ingredient to economic growth. Is Keynesianism Politically Neutral?


pages: 280 words: 79,029

Smart Money: How High-Stakes Financial Innovation Is Reshaping Our WorldÑFor the Better by Andrew Palmer

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Affordable Care Act / Obamacare, algorithmic trading, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Black-Scholes formula, bonus culture, break the buck, Bretton Woods, call centre, Carmen Reinhart, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, computerized trading, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, David Graeber, diversification, diversified portfolio, Edmond Halley, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, eurozone crisis, family office, financial deregulation, financial innovation, fixed income, Flash crash, Google Glasses, Gordon Gekko, high net worth, housing crisis, Hyman Minsky, implied volatility, income inequality, index fund, information asymmetry, Innovator's Dilemma, interest rate swap, Kenneth Rogoff, Kickstarter, late fees, London Interbank Offered Rate, Long Term Capital Management, loss aversion, margin call, Mark Zuckerberg, McMansion, money market fund, mortgage debt, mortgage tax deduction, Myron Scholes, negative equity, Network effects, Northern Rock, obamacare, payday loans, peer-to-peer lending, Peter Thiel, principal–agent problem, profit maximization, quantitative trading / quantitative finance, railway mania, randomized controlled trial, Richard Feynman, Richard Feynman, Richard Thaler, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, short selling, Silicon Valley, Silicon Valley startup, Skype, South Sea Bubble, sovereign wealth fund, statistical model, transaction costs, Tunguska event, unbanked and underbanked, underbanked, Vanguard fund, web application

One of the most thought-provoking academic papers to come out of the 2007–2008 financial crisis is a study by Nicola Gennaioli of Pompeu Fabra University, Andrei Shleifer of Harvard University, and Robert Vishny of the University of Chicago, called “Neglected Risks, Financial Innovation and Financial Fragility.” It suffers the usual curses of the economic paper: a crushingly formulaic structure and an enormous amount of algebra. In its very broad outlines, it describes a process of financial euphoria leading to fragility and then crisis that is familiar from the works of economists like Hyman Minsky. Minsky was an American economist who described a process of growing confidence that leads people to take on more and more debt, until the only way it can be safely financed is if asset prices keep rising. At this point, it takes only a small shift in circumstances or attitudes for confidence to evaporate, investors to default, and fire sales of assets to start. That rapid crumbling of confidence is known as a Minsky moment.


pages: 246 words: 74,341

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

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accounting loophole / creative accounting, bank run, banking crisis, Bernie Madoff, Black Swan, capital controls, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, new economy, Northern Rock, Own Your Own Home, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

Excessive reliance on debt financing imposes costs on investors because of the associated increased risk of financial distress and bankruptcy.32 It had simply become cheaper to use other people's money than your own, and businesses worked hard to reduce their margins. The risk, of course, was that renewing the loans would be difficult if there was a crisis, but that seemed a far-fetched concern in a world awash with capital. In addition, the high growth rates made it seem as though there was a wide range of potential investment objects. James Grant once wrote a book entitled The Trouble with Prosperity, and U.S. economist Hyman Minsky claimed that "stability leads to instability." Their point is that nothing is more dangerous than good times because they encourage investors to borrow more and take bigger risks. If things look good, they are going to get worse. "Investors said, `I don't want to be in equities anymore, and I'm not getting any return in my bond positions,"' explains a financier who is the author of many financial innovations: "Two things happened.


pages: 287 words: 82,576

The Complacent Class: The Self-Defeating Quest for the American Dream by Tyler Cowen

affirmative action, Affordable Care Act / Obamacare, Airbnb, Alvin Roth, assortative mating, Bernie Sanders, Black Swan, business climate, circulation of elites, clean water, David Graeber, declining real wages, deindustrialization, desegregation, Donald Trump, drone strike, East Village, Elon Musk, Ferguson, Missouri, Francis Fukuyama: the end of history, gig economy, Google Glasses, Hyman Minsky, Hyperloop, income inequality, intangible asset, Internet of things, inventory management, knowledge worker, labor-force participation, labour mobility, low skilled workers, Marc Andreessen, Mark Zuckerberg, medical residency, meta analysis, meta-analysis, obamacare, offshore financial centre, Paul Samuelson, Peter Thiel, purchasing power parity, Richard Florida, security theater, sharing economy, Silicon Valley, Silicon Valley ideology, Skype, South China Sea, Steven Pinker, Stuxnet, The Great Moderation, total factor productivity, Tyler Cowen: Great Stagnation, upwardly mobile, Vilfredo Pareto, working-age population, World Values Survey

The more stable that investors and homeowners, thought things would be, over time, the more willing they became to take risk and pile on excess leverage. Americans borrowed more and more, and eventually thus arose a real estate bubble and an unstable banking system. By now the story is well known and I won’t repeat it all here. But by the end of the financial crisis, economic opinion had shifted in the direction of the ideas of Hyman Minsky, an earlier theorist of cyclical economic crises. Minsky had argued that periods of financial stability contained the seeds of their own destruction, because eventually all that stability would cause investors to let down their collective guard and take too much risk. We saw a version of the same happen in the eurozone, where, following the creation of the euro, there were many very positive expectations and a major flow of capital to the economy in the periphery, including of course Greece.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Benoit Mandelbrot, Bretton Woods, central bank independence, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, energy security, equity premium, fiat currency, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, Kenneth Rogoff, Kitchen Debate, laissez-faire capitalism, Long Term Capital Management, low skilled workers, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon shock, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, popular capitalism, price stability, RAND corporation, rent-seeking, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Saturday Night Live, savings glut, secular stagnation, short selling, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

“The desire to fine-tune the economy is almost irrepressible,” he told the Washington Post. “If we knew enough, it could be useful, but because we don’t, it is almost misguided.” On the left, critics focused on the unpredictable vagaries of markets, which made the effect of Fed moves correspondingly uncertain. “There is a great hubris in the belief that by changing the cost of financing, the Fed can control the pace of economic activity,” observed Hyman Minsky, an economist who would later be celebrated for his prescient analysis of bubbles. Yet despite the plausible pushback from Blinder, and despite this barrage of attacks, Greenspan was ultimately vindicated. After the record rate hike of November 1994, long-term interest rates did not spike up, as Blinder had feared; instead they stabilized, just as Greenspan had expected. By means of this tightening and a further one the following February, the Fed engineered a soft landing, slowing the economy down without triggering a recession.31 Inflation was kept firmly under control throughout 1994 and 1995; unemployment stayed below the “natural rate” of 6 percent and gradually drifted downward.32 Neither too hot nor too cold, this miracle soon came to be known as the Goldilocks economy.33 The soft landing of 1994 defused the Jackson Hole argument.

Underscoring the perils in the maestro bubble, the chairman sounded a warning about “the degree of credibility that the Federal Reserve has accumulated in the last year or so. . . . I worry about that, and I worry about that basically because we could be our own worst enemies.” In the years after the 2008 meltdown, the world showed a fresh interest in observations of this kind: success had bred confidence; confidence had blurred into complacency; complacency had caused human beings to behave awfully. By common agreement, the unsung prophet of such cycles had been Hyman Minsky, an American economist who warned that calm periods in markets naturally stimulate an appetite for extra risk, so that finance is never truly stable. But Greenspan understood the Minsky message before Minsky was in vogue—indeed, he understood it at a time when most of the economics profession erroneously believed that macroeconomic stability bred financial stability.29 In this sense, tragically, Greenspan also was the man who knew.

Financial assets would be easier to value in a stable setting, the idea went: spared the need to worry about swings in inflation or interest rates, fund managers could focus on assessing the business prospects of firms, and their decisions would steer asset prices toward their efficient, nonbubbly level. But this proposition was excessively optimistic, too. It neglected the point for which the economist Hyman Minsky later became famous: if you remove inflation and interest-rate risk, investors are liable to compensate with extra risk of other kinds, leaving markets no more stable. Since the time when he had dubbed himself the Zipswitch chairman, Greenspan had understood this point. “When things get too good, human beings behave awfully,” he had stated then. “To the extent that we are successful in keeping product price inflation down, history tells us that price-earnings ratios [and hence stock prices] under those conditions go through the roof,” he had observed, a year later.


pages: 593 words: 189,857

Stress Test: Reflections on Financial Crises by Timothy F. Geithner

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Affordable Care Act / Obamacare, asset-backed security, Atul Gawande, bank run, banking crisis, Basel III, Bernie Madoff, Bernie Sanders, break the buck, Buckminster Fuller, Carmen Reinhart, central bank independence, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, David Brooks, Doomsday Book, eurozone crisis, financial innovation, Flash crash, Goldman Sachs: Vampire Squid, housing crisis, Hyman Minsky, illegal immigration, implied volatility, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, Nate Silver, negative equity, Northern Rock, obamacare, paradox of thrift, pets.com, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, RAND corporation, regulatory arbitrage, reserve currency, Saturday Night Live, savings glut, selection bias, short selling, sovereign wealth fund, The Great Moderation, The Signal and the Noise by Nate Silver, Tobin tax, too big to fail, working poor

While we were firefighting in Asia, I read Charles Kindleberger’s classic history of financial crises, Manias, Panics, and Crashes, and his explanation of the recurrence of crises over centuries was the most consistent with what I had observed. In Asia, credit nearly doubled in the three years before the crisis. The sustained period of rapid economic growth caused investors to ignore the vulnerability of fixed exchange rates and forget that capital inflows could become outflows in a hurry. They assumed that past performance would indicate future results. As the American economist Hyman Minsky explained in work I would read a decade later, stability can produce excessive confidence, which produces the seeds of future instability. This penchant for self-delusion is inherently human, but it does not inevitably lead to financial and economic crises. At the time, a similar dynamic was fueling the U.S. dot-com bubble, as investors enthralled by winners like eBay threw cash at losers like Pets.com.

There was no precedent for guarantees of money market funds or government support for the commercial paper market, either. In fact, even after we helped JPMorgan acquire Bear, the financial markets continued to pull back from the surviving investment banks. The prospect of a similar “rescue” was not much comfort to other systemic firms or potential investors; Bear ceased to exist and its shareholders lost a fortune. The moral hazard theorists simply underestimated the mania, the power of Hyman Minsky’s theory, which I first read in 2007, that stability can breed instability. That said, moral hazard was a legitimate problem. Fannie and Freddie exploited their access to cheap capital—a result of the widespread (and ultimately correct) assumption that the government would stand behind their obligations—to take on way too much leverage and risk, a classic example of moral hazard. The large banks also enjoyed lower-cost financing because of their access to a government safety net, which was one reason they got so large.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

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Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commoditize, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, information asymmetry, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, Myron Scholes, negative equity, New Journalism, oil shock, p-value, passive investing, Paul Samuelson, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, survivorship bias, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond, zero-sum game

Three economists besides Shiller warrant mention:• John Maynard Keynes for such pearls as “Most of our decisions . . . can only be taken as the result of animal spirits, a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities” and “It is the nature of organized investment markets, under the influence of purchasers largely ignorant of what they are buying and speculators who are more interested in forecasting the next shift of market sentiment than with a reasonable estimate of future yield of capital assets, that, when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and catastrophic force.” Keynes is also credited with a quote that foreshadows a central argument in the limits-to-arbitrage literature: “The market can remain irrational longer than you can remain solvent.” • Hyman Minsky for his insight that financial stability can be destabilizing (because prolonged stable periods make investors extrapolate the stability too far and induce them to overprice risky assets) as well as for his analysis of bubble stages. Each boom starts with displacement (an exogenous shock, akin to Shiller’s precipitating factor) that triggers profit opportunities in some sector. Asset prices begin to rise, aided by easy credit (monetary expansion and credit creation—often via financial innovation), and both developments also stimulate the real economy; this is the moment at which stability becomes destabilizing.

Available at SSRN: http://ssrn.com/abstract=1369049 Mamarbachi, Raya; Marc Day; and Giampiero Favato (2009), “Art as an alternative investment asset,” working paper, available at SSRN: http://ssrn.com/abstract=1112630 Mansour, Asief; and Hope Nadji (2007), “Performance characteristics of infrastructure investments,” RREEF Research. Martin, George A. (2010), “The long-horizon benefits of traditional and new real assets in the institutional portfolio,” Journal of Alternative Investments 13(1), 6–29. McConnell, John; and Wei Xu (2008), “Equity returns at the turn of the month,” Financial Analysts Journal 64(2), 49–64. McCulley, Paul (2009), “The shadow banking system and Hyman Minsky’s economic journey,” in Insights into the Global Financial Crisis (L.B. Siegel, Ed.), Research Foundation of the CFA Institute. McKinsey Global Institute (2009), Global Capital Markets: Entering a New Era, annual report. Mehra, Rajnish, Ed. (2007), Handbook of the Equity Risk Premium, Elsevier Science. Mehra, Rajnish; and Edward C. Prescott (1985), “The equity premium: A puzzle,” Journal of Monetary Economics 15, 145–161.


pages: 364 words: 99,613

Servant Economy: Where America's Elite Is Sending the Middle Class by Jeff Faux

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back-to-the-land, Bernie Sanders, Black Swan, Bretton Woods, BRICs, British Empire, call centre, centre right, cognitive dissonance, collateralized debt obligation, collective bargaining, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, David Brooks, David Ricardo: comparative advantage, falling living standards, financial deregulation, financial innovation, full employment, hiring and firing, Howard Zinn, Hyman Minsky, illegal immigration, indoor plumbing, informal economy, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, lake wobegon effect, Long Term Capital Management, market fundamentalism, Martin Wolf, McMansion, medical malpractice, mortgage debt, Myron Scholes, Naomi Klein, new economy, oil shock, old-boy network, Paul Samuelson, Plutocrats, plutocrats, price mechanism, price stability, private military company, Ralph Nader, reserve currency, rising living standards, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, school vouchers, Silicon Valley, single-payer health, South China Sea, statistical model, Steve Jobs, Thomas L Friedman, Thorstein Veblen, too big to fail, trade route, Triangle Shirtwaist Factory, union organizing, upwardly mobile, urban renewal, War on Poverty, We are the 99%, working poor, Yogi Berra, Yom Kippur War

The rest is history: the crash of Bear Stearns, the bankruptcy of Lehman Brothers, and the panicked response of the Republican White House and a Democratic Congress to pour massive amounts of money into the banks, investment companies, and insurance firms that were deemed “too big to fail.” Although there undoubtedly were challenged intellects among the public and business leaders who were most responsible for the economic crisis, David Brooks’s stupidity explanation does not fit. As John Maynard Keynes, Charles Kindleberger, and many, many other economists, such as Hyman Minsky, had shown, financial excesses were built into the modern economy. Economists might have different ways of explaining the boom-and-bust cycle, but it is inevitable: what goes up must come down. This was no secret on Wall Street. The term Minsky moment was coined by an investment banker for the turning point that kicks off a panic in which investors begin dumping even high-quality assets in order to cover their debts.


pages: 339 words: 109,331

The Clash of the Cultures by John C. Bogle

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asset allocation, collateralized debt obligation, commoditize, corporate governance, corporate social responsibility, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, diversified portfolio, estate planning, Eugene Fama: efficient market hypothesis, financial innovation, financial intermediation, fixed income, Flash crash, Hyman Minsky, income inequality, index fund, interest rate swap, invention of the wheel, market bubble, market clearing, money market fund, mortgage debt, new economy, Occupy movement, passive investing, Paul Samuelson, Ponzi scheme, principal–agent problem, profit motive, random walk, rent-seeking, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, shareholder value, short selling, South Sea Bubble, statistical arbitrage, survivorship bias, The Wealth of Nations by Adam Smith, transaction costs, Vanguard fund, William of Occam, zero-sum game

Yet only a long historical perspective can help us sort out what is lasting and salient from what is ephemeral and faddish. In finance, as in all human endeavors, history has valuable lessons to teach.” Restoring Balance in Our Investment Sector Although our financial sector in many ways functions in a different fashion from our productive economy, the two are hardly independent. As the economist Hyman Minsky has pointed out, “Since finance and industrial development are in a symbiotic relationship, financial evolution plays a crucial role in the dynamic patterns of our economy.” So, the dominance of today’s speculative orientation requires not only thought but also corrective action. In the effort to restore a sounder balance between investment and speculation in our financial sector, there are many actions that we should consider.


pages: 523 words: 111,615

The Economics of Enough: How to Run the Economy as if the Future Matters by Diane Coyle

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accounting loophole / creative accounting, affirmative action, bank run, banking crisis, Berlin Wall, bonus culture, Branko Milanovic, BRICs, call centre, Cass Sunstein, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation does not imply causation, Credit Default Swap, deindustrialization, demographic transition, Diane Coyle, disintermediation, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, experimental economics, Fall of the Berlin Wall, Financial Instability Hypothesis, Francis Fukuyama: the end of history, George Akerlof, Gini coefficient, global supply chain, Gordon Gekko, greed is good, happiness index / gross national happiness, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, illegal immigration, income inequality, income per capita, industrial cluster, information asymmetry, intangible asset, Intergovernmental Panel on Climate Change (IPCC), invisible hand, Jane Jacobs, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, knowledge economy, labour market flexibility, light touch regulation, low skilled workers, market bubble, market design, market fundamentalism, megacity, Network effects, new economy, night-watchman state, Northern Rock, oil shock, Pareto efficiency, principal–agent problem, profit motive, purchasing power parity, railway mania, rising living standards, Ronald Reagan, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, Steven Pinker, The Design of Experiments, The Fortune at the Bottom of the Pyramid, The Market for Lemons, The Myth of the Rational Market, The Spirit Level, transaction costs, transfer pricing, tulip mania, ultimatum game, University of East Anglia, web application, web of trust, winner-take-all economy, World Values Survey, zero-sum game

Even if you think capitalism is working pretty well despite the crisis—and after all, there have been many crises in financial markets over the centuries—it has to be acknowledged that there is at least a crisis of legitimacy. Majorities of people in many countries do not believe, at present, that markets are doing a good job of organizing the economy. The immediate crisis is probably the least interesting way in which markets are failing at the moment, however. Financial crises do indeed recur in market economies, at least as far back as the tulip mania of the seventeenth century.17 The economist Hyman Minsky has argued that there is an internal cycle of capitalism that guarantees there will be banking crises from time to time.18 There have been a few in recent decades—in 1993–94, 1997–98, in 2001, as well as 2007–8. Each one is different, and the most recent crisis has been distinctive in involving the world’s very biggest banks. So each carries new lessons, the lesson from the most recent being that regulators have allowed banks to grow too big.


pages: 385 words: 101,761

Creative Intelligence: Harnessing the Power to Create, Connect, and Inspire by Bruce Nussbaum

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3D printing, Airbnb, Albert Einstein, Berlin Wall, Black Swan, Chuck Templeton: OpenTable, clean water, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Danny Hillis, declining real wages, demographic dividend, Elon Musk, en.wikipedia.org, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, follow your passion, game design, housing crisis, Hyman Minsky, industrial robot, invisible hand, James Dyson, Jane Jacobs, Jeff Bezos, jimmy wales, John Gruber, John Markoff, Joseph Schumpeter, Kickstarter, lone genius, manufacturing employment, Marc Andreessen, Mark Zuckerberg, Martin Wolf, new economy, Paul Graham, Peter Thiel, QR code, race to the bottom, reshoring, Richard Florida, Ronald Reagan, shareholder value, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, six sigma, Skype, Steve Ballmer, Steve Jobs, Steve Wozniak, supply-chain management, Tesla Model S, The Chicago School, The Design of Experiments, the High Line, The Myth of the Rational Market, thinkpad, Tim Cook: Apple, too big to fail, tulip mania, We are the 99%, Y Combinator, young professional, Zipcar

Entrepreneurs find new opportunities within the uncertainties of new technologies and changing social relationships and values. Like artists, they thrive within a culture of chance, not a culture of control. It’s not as if economists had never seen proof of the effects of uncertainty: There is a significant literature on market panics going back over a century. In the 1960s and 1970s, as EMT was being developed, Hyman Minsky was writing about booms leading to euphoria, panic, and busts. Charles Kindleberger’s Manias, Panics and Crashes: A History of Financial Crises, was hugely popular when it came out in 1978. British journalist and essayist Walter Bagehot had written about financial crises in Lombard Street, London’s financial district, back in the latter half of the nineteenth century. And who hasn’t heard of the extraordinary tulip mania in the Netherlands of the 1630s, popularized in Charles Mackay’s 1841 book Extraordinary Popular Delusions and the Madness of Crowds?


pages: 576 words: 105,655

Austerity: The History of a Dangerous Idea by Mark Blyth

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, Black Swan, Bretton Woods, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, correlation does not imply causation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, deindustrialization, disintermediation, diversification, en.wikipedia.org, ending welfare as we know it, Eugene Fama: efficient market hypothesis, eurozone crisis, financial repression, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, Gini coefficient, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, interest rate swap, invisible hand, Irish property bubble, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, liquidationism / Banker’s doctrine / the Treasury view, Long Term Capital Management, market bubble, market clearing, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, Occupy movement, offshore financial centre, paradox of thrift, Philip Mirowski, price stability, quantitative easing, rent-seeking, reserve currency, road to serfdom, savings glut, short selling, structural adjustment programs, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, unorthodox policies, value at risk, Washington Consensus, zero-sum game

All of which brings us to the role played by ordoliberal’s cousins, the Austrian economists, in pushing austerity arguments forward. If the influence of ordoliberalism has been felt primarily in Europe, then the influence of Austrian ideas lies in the United States. Austrian ideas have long had an American pied-à-terre, as we saw in Schumpeter’s diagnoses of the 1930s.40 They came back into vogue in the current crisis because they seemed to have been onto something that few Keynesians (except Hyman Minsky) had paid much attention to, and in doing so they gave us another set of reasons to be austere. Austerity’s American Pied-à-Terre: The Austrian School In the late nineteenth century, Austrian economics emerged in the Austro-Hungarian Empire from the debate over the role the state might play in fostering economic development following Germany’s state-led growth spurt. The key figure here was Carl Menger, one of the first of the so-called marginalist economists, who saw economic value as a question of subjective utility and relative prices, rather than as a function of costs of production.


pages: 394 words: 85,734

The Global Minotaur by Yanis Varoufakis, Paul Mason

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active measures, banking crisis, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business climate, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, correlation coefficient, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, declining real wages, deindustrialization, endogenous growth, eurozone crisis, financial innovation, first-past-the-post, full employment, Hyman Minsky, industrial robot, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, light touch regulation, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market fundamentalism, Mexican peso crisis / tequila crisis, money market fund, mortgage debt, Myron Scholes, negative equity, new economy, Northern Rock, paper trading, Paul Samuelson, planetary scale, post-oil, price stability, quantitative easing, reserve currency, rising living standards, Ronald Reagan, special economic zone, Steve Jobs, structural adjustment programs, systematic trading, too big to fail, trickle-down economics, urban renewal, War on Poverty, Yom Kippur War

John Maynard Keynes (1883–1946) put the same thought more elegantly in his 1936 (Great Depression-inspired) book, known as the General Theory: Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. Prophetic words indeed. In the 1970s, Hyman Minsky (1919–96) took Keynes’ point a little further, blending it with the cyclical narrative coming out of our paradox of success. Minsky’s suggestion was that periods of financial stability and growth cause the rate of defaults on loans to drop and, for this reason, inspire confidence in banks that loans will be repaid. Interest rates thus fall. This encourages investors to take increasing risks, in order to improve their returns.

Propaganda and the Public Mind by Noam Chomsky, David Barsamian

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Albert Einstein, Asian financial crisis, Bretton Woods, capital controls, deindustrialization, European colonialism, experimental subject, Howard Zinn, Hyman Minsky, interchangeable parts, labour market flexibility, labour mobility, liberation theology, Martin Wolf, one-state solution, Ralph Nader, RAND corporation, school vouchers, Silicon Valley, structural adjustment programs, Thomas L Friedman, Tobin tax, Washington Consensus

They’re talking about some form of regulation of completely irrational financial markets right now, at the World Economic Forum in Davos, Switzerland. Jagdish Bhagwati, a free-trade true believer and economist at Columbia University, has been writing about how we have to understand elementary economics. He claims free trade is great for manufacturing but it’s a disaster for finance. Financial markets just don’t work like markets in goods. There’s good reason to believe that. Economists like John Maynard Keynes and Hyman Minsky have studied this. It’s a well-known area of economics, and the experience of the last twenty-five years seems to bear it out. It’s also worth remembering that one of the reasons why back in 1944 the Bretton Woods system did insist on regulation of financial flows was because they wanted to preserve the welfare state. They understood what should be a near truism, that if you free up financial flows, it’s a very powerful weapon against social spending.

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Albert Einstein, Asian financial crisis, asset-backed security, banking crisis, Basel III, Berlin Wall, Bernie Madoff, British Empire, capital controls, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, congestion charging, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-subsidies, debt deflation, Deng Xiaoping, Diane Coyle, endowment effect, eurozone crisis, Fall of the Berlin Wall, financial innovation, financial repression, fixed income, floating exchange rates, full employment, George Akerlof, German hyperinflation, Hyman Minsky, income inequality, income per capita, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, London Interbank Offered Rate, loss aversion, market clearing, mass immigration, moral hazard, mortgage debt, new economy, New Urbanism, Nick Leeson, Northern Rock, Occupy movement, oil shale / tar sands, oil shock, old age dependency ratio, price mechanism, price stability, quantitative easing, railway mania, rent-seeking, reserve currency, rising living standards, South Sea Bubble, sovereign wealth fund, technology bubble, The Market for Lemons, The Spirit Level, The Wealth of Nations by Adam Smith, Thomas Malthus, Tobin tax, too big to fail, trade route, trickle-down economics, Washington Consensus, women in the workforce, working-age population

Eggertsson, ‘Great Expectations and the End of the Depression’, American Economic Review, 98.4 (Sept. 2008). See Bernanke and James, The Gold Standard, Deflation, and Financial Crisis. P. Krugman, End This Depression Now! (Norton, New York, 2012). See J. Yellen, ‘A Minsky Meltdown: Lessons for Central Bankers’, Board of Governors of the Federal Reserve, Washington, DC, Apr. 2009. Named after Hyman Minsky, a Minsky moment is a situation where, in an over-­indebted economy, people are forced to sell good assets to meet the obligations to their creditors, leading to a financial meltdown and a huge increase in the demand for cash. J. M. Keynes, How to Pay for the War: A Radical Plan for the Chancellor of the Exchequer (Macmillan, London, 1940). Real per capita GDP rose only 1.3 per cent per annum between 1929 and 1939.


pages: 327 words: 90,542

The Age of Stagnation by Satyajit Das

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9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Albert Einstein, Alfred Russel Wallace, Anton Chekhov, Asian financial crisis, banking crisis, Berlin Wall, bitcoin, Bretton Woods, BRICs, British Empire, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, disintermediation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, happiness index / gross national happiness, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, labour mobility, light touch regulation, liquidity trap, Long Term Capital Management, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, Mikhail Gorbachev, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, passive income, peak oil, peer-to-peer lending, pension reform, Plutocrats, plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Ronald Reagan, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

Ultimately, excessive debt resembles a Ponzi scheme. Nations, businesses, and individuals need to borrow ever-increasing amounts to repay existing borrowings and maintain economic growth. In the half-century leading up to 2008, the amount of debt needed to create US$1 of GDP in the US increased from US$1–2 to US$4–5. This rapid rise is unsustainable, given an aging population, slower growth, and low inflation. American economist Hyman Minsky identified three phases of finance. In the early stages of a business cycle, money is only available to creditworthy borrowers whose income can meet the principal and interest on the debt, a phase known as hedge finance. As the cycle develops, competing lenders extend money to marginal borrowers, whose income can cover interest payments but not the principal, requiring the debt to be continually refinanced, a phase known as speculative finance.


pages: 354 words: 92,470

Grave New World: The End of Globalization, the Return of History by Stephen D. King

9 dash line, Admiral Zheng, air freight, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, joint-stock company, Long Term Capital Management, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, Plutocrats, plutocrats, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

In his General Theory, Keynes famously talked about so-called ‘animal spirits’, noting that: Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.11 Later, Hyman Minsky formulated a theory of financial crises which turned out to be eerily prescient. In Minsky’s world, a sustained economic expansion leads eventually to euphoria, a point at which excessive risk-taking is financed by ever-higher levels of debt. As a result, the financial structure goes from ‘robust’ to ‘fragile’. Interest rates eventually rise, maybe because of a perceived inflationary threat or a shortage of available funds.


pages: 407 words: 114,478

The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein

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asset allocation, Bretton Woods, British Empire, buy low sell high, carried interest, corporate governance, cuban missile crisis, Daniel Kahneman / Amos Tversky, Dava Sobel, diversification, diversified portfolio, Edmond Halley, equity premium, estate planning, Eugene Fama: efficient market hypothesis, financial independence, financial innovation, fixed income, George Santayana, German hyperinflation, high net worth, hindsight bias, Hyman Minsky, index fund, invention of the telegraph, Isaac Newton, John Harrison: Longitude, Long Term Capital Management, loss aversion, market bubble, mental accounting, money market fund, mortgage debt, new economy, pattern recognition, Paul Samuelson, quantitative easing, railway mania, random walk, Richard Thaler, risk tolerance, risk/return, Robert Shiller, Robert Shiller, South Sea Bubble, survivorship bias, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the rule of 72, transaction costs, Vanguard fund, yield curve, zero-sum game

So it was not unusual that the shares of companies with dubious chances of success should have some value, or that this value should fluctuate. It’s not unusual now (can you spell “biotech?”), and it was certainly not unusual 300 years ago. But from time to time, for reasons that are poorly understood, investors stop pricing businesses rationally. Rising prices take on a life of their own and a bubble ensues. Monetary theorist Hyman Minsky comes as close to a reasonable explanation of bubbles as any. He postulates that there are at least two necessary preconditions. The first is a “displacement,” which, in modern times, usually means a revolutionary technology or a major shift in financial methods. The second is the availability of easy credit—borrowed funds that can be employed for speculation. To those two, I would add two more ingredients.


pages: 460 words: 122,556

The End of Wall Street by Roger Lowenstein

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Asian financial crisis, asset-backed security, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, fixed income, high net worth, Hyman Minsky, interest rate derivative, invisible hand, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, Martin Wolf, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

Just as Fannie, Freddie, and Merrill Lynch had undone the labors of a generation—had lost, that is, all the profits and more that they had earned during the previous decade—Greenspan undermined its ideological footing.2 And even if he partly retracted his apologia (in the palliative that it wasn’t the models per se that failed, but the humans that applied them), he was understood to say that the new finance had failed. The boom had not just ended; it had been unmasked. Why did it end so badly? Greenspan’s faith in the new finance was itself a culprit. The late economist Hyman Minsky observed that “success breeds a disregard of the possibility of failure.3 The Fed both embraced and promoted such a disregard. Greenspan’s persistent efforts to rescue the system lulled the country into believing that serious failure was behind it. His successor, Bernanke, was too quick to believe that Greenspan had succeeded—that central bankers had truly muted the economic cycle. Each put inordinate faith in the market, and disregarded its oft-shown potential for speculative excess.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

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3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, peer-to-peer rental, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

The crisis that began in Asia in 1997 and threatened to drag down the Western financial system a year later was an even louder wake-up call – as I explained in my first book, Open World: the Truth about Globalisation, written in 2001.48 But seduced by the ahistorical, self-serving nonsense that the financial system was “efficient”49 – which entailed that regulation should be minimised and economic models could ignore it entirely – policymakers complacently chose to do nothing. In fact, as thinkers as varied as Kindleberger, Friedrich Hayek, John Maynard Keynes, Hyman Minsky and George Soros have pointed out, the financial system is intrinsically unstable, because it involves bets about an unknowable future that can prove self-fulfilling for a (long) while. That the future is fundamentally uncertain is not a matter for academic debate; it is the essence of the human condition. Only a fool with a spreadsheet thinks it is a known (normal) probability distribution.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

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Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business process, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, survivorship bias, The Great Moderation, Thomas Bayes, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

The hysteria with Milton Friedman’s notion that inflation is always and everywhere a monetary phenomenon places too little significance on the overleveraged nature of our society. It is of course orthodox thinking and it’s hard to say it’s wrong, but I believe it’s wrong. But this is the prevailing mood in investing today. Figure 13.8 Gold, 1979-1980 SOURCE: Bloomberg. Minsky Moment A Minsky moment is a term coined after American economist Hyman Minsky (1919-1996), whose work was primarily focused on understanding the phenomena around financial crises. Minsky held that in good times, investors begin to take on excessive leverage when cash flows begin to cover debt payments, leading to a debt spiral and ultimately a crash. In essence, strong economic environments lead to a certain euphoria, fueling increased debt until levels of borrowing can no longer be supported.

Hopes and Prospects by Noam Chomsky

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Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, British Empire, capital controls, colonial rule, corporate personhood, Credit Default Swap, cuban missile crisis, David Ricardo: comparative advantage, deskilling, en.wikipedia.org, energy security, failed state, Fall of the Berlin Wall, financial deregulation, Firefox, Howard Zinn, Hyman Minsky, invisible hand, liberation theology, market fundamentalism, Martin Wolf, Mikhail Gorbachev, Monroe Doctrine, moral hazard, new economy, nuremberg principles, one-state solution, open borders, Plutonomy: Buying Luxury, Explaining Global Imbalances, Ralph Waldo Emerson, RAND corporation, Ronald Reagan, structural adjustment programs, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, trade liberalization, uranium enrichment, Washington Consensus

Now largely in the background after dramatic empirical refutation in 2007–08, though serious deficiencies were long known. See, for example, David Felix, “The Past as Future? The Contribution of Financial Globalization to the Current Crisis of Neo-Liberalism as a Development Strategy,” Political Economy Research Institute, http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_51-100/WP69.pdf, 2003, bringing up the important work of Hyman Minsky on market inefficiencies, now gaining deserved if belated attention. 7. Michael Kranish, Boston Globe, December 21, 2009. Virtually the only report. See below, pp. 226f. 8. Eric Dash, New York Times, June 10, 2009. 9. Theo Francis and Peter Coy, “No Big Fix for Global Finance,” Business Week, September 9, 2009. David Cho, “Banks ‘Too Big to Fail’ Have Grown Even Bigger; Behemoths Born of the Bailout Reduce Consumer Choice, Tempt Corporate Moral Hazard,” Washington Post, August 28, 2009.


pages: 515 words: 132,295

Makers and Takers: The Rise of Finance and the Fall of American Business by Rana Foroohar

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3D printing, accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, additive manufacturing, Airbnb, algorithmic trading, Alvin Roth, Asian financial crisis, asset allocation, bank run, Basel III, bonus culture, Bretton Woods, British Empire, call centre, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, centralized clearinghouse, clean water, collateralized debt obligation, commoditize, computerized trading, corporate governance, corporate raider, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, crowdsourcing, David Graeber, deskilling, Detroit bankruptcy, diversification, Double Irish / Dutch Sandwich, Emanuel Derman, Eugene Fama: efficient market hypothesis, financial deregulation, financial intermediation, Frederick Winslow Taylor, George Akerlof, gig economy, Goldman Sachs: Vampire Squid, Gordon Gekko, greed is good, High speed trading, Home mortgage interest deduction, housing crisis, Howard Rheingold, Hyman Minsky, income inequality, index fund, information asymmetry, interest rate derivative, interest rate swap, Internet of things, invisible hand, John Markoff, joint-stock company, joint-stock limited liability company, Kenneth Rogoff, knowledge economy, labor-force participation, labour mobility, London Whale, Long Term Capital Management, manufacturing employment, market design, Martin Wolf, money market fund, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, offshore financial centre, oil shock, passive investing, Paul Samuelson, pensions crisis, Ponzi scheme, principal–agent problem, quantitative easing, quantitative trading / quantitative finance, race to the bottom, Ralph Nader, Rana Plaza, RAND corporation, random walk, rent control, Robert Shiller, Robert Shiller, Ronald Reagan, Satyajit Das, Second Machine Age, shareholder value, sharing economy, Silicon Valley, Silicon Valley startup, Snapchat, sovereign wealth fund, Steve Jobs, technology bubble, The Chicago School, the new new thing, The Spirit Level, The Wealth of Nations by Adam Smith, Tim Cook: Apple, Tobin tax, too big to fail, trickle-down economics, Tyler Cowen: Great Stagnation, Vanguard fund, zero-sum game

It has also led to dramatic inefficiencies in resource allocation that may be a cause, rather than a symptom, of slower economic growth.8 These aren’t new observations, but rather old warnings that have been pushed aside or forgotten. The great liberal economist John Maynard Keynes, for one, worried that market capitalism might be able to function quite well without actually employing many people, particularly if money went to speculation rather than productive investment. (He called on the government to boost long-term investment through special incentives.) Other thinkers, like Hyman Minsky, Harry Magdoff, and Paul Sweezy, took that idea further, arguing that finance itself creates bubbles and draws money away from the real economy as a matter of course. As Minsky put it, “capitalism is a flawed system in that, if its development is not constrained, it will lead to periodic deep depressions and the perpetuation of poverty.”9 He also believed that the government would be forced to act as a lender of last resort during such periods, a position that would become untenable as public debt levels rose, leading to more public pressure to allow more speculation, which would unleash renewed instability, and so on.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, John Meriwether, Kitchen Debate, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, Myron Scholes, new economy, North Sea oil, Northern Rock, oil shock, Paul Samuelson, Philip Mirowski, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Bork, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

They found that those who went into finance earned three times as much as their peers with identical measures of talent or ability. It was not as if there were no precedents for these excesses. Much the same level of speculation, often reaching absurd proportions, took place in the 1920s and set in place some of the conditions for the Great Depression. Over the years, these concerns were minimized and then forgotten. The writings of economists like John Kenneth Galbraith, Charles Kindleberger, and Hyman Minsky were neglected in favor of explanations more congenial to those who believed that unfettered free markets worked best. Fortunately, one major lesson of the 1930s was not entirely forgotten—the Keynesian lesson that government must intervene in times of crisis like the one that overwhelmed the nation in 2007 and 2008. The only reason a far worse recession did not occur was the expensive government rescue package, including not only TARP but trillions of dollars of loan guarantees and Federal Reserve purchases of debt, as well as President Obama’s nearly $800 billion of government spending and tax cuts, most of which was spent in 2009 and 2010.


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, active measures, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond, zero-sum game

What has been far too little appreciated in this respect is how pragmatic about this were the key figures at the head of the Treasury and Federal Reserve.2 They were under no illusions, in contrast to neoclassical economists, that globalization’s “extension of capitalism to world markets” only involved a movement from “one state of equilibrium to another”; thus, even the ideologically libertarian Alan Greenspan was quick to add to this formulation that “systemic breakdowns occur, of course.” He consistently justified the Fed’s indispensability as the main regulator and overseer of America’s payments system in terms of its being able to act quickly in the face of inevitable financial crises: the key thing was to have “flexible institutions that can adapt to the unforeseeable needs of the next crisis.”3 Treasury Secretary Robert Rubin sounded like he had been schooled by Hyman Minsky’s Stabilizing an Unstable Economy rather than Milton Friedman’s Capitalism and Freedom. Rubin’s “whole adult life experience” at Goldman Sachs taught him that capitalist finance could be understood as moving from one state of crisis to another: “[W]hen you have good times, there is an inherent tendency in markets, grounded in human nature and the pull of fear and greed, to go to excess.”4 The central theme of the main study the Treasury sponsored in the 1990s on the strengths and weaknesses of the US financial system was that the key role of the state needed to be one of “failure containment” rather than “failure prevention.”5 Together with the Federal Reserve, it also increasingly assumed the global lender-of-last-resort role when competitive capitalist actors revealed their lack of collective class discipline by running for the exits in the major financial crises of the 1990s.


pages: 620 words: 214,639

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street by William D. Cohan

asset-backed security, call centre, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Deng Xiaoping, diversification, Financial Instability Hypothesis, fixed income, Hyman Minsky, Irwin Jacobs, John Meriwether, Long Term Capital Management, margin call, merger arbitrage, money market fund, moral hazard, mortgage debt, mutually assured destruction, Myron Scholes, New Journalism, Northern Rock, Renaissance Technologies, Rod Stewart played at Stephen Schwarzman birthday party, savings glut, shareholder value, sovereign wealth fund, too big to fail, traveling salesman, Y2K, yield curve

Without the uptick rule, stocks are susceptible to “bear raids,” where short sellers can overwhelm a stock in huge surges of selling that intimidate buyers from stepping in. This creates a panic that can spiral ever downward. For banks and securities firms, where the confidence of counterparties is essential, the death spiral can indeed be irreversible. To Schwartz, the near-collapse of the global financial system was caused by many factors, from Hyman Minsky's financial instability hypothesis—which suggests that whenever the economy is stable for a long period, the financial markets create their own instability—to the dramatic and unprecedented surge of global wealth. “If you go back to the period from 1970 to 1974,” he told his friends, “there was a doubling of commodity prices. Commodity producers got rich, the rest of the world got poor. When they doubled again, the world got poorer.


pages: 1,073 words: 302,361

Money and Power: How Goldman Sachs Came to Rule the World by William D. Cohan

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asset-backed security, Bernie Madoff, buttonwood tree, collateralized debt obligation, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, fear of failure, financial innovation, fixed income, Ford paid five dollars a day, Goldman Sachs: Vampire Squid, Gordon Gekko, high net worth, hiring and firing, hive mind, Hyman Minsky, interest rate swap, John Meriwether, Kenneth Arrow, London Interbank Offered Rate, Long Term Capital Management, margin call, market bubble, mega-rich, merger arbitrage, moral hazard, mortgage debt, Myron Scholes, paper trading, passive investing, Paul Samuelson, Ponzi scheme, price stability, profit maximization, risk tolerance, Ronald Reagan, Saturday Night Live, South Sea Bubble, time value of money, too big to fail, traveling salesman, value at risk, yield curve, Yogi Berra, zero-sum game

Politicians need cash, and bankers crave power, if only to prove to themselves they have a higher purpose than becoming obscenely wealthy. In 1991, while he was still an economics professor at Harvard, Summers wrote an influential chapter, “Planning for the Next Financial Crisis,” that appeared in a book published by the National Bureau of Economic Research. Other chapters in the book were written by economists Hyman Minsky, Paul Volcker, William Poole, and Paul Samuelson, Summers’s uncle. “It used to be said that a repeat of the depression of the 1930s was inconceivable now that governments better understood how to manage their economies,” Summers wrote. “Yet, both Latin America and Europe have suffered economic downturns during the 1980s on a scale comparable to the 1930s. And, in 1987, the world’s stock markets suffered the greatest one-day drop in their history.