MINSKY’SMONEYMANAGERCAPITALISM

ANDTHEGLOBALFINANCIALCRISIS

L.RANDALLWRAYUniversityofMissouri‐KansasCity,UMKC

WRAYR@UMKC.EDUWWW.CFEPS.ORGWWW.LEVY.ORG

hJp://neweconomicperspecQves.blogspot.com/

*IthankYevaNersisyanfortheresearchassistanceunderlyingthisanalysis

Globalcrisis:LessonsfromKeynesandMinsky

•  Crisisrepresents– anins9tu9onalfailure(banksmutatedfromu9li9estocasinos);

– anintellectualfailure(dangerousviewofefficacyofmkts);

– andmoralfailure(systembuiltonmoneyvalues)

•  Ins9nc9veandquickreturntoKeynes(themaster—Skidelsky)

•  WithMinsky’sinsightsonthetransforma9onthatledtothecrisis

IstheFinancialCrisisover?•  No.Hardlybegun:

–  Residen9alrealestate,commercialrealestate,shoppingmalldebt,homeequityloans,creditcarddebt,studentloans,autorelateddebt,businessloans,Eurodebt,developingcountrydebt,stateandlocalgovernmentdebt,pensionfunds,insurancecompanies,creditdefaultswaps,CDOs,CDO‐squared,CDO‐cubed,SPVs,SIVs,LifeinsuranceseVlements,peasantinsurance,REITs,junkbonds,interestrateswaps,financializedhealthcare…

•  Thisisround3ofa9roundbout:–  Round1=liquiditycrisisofshadowbanks–  Round2=waveofinsolvenciesofhomemortgagespecialists–  Round3=bail‐outsandcookingthebookstopaybonuses–  Round4=anotherroundofdefaultsforceslossrecogni9on–  Round5=knock‐outpunchwithafullscaleMinsky‐Fisherdebtdefla9ondynamic

AMinskyMomentoraMinskyHalf‐Century?

•  StagesApproach–  Commercialcapitalism

–  Financecapitalism

–  Paternalis9c(Managerial‐WelfareState)capitalism– MoneyManagercapitalism(financializa9on,ownershipsociety,neoliberalism,neoconserva9vism,shadowbanking)

•  Stabilitybredinstability•  Accumula9onoffinancialassets/liabili9es

•  Globaliza9on•  Securi9za9on•  Self‐supervision

FourRecentTrends

•  RiseofManagedMoney(declineofbanking)•  InvestmentBanksgoPublic

•  Regula9onandsupervisionreplacedbyself‐supervision

•  Transforma9onofbusiness“environment”

1.RiseofManagedMoney

•  Twoaspectsofnote:– Volumesofassetsandliabili9es(“financializa9on”increasesfinance’sshare)

– Compe99onwithbanks(“shadowbanking”innova9ons,leverage,andderegula9on)

Households and nonprofit

Noncorporate and farm

Nonfinancial nonfarm corporate

Private finance

GSE

Government

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5 19

16

1918

19

20

1922

19

24

1926

19

28

1930

19

32

1934

19

36

1938

19

40

1942

19

44

1946

19

48

1950

19

52

1954

19

56

1958

19

60

1962

19

64

1966

19

68

1970

19

72

1974

19

76

1978

19

80

1982

19

84

1986

19

88

1990

19

92

1994

19

96

1998

20

00

2002

20

04

2006

20

08

Total Financial Liabilities Relative to GDP

Sources: Historical Statistics of the United States: Millennium Edition (Tables Cj870-889, Ca9-19, Ce42-68, Cj787-796, Cj748-750, Cj389-397, Cj437-447, and Cj362-374), Historical Statistics of the United States: Colonial Times to 1970 (Series X 689-697), NIPA, Flow of Funds (from 1945). Note: The government sector excludes all financial activities of the government (retirement funds, GNMA, etc.). GSE sector includes government-sponsored enterprises and agency- and GSE-backed mortgage pools (includes, among others, GNMA and FHA pools). "Private finance" excludes the GSE sector and monetary authorities (which are both part of the financial sector in the Flow of Funds accounts). Before 1945, data for financial institutions is computed from data of the Census Bureau by taking all the liabilities (excluding equity) of commercial banks, credit unions, savings institutions, life insurance stock companies, and property and life insurance companies, and by removing private banks notes, all deposits, and life insurance reserves. From 1945, the total financial liabilities of the financial sector excludes, net interbank liabilities of commercial banks, liabilities of monetary authorities, private and public pension fund reserves, money market mutual funds shares, mutual funds shares and the items previously cited. The liabilities of monetary authorities are not included anywhere. Data for the households and noncorporate sectors is deduced from Census Bureau data about net increase in liabilities and by computing backward from the 1945 level.

DecreasingWeightoftheBankingSector

Financializa9on

•  Layering,leveraging•  Priorcommitmentoffutureflows

•  Cannotbeservicedoutofincomeflows:Ponzi

•  Requirescapitalgains:pricesmustalwaysrise

Financializa9onoftheUSEconomy

Financializa9onoftheUSEconomy

2.InvestmentBanksgoPublic•  1929Alloveragain:InvestmentTrustSubsidiariesofWallStpartnerships– Promotedmassiveleverageand“pumpanddump”specula9vefever

•  Shijtotradingratherthanplacements– Topmanagementincen9vestomanipulatesharepricesandtradeoninsideinfo

•  Researcharms,ra9ngsagenciesbecomeliVlemorethanmarke9ngdivisions– Tradermentalitydominates:Vendibilityratherthanserviceability

J.M.Keynes

•  Whenspecula9oncomestodominateenterprisethejobislikelytobeill‐done

3.Deregula9on,Desupervision,Selfregula9on

•  Movingassetsandliabili9esoffbalancesheet,increasingleverage

•  Riskierassets,mismatchedmaturi9es

•  Securi9esandotherderiva9ves;“Moderniza9on”removingconstraintsonpensions,endingGlassSteagall

•  Risk‐basedcapitalreqmts,internalmodels,externalra9ngsagencies

•  Transforma9oncompletedbyhandingbankcharterstothetworemaininginvestmentbanks

4.Changingbusiness“environment”

•  Lehman’s“ac9onable”and“materiallymisleading”prac9cesapprovedbyMngmtandErnst&Young.Why?– Nootherwaytowinbusiness– Nofearofprosecu9on

•  Tradermentalitytriumphs

•  GoldmanandGreekdebt•  Magnetar,CDOsandCDSs

•  ControlFraudasnormalbusinessprac9ce

–  S&Ls

Clarifica9on:Fraudisnotthecauseofthecrisis

•  Longtermtransforma9onoffinancialsystem– Normalinnova9onsplusselfregula9on,laxity

•  Longtermgrowthofmanagedmoney– Absenceofdebtdefla9on;promo9onofsaving

•  Longtermstagna9onofrealwage– Democra9za9onofcredit

•  Chronicfiscaldrag,worsenedbytradebalance– Threebalances;privatesectordeficits

PolicyResponse

•  Policyac9onsaredirectedatsavingthesystem,notreformingit

•  Mergersandacquisi9onsagainstrules;Toobigtofailins9tu9onsevenbiggertodaythantheywerebeforethecrisis

•  Nocriminalprosecu9onsofthoseresponsibleforthecurrentcrisis

•  RelianceonWallStreettoreformitself,beliefthatgov’tonlyneedstogettheincen9vesrightformarketdisciplinetowork

AMajorObstacle:DeficitHysteria

•  Always2waystocreatedeficits:theUglywayandtheGoodWay:ChinavsUS&Japan

•  DeficitFearsnotapplicabletosovereignna9onaldebt

•  Spendsbycredi9ngaccts,taxesbydebi9ng•  Deficits=netcreditstodeposits&reserves,andcreateincomeandnetfinancialwealthofnongovtsector

-15

-10

-5

0

5

10

15

20

25

Q1

2005

Q2

2005

Q3

2005

Q4

2005

Q1

2006

Q2

2006

Q3

2006

Q4

2006

Q1

2007

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

%

Federal Government Tax Receipts, Consumption Expenditures and Transfer Payments (Growth Rate Relative to the Same Quarter of the Previous Year)

Tax Receipts

Consumption Expenditures

Transfer Payments

Source: Bureau of Economic Analysis and Authors' Calculations; Tax Receipts Data Unavailable for 2009 Q4

Minsky’spoliciestopromotestability•  Highconsump9on,highemployment

–  Greaterequality,relyonincome,notdebt

•  Favorsmalltomediumsizebanks;CDBs,notpredatorylending;debtrelief

•  Don’twasteacrisis:De‐financialize;downsize.Resolve–  Definancializehealthcare,re9rement,educa9on

•  Enhancedoversight;strengthenedregula9on–  Nothingoff‐balancesheet

•  Ins9tu9onsandprac9cestofavorstability–  Automa9cstabilizers:countercyclicalbudget

–  Ins9tu9onalCircuitbreakers•  No“final”solu9ontofundamentalflawofcapitalism