- Details
- Written by: Kamran Mofid
- Hits: 9041
Hyman Minsky. Photo: news.bbcimg.co.uk
Thirty years ago, when most economists were extolling the virtues of financial deregulation, privatisation and innovation, amongst others, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.
Many of Minsky’s adversaries regarded his “financial-instability hypothesis,” which he first developed in the nineteen-sixties, as radical, if not crackpot.
However, today, with the subprime crisis and its continuing and deepening devastating consequences, Minsky’s wisdom is being revisited and references to him have become commonplace on financial Web sites and in the reports of Wall Street analysts. Minsky’s hypothesis is well worth revisiting.
Hyman Minsky (1919-1996)
The currently observed turmoil in financial markets, which is believed to have been ignited by the collapse of the subprime mortgage market, has recently brought to prominence the ideas of Hyman Minsky (1919–1996), a professor of financial economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. Many commentators are of the view that Minsky's framework of thinking accurately anticipated the current financial crisis.
Minsky considered himself a Keynesian. He rejected conventional economic ideas such as the efficient market hypothesis in favour of what he called the financial instability hypothesis. Minsky held that, over a prolonged period of prosperity, investors take on more and more risk, until lending exceeds what borrowers can pay off from their incoming revenues. When over-indebted investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash—an event that has come to be known as a "Minsky moment."
Minsky grew up during the Great Depression, an event which shaped his views and set him on a crusade to explain how it happened and how a repeat could be prevented.
Today, as Duncan Weldon has noted, his long out-of-print books are suddenly in high demand with copies changing hands for hundreds of dollars - not bad for densely written tomes with titles like Stabilizing an Unstable Economy.
Senior central bankers including current US Federal Reserve chair Janet Yellen and the Bank of England's Mervyn King began quoting his insights. Nobel Prize-winning economist Paul Krugman named a high profile talk about the financial crisis- The Night They Re-read Minsky.
Here are five of Minsky’s ideas:
Stability is destabilising
Minsky's main idea is so simple that it could fit on a T-shirt, with just three words: "Stability is destabilising."
Most macroeconomists work with what they call "equilibrium models" - the idea is that a modern market economy is fundamentally stable. That is not to say nothing ever changes but it grows in a steady way.
To generate an economic crisis or a sudden boom some sort of external shock has to occur - whether that be a rise in oil prices, a war or the invention of the internet.
Minsky disagreed. He thought that the system itself could generate shocks through its own internal dynamics. He believed that during periods of economic stability, banks, firms and other economic agents become complacent.
They assume that the good times will keep on going and begin to take ever greater risks in pursuit of profit. So the seeds of the next crisis are sown in the good time.
Three stages of debt
Minsky had a theory, the "financial instability hypothesis", arguing that lending goes through three distinct stages. He dubbed these the Hedge, the Speculative and the Ponzi stages, after financial fraudster Charles Ponzi.
In the first stage, soon after a crisis, banks and borrowers are cautious. Loans are made in modest amounts and the borrower can afford to repay both the initial principal and the interest.
As confidence rises banks begin to make loans in which the borrower can only afford to pay the interest. Usually this loan is against an asset which is rising in value. Finally, when the previous crisis is a distant memory, we reach the final stage - Ponzi finance. At this point banks make loans to firms and households that can afford to pay neither the interest nor the principal. Again this is underpinned by a belief that asset prices will rise.
The easiest way to understand is to think of a typical mortgage. Hedge finance means a normal capital repayment loan, speculative finance is more akin to an interest-only loan and then Ponzi finance is something beyond even this. It is like getting a mortgage, making no payments at all for a few years and then hoping the value of the house has gone up enough that its sale can cover the initial loan and all the missed payments. You can see that the model is a pretty good description of the kind of lending that led to the financial crisis.
Minsky moments
The "Minsky moment", a term coined by later economists, is the moment when the whole house of cards falls down. Ponzi finance is underpinned by rising asset prices and when asset prices eventually start to fall then borrowers and banks realise there is debt in the system that can never be paid off. People rush to sell assets causing an even larger fall in prices.
The Minsky moment: Like the moment when the cartoon character
realises they're running on thin air
Photo: news.bbcimg.co.uk
It is like the moment that a cartoon character runs off a cliff. They keep on running for a while, still believing they're on solid ground. But then there's a moment of sudden realisation - the Minsky moment - when they look down and see nothing but thin air. Then they plummet to the ground, and that's the crisis and crash of 2008.
Finance matters
Until fairly recently, most macroeconomists were not very interested in the finer details of the banking and financial system. They saw it as just an intermediary which moved money from savers to borrowers.
This is rather like the way most people are not very interested in the finer details of plumbing when they're having a shower. As long as the pipes are working and the water is flowing there is no need to understand the detailed workings.
To Minsky, banks were not just pipes but more like a pump - not just simple intermediaries moving money through the system but profit-making institutions, with an incentive to increase lending. This is part of the mechanism that makes economies unstable.
Preferring words to maths and models
Since World War Two, mainstream economics has become increasingly mathematical, based on formal models of how the economy works.
To model things you need to make assumptions, and critics of mainstream economics argue that as the models and maths became more and more complex, the assumptions underpinning them became more and more divorced from reality. The models became an end in themselves.
Although he trained in mathematics, Minsky preferred what economists call a narrative approach - he was about ideas expressed in words. Many of the greats from Adam Smith to John Maynard Keynes to Friedrich Hayek worked like this.
While maths is more precise, words might allow you to express and engage with complex ideas that are tricky to model - things like uncertainty, irrationality, and exuberance. Minsky's fans say this contributed to a view of the economy that was far more "realistic" than that of mainstream economics.
*The above excerpts are taken from an article by Duncan Weldon, which was first published at the BBC News Magazine on 24 March 2014
BBC News - Did Hyman Minsky find the secret behind financial crashes?
For further reading:
The Inconvenient Truth: Capitalism with No Moral Compass
The Destruction of our World and the lies of Milton Friedman
- Details
- Written by: Kamran Mofid
- Hits: 10523
‘A deadly force is taking over our world. This is a monster that can do too much harm to be so commonly welcomed into our society, and it goes by the name “Materialism.” The scariest thing about materialism is that it is so easy to fall into, especially in this day and age. So you ask what is materialism? It is a fixation on and love for material objects over actual living things.’…
How Much Is Enough? What is money and wealth for? Why do we as individuals and societies go on wanting more? What is economic growth for? Can we/ should we carry on just growing, creating, producing, consuming,…,more and more, for ever more? Do we need to satisfy our needs or our wants? Should we be a “maximiser” or “satisfier” and choose the path of “enoughness”? Then, what is a good life? What are the main ingredients of a good, happy and peaceful life? Should we move away from Gross National Product (GDP) to Gross National Happiness? What are we here for?
How Much is Enough? Money, Materialism, Frugality and the Good Life
Graham Music, a psychotherapist, has written a book called The Good Life Wellbeing and the new science of altruism, selfishness and immorality. It confirms, through use of data collected by scientists over the last 40 years, what we have all long suspected from anecdote and our own eyes: the materialistic tend to be unhappy, those with material goods will remain unhappy, and the market feeds on unhappiness. It is an outreach programme for personal and political desolation; and it is, so far, an outstanding success. Peel away the images of the gaudy objects and find instead a condition. Reading Vanity Fair, I deduce, is now mere collusion with the broken.
Tim Kasser, for instance, a psychology professor at Knox College, Illinois, notes that if you love material objects, you are less likely to love people and so, of course, the planet. The connection between the rise of materialism and indifference to the environment is not coincidental; nor is the connection between the rise of materialism and growing inequality, and fear of the stranger, which expresses itself here in a despicable loathing for the Roma, for instance, and there in a fashionable fetish for Ukip. Money is a brutalising agent and a paranoiac drug.
And so it drips down, an infection swallowing happiness and peace. Inequality leads to an erosion of trust between people. When you couch a premise in the language of the market, people become more suspicious and less kindly. This is potentially disastrous, as public services are sold and patients find themselves transformed into consumers. In one fascinating study, people were asked to imagine a hypothetical water shortage; those described as "consumers" were less likely to share the hypothetical water than those described as "individuals".
Even the language corrupts. Advertising ratchets up the stress, and places us in imagined competition with each other. It encourages yet more materialism, which follows the paths of drug addiction: it offers a false promise of ecstasy, and it does not work. The more we spend on unnecessary material goods, the less happy we are. Mental illness, narcissism and dissatisfaction instead follow.
Here, then, is a world wrought in the image of Dr No.
"Those with more materialistic values consistently have worse relationships, with more conflict," Music writes. "This is significant if the perceived shift towards more materialistic values in the west is accurate." We cannot say we were not warned.
*The above exerpts are from an article by Tanya Gold which was originally published in The Guardian 7 May 2014
How materialism makes us sad | Tanya Gold | Comment is free | The Guardian
What Does Materialism Do To You?
“A deadly force is taking over our world. This is a monster that can do too much harm to be so commonly welcomed into our society, and it goes by the name “Materialism.” The scariest thing about materialism is that it is so easy to fall into, especially in this day and age. So you ask what is materialism? It is a fixation on and love for material objects over actual living things.
We live in a time where a conversation via iPhone takes precedence over the face-to-face conversation. I mean this in the sense that not only are in-person conversations few and far between, but when they actually do occur, often a person will stop mid-conversation to answer the phone or text someone else. When did this become socially acceptable? On top we obsess about materialistic goods. There is a fine line in enjoying beautiful things and obsessing over them. If you are always looking for owning the latest thing the magazine displays or your favorite celebrity is showing off than you are in a materialistic mode.
What are the negative effects of this? How does it hurt us as people and as a society? The list goes on and on, but here are a few big effects that I hope will at least make you think so you don’t sucked into the materialistic trap.
1. Lost perspective. Materialism warps your brain. It leads you to believe that you should care more about money, clothes, fancy cars, and other superficial items rather than your friends, family, co-workers, etc. This can cause strains in relationships and even tear some relationships apart. You can also lose sight in what you are passionate about and force you into apathy because you are too focused on filling your house up with “stuff” to have the energy to pursue your goals and ambitions.
2. Lost time. If you find love in objects, you spend time with them that you could be spending with actual human beings who have the ability to love you back. You could also be spending this time working towards achieving your dreams instead of sitting on twitter and keeping up with the Kardashians. Trust me, if you spend all of your time watching them, you’ll never keep up with them. Step away from the inanimate objects so you can accomplish your true purpose and have the Kardashians trying to keep up with you.
3. Unnecessary judgment. This one is huge. Materialism causes you to take other people at face value. It encourages you to judge them based solely on the way they dress, the house and car they own, and whether they have the newest gadget. Appearances are deceiving, and you never know a single person simply by assessing the things they own. A person’s worth should never be based on materials, but that is what materialism does. It is completely superficial and does not care about what is on the inside.
4. That green monster. Oh yes, materialism breeds jealousy in every way shape and form. When you are fully materialistic, not only will you judge others based on their possessions, but you will also judge yourself in that way. It is easy to see someone who owns more than you and become instantly jealous, but you don’t know if that person is actually happy. Possessions are not the source of happiness, far from it, but materialism will blind you to that fact and think less of yourself if you don’t have a house like J-Lo’s.
5. Breeds negativity. This one basically sums up all of the above points into one. Nothing good ever comes from fixating on objects that have no true worth. All that does is make people resentful and judgmental – two qualities that I cannot think of in a positive light. If this world needs more of anything, it is positivity, not “stuff.”
As you can see, materialism has many consequences and tends to bring out the nastier, superficial side of people. It evokes isolation, envy, judgment, and pessimism, and who can be happy when surrounded by those traits? It is important to take time every day to step away from those small, irrelevant things and focus on the big picture. Pay attention to what is going to get you where you want to go in your life. I will tell you one thing, no matter what your greatest desire is, personal or professional, material items are not going to get you there. If anything, they will only get in your way.”
*This article was originally posted at iaam: (Self Esteem: 5 Ways Materialism Hurts You - Blog | iaam)
Read also: HOW MATERIALISM IS DAMAGING YOUR RELATIONSHIP AND 5 TIPS TO FIX IT
‘The Dalai Lama was once asked what surprised him most. He replied: "Man, because he sacrifices his health in order to make money. Then he sacrifices money to recuperate his health. And then he is so anxious about the future that he does not enjoy the present; the result being that he does not live in the present or the future. He lives as if he is never going to die, and then dies having never really lived."
Now let me share with you the words and sentiments of a young executive, a CEO, earning a lot of money, with bonuses, power, and more: “Now it's all about Productivity, Pay, Performance and Profit - the four Ps – which are fuelled by the three Fs: Fear, Frustration and Failure. Just sometimes I wish that in the midst of these Ps (& Fs), there was some time left for another set of four Fs: Families, Friends, Festivals and Fun.”
You see ladies and gentlemen, we need values, we need love, friendship, kindness, generosity, sympathy, empathy, and compassion to be the guiding principles of all we do. Otherwise, no amount of money, capital, technology, IT, theories and policies, can save us from our own mistakes, the crises of our own making.’…
Read more:
“A Better Path”: A Lecture at School of Economic Science
- Details
- Written by: Kamran Mofid
- Hits: 6159
Photo: issa.int
At the invitation of The Ministry of Labour and Social Protection of the Republic of Kazakhstan, Prof. Mofid is to participate at the VII Astana Economic Forum and to present a paper: ‘A Better Path to Social Partnership and Sustainable Development for the Common Good’ at the Panel:
SOCIAL PARTNERSHIP ALLOCATION OF RESPONSIBILITY TO ENSURE PRODUCTIVE EMPLOYMENT AND THE EXPANSION OF DECENT WORK”
21 May 2014, Press centre, Palace of Independence, 15.00-16.30
A global forum of leading thinkers attracting over 10000 participants from 150 countries, Astana Economic Forum was first held in 2008. The Forum is well established as a platform for dialogue on economic development, both in Kazakhstan and globally. Astana Forum brings together government ministers, economists, public-sector representatives and business leaders from around the world to discuss current issues relating to economic development, growth and sustainability, amongst other regional and international topics of global significance.
Prof. Mofid’s Panel:
SOCIAL PARTNERSHIP. ALLOCATION OF RESPONSIBILITY TO ENSURE PRODUCTIVE EMPLOYMENT AND THE EXPANSION OF DECENT WORK | One of the largest international forums
Read Prof. Mofid's Paper:
http://www.gcgi.info/news/560-the-value-of-values-a-presentation-at-the-vii-astana-economic-forum