Are we living a "Minsky Moment"?
I believe so. Hyman Minsky, whose book "Stabilizing and unstable ecomy", written in 1986, I am reading right now, has been an illuminating discovery for me. This book provides a sober explanation of the convulsive times we are living. I do not intent to summarize a whole book in a few lines, but in a nutshell, Minsky argues that the financial system, if left unregulated (and even so), contains the very seeds of its own destruction.
He comes to say, that as in many things in life, "success breeds success, and then excess", as I read a long time ago in The Economist.
The financial system is inherently unstable, highly pro cyclical: good times create excessive lending, asset bubbles and risky behavior, and the bad times feed on a spiral of declining asset value, declining confidence, restriction of credit, reduced investment and reduced consumption, which results in a recession, and if the cycle is not short-circuited, a depression.
Here is where we are right now: in the middle of the downward spiral, looking down on an abyss which is, more and more, staring back at us.
But do not despair: our good friend Hyman, left us some ideas to avoid the dreadful scenario. In the 1970´s and in the early 1980´s, a full blown depression was avoided by what he calls Big Government (an increase in government spending to substitute the declining business and consumer spending and investment), and Lender of Last Resort measures by the central banks (making sure than money is available to business to run their operations). He admits that Lending of Last Resort is a way of socializing risk, and yes, we all hate that banks keep the profits and share the losses, but there is no other way.
The result will be inflation, which is bad, but unemployment is far worse.I know this is not orthodox thinking now. Many people will argue that this will bring "stagflation", and I used to think so myself, but I have changed my mind. Leaders of the World: forget about inflation (Mr.Trichet, please....),......the beast at our door is Depression right now. Let us fight our enemies one by one. Let us worry about inflation later.
