Hi Lord Keynes, a follower of your blog here...this seemed the most appropriate recent post to ask this question...
What do you make of this article? http://mises.org/daily/2787
I am not an Austrian and I am generally sympathetic to post-Keynesianism, MMT etc. But I do wonder about the Minskyian analysis. I agree with endogeneity and so forth, but even accepting that, isn't the Austrian criticism still right? Doesn't the fact that the central bank tops up reserves encourage moral hazard? If the central bank didn't step in to do this, wouldn't the banks be much more conservative in their lending? So even if the central bank doesn't directly cause the asset bubble (low interest rates > cheap credit > malinvestment), doesn't it still ultimately encourage it?
"What do you make of this article? http://mises.org/daily/2787"
It is curious that Shostak says:
"So while Minsky's story accurately describes the present financial-market turmoil ..."
That is quite an admission from Austrian. However, his analysis is flawed by his use of the Austrian trade cycle theory.
"Doesn't the fact that the central bank tops up reserves encourage moral hazard? "
Not really - if you have a vigorous and effective system of financial regulation, that cuts off the flow of credit to the reckless gamblers, and creators of asset bubbles.
Many Western economies had low interest rates - cheap money or easy money - from 1945-1970, yet there were no massive, destabilising debt-fuelled asset bubbles resulting in the collapse of the financial system. Why? Because the financial system was properly regulated.
Even when the wall of petro-dollars from the OPEC nations hit the West in the 1970s/early 1980s, our ecomomies were still not hit by massive asset speculation, because even then there was still reasonable financial regulation. That all changed from the mid 1980s-1990s (though the beginnings of it can be seen in the 1970s).
We allowed a diasterous, flawed neoliberal system of regulation.
What happened was essentially the 1920s bubble all over again: first in tech stocks/shares (Clinton boom), then in real estate (2000s).
Robert Skidelsky once pointed out that believing that financiers will accurately measure risk is a neoclassical delusion, but for precisely the same reason, the idea that regulators will measure risk accurately is merely a variation of the exact same neoclassical delusion.
His argument thus was that regulatory capture is almost inevitable, because risk is always subjective and any attempt by regulators to impose quantified risk limits is simply not possible to implement. Hence, financiers are FORCED to engage in regulatory capture and expend as much resources possible into it.
"His argument thus was that regulatory capture is almost inevitable, because risk is always subjective and any attempt by regulators to impose quantified risk limits is simply not possible to implement. "
It is not about eliminating risk per se, but stopping or minimising activities that have no social/economic justification. Allowing persons to borrow money who have no job, income, or assets is without social/economic justification.
"Not really - if you have a vigorous and effective system of financial regulation, that cuts off the flow of credit to the reckless gamblers, and creators of asset bubbles."
I agree this makes sense, but my problem is, isn't this putting the cart before the horse? Isn't it a rather elaborate way of getting to the same result - more conservative lending practices - that would be produced by not having a lender of last resort in the first place?
Or do you think there are other advantages to having a central bank aside from the lender of last resort function, and what do you think they are?
"Many Western economies had low interest rates - cheap money or easy money - from 1945-1970, yet there were no massive, destabilising debt-fuelled asset bubbles resulting in the collapse of the financial system. Why? Because the financial system was properly regulated.
Even when the wall of petro-dollars from the OPEC nations hit the West in the 1970s/early 1980s, our ecomomies were still not hit by massive asset speculation, because even then there was still reasonable financial regulation. That all changed from the mid 1980s-1990s (though the beginnings of it can be seen in the 1970s)."
That's really interesting, I'd suspected this myself. Do you have a blog post on this/could you do one? Austrians seem to have this oddly deterministic (and illiberal!) idea that cheap credit spontaneously turns into bubbles, as if the decisions of investors have no role in that! If there is historical evidence to the contrary it'd be a very powerful argument!
(3) for stability (2) requires a lender of last resort to increase basemoney as it is required plus regulation ---
(1) and (2) and advantages: the level of investment is higher with a credit system capable of meeting demand for loans for trade, commerce and capital goods investment.
"Do you have a blog post on this/could you do one?"
Hi Lord Keynes, a follower of your blog here...this seemed the most appropriate recent post to ask this question...
ReplyDeleteWhat do you make of this article? http://mises.org/daily/2787
I am not an Austrian and I am generally sympathetic to post-Keynesianism, MMT etc. But I do wonder about the Minskyian analysis. I agree with endogeneity and so forth, but even accepting that, isn't the Austrian criticism still right? Doesn't the fact that the central bank tops up reserves encourage moral hazard? If the central bank didn't step in to do this, wouldn't the banks be much more conservative in their lending? So even if the central bank doesn't directly cause the asset bubble (low interest rates > cheap credit > malinvestment), doesn't it still ultimately encourage it?
Thanks, keep up the great blog :)
"What do you make of this article? http://mises.org/daily/2787"
ReplyDeleteIt is curious that Shostak says:
"So while Minsky's story accurately describes the present financial-market turmoil ..."
That is quite an admission from Austrian.
However, his analysis is flawed by his use of the Austrian trade cycle theory.
"Doesn't the fact that the central bank tops up reserves encourage moral hazard? "
Not really - if you have a vigorous and effective system of financial regulation, that cuts off the flow of credit to the reckless gamblers, and creators of asset bubbles.
Many Western economies had low interest rates - cheap money or easy money - from 1945-1970, yet there were no massive, destabilising debt-fuelled asset bubbles resulting in the collapse of the financial system. Why? Because the financial system was properly regulated.
Even when the wall of petro-dollars from the OPEC nations hit the West in the 1970s/early 1980s, our ecomomies were still not hit by massive asset speculation, because even then there was still reasonable financial regulation. That all changed from the mid 1980s-1990s (though the beginnings of it can be seen in the 1970s).
We allowed a diasterous, flawed neoliberal system of regulation.
What happened was essentially the 1920s bubble all over again: first in tech stocks/shares (Clinton boom), then in real estate (2000s).
Robert Skidelsky once pointed out that believing that financiers will accurately measure risk is a neoclassical delusion, but for precisely the same reason, the idea that regulators will measure risk accurately is merely a variation of the exact same neoclassical delusion.
ReplyDeleteHis argument thus was that regulatory capture is almost inevitable, because risk is always subjective and any attempt by regulators to impose quantified risk limits is simply not possible to implement. Hence, financiers are FORCED to engage in regulatory capture and expend as much resources possible into it.
"His argument thus was that regulatory capture is almost inevitable, because risk is always subjective and any attempt by regulators to impose quantified risk limits is simply not possible to implement. "
ReplyDeleteIt is not about eliminating risk per se, but stopping or minimising activities that have no social/economic justification. Allowing persons to borrow money who have no job, income, or assets is without social/economic justification.
Thanks for your response LK.
ReplyDelete"Not really - if you have a vigorous and effective system of financial regulation, that cuts off the flow of credit to the reckless gamblers, and creators of asset bubbles."
I agree this makes sense, but my problem is, isn't this putting the cart before the horse? Isn't it a rather elaborate way of getting to the same result - more conservative lending practices - that would be produced by not having a lender of last resort in the first place?
Or do you think there are other advantages to having a central bank aside from the lender of last resort function, and what do you think they are?
"Many Western economies had low interest rates - cheap money or easy money - from 1945-1970, yet there were no massive, destabilising debt-fuelled asset bubbles resulting in the collapse of the financial system. Why? Because the financial system was properly regulated.
Even when the wall of petro-dollars from the OPEC nations hit the West in the 1970s/early 1980s, our ecomomies were still not hit by massive asset speculation, because even then there was still reasonable financial regulation. That all changed from the mid 1980s-1990s (though the beginnings of it can be seen in the 1970s)."
That's really interesting, I'd suspected this myself. Do you have a blog post on this/could you do one? Austrians seem to have this oddly deterministic (and illiberal!) idea that cheap credit spontaneously turns into bubbles, as if the decisions of investors have no role in that! If there is historical evidence to the contrary it'd be a very powerful argument!
Thanks again!
"Or do you think there are other advantages to having a central bank aside from the lender of last resort function, and what do you think they are?"
ReplyDelete(1) capitalism requires an endogenously expanding money supply
http://socialdemocracy21stcentury.blogspot.com/2011/12/monetary-production-economy-and.html
(2) that means fractional reserve bank
(3) for stability (2) requires a lender of last resort to increase basemoney as it is required plus regulation
---
(1) and (2) and advantages: the level of investment is higher with a credit system capable of meeting demand for loans for trade, commerce and capital goods investment.
"Do you have a blog post on this/could you do one?"
http://socialdemocracy21stcentury.blogspot.com/2009/11/financial-deregulation-and-origin-of.html
http://socialdemocracy21stcentury.blogspot.com/2009/08/capital-controls-financial-regulation.html