Research Topics

With quantitative easing winding down and the latest payroll tax-cut measures set to expire at the end of this year, pressing questions loom about the current state of the US economic recovery and its ability to sustain itself in the absence of support from monetary and fiscal policy.

Four Fragile Markets, Four Years Later

In this brief, Research Scholar Greg Hannsgen and President Dimitri B. Papadimitriou focus on the risks and possibilities ahead for the US economy. Using a Keynesian approach and drawing from the commentary of other observers, they analyze publicly available data in order to assess the strength and durability of the expansion that probably began in 2009. They focus on four broad groups of markets that have shown signs of stress for the last several years: financial markets, markets for household goods and services, commodity markets, and labor markets. This kind of analysis does not yield numerical forecasts but it can provide important clues about the short-term outlook for the country’s economic well-being, and cast light on some longer-run threats. In particular, dangers and stresses in the financial and banking systems are presently very serious, and labor market data show every sign of a widespread and severe weakness in aggregate demand. Unless there is new resolve for effective government action on the jobs front, drastic cuts in much-needed federal, state, and local programs will become the order of the day in the United States, as in much of Europe.

This paper applies Hyman Minsky’s approach to provide an analysis of the causes of the global financial crisis. Rather than finding the origins in recent developments, this paper links the crisis to the long-term transformation of the economy from a robust financial structure in the 1950s to the fragile one that existed at the beginning of this crisis in 2007. As Minsky said, “Stability is destabilizing”: the relative stability of the economy in the early postwar period encouraged this transformation of the economy. Today’s crisis is rooted in what he called “money manager capitalism,” the current stage of capitalism dominated by highly leveraged funds seeking maximum returns in an environment that systematically under-prices risk. With little regulation or supervision of financial institutions, money managers have concocted increasingly esoteric instruments that quickly spread around the world. Those playing along are rewarded with high returns because highly leveraged funding drives up prices for the underlying assets. Since each subsequent bust wipes out only a portion of the managed money, a new boom inevitably rises. Perhaps this will prove to be the end of this stage of capitalism–the money manager phase. Of course, it is too early even to speculate on the form capitalism will take. I will only briefly outline some policy implications.