Research Topics

Minsky’s Forgotten Lessons Ten Years after Lehman

Ten years after the fall of Lehman Brothers and the collapse of the US financial system, most commentaries remain overly focused on the proximate causes of the last crisis and the regulations put in place to prevent a repetition. According to Director of Research Jan Kregel, there is a broader set of lessons, which can be unearthed in the work of Distinguished Scholar Hyman Minsky, that needs to play a more central role in these debates on the 10th anniversary of the crisis.
 
This insight begins with Minsky's account of how crisis is inherent to capitalist finance. Such an account directs us to shore up those government institutions that can serve as bulwarks against the inherent instability of the financial system—institutions that can prevent that instability from turning into a prolonged crisis in the real economy.
 

If the Trump administration is to fulfill its campaign promises to this age’s “forgotten” men and women, Director of Research Jan Kregel argues, it should embrace the broader lesson of the 1930s: that government regulation and fiscal policy are crucial in addressing changes in the economic and financial structure that have exacerbated the problems faced by struggling communities.

In this policy note, Kregel explains how overcoming the economic and financial challenges we face today, just as in the 1930s, requires avoiding what Walter Lippmann identified as an “obvious error”: the blind belief that reducing regulation and the role of government will somehow restore a laissez-faire market liberalism that never existed and is inappropriate to the changing structure of production of both the US and the global economy.
 

To the extent that policymakers have learned anything at all from the Great Depression and the policy responses of the 1930s, the lessons appear to have been the wrong ones. In this public policy brief, Director of Research Jan Kregel explains why there is still a great deal we have to learn from the New Deal. He illuminates one of the New Deal’s principal objectives—quelling the fear and uncertainty of mass unemployment—and the pragmatic, experimental process through which the tool for achieving this objective—directed government expenditure—came to be embraced.

In the search for a blueprint from the 1930s, Kregel suggests that too much attention has been paid to the measures deployed to shore up the banking system, and that the approaches underlying the emergency financial policy measures of the recent period and those of the 1930s were actually quite similar. The more meaningful divergence between the 1930s and the post-2008 policy response, he argues, can be uncovered by comparing the actions that were taken (or not taken, as the case may be) to address the real sector of the economy following the resolution of the respective financial crises. 

By L. Randall Wray

Perhaps no economist was more vindicated by the global financial crisis than Hyman P. Minsky (1919–1996). Although a handful of economists raised alarms as early as 2000, Minsky’s warnings began a half century earlier, with writings that set out a compelling theory of financial instability. Yet even today he remains largely outside mainstream economics; few people have a good grasp of his writings, and fewer still understand their full importance. Why Minsky Matters makes the maverick economist’s critically valuable insights accessible to general readers for the first time. Author L. Randall Wray shows that by understanding Minsky we will not only see the next crisis coming but we might be able to act quickly enough to prevent it.

As Wray explains, Minsky’s most important idea is that “stability is destabilizing”: to the degree that the economy achieves what looks to be robust and stable growth, it is setting up the conditions in which a crash becomes ever more likely. Before the financial crisis, mainstream economists pointed to much evidence that the economy was more stable, but their predictions were completely wrong because they disregarded Minsky’s insight. Wray also introduces Minsky’s significant work on money and banking, poverty and unemployment, and the evolution of capitalism, as well as his proposals for reforming the financial system and promoting economic stability.

A much-needed introduction to an economist whose ideas are more relevant than ever, Why Minsky Matters is essential reading for anyone who wants to understand why economic crises are becoming more frequent and severe—and what we can do about it.

Published by: Princeton

A Keynes-Schumpeter-Minsky Synthesis

This paper discusses the role that finance plays in promoting the capital development of the economy, with particular emphasis on the current situation of the United States and the United Kingdom. We define both “finance” and “capital development” very broadly. We begin with the observation that the financial system evolved over the postwar period, from one in which closely regulated and chartered commercial banks were dominant to one in which financial markets dominate the system. Over this period, the financial system grew rapidly relative to the nonfinancial sector, rising from about 10 percent of value added and a 10 percent share of corporate profits to 20 percent of value added and 40 percent of corporate profits in the United States. To a large degree, this was because finance, instead of financing the capital development of the economy, was financing itself. At the same time, the capital development of the economy suffered perceptibly. If we apply a broad definition—to include technological advances, rising labor productivity, public and private infrastructure, innovations, and the advance of human knowledge—the rate of growth of capacity has slowed.

The past quarter century witnessed the greatest explosion of financial innovation the world had ever seen. Financial fragility grew until the economy collapsed into the global financial crisis. At the same time, we saw that much (or even most) of the financial innovation was directed outside the sphere of production—to complex financial instruments related to securitized mortgages, to commodities futures, and to a range of other financial derivatives. Unlike J. A. Schumpeter, Hyman Minsky did not see the banker merely as the ephor of capitalism, but as its key source of instability. Furthermore, due to “financialisation of the real economy,” the picture is not simply one of runaway finance and an investment-starved real economy, but one where the real economy itself has retreated from funding investment opportunities and is instead either hoarding cash or using corporate profits for speculative investments such as share buybacks. As we will argue, financialization is rooted in predation; in Matt Taibbi’s famous phrase, Wall Street behaves like a giant, blood-sucking “vampire squid.”

In this paper we will investigate financial reforms as well as other government policy that is necessary to promote the capital development of the economy, paying particular attention to increasing funding of the innovation process. For that reason, we will look not only to Minsky’s ideas on the financial system, but also to Schumpeter’s views on financing innovation.

Shadow Banking and Federal Reserve Governance in the Global Financial Crisis

The 2008 Federal Open Market Committee (FOMC) transcripts provide a rare portrait of how policymakers responded to the unfolding of the world’s largest financial crisis since the Great Depression. The transcripts reveal an FOMC that lacked a satisfactory understanding of a shadow banking system that had grown to enormous proportions—an FOMC that neither comprehended the extent to which the fate of regulated member banks had become intertwined and interlinked with the shadow banking system, nor had considered in advance the implications of a serious crisis. As a consequence, the Fed had to make policy on the fly as it tried to prevent a complete collapse of the financial system.

This monograph is part of the Levy Institute’s Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis, a two-year project funded by the Ford Foundation.

This is the fourth in a series of reports summarizing the findings of the Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis, directed by Senior Scholar L. Randall Wray. This project explores alternative methods of providing a government safety net in times of crisis. In the global financial crisis that began in 2007, the United States used two primary responses: a stimulus package approved and budgeted by Congress, and a complex and unprecedented response by the Federal Reserve. The project examines the benefits and drawbacks of each method, focusing on questions of accountability, democratic governance and transparency, and mission consistency.

The project has also explored the possibility of reform that might place more responsibility for provision of a safety net on Congress, with a smaller role to be played by the Fed, enhancing accountability while allowing the Fed to focus more closely on its proper mission. Given the rise of shadow banking—a financial system that operates largely outside the reach of bank regulators and supervisors—the Fed faces a complicated problem. It might be necessary to reform finance, through downsizing and a return to what Hyman Minsky called “prudent banking,” before we can reform the Fed.

This report describes the overall scope of the project and summarizes key findings from the three previous reports, as well as additional research undertaken in 2014.  

By Jan A. Kregel. Edited by Rainer Kattel. Foreword by G. C. Harcourt.

This volume is the first collection of essays by Jan Kregel focusing on the role of finance in development and growth, and it demonstrates the extraordinary depth and breadth of this economist’s work. Considered the “best all-round general economist alive” (Harcourt), Kregel is a senior scholar and director of the monetary policy and financial structure program at the Levy Economics Institute, and professor of development finance at Tallinn University of Technology. These essays reflect his deep understanding of the nature of money and finance and of the institutions associated with them, and of the indissoluble relationship between these institutions and the real economy—whether in developed or developing economies. Kregel has expanded Hyman Minsky’s original premise that in capitalist economies stability engenders instability, and Kregel’s key works on financial instability, its causes and effects, as well as his discussions of the global financial crisis and Great Recession, are included here.   Published by: Anthem Press

The Low and Extended Lending Rates that Revived the Big Banks

Walter Bagehot’s putative principles of lending in liquidity crises—to lend freely to solvent banks with good collateral but at penalty rates—have served as a theoretical basis for thinking about the lender of last resort for close to 100 years, while simultaneously providing justification for central bank real-world intervention. If we presume Bagehot’s principles to be both sound and adhered to by central bankers, we would expect to find the lending by the Fed during the global financial crisis in line with such policies. Taking Bagehot’s principles at face value, this paper aims to examine one of these principles—central bank lending at penalty rates—and to determine whether it did in fact conform to this standard. A comprehensive analysis of these rates has revealed that the Fed did not, in actuality, follow Bagehot’s classical doctrine. Consequently, the intervention not only generated moral hazard but also set the stage for another crisis. This working paper is part of the Ford Foundation project “A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis” and continues the investigation of the Fed’s bailout of the financial system—the most comprehensive study of the raw data to date.

This monograph is part of the Institute’s research program on Financial Instability and the Reregulation of Financial Institutions and Markets, funded by the Ford Foundation. Its purpose is to investigate the causes and development of the recent financial crisis from the point of view of the late financial economist and Levy Distinguished Scholar Hyman Minsky, and to propose “a thorough, integrated approach to our economic problems.”

The monograph draws on Minsky’s work on financial regulation to assess the efficacy of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enacted in response to the 2008 subprime crisis and subsequent deep recession. Some two years after its adoption, the implementation of Dodd-Frank is still far from complete. And despite the fact that a principal objective of this legislation was to remove the threat of taxpayer bailouts for banks deemed “too big to fail,” the financial system is now more concentrated than ever and the largest banks even larger. As economic recovery seems somewhat more assured and most financial institutions have regrouped sufficiently to repay the governmental support they received, the specific rules and regulations required to make Dodd-Frank operational are facing increasing resistance from both the financial services industry and from within the US judicial system.

This suggests that the Dodd-Frank legislation may be too extensive, too complicated, and too concerned with eliminating past abuses to ever be fully implemented, much less met with compliance. Indeed, it has been called a veritable paradise for regulatory arbitrage. The result has been a call for a more fundamental review of the extant financial legislation, with some suggesting a return to a regulatory framework closer to Glass-Steagall’s separation of institutions by function—a cornerstone of Minsky’s extensive work on regulation in the 1990s. For Minsky, the goal of any systemic reform was to ensure that the basic objectives of the financial system—to support the capital development of the economy and to provide a safe and secure payments system—were met. Whether the Dodd-Frank Act can fulfill this aspect of its brief remains an open question.

This monograph is part of the Levy Institute’s Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis, a two-year project funded by the Ford Foundation.

In the current financial crisis, the United States has relied on two primary methods of extending the government safety net: a stimulus package approved and budgeted by Congress, and a massive and unprecedented response by the Federal Reserve in the fulfillment of its lender-of-last-resort function. This monograph examines the benefits and drawbacks of each method, focusing on questions of accountability, democratic governance and transparency, and mission consistency. The aim is to explore the possibility of reform that would place more responsibility for provision of a safety net on Congress, with a smaller role to be played by the Fed, not only enhancing accountability but also allowing the Fed to focus more closely on its proper mission.

The extraordinary scope and magnitude of the financial crisis of 2007–09 required an extraordinary response by the Federal Reserve in the fulfillment of its lender-of-last-resort (LOLR) function. In an attempt to stabilize financial markets during the worst financial crisis since the Great Crash of 1929, the Fed engaged in loans, guarantees, and outright purchases of financial assets that were not only unprecedented, but cumulatively amounted to over twice current US GDP as well. the purpose of this brief is to provide a descriptive account of the Fed's response to the recent crisis—to delineate the essential characteristics and logistical specifics of the veritable "alphabet soup" of LOLR machinery rolled out to save the world financial system. It represents the most comprehensive investigation of the raw data to date, one that draws on three discrete measures: the peak outstanding commitment at a given point in time; the total peak flow of commitments (loans plus asset purchases), which helps identify periods of maximum financial system distress; and, finally, the total amouunt of loans and asset purchases made between January 2007 and March 2012. This third number, which is a cumulative measure, reveals that the total Fed response exceeded $29 trillion. Providing this account from such varying angles is a necessary first step in any attempt to fully understand the actions of the central bank in this critical period—and a prerequisite for thinking about how to shape policy for future crises.

A Minskyan Interpretation of the Causes, the Fed’s Bailout, and the Future

This paper provides a quick review of the causes of the Global Financial Crisis that began in 2007. There were many contributing factors, but among the most important were rising inequality and stagnant incomes for most American workers, growing private sector debt in the United States and many other countries, financialization of the global economy (itself a very complex process), deregulation and desupervision of financial institutions, and overly tight fiscal policy in many nations. The analysis adopts the “stages” approach developed by Hyman P. Minsky, according to which a gradual transformation of the economy over the postwar period has in many ways reproduced the conditions that led to the Great Depression. The paper then moves on to an examination of the US government’s bailout of the global financial system. While other governments played a role, the US Treasury and the Federal Reserve assumed much of the responsibility for the bailout. A detailed examination of the Fed’s response shows how unprecedented—and possibly illegal—was its extension of the government’s “safety net” to the biggest financial institutions. The paper closes with an assessment of the problems the bailout itself poses for the future.

Writing Down Debt, Returning to Democratic Governance, and Setting Up Alternative Financial Systems—Now

The five-year-long crisis of Western finance capitalism is pushing advanced liberal societies to a breaking point. If governments continue to be proxies of finance capital and aspiring political leaders cheerleaders for their financial backers, a catastrophic economic scenario is not really as far-fetched as some might like to think. Governments, industries, and households are under debt bondage, with the result that revenues from every sector of the economy are being diverted toward interest payments and late fees for various loans taken out on largely exploitative, even fraudulent terms. Now, after years of building up a Ponzi financial regime, Western capitalism faces its ultimate test. Will it collapse, giving rise to long-term economic instability and authoritarian political regimes? Or will it find the strength and the wisdom to make a comeback?

President Dimitri B. Papadimitriou and Senior Scholar L. Randall Wray argue that the common diagnosis of a “sovereign debt crisis” ignores the crucial role of rising private debt loads and the significance of current account imbalances within the eurozone. Profligate spending in the periphery is not at the root of the problem. Moreover, pushing austerity in the periphery while ignoring the imbalances within the eurozone is a recipe for deflationary disaster.
 
The various rescue packages on offer for Greece will not ultimately solve the problem, say the authors, and a default is a very real possibility. If a new approach is not embraced, we are likely seeing the end of the European Monetary Union (EMU) as it currently stands. The consequences of a breakup would ripple throughout the EMU as well as the shaky US financial system, and could ultimately trigger the next global financial crisis.

Lessons from Argentina

The literature on public employment policies such as the job guarantee (JG) and the employer of last resort (ELR) often emphasizes their macroeconomic stabilization effects. But carefully designed and implemented policies like these can also have profound social transformative effects. In particular, they can help address enduring economic problems such as poverty and gender disparity. To examine how, this paper will look at the reform of Argentina’s Plan Jefes into Plan Familias. Plan Jefes was the hallmark stabilization policy of the Argentine government after the 2001 crisis. It guaranteed a public sector job in a community project to unemployed male and female heads of households. The vast majority of beneficiaries, however, turned out to be poor women. For a number of reasons that are explored below, the program was later reformed into a cash transfer policy, known as Plan Familias, that still exists today. The paper examines this reform in order to evaluate the relative impact of such policies on some of the most vulnerable members of society; namely, poor women. An examination of the Argentine experience based on survey evidence and fieldwork reveals that poor women overwhelmingly want paid work opportunities, and that a policy such as the JG or the ELR cannot only guarantees full employment and macroeconomic stabilization, but it can also serve as an institutional vehicle that begins to transform some of the structures and norms that produce and reproduce gender disparities. These transformative features of public employment policies are elucidated by turning to the capabilities approach developed by Amartya Sen and elaborated by Martha Nussbaum—an approach commonly invoked in the feminist literature. This paper examines how the access to paid employment can enhance what Sen defines as an individual’s “substantive freedom.” Any policy that fosters genuine freedom begins with an understanding of what the targeted population (in this case, poor women) wants. It then devises a strategy that guarantees that such opportunities exist and removes the obstacles to accessing these opportunities.

A Dissenting View

It is commonplace to link neoclassical economics to 18th- or 19th-century physics and its notion of equilibrium, of a pendulum once disturbed eventually coming to rest. Likewise, an economy subjected to an exogenous shock seeks equilibrium through the stabilizing market forces unleashed by the invisible hand. The metaphor can be applied to virtually every sphere of economics: from micro markets for fish that are traded spot, to macro markets for something called labor, and on to complex financial markets in synthetic collateralized debt obligations—CDOs. Guided by invisible hands, supplies balance demands and markets clear. Armed with metaphors from physics, the economist has no problem at all extending the analysis across international borders to traded commodities, to what are euphemistically called capital flows, and on to currencies themselves. Certainly there is a price, somewhere, somehow, that will balance supply and demand. The orthodox economist is sure that if we just get the government out of the way, the market will do the dirty work. The heterodox economist? Well, she is less sure. The market might not work. It needs a bit of coaxing. Imbalances can persist. Market forces can be rather impotent. The visible hand of government can hasten the move toward balance.

Orthodox economists as well as most heterodox economists see the Global Financial Crisis as a consequence of domestic and global imbalances. The most common story blames the US Federal Reserve for excessive monetary ease that spurred borrowing, and the US fiscal and trade imbalances for a surplus of liquidity sloshing around global financial markets. Looking to the specific problems in Euroland, the imbalances are attributed to profligate Mediterraneans. The solution is to restore global balance, which requires some combination of higher exchange rates for the Chinese, reduction of US trade deficits, and Teutonic fiscal discipline in the United States, the UK, and Japan, as well as on the periphery of Europe.

This paper takes an alternative view, following the sectoral balances approach of Wynne Godley, combined with the modern money theory (MMT) approach derived from the work of Innes, Knapp, Keynes, Lerner, and Minsky. The problem is not one of financial imbalance, but rather one of an imbalance of power. There is too much power in the hands of the financial sector, money managers, the predator state, and Europe’s center. There is too much privatization and pursuit of the private purpose, and too little use of government to serve the public interest. In short, there is too much neoliberalism and too little democracy, transparency, and accountability of government.

The extraordinary scope and magnitude of the financial crisis of 2007–09 induced an extraordinary response by the Federal Reserve in the fulfillment of its lender-of-last-resort function. Estimates of the total amount of bailout funding provided by the Fed have ranged from its own lowball claim of $1.2 trillion to Bloomberg’s estimate of $7.7 trillion (just for the biggest banks) to the GAO tally of $16 trillion. But new research conducted as part of a Ford Foundation project directed by Senior Scholar L. Randall Wray finds that the Fed’s commitments—in the form of loans and asset purchases to prop up the global financial system—far exceeded even the highest estimates.

 

There have been a number of estimates of the total amount of funding provided by the Federal Reserve to bail out the financial system. For example, Bloomberg recently claimed that the cumulative commitment by the Fed (this includes asset purchases plus lending) was $7.77 trillion. As part of the Ford Foundation project “A Research and Policy Dialogue Project on Improving Governance of the Government Safety Net in Financial Crisis,” Nicola Matthews and James Felkerson have undertaken an examination of the data on the Fed’s bailout of the financial system—the most comprehensive investigation of the raw data to date. This working paper is the first in a series that will report the results of this investigation.

The purpose of this paper is to provide a descriptive account of the Fed’s extraordinary response to the recent financial crisis. It begins with a brief summary of the methodology, then outlines the unconventional facilities and programs aimed at stabilizing the existing financial structure. The paper concludes with a summary of the scope and magnitude of the Fed’s crisis response. The bottom line: a Federal Reserve bailout commitment in excess of $29 trillion.

As the crisis in Europe spreads, policymakers trot out one inadequate proposal after another, all failing to address the core problem. The possibility of dissolution, whether complete or partial, is looking less and less farfetched. Alongside political obstacles to reform, there is a widespread failure to understand the nature of this crisis. And without seeing clearly, policymakers will continue to focus on the wrong solutions.

Yet another rescue plan for the European Monetary Union (EMU) is making its way through central Europe, but no one is foolish enough to believe that it will be enough. Greece’s finance minister reportedly said that his nation cannot continue to service its debt, and hinted that a 50 percent write-down is likely. That would be just the beginning, however, as other highly indebted periphery nations will follow suit. All the major European banks will be hit—and so will the $3 trillion US market for money market mutual funds, which have about half their funds invested in European banks. Add in other US bank exposure to Europe and you are up to a potential $3 trillion hit to US finance. Another global financial crisis is looking increasingly likely.

We first summarize the situation in Euroland. Our main argument will be that the problem is not due to profligate spending by some nations but rather the setup of the EMU itself. We then turn to US problems, assessing the probability of a return to financial crisis and recession. We conclude that difficult times lie ahead, with a high probability that another collapse will be triggered by events in Euroland or in the United States. We conclude with an assessment of possible ways out. It is not hard to formulate economically and technically simple policy solutions for both the United States and Euroland. The real barrier in each case is political—and, unfortunately, the situation is worsening quickly in Europe. It may be too late already.

The Minskyan Lessons We Failed to Learn

Senior Scholar L. Randall Wray lays out the numerous and critical ways in which we have failed to learn from the latest global financial crisis, and identifies the underlying trends and structural vulnerabilities that make it likely a new crisis is right around the corner. Wray also suggests some policy changes that would shore up the financial system while reinvigorating the real economy, including the clear separation of commercial and investment banking, and a universal job guarantee.

Can the Blind Heal the Crippled?

Whoever said that economic science is free of ideological bias and political prejudice? Three hundred years of financial and economic crises have meant nothing to die-hard neoliberals, who believe in (among other things) self-regulating markets and trickle-down theory. With so many incorrect assumptions guiding market liberalism, it’s no wonder neoliberals have failed to draw the proper lessons from the Great Depression and turned a blind eye to the real causes of the global financial crisis of 2007–08 and the ensuing recession.

This paper begins by recounting the causes and consequences of the global financial crisis (GFC). The triggering event, of course, was the unfolding of the subprime crisis; however, the paper argues that the financial system was already so fragile that just about anything could have caused the collapse. It then moves on to an assessment of the lessons we should have learned. Briefly, these include: (a) the GFC was not a liquidity crisis, (b) underwriting matters, (c) unregulated and unsupervised financial institutions naturally evolve into control frauds, and (d) the worst part is the cover-up of the crimes. The paper argues that we cannot resolve the crisis until we begin going after the fraud, and concludes by outlining an agenda for reform, along the lines suggested by the work of Hyman P. Minsky.

A Nonmainstream Perspective

The global financial crisis has now spread across multiple countries and sectors, affecting both financial and real spheres in the advanced as well as the developing economies. This has been caused by policies based on “rational expectation” models that advocate deregulated finance, with facilities for easy credit and derivatives, along with globalized exposures for financial institutions. The financial crisis has combined with long-term structural changes in the real economy that trend toward underconsumption, generating contractionary effects therein and contributing to further instabilities in the financial sector. The responses so far from US monetary authorities have not been effective, especially in dealing with issues of unemployment and low real growth in the United States, or in other countries. Nor have these been of much use in the context of the lost monetary and fiscal autonomy in both developing countries and the eurozone, especially with the debt-related distress in the latter. Solutions to the current maladies in the global economy include strict control of financial speculation and the institution of an “employer of last resort” policy, both at the initiative of the state.

Scott Fullwiler and Senior Scholar L. Randall Wray review the roles of the Federal Reserve and the Treasury in the context of quantitative easing, and find that the financial crisis has highlighted the limited oversight of Congress and the limited transparency of the Fed. And since a Fed promise is ultimately a Treasury promise that carries the full faith and credit of the US government, the question is whether the Fed should be able to commit the public purse in times of national crisis.

Stability is destabilizing. These three words concisely capture the insight that underlies Hyman Minsky’s analysis of the economy’s transformation over the entire postwar period. The basic thesis is that the dynamic forces of a capitalist economy are explosive and must be contained by institutional ceilings and floors. However, to the extent that these constraints achieve some semblance of stability, they will change behavior in such a way that the ceiling will be breached in an unsustainable speculative boom. If the inevitable crash is “cushioned” by the institutional floors, the risky behavior that caused the boom will be rewarded. Another boom will build, and the crash that follows will again test the safety net. Over time, the crises become increasingly frequent and severe, until finally “it” (a great depression with a debt deflation) becomes possible.

Policy must adapt as the economy is transformed. The problem with the stabilizing institutions that were put in place in the early postwar period is that they no longer served the economy well by the 1980s. Further, they had been purposely degraded and even in some cases dismantled, often in the erroneous belief that “free” markets are self-regulating. Hence, the economy evolved over the postwar period in a manner that made it much more fragile. Minsky continually formulated and advocated policy to deal with these new developments. Unfortunately, his warnings were largely ignored by the profession and by policymakers—until it was too late.

In the aftermath of the global financial collapse that began in 2007, governments around the world have responded with reform. The outlines of Basel III have been announced, although some have already dismissed its reform agenda as being too little (and too late!). Like the proposed reforms in the United States, it is argued, Basel III would not have prevented the financial crisis even if it had been in place. The problem is that the architects of reform are working around the edges, taking current bank activities as somehow appropriate and trying to eliminate only the worst excesses of the 2000s.

Hyman Minsky would not be impressed.

Before we can reform the financial system, we need to understand what the financial system does—or, better, what it should do. To put it as simply as possible, Minsky always insisted that the proper role of the financial system is to promote the “capital development” of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined.

In this paper, we first examine Minsky’s general proposals for reform of the economy—how to restore stable growth that promotes job creation and rising living standards. We then turn to his proposals for financial reform. We will focus on his writing in the early 1990s, when he was engaged in a project at the Levy Economics Institute on reconstituting the financial system (Minsky 1992a, 1992b, 1993, 1996). As part of that project, he offered his insights on the fundamental functions of a financial system. These thoughts lead quite naturally to a critique of the financial practices that precipitated the global financial crisis, and offer a path toward thorough-going reform.

Recovery Prospects and the Future

The global crisis of 2007–09 affected developing Asia largely through a decline in exports to the developed countries and a slowdown in remittances. This happened very quickly, and by 2009 there were already signs of recovery (except on the employment front). This recovery was led by China’s impressive performance, aided by a large stimulus package and easy credit. But China needs to make efforts toward rebalancing its economy. Although private consumption has increased at a fast pace during the last decades, investment has done so at an even faster pace, with the consequence that the share of consumption in total output is very low. The risk is that the country may fall into an underconsumption crisis.

Looking at the medium and long term, developing Asia’s future is mixed. There is one group of countries with a highly diversified export basket. These countries have an excellent opportunity to thrive if the right policies are implemented. However, there is another group of countries that relies heavily on natural resources. These countries face a serious challenge, since they must diversify.

Before we can reform the financial system, we need to understand what banks do; or, better, what banks should do. This paper will examine the later work of Hyman Minsky at the Levy Institute, on his project titled “Reconstituting the United States’ Financial Structure.” This led to a number of Levy working papers and also to a draft book manuscript that was left uncompleted at his death in 1996. In this paper I focus on Minsky’s papers and manuscripts from 1992 to 1996 and his last major contribution (his Veblen-Commons Award–winning paper).

Much of this work was devoted to his thoughts on the role that banks do and should play in the economy. To put it as succinctly as possible, Minsky always insisted that the proper role of the financial system was to promote the “capital development” of the economy. By this he did not simply mean that banks should finance investment in physical capital. Rather, he was concerned with creating a financial structure that would be conducive to economic development to improve living standards, broadly defined. Central to his argument is the understanding of banking that he developed over his career. Just as the financial system changed (and with it, the capitalist economy), Minsky’s views evolved. I will conclude with general recommendations for reform along Minskyan lines.

Gender Perspectives and Policy Choices

This paper looks at the countries of Central and Eastern Europe (CEE) and the Commonwealth of Independent States (CIS), where economies have been most dramatically hit by the global crisis and its impact is likely to be most long-lasting, especially among poor and vulnerable groups. Using poverty as the main axis, it looks at aspects of economic and social development in countries at similar poverty levels to identify the degree of fiscal space in each, as well as the different policy choices made. The paper argues that despite such economic fundamentals as increasing external debt, worsening current account imbalances, and demands for a balanced budget, governments have policy choices to make about how to protect different groups, especially the most vulnerable—including women.

This paper sets out to investigate the forces and conditions that led to the emergence of global imbalances preceding the worldwide crisis of 2007–09, and both the likelihood and the potential sustainability of reemerging global imbalances as the world economy recovers from that crisis. The “Bretton Woods 2” hypothesis of sustainable global imbalances featuring a quasi-permanent US current account deficit overlooked that the domestic counterpart to the United States’ external deficit—soaring household indebtedness—was based not on safe debts but rather toxic ones. We critique the “global saving glut” hypothesis, and propose the “global dollar glut” hypothesis in its stead. With the US private sector in retrenchment mode, the question arises whether fiscal expansion might not only succeed in filling the gap in US domestic demand but also restart global arrangements along BW2 lines, albeit this time based on public debt—call it “Bretton Woods 3.” This paper explores the chances of a BW3 regime, highlighting the role of “dollar leveraging” in sustaining US trade deficits. Longer-term prospects for a postdollar standard are discussed in the light of John Maynard Keynes’s “bancor” plan.

This paper investigates the United States dollar’s role as the international currency of choice as a key contributing factor in critical global developments that led to the crisis of 2007–09, and considers the future role of the dollar as the global economy emerges from that crisis. It is argued that the dollar is likely to retain its hegemonic status for a few more decades, but that United States spending powered by public rather than private debt would provide a more sustainable motor for global growth. In the process, the “Bretton Woods II” regime depicted by Dooley, Folkerts-Landau, and Garber (2003) as sustainable despite featuring persistent US current account deficits may turn into a “Bretton Woods III” regime that sees US fiscal policy and public debt as “minding the store” in maintaining US and global growth.

The Fiction and Reality of the 10th Anniversary Blast

This paper investigates why Europe fared particularly poorly in the global economic crisis that began in August 2007. It questions the self-portrait of Europe as the victim of external shocks, pushed off track by reckless policies pursued elsewhere. It argues instead that Europe had not only contributed handsomely to the buildup of global imbalances since the 1990s and experienced their implosive unwinding as an internal crisis from the beginning, but that it had also nourished its own homemade intra-Euroland and intra-EU imbalances, the simultaneous implosion of which has further aggravated Europe's predicament. To keep its own house in order in the future, Euroland must shun the outdated “stability oriented” policy wisdom inherited from Germany’s mercantilist past and Bundesbank mythology. Steps toward a fiscal union to back the euro are also warranted.

Is the B Really Justified?

The term BRIC was first coined by Goldman Sachs and refers to the fast-growing developing economies of Brazil, Russia, India, and China–a class of middle-income emerging market economies of relatively large size that are capable of self-sustained expansion. Their combined economies could exceed the combined economies of today’s richest countries by 2050. However, there are concerns about how the current financial crisis will affect the BRICs, and Goldman has questioned whether Brazil should remain within this group.

Senior Scholar Jan Kregel reviews the implications of the global crisis for developing countries, based on the factors driving global trade. He concludes that there is unlikely to be a return to the extremely positive conditions underlying the recent sharp increase in growth and external accounts. The key for developing countries is to transform from export-led to domestic demand-led growth, says Kregel. From this viewpoint, Brazil seems much better placed than the other BRIC countries.