Hyman P. Minsky, the renowned financial economist, macroeconomist, and Levy Institute distinguished scholar, was born 91 years ago today. A short bio of Minsky, along with links to many of his publications, can be found here. Minsky’s papers are collected at the Minsky Archive, which is housed at the institute. In April, we will be holding our 20th Annual Hyman P. Minsky Conference in New York City. I hope you enjoy these links to information about an economist who was and is very important to this institute.

Levy Senior Scholar L. Randall Wray explains the foresight of Hyman Minsky in this video.

Over the course of the summer, Levy senior scholar James K. Galbraith gave a series of lectures in Europe laying out his view of the financial crisis that originated on this side of the Atlantic. At the most recent of these, in July, he emphasized the role of fraud:

It’s important to recognize that at the root of the financial crisis there was one of the greatest swindles of all economic history. The mortgages that were originated in the private sector in the United States which were then transformed into securities and sold through the financial markets around the world were in effect counterfeits. They were documents that looked like mortgages but were known by the people making them to be certain to fail.

Links to the rest of Galbraith’s talks are listed below:

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I seem to remember that there used to be a column in a magazine featuring contradictory newspaper headlines. One headline might say, “Fed Chair Says Interest Rates Likely to Rise,” while another in a different newspaper from the very same day would insist, “Fed Chair Says Interest Rates Likely to Fall.”

Something like this appears to have occurred in blogs and articles that have published lists of prognosticators who predicted the financial crisis, the Great Recession, and/or the housing crisis. In fact, some pairs of these lists have very few names in common. For example, David Warsh’s often-fascinating online column, “Economic Principals” published the following “Pantheon of Prescients” two days ago:

Raghuram Rajan
Kenneth Rogoff
Nouriel Roubini
Robert Shiller
William White

On the other hand, here are the winners of the heterodox Revere Award, “for the economist who first and most cogently warned the world of the coming Global Financial Crisis”:

Dean Baker
Steve Keen
Nouriel Roubini

All of the economists on both lists have had some very interesting things to say about the financial crisis, recession, and/or various other developments since 2007 or so. A major concern of mine with the first list is that, in my view, some on the list have greatly underestimated the role of weak financial regulation as a factor in the crisis. (Another intriguing list was recently removed from the web, hopefully by its author. Appropriately, it included the late Levy Distinguished Scholar Wynne Godley.)

All such lists are of somewhat limited usefulness and importance. But somehow many people (including this blogger) find them interesting, and they continue to appear.

It is remarkable that the two lists above would have only one name in common, though I think no economist would seriously claim that even both of them combined would be all-inclusive. Is this just an indication that there are borders between groups of economists (left versus right, Keynesian versus New Classical, European versus North American, heterodox versus neoclassical, etc.) that are rarely crossed? I have been wondering if anyone will step up to the plate with the most comprehensive list possible, one that might cross more of these and other boundaries. One bit of good news that might emerge from this exercise is that we have quite an impressive “competition” indeed, yielding far more insights than one might have at first anticipated.

A number of prominent economists have signed a letter calling for more economic stimulus from the United States government in order to put people back to work. Levy senior scholar James K. Galbraith and two other well-known Keynesians chose not to participate, and issued this comment explaining why.

A statement from Paul Davidson, James Galbraith and Lord Skidelsky

We three were each asked to sign the letter organized by Sir Harold Evans and now co-signed by many of our friends, including Joseph Stiglitz, Robert Reich, Laura Tyson, Derek Shearer, Alan Blinder and Richard Parker. We support the central objective of the letter — a full employment policy now, based on sharply expanded public effort. Yet we each, separately, declined to sign it.

Our reservations centered on one sentence, namely, “We recognize the necessity of a program to cut the mid-and long-term federal deficit… ” Since we do not agree with this statement, we could not sign the letter.

Why do we disagree with this statement?  The answer is that apart from the effects of unemployment itself the United States does not in fact face a serious deficit problem over the next generation, and for this reason there is no “necessity [for] a program to cut the mid-and long-term deficit.”

On the contrary: If  unemployment can be cured, the deficits we presently face will necessarily shrink.  This is the universal experience of rapid economic growth: tax revenues rise, public welfare spending falls, and the budget moves toward balance. There is indeed no other experience in modern peacetime American history, most recently in the late 1990s when the budget went into surplus as full employment was reached.

We agree that health care costs are an important issue. But health care is a burden faced by both the public and private sectors, and cost control is a job for health policy, not budget policy.  Cutting the public element in health care – Medicare, especially – in response to the health care cost problem is just a way of invidiously targeting the elderly who are covered by that program.  We oppose this.

The long-term deficit scare story plays into the hands of those who will argue, very soon, for cuts in Social Security as though these were necessary for economic reasons.  In fact, Social Security is a highly successful program which (along with Medicare)  maintains our entire elderly population out of poverty and helps to stabilize the macroeconomy. It is a transfer program and indefinitely sustainable as it is.

We call on fellow economists to reconsider their casual willingness to concede to an unfounded hysteria over supposed long-term deficits, and to concentrate instead on solving the vast problems we presently face.  It would be tragic if the Evans letter and similar efforts – whose basic purpose we strongly support – led to acquiescence in Social Security and Medicare cuts that impoverish America’s elderly just a few years from now.

Paul Davidson is editor of the Journal of Post Keynesian Economics and author of The Keynes Solution.

James K. Galbraith is a professor at the University of Texas at Austin and author of The Predator State.

Lord Robert Skidelsky is the author, most recently, of Keynes: The Return of the Master.

Paul Krugman and James K. Galbraith agree that this is a time for fiscal stimulus, not austerity. But they differ on a larger question: do government deficits ever matter? Or is the government so special–by virtue of its ability to create money out of thin air–that its spending can exceed income forever, by any amount?

In an interesting blog post (warning: not safe for the equation-challenged), the New York Times columnist and Nobel laureate Krugman argues that, carried to extremes, deficit spending by government can lead to runaway inflation. But, he adds, “we’re nowhere near those conditions now. All I’m saying here is that I’m not prepared to go as far as Jamie Galbraith. Deficits can cause a crisis; but that’s no reason to skimp on spending right now.”

Krugman wrote this in response to testimony by Galbraith, a Levy senior scholar, to the federal Commission on Deficit Reduction. Galbraith responds in the comments by asserting that Krugman’s conclusion is the result of a modeling error. But his key graf comes earlier:

If the government spent but declined to “borrow,” what would happen? Nothing much. Banks would hold their reserves as cash rather than bonds, and their earnings would be a bit lower. It is *not* true, as a rule, that people (or banks) move readily to substitute lumps of coal for dollars, unless the price level is already moving up and out of control.

Randall Wray, also a Levy senior scholar, weighs in with this:

f you look at the data on tax revenue growth over the previous two cycles you will observe that in the upswing federal revenue grows at an annual rate above 15%–typically two to three times faster than GDP and government spending. This is why the deficit is reduced. Your scenario in which govt just keeps “pumping” money into the economy even as we reach full employment of resources is not plausible. In any case, your original case against the Modern Money Theory approach adopted by Galbraith had to do with insolvency, not inflation. Insolvency is a matter of inability to meet NOMINAL commitments as they come due. When govt spends by crediting bank accounts, there is no situation in which it cannot make its promised payments. You have tried to shift this to a case of full employment of all resources, when govt cannot move more resources to the public sector. But again that is not plausible–so long as there are any resources for sale for dollars, the federal govt can compete with the private sector for them, and can win by bidding up the price. Note I am not advocating such policy.

The Wall Street Journal reports on signs that risky lending is once again on the upswing. For example:

Credit-card issuers mailed 84.8 million offers of plastic to U.S. subprime borrowers in the first six months of this year, up from 43.7 million a year earlier, estimates research firm Synovate. Nearly 8% of loans for new cars in the latest quarter went to borrowers with the lowest range of credit scores, up from 6.2% in 2009’s fourth quarter, according to J.D. Power & Associates and Fair Isaac Corp.

The lenders say they’re being careful–really!–and of course things aren’t as bad as they once were. But there are disturbing anecdotes of people who are essentially broke getting credit-card solicitations, and apparently these aren’t isolated incidents:

Kathleen Day, a spokeswoman for the Center for Responsible Lending, said the consumer group is “seeing banks re-enter the subprime market at a steady clip and make loans to borrowers who don’t have the ability to repay.”

Under the new financial reform measure hammered out by Congressional negotiators, mortgage lenders “will have to check borrowers’ income and assets.” Here it is, in black and white. A regular sea change.

The clock is ticking and right now first-time buyers have to close the deal in six days. The incentive is sweet: up to $8,000 from Uncle Sam. The Internal Revenue Service reported that $12.6 billion was credited to 1.8 million home buyers (the final toll will be higher as transactions in 2010 have not been filed yet, not to mention the inevitable fraud).

Calculated Risk, a highly regarded blog that tracks these matters, suggests that six months of inventory is normal in the housing market. For new homes, in May, the level rose to 8.5 months from 5.8 in April as sales plunged. Things are little better in the market for pre-existing homes; there we find 8.3 months of supply, in part due to the non-stop flow of foreclosures and short sales.

From the data, it seems that the tax credit program has stimulated the market, at least a little, and for awhile. My question to you is, should our uncle in Washington keep the program going?

Pros:

• Propping up shaky home prices may encourage private spending and support aggregate demand.
• Aiding the real estate market in lowering inventories may keep prices from falling further and generate some construction jobs.
• Reaching a “normal” level of inventories may improve everyone’s expectations and thus create a virtuous cycle of self-fulfilling recovery.

Cons:

• The tax credit program may condition potential buyers to wait for another round of subsidies, thus delaying the very purchases we most want to accelerate..
• The temporary subsidy may not be enough to sustain a high volume of transactions, and inventories may rebound (unless higher demand fueled by economic recovery takes place miraculously). Multiplier effects of the subsidy may not be enough to get us to a self-sustaining market.
• The program delivers benefits to people who can afford to buy home, and therefore is regressive. This regressivity implies high opportunity costs.

About a year ago, supply-side economist Arthur Laffer (known for the “Laffer curve,” a graph that depicted tax revenue first rising, then falling as tax rates increased) published an op-ed piece in the Wall Street Journal predicting sharply higher inflation and nominal interest rates over the next four to five years. The justification given for this claim was the rapid growth of the money supply, as measured by the Fed’s monetary base statistic, since the fall of 2008.

One year later, inflation has not taken off. Meanwhile, the stock of currency and bank reserve deposits at the Fed has continued to grow rapidly, though growth has slowed markedly over the past year. The chart to the left (click on it for a better look) shows that Laffer’s preferred measure of money-supply growth has trended downward recently. It remained at about 100 percent, year-on-year, in the three months immediately following the op-ed piece. Since then, money-supply growth has remained in the double-digit range. However, there has been no discernible and sustained upward trend in nominal interest rates or inflation. Many recent events have conspired to keep these numbers at low levels. On the other hand, an argument can be made that the money supply itself is mostly a somewhat unreliable indicator of what is happening, rather than a crucial mover of the economy.

About 40 years ago, economists Nicholas Kaldor and James Tobin, both followers of Keynes, published important articles arguing that changes in the “money supply” in themselves were probably not causes of economic growth or inflation, but instead a product of those forces. (This claim does not mean that interest rates do not play an important role.) Monetarists like Milton Friedman, who had long argued that the growth rate of the money supply determined the growth rate of nominal income in the short run and inflation in the long-run, had it almost completely backwards, according to this post-Keynesian view. Granted, the Fed chooses in a literal sense the size of its balance sheet by making voluntary asset trades, loans, etc., but as a practical matter it cannot consistently maintain an arbitrarily chosen money-supply growth rate. For example, the Fed usually targets the federal funds rate. This forces it to buy or sell just enough bonds to stay at the targeted interest rate, which affects the supply of Fed liabilities in often-unpredictable ways. Attempts by central banks around the world to set and meet targets for the growth rate of the money supply have been repeatedly frustrated and, worse, have often led to recessions.

The Fed has recently expanded the range of assets it buys and sells in order to guide the economy, in what might seem more like a deliberate policy decision. (Mortgage-backed securities, longer-dated bonds, and some distressed assets obtained from failing firms and institutions are important examples of the types of assets currently held by the Fed in significant amounts.) One might assume that such purchases are well within the Fed’s power to control. But there is less discretion even in these actions than many observers seem to think. For example, in the Fed’s view and that of the federal government, a decision to ignore the AIG situation could have led to a wider financial panic, because it would have threatened investment banks and other companies with which AIG had done business. As Hyman Minsky pointed out repeatedly in his writings, working to alleviate and prevent financial crises by helping failing banks may be the most crucial of the Fed’s duties—more important even than setting interest rates. The recent crisis seems unusual only because it was by some measures the most serious challenge of its type in many years. Despite the unusual scope and size of the bailout efforts, the Fed’s overall approach set very few precedents, and wide-ranging efforts to stabilize financial institutions and markets could not possibly have been avoided without serious economic consequences, though perhaps the task could have been accomplished at a much lower cost.

Such efforts have ineluctably led to the huge money-supply growth rates that are shown in the figure. Laffer pointed out that most of this growth was due to a dramatic increase in bank reserves. However, high levels of reserves will not lead to significantly increased lending unless financial institutions believe that more loans will be repaid with a profitable return, an eventuality that in the current situation will await stronger demand for American goods and services. Anyway, because of the weakness and fragility of the recovery, many fewer economists worry about excessive lending now than one year ago.

Actions that the Fed is in effect compelled to take—either to meet an interest-rate target or to fulfill its lender-of-last resort function and similar obligations to stabilize the financial system—cannot be seen as fundamental causes of inflation. Doubtless, a failure to perform either of these key central-bank functions effectively could lead to a deeper recession and/or deflation. But even to the extent that the Fed is responsible for adverse economic outcomes, these are likely to be the result of mistakes in interest-rate policy and in stabilizing the financial system, which are best not thought of as erroneous decisions about the proper growth rate of the money supply.