The Wall Street Examiner Sun 2010-05-09 09:58 EDT

The Minsky Cruise (part 2, Households)

...Now for the Minsky part. The theory above, in layman's terms, argues that over time, when an economy expands without serious contractions, finances will become increasingly risky. Minsky wrote of a shift from hedge finance (when debt, both principal and interest, can be serviced from cash flows) through speculative finance (when debt must be rolled over as only interest payments can be serviced from cash flows) and into Ponzi finance (when cash flows cannot cover interest payments and thus new debt must be added or assets sold). The idea in the Ponzi finance stage is that asset appreciation will compensate for the extra risk...I don't mean to suggest we (collectively) are broke, just that, as Minsky argued (and the data bears out) our balance sheets are increasingly betting on real estate and equity price appreciation with borrowed money...

Household; Minsky Cruise; Part 2; Wall Street Examiner.

Thu 2009-09-17 09:31 EDT

Why capitalism fails - The Boston Globe

Stephen Mihm

Mainstream economics rediscovers Hyman Minsky; ``Instability,'' he wrote, ``is an inherent and inescapable flaw of capitalism.''...Minsky drew his own, far darker, lessons from Keynes's landmark writings, which dealt not only with the problem of unemployment, but with money and banking...Minsky argued that Keynes's collective work amounted to a powerful argument that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff...Minsky spent the last years of his life, in the early 1990s, warning of the dangers of securitization and other forms of financial innovation, but few economists listened. Nor did they pay attention to consumers' and companies' growing dependence on debt, and the growing use of leverage within the financial system... Minsky...argued for a ``bubble-up'' approach, sending money to the poor and unskilled first. The government - or what he liked to call ``Big Government'' - should become the ``employer of last resort,'' he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else's wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder.

Boston Globe; Capitalism Failed.