Matthew Klein has a great, last post up over at Free Exchange.
It’s a frustrating post, because it lays out many of the themes and ideas which are floating around the world, and tries to tie them all together into a coherent whole that explains everything. It’s a long post, with lots of great charts – a must read for everyone interested in the economy.
I can’t disagree with any of the facts laid out in the post, but I will disagree with the “Doomed to Fail” premise. I don’t know what “Fail” means in this context. Minsky’s idea is restated by Mr. Klien:
“ I am sceptical that any central bank is capable of fulfilling its objectives over any meaningful length of time because, as the late Hyman Minsky explained, lower observed macroeconomic volatility in the short term encourages greater financial risk-taking. Thus, the longer the perceived good times last, the more fragile the economy becomes.”
Here is more directly from Minsky:
“Credit is the oil that makes the economic machine run more smoothly. But unless it is sufficiently well anchored, credit creation can also support unsustainable paths…Like a piece of rubber that stretches too far and eventually snaps, the self-reinforcing interaction between credit creation, asset prices and the real economy can lead to a build-up of financial imbalances that eventually derails economic activity.
The problem is that we don’t bother, not that we can’t bother. The interaction between credit creation, asset prices, and the real economy isn’t some obscure mystery, it is kinda known, or it should be known.
Most private credit creation in the United States uses real estate to back this credit. We just hide this relationship rather than be explicit about it. Banks mostly lend money to the non-financial sector against real estate and capital improvements.