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Prof. Anna Maria Variato A.A. 2015-2016 Macroeconomic Dynamics a.a. 2017-2018 Prof. Anna Maria Variato a.a. 2015-2016 Prof. AnnaMaria Variato 1 Macroeconomic Dynamics a.a. 2017-2018 The relevance of minskian contribution in the explanation of empirical facts: the subprime crisis The role of FIH as a paradigm to explain macroeconomic dynamics Is the FIH the only relevant “piece of explanation” even for Minsky himself? Main references: • A. Vercelli, (2010), Minsky moments, Russell chickens and grey swans: the methodological puzzles of financial instability analysis, in «Minsky, crisis and develpment», Tavasci and Toporowski (eds.) St. Martin Press, McMillan, 15-31 • A. Vercelli, (2011), A Perspective on Minsky moments, revisiting the core of the financial instability hypothesis, Review of Political Economy, v. 23, 49-67 • A. Variato, (2015), Can we say Minsky moment when households matter?, in «Cycles, Growth and the Great Recession», Cristini, Fazzari, Greenberg and Leoni (eds.), Routledge, London, 25-44 Prof. AnnaMaria Variato 2 Macroeconomic Dynamics a.a. 2017-2018 … to be … or not to be Finance Money Liquidity Solvency Fragility Stability Endogeneity Exogenous shocks Fairness Efficiency Uncertainty Irreversibility All agents Firms Real effects Nominal Effects Aspects emphasized by Minsky Standard issues Prof. AnnaMaria Variato 3 Macroeconomic Dynamics a.a. 2017-2018 Issues raised by Minsky Empirical: Suitable for the explanation of recent events? Yes, Yes but, No, Who cares? From theoretical to methodological: Is the Financial Instability Hypothesis as an interpretative framework: Original? Complete? Relevant? Prof. AnnaMaria Variato 4 Macroeconomic Dynamics a.a. 2017-2018 Part I Prof. AnnaMaria Variato 5 Macroeconomic Dynamics a.a. 2017-2018 In order to evaluate the issue, the research questions usually evaluated are: Was the subprime crisis a Minsky Moment? Does the subprime crisis belong to the core of FIH? Examining the existing literature one can find that the first type of question finds a different answer because: There exist different evaluations of the conditions apt to identify a Minsky Moment (instant vs. process) (see Vercelli, 2011) More in depth we can find different uses of the concept of time (historical vs. logical) (see Variato, 2015) Prof. AnnaMaria Variato 6 Macroeconomic Dynamics a.a. 2017-2018 The expression ‘Minsky moment’ was coined in 1998 by PIMCO bond fund manager Paul McCulley on the occasion of the Russian debt crisis. This neologism became a fashionable catchphrase during the subprime crisis; Point of time Process of indeterminate length that is supposed to be • Magnus (2007a): the point short-lived, at least relatively to periods of where credit supply starts to financial tranquillity. dry up • McCulley (2001): a self-feeding process of debt-deflation • Wolf (2008): the point at • Lahart (2007): when over-indebted investors which a financial mania are forced to sell even their solid turns into panic investments • Magnus (2007c): when lenders become increasingly cautious • Whalen (2008): credit crunch • Davidson (2008): when the Ponzi pyramid financial scheme collapses Quotes 2011, p.50 from Vercelli The two categories of definitions do not exclude each other since a point of time may start a process. […] More troubling is the fact that the existing definitions focus on disparate aspects of financial crises, […] playing distinctive roles in different historical episodes. Prof. AnnaMaria Variato 7 Macroeconomic Dynamics a.a. 2017-2018 According to Variato (2015) the different interpretations given to Minsky moments relate to different notions of time Logical time: Process Historical time: See Wray (2009): the process starts as a crisis of Point of time money-manager capitalism See Bellofiore and Halevi (2011): 1997-2000 the point is subprime crisis 2007 “The immediate cause of a crisis does not matter. The forces at work that led to the crisis started to operate long time before the factor triggering the occurrence of the crisis”. Tymoigne (2006) Prof. AnnaMaria Variato 8 Macroeconomic Dynamics a.a. 2017-2018 The subprime crisis 2007 can be Unfavourable but FIH viewed as a Minsky moment? useful tool • Davidson (2008) Favourable but with • DeAntoni (2010) criticism • Behlul (2011) • FIH relevant, but in • Kregel (2008) Favourable need to be refined • Bellofiore and Halevi • Emphasis on the • Vercelli (2010), (2011) sufficient pieces of (2011); Strongly favourable the minskian • Erturk and Ozgur, The FIH can be explanation (2009), (2010); extended to other • Stages of capitalism: • Toporowski (2005), fields of economics and role of interaction (2010) sciences between real/finance/institut We will deserve • Regional an ions; Role of policy particular international intervention economics (Henry, attention to these 2009; Dymski, 2010) • The nature of contributions ceilings: institutional • Macroeconomic not market driven modeling (Barbera and Weise, 2010) • Wray (2009, 2011), Whalen (2008), • Social science Kregel (2010, 2010a) (Galbraith and Sastre, 2010) • Method and science Who cares? paradigms (Reinert, Prychitko (2010): 2009) Austrian economics Prof. AnnaMaria Variato 9 Macroeconomic Dynamics a.a. 2017-2018 Definition of Minsky moment Distinction between Minsky moment and Minsky process Continuos time/type model where the endogenous path of the economy is determined by the interaction of liquidity and solvency indicators Policy implications Go to the Second Part Prof. AnnaMaria Variato 10 Macroeconomic Dynamics a.a. 2017-2018 was not triggered by over-indebted firms, but households (or banks, or other financial institutions); (almost everywhere in the literature) was not caused by a “ponzification” of the system (that is a dynamic process where hedge units transform into speculative ones, and speculative units into Ponzi): households were not allowed to be Ponzi (ponzification of households was an effect, not a cause of the development of the crisis) (especially Davidson, but almost everywhere except Kregel); was due to mispricing of risk (Kregel) (+ Behlul); was not due to a boom of firms’ productive investment, i.e. was not due to profit-seeking firms, but to other profit-seeking units (again either households, or banks, or other financial institutions); (everywhere in the literature); while implying speculative bubbles it did not lead to wage and price inflation (Bellofiore and Halevi). This critique, also contains a twin argument which blames Minsky for excessively emphasizing the role of banks instead of other financial institutions. Prof. AnnaMaria Variato 11 Macroeconomic Dynamics a.a. 2017-2018 … while Minsky does provide some useful insight into the financial crisis of 2008– 9, the ability of his most prominent theory of financial instability—the financial instability hypothesis (FIH)—to explain current crisis is absent. (p. 137) (…) I argue that in the decade leading up to the crisis, financial behavior at the firm level did not show a gradual and progressive deterioration toward instability—an essential requirement for a Minsky moment. (p. 137-138) (…) Thus, the fragility of the macroeconomy in this case was not caused by the nonfarm, nonfinancial corporate sector. (p. 145) (…) The “moment,” in a true Minskian sense, arrives after a cumulative process towards instability, the “moment” being a debt-deflation process. However, in order to arrive at that “moment,” the economy should have first moved from hedge to speculative and finally to Ponzi financing. In the current crisis, the banking system was either speculative—or Ponzi—financing from the beginning (Behlul, 2011, p. 151) Prof. AnnaMaria Variato 12 Macroeconomic Dynamics a.a. 2017-2018 “…over the course of any expansion, the economy moves from hedge to speculative to Ponzi finance. Minsky argued that this is a necessary precondition for an unstable financial system” (Papadimitriou and Wray, 1999, p. 10, emphasis added) (…) Consequently, with no movement from hedge to speculative to Ponzi finance, the “necessary precondition” for a Minsky moment has not been met. Instead, the current financial market problem was set off by insolvency problems of large financial market underwriters who attempted to transform illiquid noncommercial mortgages into liquid assets via securitization (Davidson 2008, p. 670). Prof. AnnaMaria Variato 13 Macroeconomic Dynamics a.a. 2017-2018 If we consider the subprime crisis in itself, it is probably legitimate to interpret it as a “Minsky moment” followed by a “Minsky meltdown” (Roubini 2007a, 2007b; Whalen 2007; Wray 2007). Many features are in fact the same. Our problem, however, extends beyond the episode in itself: to what extent does the subprime turmoil fit with the “core” of Minsky’s financial instability hypothesis? I refer to the hypotheses (i) that the fundamental instability of capitalism is upward (ii) that growth endogenously leads to financial fragility and consequently tends to be shaken by financial crises followed by debt deflations and deep depressions. The two theses are equally essential to Minsky’s construction. As we will see, the recent experience seems to gainsay the latter and, perhaps, also the former. (De Antoni, 2010, p. 18) Prof. AnnaMaria Variato 14 Macroeconomic Dynamics a.a. 2017-2018 Davidson, 2008 Something is missing DeAntoni, 2010 • Critique 1: FIH deals with firms’ Behlul, 2011 investment, while subprime crisis Kregel, 2008 was due to households Bellofiore and Halevi, 2011 The role of big players Something is wrong (or at • Critique 4: Do we really
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