Mark Buchanan — Market complexity also makes for instability

Looks like another fallacy of composition is at work in finance to increase system instability by assuming that increasing the stability of individual institutions will increase the stability of the system as a whole. This post suggest that this is apparently not the case owing to network effects.

Physics Perspective
Market complexity also makes for instability
Mark Buchanan

Bill Mitchell — The BIS adds to the financial turbulence and should be disbanded

In 2014, it was apparent that the Bank of International Settlements (BIS) had made itself part of the ideological wall that was blocking any reasonable recovery from the GFC. I wrote about that in this blog – The BIS remain part of the problem. I was already concerned in 2013 (see this blog – Since when did the BIS become the Neo-liberal Ministry of Misinformation?). Things haven’t improved and the latest statements from the Bank in the BIS Quarterly Review (March 6, 2016) – Uneasy calm gives way to turbulence – demonstrates two things that are now obvious. First, that the neo-liberal Groupthink that created the crisis in the first place, and, which has prolonged the malaise continues to dominate the leading international financial institutions. Second, not only are these institutions (and I include the OECD, the IMF, to BIS, among this group) impeding return to prosperity as a result of their continued adherence to failed macroeconomics, but worse, their patterned behaviour actually introduces new instabilities that ferment further crises. Someone should be held accountable for the instability these organisations cause, which, ultimately leads to higher rates of unemployment and increased poverty rates.

Bill Mitchell – billy blog
The BIS adds to the financial turbulence and should be disbanded
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

See also Carroll Quigley, Tragedy and Hope: A History of the World in Our Time, Volumes 1-8 (New York: The Macmillan Company, 1966, Chapter 7, page 324

"The powers of financial capitalism had (a) far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank... sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

This is an extract from a section running several pages that lays out the basis behind the thinking that led to contemproary central banking.

George Cooper — Money and the magical mathematics of Brahmagupta

What do the Indian mathematician that discover zero, John Maynard Keynes and Hyman Minsky have in common. Explaining money as credit and debt.

Money and the magical mathematics of Brahmagupta

George Cooper

Lars P. Syll — The Keynes-Minsky-Kindleberger theory of financial crises

Charles Kindleberger quote.

Lars P. Syll’s Blog
The Keynes-Minsky-Kindleberger theory of financial crises
Lars P. Syll | Professor, Malmo University

Bruno Biais, Jean-Charles Rochet, Paul Woolley — Ballooning finance

Minsky without attribution.

Vox.eu
Ballooning finance
Bruno Biais, Jean-Charles Rochet, Paul Woolley

Adair Turner — The Perils of Financial Freedom

Adair Turner gives China some advise about financial instability without mentioning Minksy.

The credit cycle is too important to be left to free markets.

Project Syndicate
The Perils of Financial Freedom
Adair Turner, former Chairman of the United Kingdom’s Financial Services Authority, is a member of the UK’s Financial Policy Committee and the House of Lords

See also James Kwak, Finance and Democracy at The Baseline Scenario

In other words, it’s not just that complexity can cause banks to blow up. It’s also that complexity makes it impossible for regulators to monitor banks, which is a critical ingredient in the financial crises that we all supposedly want to avoid.

BBC News — Did Hyman Minsky find the secret behind financial crashes?

Nice article on Minsky.

BBC News
Did Hyman Minsky find the secret behind financial crashes?
(h/t Andy Blatchford via Neil Wilson)

Analysis: Why Minsky Matters is broadcast on BBC Radio 4 at 20:30 GMT, 24 March 2014 or catch up on BBC iPlayer

Steve Keen — Modeling Financial Instability

This paper will be published in a forthcoming book on the crisis edited by Malliaris, Shaw and Shefrin. In what follows, I derive a corrected formula for the role of the change in debt in aggregate demand, which is that ex-post aggregate demand equals ex-ante income plus the circulation of new debt, where the latter term is the velocity of money times the ex-post creation of new debt.
The PDF is available here: Keen2014ModelingFinancialInstability. The Minsky models used in this paper are here in a ZIP file. The latest version of Minsky can be downloaded from here.

Debtwatch
Modeling Financial Instability
Steve Keen

Merijn Knibbe — Inefficient financial markets and an irrational economist: examples

Combine this with the fact that these loans are ‘financed’ by money creation and with the diabolical feedback loop between money printing and higher asset prices, asset prices wich in turn are the collateral for additional money printing and not much is left of the rationality of the housing/mortgage market.

Mr. Fama, a winner of the economics Nobel price and a proponent of the idea of rational markets however seems, rather irrationally, unaware of such basic monetary economics, i.e. that our stock of money is to a very large extent created by banks which lend freshly printed money to people buying houses. [From at article translated from Dutch by Merijn Knibbe]

"Money printing" and "lend[ing] freshly printed money" are confusing. What it is means is the central bank providing liquidity for bank lending on mortgages irrespective of the quality of credit, e.g., value of the underlying collateral and ability of the borrower to repay. 

If a central bank enables imprudent or even predatory lending instead of exerting its regulatory power then asset values increase beyond their worth based on credit fundamentals, which is unsustainable. When this persists, eventually bubbles form that will inevitably burst. As Irving Fisher and Hyman Minsky described.

Eugene Fama seems to be unaware of this.

Real-World Economics Review Blog
Inefficient financial markets and an irrational economist: examples
Merijn Knibbe

Noah Smith — The hard-money people throw Gene Fama under the bus

I think where one does see evidence of prices higher than they would be otherwise is likely in equities were low borrowing rates decrease the cost of margin (leverage). Cost of margin is hugely influential in speculative markets.

Housing "bubble" reigniting? No way. Prices are still way down from their highs, a historically high percentage of purchases of existing residential RE are foreclosure or underwater related and for cash, with Wall Street and flippers big buyers in expectation of exceptional ROI on resale. Rent/purchase ratio is still reflecting the bursting of the bubble, and new housing is not exactly "on fire." There is not going to be another housing bubble in the US for years and there are still housing bubbles to pop abroad.


But it's good to see the inflationistas in retreat and throwing the EMH under the bus, too, in favor of financial instability. But is the Fed creating financial instability now? No way. The Fed is still fighting the consequences of financial instability and not all that successfully.

Noahpinion
The hard-money people throw Gene Fama under the bus

Noah Smith

Steve Keen's presentation on financial instability - Harvard 2013

My presentation on financial instability at the Harvard Law School "Re-theorizing Liquidity" seminar.

Keen Harvard 2013 Financial Intability [sic]

Steve Keen

Michael Stephens — Kocherlakota on Low Interest Rates and Instability

Narayana Kocherlakota is the head of the Federal Reserve Bank of Minneapolis and is known for an uncommon feat in high-level policy circles: he changed his mind.

Multiplier Effect
Kocherlakota on Low Interest Rates and Instability
Michael Stephens

Steve Keen — Instability may not be optional (1)

If instability is a feature of capitalism rather than a bug, the question becomes how much instability should be risked institutionally in order to unleash individual incentive to risk without excessively putting social stability at extreme risk.

Or should we be asking whether "capitalism" is worth the human cost.

Steve Keen's Debtwatch
Instability may not be optional (1)
Steve Keen

Marshall Auerback — Should we tax excess corporate profits?

In North America, the reversal of the net lending/borrowing position of the business and household sectors is of critical importance in understanding the evolution of financial capitalism over the last decade, with much of the speculative drive having been fueled by the growing savings of the corporate sector. It was the rentier behaviour of the corporate sector, with the latter finding it ever more lucrative to engage in financial acquisitions, which largely led to an abandoning of productive investment since the 1990s.

When an economy becomes financialised and therefore far less productive, it becomes more prone to fraud, greater financial instability, and higher rates of unemployment. But it serves the interests of the economic rentiers. Minsky was right: you need a “big government” to act as a stabilising bulwark against the financialisation of the economy. Taxing retained corporate earnings is clearly another aspect of dealing with the ravages of money market capitalism.

Michael Hudson calls it "taxing away economic rent."

Macrobits
Should we tax excess corporate profits?
Marshall Auerback | Corporate Spokesperson, Pinetree Capital Ltd.
(h/t Kevin Fathi via email)


Cant' get clearer and more succinct than this about the role of fiscal deficits:

Deficit spending by the government is merely the counterpart of private sector saving. What government deficit spending does is to permit the private sector to achieve its level of desired saving. When the latter changes, government spending ought to be adjusting in the opposite direction to offset it (unless the current account balance happens to do the job).

Galo Nuño and Carlos Thomas — Bank leverage cycles

Economists tend to agree that explosive deleveraging in the banking sector was a central element of the 2008 global financial crisis. This column argues that such deleveraging is far from unique. In fact, there is a ‘bank leverage cycle’ in which bank leverage, assets and GDP ramp up and down together; and this is true across financial subsectors. Such procyclicality strengthens the case for macroprudential regulations.

VOX.eu
Bank leverage cycles
Galo Nuño, Economist at the European Central Bank, and Carlos Thomas
Economist, Banco de España

At least they read some Minsky. Now they really need to read some Mosler. Their solutions are RHS instead of LHS.

Frances Coppola — Productivity, savings and financial crises

Frances Coppola analyzes ECB Working Paper, "Booms and Systemic
Banking Crises" by Frederic Boissay, Fabrice Collard and Frank Smets (February 2013)

The ECB's paper makes a valiant attempt to fit the financial system into a DSGE model of the economy that previously ignored it. The maths is fearsome and I admit I skipped much of it. But they draw some important conclusions.

Very early in the paper they accept the prevailing wisdom that financial crises are endogenously determined - in other words, they happen as a consequence of behaviour within the system, not because of external shocks to it. Now this immediately causes a problem with the model. DSGE models work on the basis that shocks are exogenous - sort of like meteorite impacts on life on earth. But using the same analogy, an endogenous crisis would be CAUSED by the behaviour of life on earth. Attempting to use a DSGE model to explain the effects of the behaviour of humans on their own behaviour is enough to drive a serious economist to drink. Admittedly there are shocks in the model, but adverse ones are regarded as secondary and the causative positive supply-side shocks they postulate happen some time before the crisis itself. They cause the buildup of the behaviour that leads to the crisis, rather than the crisis itself. This I think is an important insight, and I commend the ECB economists for sticking to their guns despite the considerable difficulty in using a model that on the face of it looks inappropriate.

Coppola Comment
Productivity, savings and financial crises
Frances Coppola

Michael Stephens — Hyman Minsky Conference on Financial Instability in Berlin

Last week, a short walk from the Brandenburg Gate, the Levy Institute held its most recent Hyman P. Minsky Conference on Financial Instability. The two day conference in Berlin featured a mix of central bankers, academics, politicians, and financial practitioners and dealt with issues related to the eurozone debt crisis, the Federal Reserve, signs of instability in China, Dodd-Frank and financial reform, the payments system (including the threat of cyber attacks and the potential destabilizing effect of the development of alternative payments technologies), indexes of financial fragility, and a host of other intriguing topics.

Multiplier Effect
Minsky in Berlin
Michael Stephens

Links to audio of presentations.

Michael Biggs and Thomas Mayer — How central banks contributed to the financial crisis

Even before the crisis, there were some who stressed that monetary policy should keep an eye on asset bubbles and the growth of credit. This column argues that the policy of inflation targeting, used widely in the 1990s and 2000s, did indeed lead to excessive credit growth that eventually bred financial instability.
VOX
How central banks contributed to the financial crisis
Michael Biggs, Global Economist at Deustche Bank, and Thomas Mayer, Senior Fellow at the Center of Financial Studies, Goethe Universität, Frankfurt

Krugman does Minsky on PBS

Thursday on PBS Newshour, Nobel prize-winning economist Paul Krugman explained the relevance of Hyman Minsky’s theory on the current economic crisis.

“One of his arguments was exactly that you have, you have a depression, you have a bad scene and everybody gets cautious and that caution gives you several decades of stability and as the stability goes on people forget the dangers and they make the same mistakes and get you right back into another one,” he said. “So there was a natural cycle.”

Krugman added that in addition to this natural cycle, conservatives had pushed a “religiously pro-market” ideology that claimed all regulation was harmful and the government was always the problem.

Read it at Raw Story
Krugman explains the gradual march to economic crisis
by Eric W. Dolan


The PBS video is included at the end of the article

Jan Kregel & Dimitri B. Papadimitriou — Building Effective Regulation Requires a Theory of Financial Instability

Stepping back and surveying the last half decade's worth of US policy responses to the global financial crisis,what we see before us looks very much like the "piecemeal" and "patchwork" pattern of reform that Hyman Minsky cautioned against in his 1986 book Stabilizing an Unstable Economy. If there ever was any real political space for fundamental reform of the financial system, it has since disappeared, even as the economic wounds left by the crisis continue to fester. The battle to shape the rule-making and implementation process of the 2010 Dodd-Frank Act is ongoing, but Dodd-Frank—indeed, the whole host of policy reactions (and nonreactions) since 2007—is largely undergirded by an approach to financial regulation that is incomplete and inadequate.

Read the rest at the Levy Institute

Building Effective Regulation Requires a Theory of Financial Instability

by Jan Kregel, director of the Levy Institute’s Monetary Policy and Financial Structure program and a professor at Tallinn Technical University, and Dimitri B. Papadimitriou, president of the Levy Institute and executive vice president and Jerome Levy Professor of Economics at Bard College

(h/t Michael Stevens at Multiplier Effect, It's hard to fix what you don't think is broken)