Economic research outside of the paradigm of the rationality postulate was made impossible by academic institutions – journals, central banks, etc. It is a great vindication for Hyman Minsky’s idea that (financial) stability creates instability.Econoblog 101
NY Times reports on Keen, Bernanke, Kindleberger and Minsky
Dirk Ehnts | Berlin School for Economics and Law
The last mile closes a little more.
But as long as Big Finance can point to rationality and market efficiency as standards, it can successfully lobby for less regulation, since "markets are optimally self-regulating" when left alone, given these assumptions.
Amazingly, Greenspan later admitted that he was mistaken about these assumptions, but Bernanke is paying no heed to the Maestro's admission of failure.
I didn't know where to post this Tom, it's a paper about the problems in Detroit, it's a free download and worth reading if you have the time.
ReplyDeleteAt times it's understandably more from a black perspective, but the issues with neoliberal ideology, which they're addressing, is similar to what's discussed quite often on here.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2229554
Thanks, James. Promoted to a post.
ReplyDeleteIt's a good post by Dirk.
ReplyDeleteAt the same time, one must be careful to recognize that Minsky's approach is NOT based on irrationality at all. This is a common misrepresentation used by neoclassicals to ignore Minsky on methodological grounds alone.
Here's Kregel on Minsky:
"It is common to describe the process of the endogenous creation of financial fragility as one of euphoria, or “bubble” mania. But Minsky always maintained that bankers, who are usually betterbinformed about the overall market environment and potential competitors,are inherently skeptical of the borrower’s estimate of future cash flows, and thus insist on margins of safety.In short, bankers are neither gullible nor irrational. Thus, an endogenous evolutionary process leading to a reduction of margins of safety must be based on something more than euphoria or excessively optimistic expectations."
http://www.levyinstitute.org/pubs/ppb_93.pdf
Earlier paper by Kregel goes into more detail on Minsky's traditional model:
http://cas.umkc.edu/econ/economics/faculty/Kregel/645/Winter2003/Readings/Margins%20of%20safety.pdf
@ STF
ReplyDeleteFrom the NYT article:
It seems to me that he had both Minsky and Kindleberger wrong. Their insight was that behavior that seems perfectly rational at the time can turn out to be destructive. As Robert J. Barbera, now the co-director of the Center for Financial Economics at Johns Hopkins University, wrote in his 2009 book, “The Cost of Capitalism,” “One of Minsky’s great insights was his anticipation of the ‘Paradox of Goldilocks.’ Because rising conviction about a benign future, in turn, evokes rising commitment to risk, the system becomes increasingly vulnerable to retrenchment, notwithstanding the fact that consensus expectations remain reasonable relative to recent history.”
So both assume rationality, but in equilibrium based theories, rationality necessarily leads to good outcomes?
ReplyDeleteReading Bill Black, I think that something else was at the bottom of the crisis rather than simply loosening credit standards in the Ponzi stage.
ReplyDeleteBill makes a good case that the bottom line was criminogenic environments and control fraud made possible by govt capture that allowed the financial sector to write its own rules and to avoid regulatory oversight. In addition, complex financial engineering allowed banks to offload dreck onto unsuspecting customers behind the facade of inflated appraisals and bogus ratings. And Bill goes on from there. The result was a Grasham dynamic in which the bad drove out the good. This really was a Ponzi scheme, i.e, a criminal operation that could only take place if government ratified it, which as we know now it did.
Criminals act perfectly rationally in pursuing self-interest in the conventional economic concept of max U, which is amoral. What this means is that as in the jungle, power rules.
Oops. "Grasham" above should be Gresham, from Gresham's law — "bad money drives out good."
ReplyDelete