You can tell people are freaking out about what’s going on in financial markets around the world when much of the Australian media turns to Steve Keen for expert commentary. Keen’s an Associate Professor in Economics at the University of Western Sydney, but as author of a book called Debunking Economics, he’s not your typical market commentator.
Keen’s blog tracks debt and financial instability in Australia and abroad, and is an excellent, well-researched resource. He is more than a little bearish and has few reservations about predicting a reckoning – maybe not imminently but certainly before too long.
Keen is heavily influenced by an economist called Hyman Minsky. I also like Minsky a lot, and he plays a big role in my thesis. Minsky is known mainly for his ‘financial instability hypothesis’, which, to put it very simply, argues that stability is destabilising for capitalism – good times tempt capitalists into overstretching their credit. In fact, John King writes in his History of Post-Keynesian Economics that Minsky was a classic hedgehog, in Isaiah Berlin’s sense that “a fox knowns many things, but a hedgehog knows one big thing”.
I think this is a little unfair to Minsky. Although he did drive home this ‘financial instability hypothesis’ in many articles and his major book Stabilising an Unstable Economy, he is misinterpreted as a prophet of doom. What’s often left out of nutshell accounts is the role of the central bank. Minsky’s real message is not that advanced capitalism is likely to suffer another 1929. It is that every time the system has been threatened since the 1960s, central banks have stepped in to shore things up. This has some consequences: flooding the market with liquidity can undermine counter-inflation policy, and the cleansing function of a financial crisis never takes place, so that asset price inflation quickly gets going again, each time from a higher starting point.
This, rather than major financial crisis, has been the outcome of most episodes of financial stress since the 1980s. And, once again, central banks have stepped in over the last few days. The state must be taken into account in any prediction of a serious financial crisis.