Archive for January 8th, 2010

There’s an Economist post [ht: Ezra] on a new Fed working paper that appears to embrace non-neoclassical financial theories. The Economist says,

But most useful is the authors’ reconstruction of the forces that produced the bubble. They cite a self-reinforcing feedback loop of rising home prices, declining lending standards, financial innovation, and buyer euphoria. They explicitly endorse the models of Robert Shiller, a leading proponent of the role of psychology in bubbles, Charles Kindleberger, author of the classic “Manias, Panics and Crashes”, and Hyman Minsky…

To be sure, the references by this paper to Mr Minsky and Mr Kindleberger are fleeting. Nor is the application of their insights terribly novel…But for the Fed staff, this is pretty radical. My own search of the Fed’s web site found only two previous references to Mr Minsky…

The prior negligence is understandable. Not only was Mr Minsky on the fringe of mainstream economics, his core insight is antithetical to the Fed. The Fed’s raison d’etre is stability: stable prices, stable employment, financial stability. But Mr Minsky argued that economic stability encourages more risk taking and leverage, and ultimately produces more instability and bigger recessions.

This paper’s embrace of Mssrs Minsky, Shiller and Kindleberger may bely a subtle shift to a less utopian, more fatalistic view…

It’s kind of embarrassing that the Fed would have to “discover” an economist whose work is key to the work of an entire sub-group of economists, the post-Keynesians. That said, I would take these “fleeting references” with a grain of salt. The key insight that the Economist’s post makes is most germane here- Minsky’s work undermines much of the Fed’s MO, which, regardless of passage of CFPA or perhaps something with more regulatory teeth, will remain mostly laissez-faire.

Of course, this post brings to mind another interesting point. My hunch is that Minsky will continue to not be taught in mainstream graduate schools. However, the economics blogosphere has made his work much more prominent. It only takes a couple of well-read bloggers to connect the dots between Minsky’s work and the current crisis before people like Paul Krugman begin to title their speeches after him. With even that small shift, it can become fashionable for authors of a working paper to throw in a reference to Minsky, even without embracing his core values. That embrace, I’m guessing, would seem to be a bridge too far for the Fed and its denizens.


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