From an institutional sales desk that must remain anonymous
There something very unnerving about this Minsky conference and I may be getting closer to putting my finger on what that is. There are myriad differences between adherents of the Austrian School of economics (“Austrians” from now on) and Minskians, who view themselves as a kind of elite guard in the Keynesian army. I won’t go into them all here, mostly because I am first and foremost a market enthusiast and have only an amateurish understanding of the two schools. I’ve read some Von Mises, I’ve read some Menger, I’ve read some Hayek, I’ve read some Keynes and I’ve read some Minsky. I have friends who hail from both camps and have been party to vigorous debates on the relative merits of the two schools. That’s the extent of my knowledge – well, that and a B.A. in economics – and I don’t want to hold myself out as an expert.
That disclaimer aside, I have an observation to make about the Minskians: you have to be very smart to be one. I mean, you have to be very smart…preferably brilliant. Let me give you an example of what I mean. Here is how Gary Gorton (professor of finance at Yale and a research associate at the NBER) began his presentation this afternoon (you can access all of these presentations in audio form here: http://www.levyinstitute.org/news/?event=32):
“I’m going to talk about ‘talking.’ I’m going to talk about talking about the financial crisis. As a by-product of that I will talk about the financial crisis. I want to talk about how we talk about the financial crisis and why we talk a certain way about the financial crisis.”
That, I think, sums up well the level of thinking (and talking!) that’s being done at this conference. The Gorton speech was phenomenal. He drew on a working knowledge of two hundred years of American economic history in making his argument, which goes (I think) something like this:
1. All financial crises begin with an impulse by lenders or depositors to secure their cash, and in that regard this crisis was not out of the ordinary. The “shadow banking system” was outside of the regulatory landscape and was therefore unprotected and vulnerable to a “run.” Contrary to popular opinion, CDOs and derivatives weren’t the root of the problem – a run on the repo market was, as lenders in that market moved to secure their cash.
2. The run on the ~$10trillion repo market resulted from a shortage of good collateral (an age-old economic problem, according to Gorton, although I confess I’ve never seen it emphasized by other economists).
3. Academic economists were caught totally flat-footed by the crisis and only pretended that they understood it after the fact. The reason they were caught flat-footed is because the existence of the Fed had led them to believe that such a crisis was no longer possible. In fact, if you look at modern crises – the Japanese real estate/stock market bust for example or the S&L crisis in the U.S. – you’ll see that economic and financial market participants don’t act the way they would normally act if there wasn’t a central bank. Nobody panics because it’s ingrained in them that the central bank will act to snuff out any “run.”
4. As a result of this ingrained belief in the agency of the Fed (or central banks in general), economists’ collective focus has shifted away from the underlying “shortage of good collateral” problem and toward the problems caused by the government’s response to the underlying problem. That is, the focus shifts to “moral hazard” and “too big to fail.”
5. The real problem is that government/central bank intervention is unreliable. Therefore, economists, who are the crossing guards for the economy so to speak, don’t know whether to anticipate the fallout from the financial system’s underlying problems (e.g. a “shortage of good collateral” leading to a run on repos) or the fallout from the government’s interventions.
I’m doing his speech a disservice with this recap, because his insights really come through in the details and the examples, but hopefully you get a flavor for the kinds of discussions taking place at this conference.
Not all of the speeches are brilliant, of course, but enough of them are to make it a worthwhile experience. You can do worse than spend an afternoon at the website which I’ve linked to above to listen to some of them (I’d recommend Randall Wray and Eric Tymoigne in session 1, Steve Randy Waldman in Session 2, Andrew Sheng, Rob Parenteau and Marshall Auerback in session 5, and Gary Gorton).
The problem which nags me, however, and I’ve alluded to this above, is that the level of brilliance needed to untangle the inner workings of our financial system is absurd. It just shouldn’t be this complicated, this reflexive, or this psychological. Austrians happen to understand that, and they propose an economic system which really isn’t a system at all. You have commodity-based money, well-defined property rights, no lender of last resort for the banking system, and economic actors figure out the rest themselves. I promise I will delve more into this debate in my weekend note.