Beyond Twin Deficits: Emotions of the Future in the Organizations of Money

American Journal of Economics and Sociology, The, Oct, 1999 by J. F. Pixley

Moving on, then, to 'studying up', historians of finance describe a past of 'elusive stability' (Eichengreen 1990), and this equally applies to the fragile present. Instability, moreover, offers less certainty about the future even in the limited sense of simple potential trends. Hyman Minsky places instability at the peak of the economic system, in the corporate business sector, as well as the finance sector. As Minsky says, 'an economy with a Wall Street cannot be static; it cannot abstract from time' (1985 p. 39). His major point is that 'financial instability is a normal functioning, internally-generated result of the behavior of a capitalist economy' (1985 p. 26). Minsky's 'financial instability hypothesis' poses the paradox that stability - 'or tranquillity - in a world with a cyclical past and capitalist financial institutions is destabilizing' (Minsky 1985 p. 37; Henwood 1998 p. 222). During the course of a sustained expansion, stability feeds back and affects long-term expectations. This in turn aff ects views about uncertainties which 'in turn will affect the asset values and permissible liability structures' (Minsky 1985 pp, 36-7). Once increasing units are engaged in speculative finance and what Minsky calls 'Ponzi finance' (where debts can only be paid for with further debts), an initial 'financial tautness' may easily turn into a financial crisis and even 'debt-deflation interactions' (Minsky 1985 pp 42; 50). [18]

For Minsky instability is normal! 'Tranquillity and success are not selfsustaining states, they induce increases in capital asset prices relative to current output prices and a rise in acceptable debts.' The role of profits is central, since 'present profits' may or may not validate decisions made in the past. This will affect long-term expectations and frame present as well as future investment and financing decisions (Minsky 1985 p. 41). Minsky also draws attention to the rapid search for 'financial innovations' whereby 'aggressive investors' search for loopholes in the central bank's efforts to reduce inflationary pressures. In all moves to financial liberalization, innovations are very difficult to control. This makes 'radical reforms more difficult than many populists would like, since policies aimed at finance aim at a moving target' (Henwood 1998 p. 220). According to Doug Henwood, the Federal Reserve's attempts to control such innovations, for example with the move to Eurodollars in the 1970s, led to the Volcker 'clampdown' which virtually paralyzed the American economy, and significantly affected other economies (1998 pp, 219-20). In 1987, the reason why the Wall Street 'crash' did not result in a 1930s depression was because it was better managed by the Federal Reserve. Yet, as John Smithin (1996) argues, it was 'triggered' by Reserve Bank statements that led to panic ('climbing a wall of fear' is the cliche) Wall Street's assumptions from Volcker's previous clampdown that inflated asset prices might bring a similar, Federal Reserve-induced recession, proved unfounded. In this case, fear was induced by anxiety about the effects of 'fighting inflation'; the rentiers' own medicine (Smithin 1996 pp, 126-31).