Important Figures in the Development of MMT: Hyman Minsky 'Stability Breeds Instability'
The danger lies in private sector debt not government sector debt
Hyman Minsky (September 23, 1919 – October 24, 1996) is most notable for his theory of financial instability: in his view, periods of economic stability inevitably leads to excessive risk-taking, which in turn leads to financial crises. Minsky coined the phrase "stability breeds instability."
Minsky’s explanation can be summarised in the following bullet points:
When things are going well, people assume they will continue to go well.
Financiers, businesses, banks and private individuals take greater risks to make the best of what they regard as a safe, ongoing opportunity.
To free the energy of the market and allow businesses, banks and financiers to invest more freely, there are calls to dismantle restrictive financial regulations.
The government weakens financial regulations, allowing for greater risks on the assumption of greater rewards.
However, deregulation combined with risky investments causes instability in the economy.
An unexpected change leads to an economic downturn. For example, a rise in interest rates (i.e. the cost of borrowing has gone up), whereby investors find that their investments are no longer sustainable. Private debt spirals, firms go bust, individuals lose their homes and banks go under. The economy is in crisis.
As Minsky writes, ironically, stability has bred instability.
MMT agrees with Minsky and emphasises the need for strong financial regulation
In relation to Modern Monetary Theory (MMT), Minsky's insights underscore the importance of proactive government intervention and strong financial regulation to prevent and/or cushion the effects of economic crises.
It is private sector debt not government debt that is dangerous
Minsky shows that, contrary to neoliberal orthodoxy, it is not public sector debt that leads to instability but private sector debt. In the MMT view, the ability of currency-sovereign governments to spend without accruing debts in the common sense of the word (i.e. by governments that are issuing their own currency) is a stabiliser for the economy. This can be done without causing inflation—such as by employing people directly through a job guarantee program.
Neoliberal economists expect everything to come back into balance - if the market is left to its own devices
Neoliberal economists believe that left to their own devices, economies tend toward full employment and are naturally self-correcting during downturns. Government intervention, they argue, distorts these natural adjustments, leading to inefficiencies and prolonged downturns. The government actions they are referring to include excessive regulation, deficit spending and high taxes, as these actions interfere with the market's ability to allocate resources efficiently and therefore, can only slow down recovery during an economic downturn.
MMT economists disagree: government intervention and strong financial regulations are essential
This contrasts with MMT, which supports active government intervention and strong financial regulation to ensure economic stability and full employment.
Both Minsky and MMT economists point out that boom and bust are a natural part of the economy and government intervention is required to stabilise that economic cycle. Strong financial regulation will always be required as it mitigates the risk of financial meltdowns - such as the one that happened in 2008.
Your comments are welcome whether you agree or disagree.
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Jim Byrne MMT101.org
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