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Edward Chancellor, author of a very expensive report
on the credit bubble, and the classic Devil Take the Hindmost: A
History of Financial Speculation presented a talk last summer to the
Global Borrowers and Investors Forum on The
Destabilizing Stability of the Greenspan Era.
The talk analyzes "the
Greenspan Reflation". First he presents Greenspan's own view, that a
"soft landing" from the bursting of the 1990s stock bubble, has
been achieved and that the relatively brief and mild recession vindicates Fed
policy. We can now look forward to a sustained period of low inflation and
stable economic growth.
Then Chancellor looks at the
recent period from the three theoretical perspectives of Hayek, Minsky, and
Mises. In my opinion, judging by the slides, he did the best job on Hayek but
pretty muched missed the point on Mises. Chancellor's discussion of Mises
mostly focussed on a few examples without providing a foundational view of
Mises theory of credit expanion driven booms and busts.
Not having read Minsky, I can't
comment on the accuracy of his treatment of Minsky. While it is indicative of
the increasing exposure of the views of the Austrian thinkers that they would
be presented at what appears to be an institutional money management
conference, what I do find puzzling is Minsky's inclusion on the list
alongside Mises and Hayek.
According the Chancellor's
explanation, Minsky's view is that market economies are inherently unstable
and crisis-prone. Stability leads to instability by creating an illusion of
the disappearance of risk and thereby fostering excessive risk-taking. In the
notes to the presentation, Chancellor quotes Minsky:
No theory of the behavior of a capitalist economy has
merit if it explains financial instability as the result of either exogenous
policy mistakes or institutional flaows that can easily be
corrected...onfortunately, policymakers and advisors are slaves of an
economic theory that misspecifies the nature of our economy by ignoring its
instability...all capitalisms are unztable, some are more unstable than
others.
The Austrian theory does exactly
has no merit according to Minsky: it shows how investment funded by savings
results in stable economic growth. Mises' theory explains boom and bust cycles
as a result of fractional reserve banking and credit expansion. This is an
institutional feature, not of a market economy as such, which would require
100% reserve, no lending against deposits, and a market chosen money, most
likely gold or some combination of precious metals. This institutional
feature was introduced by bad court
decisions in England during the 19th century, and could be voided by legal
reforms. (See also Heurta de Soto's A Critical Analysis
of Central Banks and Fractional-Reserve Free Banking). These
institutional problems have been further amplified by banking cartels creating central
banks.
While I am encouraged at
Chancellor's inclusion of the Austrian thinkers in a public presentation, at
the end, I am confused by what he is trying to accomplish in presenting two
mutually contradictory viewpoints. Does he not understand the Austrians? Or
is he trying to show that if you start from two completely different
theoretical frameworks, either way you find that we are in a big mess right now?
Or is he conducting an exercise in comparative history of thought?
Robert Blumen
Robert Blumen is an independent
software developer based in San Francisco, California
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