New Directions in Modern Economics series
Chapter 6: Balance Sheet (Minsky) Effects: An Empirical Analysis
6. Balance sheet (Minsky) eﬀects: an empirical analysis The previous chapters have attempted to explain how the emergence of social habit structures amenable to the use of credit to buy things such as consumer electronics, clothing, travel, food and entertainment has, in conjunction with ﬁnancial innovations such as the asset-backed security (ABS), pushed consumer spending to unexpected levels in the past two decades – or more precisely, to levels that would not have been anticipated based on the contemporaneous performance of fundamental factors such as income and employment. We argued that a key implication of consumer credit is that it tends to diminish the structural dependence of consumption on current income and thus makes it reasonable to think in terms of an animal-spirited consumption function. As credit extended its range of importance, the prevailing mood of the household sector assumed greater power to disturb aggregate spending. A funk that envelops a substantial share of households can, in the context of the credit-dependent economy, have devastating consequences. Resistance to taking on new debt obligations is a predictable reaction among those suﬀering heightened distress about economic security. The parameters of the consumption function cannot remain unaﬀected if a great number of households are determined to shift from deﬁcit ﬁnance to a pay-as-you-go regime (or in Minskian terms, a shift from speculative and Ponzi positions to hedge positions). The situation is made worse if individuals on average earmark an increased share of income for servicing of previously incurred debt obligations....