Macroeconomic Theory and its Failings
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Macroeconomic Theory and its Failings

Alternative Perspectives on the Global Financial Crisis

Edited by Steven Kates

This innovative book focuses on the current global financial crisis and the inadequacies of the economic theories being used to guide policy. In so doing, it tackles the economic theories that have been used firstly to understand its causes and thereafter to contain the damage it has brought.
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Chapter 15: Minsky, the Global Money-Manager Crisis, and the Return of Big Government

L. Randall Wray


261 and again in 2000 with the dot-com bust; the Japanese meltdown from the late 1980s; Long Term Capital Management (LTCM), the Russian default and Asian debt crises in the late 1990s; and so on. Until the current crisis, each of these was resolved (some more painfully than others – impacts were particularly severe and long-lasting in the developing world) with some combination of central bank or international institution (IMF, World Bank) intervention plus a fiscal rescue (often taking the form of US Treasury spending of last resort to prop up the US economy to maintain imports that helped to generate rest of world growth). Minsky always insisted that there are two essential propositions of his ‘financial instability hypothesis’.2 The first is that there are two financing ‘regimes’ – one that is consistent with stability and the other that subjects the economy to instability. The second proposition is that ‘stability is destabilizing’, so that endogenous processes will tend to move a stable system toward fragility. While Minsky is best known for his analysis of crises, he argued that the strongest force in a modern capitalist economy operates in the other direction – toward an unconstrained speculative boom. The current crisis is a natural outcome of these processes – an unsustainable explosion of real-estate prices, mortgage debt and leveraged positions in collateralized securities and derivatives in conjunction with a similarly unsustainable explosion of commodities prices. Add to the mix an overly tight fiscal policy (so that growth required private sector deficits) and it was not...

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