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Did Hyman Minsky Find The Secret Behind Financial Crashes?

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http://www.bbc.co.uk/news/magazine-26680993

American economist Hyman Minsky, who died in 1996, grew up during the Great Depression, an event which shaped his views and set him on a crusade to explain how it happened and how a repeat could be prevented, writes Duncan Weldon.

Minsky spent his life on the margins of economics but his ideas suddenly gained currency with the 2007-08 financial crisis. To many, it seemed to offer one of the most plausible accounts of why it had happened.

His long out-of-print books were suddenly in high demand with copies changing hands for hundreds of dollars - not bad for densely written tomes with titles like Stabilizing an Unstable Economy.

Senior central bankers including current US Federal Reserve chair Janet Yellen and the Bank of England's Mervyn King began quoting his insights. Nobel Prize-winning economist Paul Krugman named a high profile talk about the financial crisis The Night They Re-read Minsky.

Still at least the 2% inflation target is stability we all crave...

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Dunno why they bother mentioning Krugnut and not Keen. Theyve even had Keen on N24 over the past couple of years to talk about this stuff.

Because while Krugman has turned into a partisan hack over the last decade, he was at his peak an unquestionably great economist who done work respected by most of the profession. People may have strong disagreements with how Krugman conducts himself these days, but noone is seriously denying his intellect or competence. Keen on the other hand is a very minor figure, who has never published anything in any decent economics journal. He is mainly a media figure who is famous for writing popular books aimed at non-economists, not for any work he has done within the discipline itself.

Edited by Smyth

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http://www.bbc.co.uk...gazine-26680993

Still at least the 2% inflation target is stability we all crave...

The night they re-read Minsky? Krugman confessed he'd never properly read Minsky prior to 2008! He had heard of him, however, unlike the majority of the profession. Since all but one of Minsky's papers were rejected for publication by the mainstream econ journals perhaps we shouldn't be surprised. As with Bachelier and Mandelbrot, the ignorance was intentional and systemic.

Minsky's greatest insight was to see through the static equilibrium models that came to dominate economic thinking from the 1960s to the present. He proposed instead that the economy was a dynamic nonlinear system which disequlibrium forces would ultimately overwhelm if not checked by govt. He subsequently developed a conceptual model of a Ponzi economy overwhelmed with private debt which took Irving Fisher's ideas of debt deleveraging and established how the phenomenon could lead in principle to a runaway depression.

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Because while Krugman has turned into a partisan hack over the last decade, he was at his peak an unquestionably great economist who done work respected by most of the profession. People may have strong disagreements with how Krugman conducts himself these days, but noone is seriously denying his intellect or competence. Keen on the other hand is a very minor figure, who has never published anything in any decent economics journal. He is mainly a media figure who is famous for writing popular books aimed at non-economists, not for any work he has done within the discipline itself.

Discipline?! 30,000 professional economists worldwide and maybe 12 of them had the first f***ing idea the Second Great Depression was about to blow up in their stupid faces! As it happens, Krugman was among them. But only one guy developed a monetary model that predicted both the crash and the subsequent non-recovery, Steve Keen.

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Discipline?! 30,000 professional economists worldwide and maybe 12 of them had the first f***ing idea the Second Great Depression was about to blow up in their stupid faces! As it happens, Krugman was among them. But only one guy developed a monetary model that predicted both the crash and the subsequent non-recovery, Steve Keen.

Keen didnt predict anything, and the whole essence of modern financial theory is that prices are inherently unpredictable, so blaming economists for not predicting it is pretty stupid.

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Keen didnt predict anything, and the whole essence of modern financial theory is that prices are inherently unpredictable, so blaming economists for not predicting it is pretty stupid.

I really can't work out whether you believe this nonsense. The crash was the result of a bit of price fluctuation? WTF?

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Keen didnt predict anything, and the whole essence of modern financial theory is that prices are inherently unpredictable, so blaming economists for not predicting it is pretty stupid.

That must be why Bernanke, King, Carney, Chote et al spent the last 5 years predicting a recovery that never showed up!

:lol:

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Very similar in essence to Soros' dynamic (& static) disequilibria, and Taleb.

Problem for academia in general, and economists in particular, is that they're eseentially historians, attempting to document and explain what already happened.

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Neither of those address the fundamental issue. To put it another way, if the financial organisations were so certain of uncertainty, why did they place bets that contradicted that? You write as though they were neutral players, but they created the very debt (and invented increasingly tortuous implements for doing so) that resulted in the crash.

You write as though they were a dedicated A&E team, overwhelmed by some disaster. They were the disaster.

Goldman Sachs took $13 billion from the AIG bailout. Months later, they declared record profits and showered their staff with bonuses.

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Neither of those address the fundamental issue. To put it another way, if the financial organisations were so certain of uncertainty, why did they place bets that contradicted that? You write as though they were neutral players, but they created the very debt (and invented increasingly tortuous implements for doing so) that resulted in the crash.

You write as though they were a dedicated A&E team, overwhelmed by some disaster. They were the disaster.

Goldman Sachs took $13 billion from the AIG bailout. Months later, they declared record profits and showered their staff with bonuses.

Smyth is obviously trolling again. How can you laud the accomplishments of Paul Krugman the economist in one voice then in the next argue that economic forecasting is essentially useless? Krugman has spent his entire life constructing economic models. Indeed, he warned repeatedly from 2005 onwards of the dangers of subprime mortgages and unregulated OTC derivatives.

And then there's the question of price unpredictability. True for every market except houses which only ever go up in price? Absurd.

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Smyth is obviously trolling again. How can you laud the accomplishments of Paul Krugman the economist in one voice then in the next argue that economic forecasting is essentially useless? Krugman has spent his entire life constructing economic models. Indeed, he warned repeatedly from 2005 onwards of the dangers of subprime mortgages and unregulated OTC derivatives.

And then there's the question of price unpredictability. True for every market except houses which only ever go up in price? Absurd.

Krugman's main economic contributions were in the field of trade theory (for which he won his Nobel prize). They had nothing to do with financial markets or forecasting the future values of particular assets. He isnt a financial guy or macroeconomist, he's a trade theorist.

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Very similar in essence to Soros' dynamic (& static) disequilibria, and Taleb.

Problem for academia in general, and economists in particular, is that they're eseentially historians, attempting to document and explain what already happened.

They complement each other beautifully, and I think you'd need aspects of all three to begin to fashion a New Economics.

Minsky/Keen on the disequilibria of debt, Taleb/Mandelbrot on the disequilibria of risk and Soros/Kahneman on the disequilibria of market psychology.

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Taleb has said nothing which is remotely new, and Mandelbrot's insights into the heavy-tailed nature of financial returns have been incorporated into standard financial models for decades.

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Guest spp

They try to 'stabilize' the economy without understanding the business cycle. This makes the next problem even bigger. KICK THE CAN economics.

We are probably living in one of the biggest can kicking experiments in history.

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Because while Krugman has turned into a partisan hack over the last decade, he was at his peak an unquestionably great economist who done work respected by most of the profession. People may have strong disagreements with how Krugman conducts himself these days, but noone is seriously denying his intellect or competence. Keen on the other hand is a very minor figure, who has never published anything in any decent economics journal. He is mainly a media figure who is famous for writing popular books aimed at non-economists, not for any work he has done within the discipline itself.

Of the two only Keen has a coherent theory as to why the crash happened. You confuse conformity to existing norms with genuine insight. The fact that Keen was 'minor figure' figure in a profession that en masse failed to detect the largest financial crash in almost 100 years does not invalidate his views- if anything it lends them more weight.

Always important to remember that not that long ago the consensus view was that the Earth was flat- and those 'minor figures' who said otherwise were dismissed- but they were also right.

Krugman is a smart guy- but so were the people running Lehman brothers- being smart does not mean you can't be wrong- and on the role of bank credit in the crash- (a key part of Keen's analysis) Krugman has a massive blind spot, one that he seems unable to correct.

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Krugman's main economic contributions were in the field of trade theory (for which he won his Nobel prize). They had nothing to do with financial markets or forecasting the future values of particular assets. He isnt a financial guy or macroeconomist, he's a trade theorist.

Wiki:

Krugman identifies as a Keynesian[145] and a saltwater economist,[146] and he has criticized the freshwater school on macroeconomics.[147][148] Though he applies New Keynesian theory in some of his work, he has also criticized it for lacking predictive power and for hewing to ideas like the efficient-market hypothesis and rational expectations.[148] Since the 1990s, he has promoted the IS-LM model as invented by John Hicks, pointing out its relative simplicity compared to New Keynesianism and continued currency in practical economic policy.[149][150][151]

In the wake of the 2007-2009 financial crisis he has remarked that he is "gravitating towards a Keynes-Fisher-Minsky view of macroeconomics."[152] Post-Keynesian observers cite commonalities between Krugman's views and those of the Post-Keynesian school.[153][154] [155] In recent academic work, he has collaborated with Gauti Eggertsson on a New Keynesian model of debt-overhang and debt-driven slumps, inspired by the writings of Irving Fisher, Hyman Minsky, and Richard Koo. Their work argues that during a debt-driven slump, the "paradox of toil", together with the paradox of flexibility, can exacerbate a liquidity trap, reducing demand and employment.[156]

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Wiki:

Yeah, Krugman has basically been an (educated) opinion columnist for the last 10 years, and has a view on everything. However, back when he was academically active, the work which he was noted for within economics (ie his speciality,, for which he won a Nobel prize) was new trade theory, most of which he carried out in the 1980s. You can see his brief bio on the Nobel site, for example, the prize had zero to do with anything he has written about financial markets: http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2008/press.html

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Keen didnt predict anything, and the whole essence of modern financial theory is that prices are inherently unpredictable, so blaming economists for not predicting it is pretty stupid.

That clears that up then.

If medicine took the same approach, then we would be here:

http://ancienthistory.about.com/cs/hippocrates/a/hippocraticmeds.htm

Please don't tell me that the economy is much more complicated than human biology.

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Taleb has said nothing which is remotely new, and Mandelbrot's insights into the heavy-tailed nature of financial returns have been incorporated into standard financial models for decades.

A series of international best-sellers on the intellectual shortcomings of academic discourse generally and economics in particular suggest that Taleb was saying something new to a lot of people who aren't either economists or quants.

His collected papers on risk and uncertainty can be found at fooledbyrandomness.com. The essential thrust of his work, that economists and investment bankers are unscientific frauds and liars by-and-large, who don't know what they're doing, was borne out spectacularly of course by the Great Financial Crash.

As for Mandelbrot? The economics/finance community has spent 40+ yrs ignoring his revolutionary discoveries, largely because the Black-Scholes equation gave them a simple and predictable model to work with instead, and even though they know of its inadequacies they haven't stopped using it since.

.

Edited by zugzwang

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