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?
