[OPE] Minsky moment?

At the HM conference last year, Riccardo Bellofiore said that this was not a "Minsky moment". In a sense he was right, since according to the NBER retrospective, December 2007 marked only the beginning of the US recession, considering all economic indicators as a whole. As for myself, I had initially thought the financial panic would abate, but market confidence receded much further, and in fact the credit crisis grew worse, rapidly spreading internationally. John Kemp (Reuters) ("Uncertainty paralyzes US banking system", November 28th, 2008) writes succinctly:

"The credit crunch has manifested itself in an extreme preference for low-yielding but ultra-safe assets. The massive cushion of cash and cash-like assets held by the commercial banks has dispelled any residual doubts about their short-term liquidity, as it was designed to do. But by shifting their balance sheets in this way, the commercial banks have essentially blocked the monetary transmission line from the Fed to the rest of the economy, ensuring that monetary easing has not filtered through to Main Street, and forcing the Fed to turn to more unconventional measures to get credit through to the economy." http://blogs.reuters.com/great-debate/2008/11/28/uncertainty-paralyzes-us-banking-system/

What is the effect on industry's capital finance? Anousha Sakoui and Richard Milne, ("Companies face spiralling funding costs", FT December 1 2008) report for instance:

“A wide range of European corporates are facing 10- to 30-fold increases in debt cost on a spread basis," said Suki Mann, credit strategist at Société Générale. “The big issue now is cost of capital and the impact it will have on earnings going forward because of the stepped increase in the cost of debt funding." On Monday National Grid, which describes itself as an “extraordinarily low-risk business", sold 600m euro in six-year bonds at 3.3 per cent above the rate banks lend to each other, about seven times what it is paying before the credit crunch hit for debt funding - or 17m euro per year increased borrowing cost on 600m euro of bonds. http://www.ft.com/cms/s/0/33281dae-bfdf-11dd-9222-0000779fd18c.html

That kind of thing ends up choking off output growth - it's falling final demand against falling profit rates, creating an even more cautious investment stance. So a sort of "Minsky moment" does seem to have arrived, though maybe not a "moment", but an "episode". Previously the talk was about a "downturn", then it was about a "recession", but there is now a real possibility of depression, i.e. negative output growth, in which case we not looking at another recession of 1.5 years or so and a recovery in 2009, but a much deeper contraction lasting longer, affecting most countries more or less at the same time, though some more than others.

Even if credit problems were resolved to a large extent, there is still a longer lasting problem of final demand, namely you cannot sell additional products to the working population, if their buying power stagnates or falls, in the context of stagnant real wages, rising unemployment and tightening credit provision. It is an unpopular topic of conversation, because of the need to stimulate "investor confidence", but the dangers are real. Possibly this helps explain Angela Merkel's stance, i.e. that there are bigger problems further down the track. In this sense, the Handelsblatt daily indeed writies: "On the national level, Merkel wants to keep her options open in case economic conditions worsen further. However, the global financial crisis can only be solved on an international level." (cited Der Spiegel, 2 Dec 2008).

Economic conditions are likely to worsen further, but it's just not really clear what would solve things "internationally", there isn't much consensus about it, and the ruling economists aren't trained in state interventionism these days, because the market mechanism was supposed to solve everything. It is not easy to see how you can get rightwing policymakers to pursue what are effectively leftwing reformist policies required for economic recovery. If, as Michael Hudson argues, the wealthy prefer not to earn income, which is liable for tax, and get their returns instead from capital gains ("The Obama Letdown", Counterpunch, 26 Nov 2008) then income redistribution policies don't even make much sense to them. The IMF is rather vague: "Fiscal expansion must, therefore, now play a central role in sustaining domestic demand. Such
stimulus could include steps to improve public infrastructure, assist adjustments in housing and financial sectors, and boost activities that may have larger impacts on activity than general tax rebates." (Olivier Blanchard, The Tasks Ahead, WP/08/262).

Martin Wolf, who is always in favour of market expansion, argues that "Global imbalances threaten the survival of liberal trade" (FT, 2 Dec 2008) but those global imbalances are precisely the outcome of liberal trade, liberal trade of a certain type - if countries end up losing more from international trade than they gain, more protectionist regulation obviously becomes a possibility, but it's not even clear that this solves very much in aggregate, if it leads to more international capital flight.

J.

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Received on Tue Dec 2 18:33:53 2008