Мобильный 1 Add news
March 2010
April 2010
May 2010June 2010July 2010
August 2010
September 2010October 2010
November 2010
December 2010
January 2011
February 2011March 2011April 2011May 2011June 2011July 2011August 2011September 2011October 2011November 2011December 2011January 2012February 2012March 2012April 2012May 2012June 2012July 2012August 2012September 2012October 2012November 2012December 2012January 2013February 2013March 2013April 2013May 2013June 2013July 2013August 2013September 2013October 2013November 2013December 2013January 2014February 2014March 2014April 2014May 2014June 2014July 2014August 2014September 2014October 2014November 2014December 2014January 2015February 2015March 2015April 2015May 2015June 2015July 2015August 2015September 2015October 2015November 2015December 2015January 2016February 2016March 2016April 2016May 2016June 2016July 2016August 2016September 2016October 2016November 2016December 2016January 2017February 2017March 2017April 2017May 2017June 2017July 2017August 2017September 2017October 2017November 2017December 2017January 2018February 2018March 2018April 2018May 2018June 2018July 2018August 2018September 2018October 2018November 2018December 2018January 2019February 2019March 2019April 2019May 2019June 2019July 2019August 2019September 2019October 2019November 2019December 2019January 2020February 2020March 2020April 2020May 2020June 2020July 2020August 2020September 2020October 2020November 2020December 2020January 2021February 2021March 2021April 2021May 2021June 2021July 2021August 2021September 2021October 2021November 2021December 2021January 2022February 2022March 2022April 2022May 2022June 2022July 2022August 2022September 2022
News Every Day |

Does Capitalism Itself Create Economic Instability or Is Central Banking the Culprit?

Does Capitalism Itself Create Economic Instability or Is Central Banking the Culprit?

Instability in financial markets has brought back the ideas of post-Keynesian school of economics (PK) economist Hyman Minsky. Minsky held that the capitalist economy inherently is unstable, culminating in severe economic crisis, accumulation of debt being the key mechanism pushing the economy toward a crisis.

During “good” times, according to Minsky, businesses in profitable areas of the economy are well rewarded for raising their level of debt. The more one borrows the more profit one seems to be making. The rising profit attracts other entrepreneurs to join in and encourages them to raise their level of debt.

Since the economy is doing well, and borrowers financial health shows a visible improvement this makes lenders more eager to lend. Over time, however, the pace of debt accumulation starts to rise much faster than borrower’s ability to repay and serve the debt. At this stage, the foundation for an economic bust is set in motion.

Minsky distinguishes between three types of borrowers. The first type he labels hedge borrowers that can meet all debt payments from cash flows. The second type are speculative borrowers who can only meet interest payments but must constantly roll over their debt to be able to repay their original loans.

The third group of borrowers Minsky labels as Ponzi borrowers that cannot repay neither the interest nor the original loan. These borrowers rely on the appreciation of the value of their assets to refinance their debt.

This framework comprises what Minsky calls the financial instability hypothesis (FIH). According to the FIH, financial structure of a capitalist economy becomes more and more fragile during the period of prosperity. The longer the prosperity the more fragile the system becomes. According to Minsky:

In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance.

Another aspect of the FIH is that during good times, banks and other intermediaries by means of sophisticated innovations try to lure investors to buy the debt. Minsky labelled them as “merchants of debts.” The chase for profits causes investors in financial markets to place their money in various investments with little substance.

However, once economic conditions change the true state for borrowers, a crisis begins. Lenders curtail their supply of funds and borrowers are pushed to bankruptcy for they cannot renew their borrowing to pay debts—a financial crisis emerges.

According to Minsky, as time goes by both borrowers and lenders tend to become reckless, leading to a financial crisis. However, why should it be this way?

Does the Expansion of Credit Lead to Instability?

Note that loaned savings are the key for economic expansion, as they fund the production of tools and machinery, which then permits the expansion of final goods. This increase, in turn, permits a further increase in savings that then can now support the buildup of a more sophisticated production structure.

The introduction of money does not alter the situation. Through money, individuals can channel savings, permitting the widening of the wealth generation process. Whenever an individual lends money, the borrower via money can secure final consumer goods that will support him while he is engaged in the production of various goods and services.

The expansion of credit because of the increase in savings is good for the economy. Such credit, which is fully backed by savings, is the agent of economic growth. Note that the expansion of fully backed credit does not result in natural tendencies, as suggested by Minsky, for the good times to be a precursor for bad times. Contrary to Minsky, the accumulation of capital makes the economy more robust and less vulnerable.

Unbacked Credit and Economic Instability

Trouble erupts, however, when savings do not back up lending. The borrower holding the empty money, so to speak, exchanges it for final consumer goods, taking from the pool of savings without any additional savings have taken place, all other things being equal. The genuine wealth producers who have contributed to the pool of final consumer goods—the pool of saving—will discover that the money in their possession will get them a smaller number of final goods.

The reason for that is that borrowers have consumed some of the final goods. There is a diversion of wealth (final consumer goods) from wealth generating activities toward the holders of money, which emerged out of “thin air.”

As the pace of unbacked credit expands relative to the supply of savings, less becomes available to genuine wealth generators. Consequently, with less savings less wealth can be now generated. In the extreme case if everybody were to just consume without contributing to the pool of saving, eventually there would be nothing left to consume.

Free market economy and unbacked credit expansion

In a free market economy, intermediaries such as banks will have difficulty expanding unbacked credit, since banks would likely to encounter difficulties to honor their checks because of lending unbacked by savings. The threat of bankruptcy would likely deter banks from pursuing the expansion of unbacked credit.

Hence, there is no inherent tendency in the capitalist economy to generate unbacked credit that will destabilize the economy. In the modern capitalist economy, what enables banks to engage in the reckless expansion of credit that makes the capitalist system unstable is the existence of the central bank.

Using monetary expansion policies, the central bank makes it possible for banks to expand unbacked credit. Thus, if Bank A is short of $50, it can sell some of its assets to the central bank for cash, thus preventing the Bank A being “caught.” Bank A can also secure the $50 by borrowing them from the central bank. Where does the central bank get the money? It generates it from “thin air.”

The modern banking system can be seen as one huge monopoly bank which is guided and coordinated by the central bank. Banks in this framework can be regarded as the branches of the central bank. By means of monetary injections, the central bank makes sure that the banking system is “liquid enough” so banks will not bankrupt each other.

While the Minsky framework describes the present financial market volatility, it doesn’t provide a satisfactory explanation based on previously established and identified phenomena. Hence, Minsky describes but does not explain. It arbitrarily places the blame for instability on the capitalistic economy without establishing verification for this claim.

Contrary to Minsky, we conclude that there is nothing wrong with capitalism. To avoid the menace of boom-bust cycles, the loopholes responsible for the creation of money out of “thin air” must be closed.

Not so, argue Minsky and post-Keynesians. On the contrary, they hold that any attempt to revert to a proper free market laissez-faire economy is a prescription for economic disaster.

This response is not surprising, since Minsky accepted beforehand that capitalism is unstable and hence never questioned his premise. For Minsky, the only way to fix the supposedly unstable capitalism is through larger dosages of government and central bank interference with the economy.

Contrary to post-Keynesians and Minsky, the existence of the central bank makes the present capitalistic framework unstable. In addition, it is not the expansion of credit as such that leads to instability but the expansion of credit out of “thin air.”

Conclusion

It is through unbacked credit that savings are diverted from productive activities to nonproductive activities, which then weakens the process of wealth expansion. The instability that Minsky has identified has nothing to do with capitalism but rather with the central bank that prevents the efficient functioning of capitalism.









Read also

Connect! Unite! Act! We can't gamble with our future

Oviedo cruises through 7, Pirates top Cubs 6-0 to end skid

Chris Curtis vs. Joaquin Buckley added to UFC 282


Прямой эфир РБК. Главные новости России и мира сегодня (Прямой эфир ежедневно)

News, articles, comments, with a minute-by-minute update, now on Today24.pro

News Every Day

How to Get MICROSOFT OFFICE for FREE in 2022!

Today24.pro — latest news 24/7. You can add your news instantly now — here


News Every Day

Trump Claims He Declassified Documents Using Special Powers!



Sports today


Новости тенниса
Роджер Федерер

Алексей Селиваненко: Федерер закончил игровой этап своей карьеры, но уверен, что мы увидим его во многих других качествах



Спорт в России и мире
Москва

Завершился чемпионат Центрального округа Росгвардии по военно-прикладным видам спорта


Загрузка...

All sports news today




Загрузка...

Sports in Russia today

Москва

Дацику понадобилось всего 12 секунд для победы нокаутом над Емельяненко


Новости России

Game News

This cheery, Hexen-like FPS declares war on goblins


Russian.city


Москва

Проект для самозанятых в Москве набирает обороты


Губернаторы России
Динамо

Московское «Динамо» прервало серию поражений в матче против «Северстали»


Завершился чемпионат Центрального округа Росгвардии по военно-прикладным видам спорта

Минобрнауки подтвердило отсрочку от мобилизации для аспирантов и ординаторов

Команда ГК «Медскан» и Hadassah Medical Moscow приняла активное участие в V Международном форуме онкологии и радиотерапии

Суточные пробки, автобусы вне очереди и граница, о которой никто не знает: как россияне покидают страну по суше


Специалисты АО «РЭС» провели очередную экскурсию для школьников

«Доступ к влаге»: герпетолог Хлебникова бьет тревогу из-за видео с хамелеоном в Ленинградском зоопарке

Помощница Слепакова рассказал правду об отъезде артиста в Израиль

Стартовал джазовый гала концерт в рамках фестиваля Олега Лундстрема, посвященный столетию российского джаза (21 сентября 2022 г.)


В ФТР оценили перспективы Самсоновой в финале турнира WTA в Токио

Самсонова пробилась в 1/4 финала турнира WTA-500 в Токио

Медведев сенсационно уступил Вавринке на турнире во Франции

Глава Федерации тенниса Казахстана пригласил Джоковича на турнир ATP 500 в Астане



Дацику понадобилось всего 12 секунд для победы нокаутом над Емельяненко

Источник «360»: москвичка застряла в мусоропроводе на юге столицы

Завершился чемпионат Центрального округа Росгвардии по военно-прикладным видам спорта

Сотрудники Центра специального назначения вневедомственной охраны Росгвардии присоединились к акции «Зеленая Россия»


Московское «Динамо» прервало серию поражений в матче против «Северстали»

Гидрометцентр: в Москве 24 сентября ожидается сильный дождь и до 10 градусов тепла

С 24 по 25 сентября 2022 года на Землю обрушатся магнитные бури: какой силы они будут и что делать метеопатам

Около 30 рейсов задержали и отменили в московских аэропортах


Водитель легковушки в результате ДТП наехал на пешеходов

Эпидемиолог Альтштейн оценил заболеваемость COVID-19 в России

Дзюба отреагировал на быструю развязку в поединке Емельяненко и Дацика

Роман Савин подозревается в лоббировании интересов поставщика медоборудования



Путин в России и мире







Персональные новости
Russian.city

Николай Цискаридзе

Николай Цискаридзе признался в желании стать ведущим программы «Время»



News Every Day

Sweet Potato Souffl




Friends of Today24


Загрузка...
Музыкальные новости
"Воскресенье " Олег Митяев



Персональные новости
Близкий друг Путина миллиардер Пугачев. Вся правда о Путине, его семье и деньгах. В гостях у Гордона (2021)

Навальный об уволенном за пост священнике (2021)

Slava Marlow – суперуспех и депрессия в 21 год / вДудь (2021)

Обнаглевшие дети путинской элиты (2021)

Дайте собакам мяса (новый звук) -Владимир Высоцкий

Группа "Рождество" - песня "Так хочется жить!" (Видео с концерта в Киеве группы "РОЖДЕСТВО" в 2011 году в Доме офицеров)

Adriano Celentano Любимая песня Челентано (высочайшая энергетика) talentTV


Moscow.media