I see a lot of people talking about how great Ben Bernanke is these days and how all the “Fed Rage” (the constant degradation of Bernanke and his policies) is unwarranted. Yes, people are probably too hard on one guy. And a lot of people are probably mad for all the wrong reasons (like silly predictions about hyperinflation, bond bubbles, etc). But I find it interesting that Keynesians like Paul Krugman dismiss this concept so quickly. After all, the Minskyan idea of the Financial Instability Hypothesis (FIH) is “an interpretation of Keynes’s ‘General Theory'”, as Minksy himself once said.
I have a feeling though that there’s a good reason why so many academics and those not familiar with Minksy are quick to shrug off the idea that the Fed might be hurting the economy in some ways. First, Minksy’s FIH is based on two important concepts which are largely ignored by the layperson as well as the academic economist:
1) The monetary system is credit based.
2) The idea of equilibrium within the economy is a farce.
The first one is rather obvious to anyone who’s read my paper on Monetary Realism. Misunderstanding the role of credit in the monetary system is like ignoring the role of the circulatory system in the human body. Most economists don’t even include banks in their models and the few who do still don’t seem to actually understand how banks work. But it’s also equally important to understand that the monetary system is a non-linear dynamical system. It’s constantly in a state of flux. In other words, you could argue that it’s always in a state of disequilibrium to some degree. The economy is not like a pen resting still on a table in a nice state of equilibrium. It’s more like a pen that got thrown through the air in a thunderstorm.
Minksy said that “stability creates instability”. But I don’t even know if I agree with that. In my opinion it’s more like “disequilibrium is susceptible to increased disequilibrium”. For instance, trying to catch the pen in mid air to contain its vulnerability during flight might actually increase systemic fragility as your body is a conduit for attracting a lightning bolt. Not that the lightning bolt always hits, but it certainly can and does at times.
When you understand these important points you become increasingly concerned about policy that pushes this unstable system into an increasingly unstable environment. Especially when it’s central bank related because central banks operate primarily through the financial markets by influencing credit. So they can often times contribute to the instability by encouraging actions that become inherently more unstable as they progress (like sub-prime lending and securitization).
So, is that happening right now? I don’t know. I certainly don’t think there’s a bubble in t-bonds or that hyperinflation is coming. But I do get concerned about the concept of “keeping asset prices higher than they otherwise would be” because I believe the economy is in a constant state of flux that just needs to be nudged in the wrong direction which creates a positive feedback loop leading to negative outcomes. That doesn’t mean that everything a central bank does is bad. I am not anti-monetary policy all the time. But I do think there are lines that can be crossed at times which push us into an increasingly unstable environment.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.