Question

1. Minsky:

   • After reading the two chapters on Minsky, what is his major contention regarding the dynamics of the financial system and how it relates to the macroeconomy?

   • Do you see Minsky's ideas as relevant to the 2008 crisis? What about the current CoVID-19 crisis?

   • What was Minsky's approach to "welfare" vs. employment programs? What would his policy suggestion be today?

Answer 1

His major contention regarding the dynamics of the financial system is that financial crisis arises because of the swings in the financial system. He states that there is government intervention required and that overaccumulation of debt poses huge macroeconomic risks. As huge levels of debt lead to financial crisis because firms and banks turn complacent during booms which makes them unprepared for the busts and incur huge debt levels.

Yes, Minsky's ideas are very relevant to the financial crisis and infact many publishers started looking at his work and relating to it when the financial crisis came into place. The huge levels of debt and decline in asset prices in Mortgate Backed Securities led to the crisis which is what he emphasized.

The current covid-19 crisis is also relevant as governments debt to GDP ratio is increasing manifold and businesses also have to avail credit facilities as most of them don't have enough working capital, which could lead to further debt burden and major financial crisis.

Minsky supported Employer of Last resort policy wherein governments spend money to employ the unemployed, thereby providing jobs to workers which fit their skillset. He also supported welfare targeted towards children and medical care which was unconnected to employment. But all in all he emphasized that an employment generation program would in itself solve most of the problems of poverty prevalence rather than welfare as it creates a hindrance and tax money is wasted.  

Today, his policy suggestion would be helping the poor / unemployed in sectors such as hospitality, tourism, small and medium enterprises, by employing them instead of spending on large scale investments and asset purchases. He would lead governments to spend on employment generation mechanisms by spending on capex and incurring roadway and infrastructure works, wherein there would be large scale need of labour and thus money will trinkle down to those who need it the most in order to have a decent livelihood.