When Lehman Brothers collapsed twelve years ago governments moved quickly, coordinating support to stop financial contagion from entirely upending the real economy. This time, the reverse is true. It’s the real economy that stopped abruptly and governments and central banks have made dramatic interventions to protect financial markets.
The scale of their action is eye-watering and had the peculiar effect of seeing rampant unemployment coincide with a recovery in stock prices.
The disconnect between financial markets and the real economy is not new. In 2008 the actual value of failed mortgages in America was disproportionally smaller than the scale of the breakdown in global finance. The income holders of mortgage assets could expect to receive was lower, but it was not on the whole devastating. In the moment of panic, however, prices of these assets collapsed, undermining their capacity to serve as collateral to secure short-term lending between financial institutions.
What the episode showed was how incomes of the future mattered far less than the prices of the present. This is what separates the nominal economy of ‘monetary’ values from the supposedly ‘real’ one of goods and services. Because there is a time lag between the payments we expect to receive in the future and the ones we have to pay right now, there is a fundamental problem in capitalism. Simply, how do we make sure we have the cash we need to make our daily payments? This problem is as true for the poorest individual as it is for the richest global conglomerate bank. The financial system – by allowing us to borrow cash – bridges future to present. By managing this disjuncture in time, it becomes the centre of capitalism.
As Daniel Neilson describes in this crucial introduction, this is what occupied the mind of the iconoclast economist Hyman Minsky. Rather than a standard academic overview, Neilson’s book is more biographical. He situates Minsky in time and place, exploring a thinker who was forever responding to events around him. As part of his academic research, Minsky worked at a brokerage house in New York in the late 1950s learning about the workings of money markets that became a central focus for his writing. Over the course of his academic career, he observed periodic crises of finance: 1963 Kennedy Slide, 1966 Credit Crunch, 1969-70 Penn Central liquidity squeeze, the international monetary crisis of 1971, the Franklin National crisis of 1974-75, and on, and on. Understandably, he came to the view that finance was systemically unstable.
Neilson portrays how Minsky, though fluent in the mathematical rigours of mainstream neoclassical economics, chose to stay on the margins precisely because he thought payment was too important to ignore. Mainstream economics was modelled on the barter myth, where people exchanged in goods. Money enters this model as neutral grease to the wheels of exchange. Minsky knew better, seeing how money is not always available, and how its abundance or scarcity actively drives economic activity. The nominal, not the real, is what counts.
By narrating Minsky’s theoretical developments in their historical context, Neilson introduces with clarity a body of economic thought that has become very influential in the last decade. The focus on central banks, debates about MMT, and the way terms like ‘collateral’ and ‘liquidity’ have become so commonplace in public economic discourse today is testament to Minsky’s focus on the problem of payment.
Though Minsky saw himself as building on Keynes’s legacy, Neilson shows how it was in fact the influence of Joseph Schumpeter, who supervised Minsky’s PhD work, that was maybe more important. Like Minsky, Schumpeter was interested in how the way credit cycles drove cycles in the real economy, rather than the reverse.
While that may seem obvious it runs counter to orthodoxy. If making payment is the key to survival, Minsky points us to radical conclusions. An organisation may be bust, its future growth prospects dubious, its debts may well outweigh its assets, but provided it can still access the money to meet its payments, it will survive. The peculiar disjuncture between the current account deficit of the United States and the continued, growing dominance of the US dollar is a case in point. What Neilson helps us understand through Minsky is that it is liquidity, not solvency that counts. And if dollars are the primary means of payment, the US dollar will forever be a safe haven for investors.
The focus on payment also brings another often-overlooked institution to light. The money market upon which banks access the means of payment, and one particularly important part called the repurchase (or ‘repo’) market. If a bank needed to make a payment, but did not have the cash on hand in its reserves that day, it could ‘borrow’ what is needed by selling one of its assets to another financier, and buying it back later at a higher price. The difference between the sell and buy price is the ‘interest’ earned by the lender of the cash. Countless agreements of this type take place daily and they are the primary means by which financial institutions manage their cash-flow commitments.
It makes the repo market a pivotal site of global finance. When in March the uncertainty unleashed by Covid-19 threatened to freeze financial markets it was because the price of the assets normally sold and rebought in the repo market momentarily collapsed. This risked choking cash flow in just the same manner as 2008. But the Federal Reserve stepped in and promised it would stand behind the key asset, promising $1.5 trillion if needs be to ensure that anyone holding Treasury Bills and needing cash would have a buyer ready for repo. Following Minsky, it is easy to understand why central banks today have such an enormous capacity to shape economic outcomes.
Yet for all that he was a renegade, Minsky was still an economist. What even Neilson’s radical interpretation of Minsky still can’t help us to understand is the social purpose of financiers, and why the sector directs credit so abundantly to some and so scarcely to others.
Yet implied in Minsky’s priority of liquidity over solvency is the fact that what is politically protected – through central bank interventions that guarantee liquidity – can live forever. We know the investment in the green transition to a sustainable future is essential. We know that it will, in time, yield returns that vastly outweigh costs of today. Yet green investment remains stubbornly low, and firms unable to make payment today are having to ignore the necessities tomorrow will bring.
Perhaps central banks could choose to extend liquidity not just to mortgage securities and treasury bills but to the developers of green infrastructure and their debts. In 2019, the UN estimated $1.7 trillion a year was needed to finance a Global Green New Deal and drive the energy transition. Little of it has been forthcoming. In the last weeks though, the US committed to a fiscal stimulus of $2 trillion and the G20 a global economic recovery plan of $5 trillion. Fiscal heft has been backed up by monetary financing in the US, UK, Japan and EU.
Neilson’s crucial book allows us to understand the mechanics of how this happens, even if it can’t answer why.