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Reading 10 – A theory of Minsky super-cycles and financial crises - PalleyPolicy Implications
Policy prescription 1 policy makers should be skeptic of the euphoria that emerges in business
cycles + euphoria = inevitable product of financial instability hypothesis
Policy prescription 2 capitalist economies = need regulations containing financial speculation +
financial excess because economy = has a behavioral tendency towards instability
- Friedman = advocate of a deregulated economy due to First Welfare Theorem of
competitive general equilibrium theory
- Minsky = advocate of a regulated economy due to financial instability hypothesis
Policy prescription 3 emphasis on policy discretion over policy rules = economy goes towards
instability rules-based policy = unable to recognize this tendency so Minsky’s equivalent of rules =
combination of discretion + thwarting institutions key role for policy = to thwart instability
Challenge for policy makers: to identify incipient sources of instability + to prevent
market participants to argue for abolition of thwarting institutions (needed to avoid
instability) due to their own private economic interests advocacy that can be in the
form of 1) direct capture of regulators + policymakers + politicians or 2) indirect capture
via capture of economic discourse.
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