The Boston Globe recently did a piece on capitalism and why it’s inherently flawed. Before you call me Socialist and click away, please read on as I explain how one economist predicted our current financial crisis more than forty years ago as a result of his insights regarding the problems inherent in the American economy.
Hyman Minsky, a macroeconomist who died over a decade ago predicted our current financial crisis. When did he have this revalation? Roughly the 1960s. He believed that modern finance policies are the very mechanisms that “created the illusion of stability while simultaneously crating the conditions for an inevitable and dramatic collapse.
He argued that capitalism, as a whole, is inherently flawed. Minsky argued that the American economy was not the self-correcting machine that many of his contemporaries thought. “Far from trending toward some magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a cliff.”
He explained the pattern that he recognized. Following the Great Depression, everybody, consumers and businesses alike, was being very conservative. Loans were not given out unless you were highly qualified and repayment of loans was the highest priority. However, as the years progressed and the Depression became more and more of a distant memory, people were steeped in prosperity and forgot the problems they faced. Borrowing became easier to do and it gave rise to the kind of speculative lending and trading practices that you saw just a couple of years ago. Despite his warnings throughout the 60’s, 70s, 80’s and even into the 90’s (just before his death), this house of cards continued to build until it hit an unsustainable peak.
The system collapsed under its own weight and this is where we find ourselves today. Although some of Minsky’s solutions for recovering from this death-spiral have been put into place by Bernanke and the Obama Administration, many of his solutions were considered too “socialist” for this current political climate.
This is a fascinating article and I highly encourage you to read it. It can be found here.