Coursework material

Reading 10 – A theory of Minsky super-cycles and financial crises - Palley

Policy 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.