http://money.usnews.com/money/personal-finance/mutual-funds/articles/2012/08/27/that-rumbling-in-your-portfolio-its-real
I am providing the link because this is a good antidote to the usual “Minsky moment” or euphoric bubble approach to Minsky usually taken. That is more Kindleberger than Minsky. Kindleberger was a great economist and a close personal friend to Minsky, but Minsky’s approach did not rely on irrationality. No “tulip bulb mania” for Minsky. In my view, his approach is much more relevant to the GFC of 2007, and also to the Great Crash of 1929. Sure there were bubbles and irrationality, and sure those made things worse, but they do not explain the dynamics.
Most economists are still trying to catch-up to the MMT explanation of what went wrong with the Euro project. MMT got it right as early as the mid 1990s. Others are trying as best they can to provide an ex post explanation to make up for the fact that they never “saw it coming”. Here’s a very early piece by Warren Mosler, that got it right–from 1997. If I recall correctly, this was Bill Mitchell’s first Coffee conference at Newcastle. Warren (correctly) explained what is wrong with pegging exchange rates. Of course the EMU upped the ante by going whole hog as nations dropped their own currencies and adopted a foreign currency–the Euro. The rest, as we say, is history. Read it here: http://econintersect.com/wordpress/?p=25700
It just warms the cockles of one’s heart to see that many economists are now trying to “rediscover” the insights of MMT. (See here: http://nakedkeynesianism.blogspot.com/2012/08/a-reply-to-wray-part-i.html?spref=fb) Still, some find it very hard to shake the bonds of old-style approaches, such as the Kaldor-Thirlwall gold standard approach to current account balances. They mix up the constraints imposed by fixed exchanged rates or currency boards or currency unions with supposed current account balance constraints. As such, they think that Greece’s problem is that it ran trade deficits, not that it gave up its currency.
They accuse MMT of supposed logical problems. Our argument: a country that retains its own sovereign currency with a floating exchange rate has an “additional degree of freedom”–it can still pursue full employment at home, while letting the exchange rate float. It has at its disposal a number of alternative ways to deal with a current account “imbalance” should it choose to do so. Their interpretation: “had the EZ been a currency area like the US, it could not have balance of payment crisis….So the problem is that the EZ is not the US, since if it were, no BoP crisis would have occurred!” No, of course this is not our argument.
Our argument: if the EMU had been formulated along the lines of the US, a current account deficit of a member state–say, Greece–would have been of no more consequence than the current account deficit of a US state–say Alabama. We do not talk of kicking Alabama out of the US because of chronic trade deficits with other US states. By the same token, if Greece had stayed out of the EMU, it might well have run current account deficits, but it would have had more policy space to deal with them (if it desired to do so) if it had its own floating currency. The argument is simple, it is straight forward, and it is correct. But those who never saw the EU crisis coming are still playing catch-up.
Our argument: a country that adopts a foreign currency (or otherwise pegs its exchange rate) has less discretion than one that retains its own sovereign and floating currency, and in many relevant cases must abandon full employment at home to try to keep the peg. It is not hard to find examples–in the EMU and all over the globe. Critics charge we never look under the covers deeply enough to examine any country except the US–the issuer of the international reserve. The charge is false. Read Warren’s piece. We’ve been very clear on these matters. Yes, the US enjoys some advantage–it takes two to tango but everyone wants to tango with the US dollar. Many want to tango with Australia and the UK and Canada. Fewer want to tango with Rwanda. It is thus easier for the US or Oz to run current account deficits. Yes!
But the MMT principles apply to all sovereign countries. Yes, they can have full employment at home. Yes, that could lead to trade deficits. Yes that could (possibly) lead to currency depreciation. Yes that could lead to inflation pass-through. But they have lots of policy options available if they do not like those results. Import controls and capital controls are examples of policy options. Directed employment, directed investment, and targeted development are also policy options.
Unfortunately, many learn the wrong example from–say–Greece. Rather than the obvious conclusion that giving up currency sovereignty ties hands of government, many conclude that Greece is an example of what goes wrong if you run a trade deficit. It is the wrong lesson–based on a tired old theory that was, itself, based on gold standard thinking.
We’re off gold. We’re not going back. Get over it.