Stabilizing an unstable economy (sub-prime crisis)

Hyman Minsky was an economist who throughly explained events like the sub-prime crisis, and how they could be comphrensively avoided. Wall street has labelled the sub-prime crisis the Minsky moment.

PS: Forward titled, “Agenda for reform”, very readable.

I did not read the book you provided in the link. But, I did want to add that sub-prime was not the only thing that caused this mess. It was part of it, but not the only thing. You have to remember, go back to that time, that when things started going crazy, what happened? Well, bubbles started to burst. The job market bursted. Companies had hired so many employees that could have been done by less people. That bubble broke open during this crisis. The oil bubble broke open when gas hit $4, and nobody could afford it. I remember how people were deciding whether to get food or gas for the week, how do you expect them to pay their mortgage, electricity or water bill? Then the housing bubble broke open. I knew 20 people on my street who sold houses for a living, sometimes to each other. The prices got way too high, and who can afford to pay a mortgage for them? If you get sick, don’t have health care, you probably would have to file for bankruptcy, which is another bubble that broke open.

We can blame politicians for these problems, in reality, we all played a role. Our egos got huge, and then BOOM!!! It all crashed at once. I am sure we all had friends who had big homes, new cars, big TVs, latest electronics, and so on. People just lived outside of their means. They lived like their was no tomorrow, and when tomorrow came, they were in trouble. We were leading a life that allowed us to get whatever we want, and not worry about the costs. The problem is that we did not have the jobs to live that style of lives.

A backbone of every economy should be manufacturing, my belief. If you are not making anything, you really have no position in a global economy. In the USA, we have almost no manufacturing. If I buy a product, it is probably made overseas. It is cheaper to buy a new product if it breaks, than to have it fixed. Why should I pay someone to fix it, when it is cheaper to buy a new product?

You will hear many people say this is what caused the economic crisis. They will be partially correct. The real answer to that question is that many bubbles went at the same time. How do you stabilize the economy? That is a great question. Do you give tax cuts? Do you provide government jobs to fix roads, infrastructure, and schools? Yes, yes, yes, and yes. The government steps up and tries to get those people jobs, get money in their pockets so demand is still there for products. Then, they find out the root of the problem, and try to fix it. Now, you could offer other ideas, and they could work too. But, we cannot depend on government to do everything. We as citizens need to step up and take blame, and make changes too.

Companies should be called “Too big too fail.” These are monopolies, and should be broken up. Bigger is not always better. It is like Wal-Mart, they come to a town, they destroy all small business. They bring low paying jobs, and we wonder why we cannot find a job that pays a livable wage. Think about it for a change.

This crisis occurred for numerous reasons. Things could be much much worse, but things are slowly improving. We will be recovering for years. There is no quick fix, just slow steps.

What’s your take on inflation in a couple of years? What about plans Obama has that may impact recovery?

The government sector that contributes one third of GDP in the USA, has stopped the recession from turning into a depression, and that is a good outcome. The increase in transfer payments like unemployment insurance, and other government expenditures has maintained company profit levels, and this will eventually lead to an economic recovery. On the other hand the increase in the number of people relying on government handouts has made the economy more prone to inflation, which is not a good outcome. Hyman Minsky proposed that people receiving transfer payments participate in workfare programmes, because even if the work is mundane, if the programmes are managed properly they will increase productivity and therefore reduce inflationary pressures.

Prices go up and down all the time. As the economy recovers, the dollar will become more valuable, and inflation will not be such a huge issue. Right now, we need to keep it under control because the jobs are not there, and will not be for a while. I do think companies understand they can’t go crazy on raising the price, which is why they let go many high paid workers.

As for Obama’s plans, it is too hard to tell. A lot of what he wants done, won’t happen. I think he understands he can’t push some of his ideas because the money is not there. I do like that he is going after things that have caused this current crisis: take health care as an example. Health care costs have bankrupted many people, and it is not as discussed as it should be. We do not have a final bill on the plan, and so, it is all a guessing game as to what the final bill will be, and if it is even passed.

His plans to push the country off of foreign oil and onto renewable energies is probably one of the best plans. Remember, Bush and Cheney were oils guys. For them, it was about oil. Do not forget, we were paying over $4 for a gallon of gas a year ago. That really hit everyone’s budget.

We are in a situation were we are rebuilding, and it is the perfect time to get new ideas implemented. Who is going to want to make any changes when everything is going well?

The three policy slogans - conservatives call for free markets, liberals have a commitment to economic growth and pseudo-radicals call for national planning and industrial policy.

As a consequence we have an economy that is committed to growth through private investment instead of an economy committed to creating employment. This emphasis on business investment being a cure for all our economic aliments has led to a capitalist economy that has persistent financial and economic instability. Our type of economy generates fragility, unemployment and inflation.

A thorough, integrated approach to our economic problems must be developed, these solutions must incorporate full employment, price stability and greater equity. This change of approach should create a humane economy as a first step towards a humane society.

This is a good introductory article on Hyman Minisky’s contribution to economics.

rboni, to get onto your post some more, been a few months, this is close to impossible. We have elections every few years, and people come and go all the time. You need to have basically the same ideologies in office for stability to stay.

Plus, things change all the time. There once was a time where companies had mailroom clerks. Today, most companies do not, a few do, but at a much smaller scale.

Technology is always changing, helping increase and decrease the workforce. In the coming years, we will begin to see online sales outpace brick and mortar stores. Internet is only going to get faster. We could see cell phones actually take over computers, they basically do everything a computer does anyways.

The economy, it is a global economy might as well call it the economy, will always be unstable. Jobs come and go, and there is no way to change that. The internet has revolutionized everything we do. The way we use technology has evolved. Remember when you called a company and someone picked up the phone, anymore, it is a computer telling you to press a number for so and so. It reduces cost, and helps companies run more efficient.

Excessive business investment is causing the increased economic instablity. Technology has become the ideology of business. Firms are constantly updating their technology in order to remain competitive, but in alot of cases the technology ends up increasing costs instead of leading to a reduction. The constant changes in technology end up causing an ever increasing amount of problems that get solved in the long run through more abstract changes, which cause even more problems. The increased income inequality that this causes through the need to have highly specialised and skilled employees, makes the problem worse. Employees start hiding information from each other, to protect their employment, and to beat each other to the next promotion.

Very true. It is like new computers. Today, you got a flashy new computer, tomorrow, it is old, and out of date. Even cell phones are the same way. How many people get a new phone each year? I have friends who have purchased upwards to 5-10 each year because this phone has a feature my current phone does not. I do not know how much they spend on switching providers to get to use their phones, but I am sure it is a lot.

With this economic downturn, many companies where I live, let go of many people, and replaced them with computers. Sounded like a great plan, but then increases in orders came, and the computers could not keep up. So, either bring in more computers, or hire employees again. This has happened many times.

People are extremely worried about stability at their jobs. Many are doing whatever it takes to keep their jobs. I have friends who have hid information from their employers, so, they could keep their jobs.

Look at operating systems, every few years a new one comes out that is going to be more secure, and have less issues than the previous one(s). Then it is revealed that this new os is worse than the other ones.

Companies then get a little excited, and start making cutbacks with quality, Toyota anyone? Toyota did many things wrong, the main two things are they expanded way too much, and starting cutting quality.

Look at Microsoft with their Xbox, rushed its release to beat the PS3. How many people have gotten the Red Ring of Death? Too many. This along should push many people to avoid their products, and go elsewhere. This has cost Microsoft a lot in their finances.

These are just examples to prove your point. But even then, technology is helping cut the amount of jobs needed. I mentioned a mail room clerk and secretaries, but many jobs that have been reduced during this recession were on there way out. This recession just sped them up. I know many people who worked in the newspaper business. Who buys a newspaper anymore? I can get my news online in seconds, and up-to-date. A newspaper is usually so outdated by the time I get it.

Companies should embrace technology, I believe we can all agree to that. I think rboni hit the nail on the head that companies try to upgrade more than they should.