Episode 113 – Financial Fragility with Eric Tymoigne

Macro N Cheese – Episode 113
Financial Fragility with Eric Tymoigne
March 27, 2021

 

[00:00:04.060] – Eric Tymoigne [intro/music]

At the core of the regulatory process should be a recognition first, that crises don’t just occur. They’re not just random events that occur like, as Greenspan put it, tsunamis.

[00:00:21.030] – Eric Tymoigne [intro/music]

NINJA means no income, no job, no assets. So if you go to the bank and say I want to buy a house, the bank would ask, well, do you have an income? No, I don’t have an income. Do you have a job? No. Do you have any collateral? No. OK, here is $500,000. And so there is no way the household will ever be able to repay.

[00:01:35.230] – Geoff Ginter [intro/music]

Now, let’s see if we can avoid the apocalypse altogether. Here’s another episode of Macro N Cheese with your host, Steve Grumbine.

[00:01:43.120] – Steve Grumbine

All right. And this is Steve with Macro N Cheese. I have Eric Tymoigne with me today. He is a professor at Lewis and Clark College and he teaches economics. And Eric has written many of the most important documents out there that many of us MMTers will go through. One of them, in particular, is the banking primer that you’ll find at New Economic Perspectives and soon you’ll find it RealProgressives.org, thank you, Bill Black.

And with that in mind, one of the things that made me want to talk with Eric was the fact that he had written a book with Randy Wray sometime back. And this book was all about finance capitalism, and understanding the relationship between finance capitalism and the economy. The book was called The Rise and Fall of Money Manager Capitalism: Minsky’s Half Century from World War Two to the Great Recession. And that was again co-authored with Randall Wray.

And with that, Eric, thank you so much for joining me today. We are in troubling times, obviously, and we do another podcast called The New Untouchables: The Pecora Files, with people such as the legendary Bill Black. And we’ve been really looking deeply at the corruption in the finance system and the way the Federal Reserve basically backstops a criminal enterprise.

But I was particularly taken aback by the subject matter of this book, and I was wondering if maybe you could help me understand what this book was about and what the genesis of it was. And we’ll tie the two sides together, if you don’t mind. How’s that sound?

[00:03:20.620] – Tymoigne

Fine.

[00:03:20.620] – Grumbine

So talk about this book. What was the genesis of this book?

[00:03:24.830] – Tymoigne

Well, the genesis was really the crisis itself. What we wanted to do, Randy and I, is try to analyze the crisis, not only what was going on at the time, but how we got there by using two aspects of Minsky’s theoretical framework. The first one is financial instability hypothesis that is quite well known, and the other side is more his approach to the history of capitalism from the point of view of finance and the evolution of finance.

And so its stage approach of capitalism. Looking at the earliest form toward what we have today, or money manager capitalism. And so our goal was to show that the origins of the housing crisis is quite long ago, OK? And so we didn’t have a “Minsky moment” as the phrasing came and became popular at the time.

But we had more Minsky half-century in the sense that if you want to understand how we got to the housing crisis, you have to go back to the late 1970s and the beginning of deregulation and change in finance that led to the outcome we have in 2008 with growing instability throughout the period.

[00:05:05.620] – Grumbine

So your very first chapter, your introduction, you say the growth of financial fragility and the Great Depression. Let’s just start with that. Tell me about what financial fragility is and how that played into the Great Depression.

[00:05:20.620] – Tymoigne

Right. So the first chapter is about presenting the theoretical framework we’re going to use throughout the book. So we try to really provide a detailed understanding to the reader of what Minsky’s theoretical framework is. And we want to remove confusion in there. The first is we want to make sure the reader understands that Minsky’s theoretical framework is really not about the crisis, it’s about the process that leads to the crisis, and that’s where financial fragility comes into play.

So I’ll get to that in a second. The other thing we wanted to bring forward is that Minsky’s often associated with the period of boom, OK? And we have Kindleberger that has a book on bubbles and periods of booms. I don’t remember the title right off my head right now. And he associates his book to Minsky, but he focuses especially on the periods of booms. So that brings the idea that Minsky’s all about irrationality.

It’s all about people going crazy. And what we want to say in the book is that, no – what’s important, again, is a period going toward the crisis where you have people making conscious decisions and rational decisions and that progressively leads to a growing financial fragility. And so it’s the mechanics of capitalism that lead to the financial crisis. It’s not irrational behaviors. And so what is financial fragility?

The idea here is that basically the balance sheets of some economic units in the systems or households or could be firms, it could be governments under certain conditions, which are the ones where you have no monetarily sovereign government. So you have economic units that become much more sensitive to small changes, small negative changes in economic conditions, so that even a small decline in income or a small increase in interest rates will lead to inability to pay and will lead to the need to liquidate the economic unit.

And so that’s the idea of fragility and you become much more sensitive to even tiny changes in economic conditions that adversely impact your finances. And so, again, that is contrasted to the, for example, the Black Swan idea that the financial crisis was a black swan event. OK, and a Black Swan event is the idea that it’s highly improbable, large shock on the system that led to the crisis. So what Greenspan called once in a century tsunami, OK.

And so the narrative here is that there was a huge shock that occured on the system that had a very low probability of occurring but occurred. And of course, we were not prepared. And so that led to the crisis. And the Minsky narrative is the opposite. It’s a very tiny shock that blew up the entire system. And why? Because over time, the system becomes more fragile, weaker, less able to buffer against even small adverse shocks on the system.

[00:09:32.540] – Grumbine

So what is the Minsky framework anyway? That’s sort of where you’ll head with this next. What does that even mean? Most people don’t even know who Hyman Minsky is. Why don’t we take just a quick moment here and tell everyone who Hyman Minsky even is?

[00:09:48.440] – Tymoigne

OK, so Hyman Minsky was born in 1919, died in 1996. Was trained in Chicago, went to study at Harvard under the direction of Schumpeter, was influenced by several economists of Schumpeter, was influenced by Irving Fischer, who was also a very influential economist in the first half of the 20th century. Later became influenced by Keynes, too, and ultimately tried to merge all these different insights into his own theoretical framework.

He got his first position, if I remember, at Brown University, then moved to Berkeley and ultimately went to the University of St. Louis, where he stayed quite a long time. I think he was not expecting to stay there long, but ended up staying there and once he retired, he moved to the Levy Economic Institute in New York. So he was not very well known throughout his career, although he had studied with well-known people and so he was in the background most of his time except during periods of crisis.

For example, during the stock market crisis of 1987, there was an interest that suddenly emerged into the Minskian framework. And so people started to read Minsky. And in the same way, the 2008 crisis led to a renewed interest in Minsky’s framework. And there is a famous newspaper article by Greenspan. The title is A Night We All Reread Minsky. So throughout time, he pops up here and there, but mostly he was under the radar.

He was quite well acquainted with finance, he was on the board of a private bank and took the insight he got from there and included them into his theoretical framework. And so with that, what he gets is a specific idea of what capitalism is, first, a view of capitalism that is seeing the system in terms of a monetary system, a system that is at its core, a financial system where money is the driving force and where productive activities are secondary.

The point is to make money, not to make things. And so you judge the relevance of an economic activity from the point of view of its ability to generate high enough monetary return. And from there, then he moves into the idea that, OK, given that money is important, we also need to understand how economic activity is financed, and that means that you cannot start your economic analysis with an economic system in which there is no money and no banks and no financial system.

Those can now be added to later on, something that, for example, Milton Friedman argues we should do, OK? Milton Friedman said, basically, if you want to understand capitalism, you don’t need to understand money. You don’t need to understand corporations. What you just need to do is let’s assume we have a small peasant economy and they barter with each other.

And so you understand the mechanics of exchange within that economic system. You get a pretty good understanding of what capitalism is and adding money and corporations and long-living capital equipment doesn’t add anything to the analysis. What you need to understand is just exchange. And after that, you can add it in but you don’t get much of anything.

And Minsky is basically saying, “No. You have to put finance immediately in the analysis and recognize that capitalism is a monetary economy that has long-lived capital equipment. And so that means that you have to have views about the future regarding the ability of this capital equipment to perform over time and to generate high enough monetary return. And so finance then becomes oriented toward the future and making expectations about the future.

And so you need to understand how money and views of the futures are linked to each other. And one way he does that is by putting together this idea of financial fragility and for him, there are different degrees of financial fragility. One is hedge finance. The other one is speculative finance. And the last one is Ponzi finance. And these different states relate to expectation about the future regarding monetary outcome.

So in hedge finance, there is the expectation that the income that you will earn from your capital equipment – or if your household, from your work – will be large enough to cover the debt service you have to pay on your debts. So if you have a mortgage, you have to pay interest and principal. And so you want to make sure that you have a high enough income to service those. Otherwise, we will have to sell the house. Or we’ll have to refinance if possible.

[00:16:06.550] – Grumbine

Let me ask a quick question. One of the things that’s jumping out at me immediately is we’re using the word finance and we’re using private banks. But in an MMT lens, we understand in state theory of money, we understand that the currency issuing government is the monopolist here.

If you don’t mind, what is the relationship between finance and the macro economy? I know this is a deeper subject, but if you could just take a quick swag so we can understand the difference between finance that you’re speaking of and the government’s role in fiscal policy.

[00:16:44.560] – Tymoigne

Let me finish up on the categories and I’ll address that. So the first one is hedge finance, where you have money and expectations that are linked together through income expectations and debt service. The speculative finance, the idea here that you can pay the interest, but you have to refinance the principal and so you can’t pay the principal.

And Ponzi is the idea that you can pay neither the interest nor the principal on your debt service. And the implication of that is, one, you can try to refinance, but if you can’t, you’re going to have to sell some of your assets. So you have to sell your house, for example. And the question then becomes, well, are you able to sell your house at a price high enough to be able to pay all the debts that are owed?

And when you are the only one in trouble, that’s possible. But when everyone is doing it at the same time, everyone is involved in Ponzi finance at the same time, then if everybody tries to sell their assets at the same time, sell their house at the same time, home prices plunge. And so in that case, banks cannot recover the money they expected and they have troubles.

So the point of Minsky is to understand the role of money, link it to the future, and explain how basically a capitalist economy moves progressively during periods of relative stability from hedge finance, where people are able to pay their debt. And I expect it to do so to a period where we have Ponzi finance and where basically there is no expectation that the debt will be serviced.

And so the only means to pay the debt is to sell the assets. And so we had example of that during the housing boom, where banks started to lend without making an expectation that income would be there. The only means to repay would be to sell the house. And those things were called NINJA loans. And NINJA means “no income, no job, no assets.”

So if you go to the bank and say, I want to buy a house, the bank would ask, well, do you have an income? No, I don’t have an income. Do you have a job? No. Do you have any collateral? No. OK, here is $500,000. And so there is no way the household will ever be able to repay. And the bank knows this, but you still had to fill up documents to try to report an income, and that’s where the fraud comes in and that’s where Bill Black is very good.

And so the only way to make money here was to sell the house at a high enough price. But that only is possible if you can find a new buyer that is willing to buy at this higher price. And so here you have a Ponzi game going on basically. And when you don’t have enough buyers, in the end, the whole thing collapses, basically, OK?

And so that’s the point of Minsky and his framework, the idea that over time, the economic system during a period of stability that may record small crisis, but that don’t impact much the expectations of economic agents. Over time, you move to a more fragile position, one where you have Ponzi finance. Now, how does that all link to the idea of chartalism and the idea that the state has a monopoly over the currency and has control in the monetary system?

Well, it’s basically, again, something that Minsky recognized, which is the idea that everyone can create money, OK? You and I can create money. The point is to get it accepted. And so the degree of acceptance will vary depending on economic units. What will determine the degree of acceptance? And here we draw on Minsky, but we draw on much earlier work also from Innes, from Knapp earlier.

You have someone, Smith (Thomas Smith) also not Adam Smith, another Smith. I don’t remember his first name, but from the mid 19th century, someone cited by Innes. The idea is that what drives acceptance is if you have a lot of people that are indebted to you. And so the broader the scope of people indebted to you, the broader the acceptance of the money that you issue. Because what people can do then is pay the debt they owed to you with the money that you issued.

And so some economic units are of broader segments of the population that are indebted to them. Banks have a wide range of people indebted to them, and these people are able to use bank money to pay the debt they owe to their banks. But by far, the economic unit that has the broadest segment of the population indebted to them is the state, and so that’s why state money is the most widely accepted.

[00:22:38.930] – Grumbine

What is the difference between state money and bank money? We often hear banks can make money. Well, you just stated anybody can make money. You can make money. I can make money. What is the difference? The way I understand this is the difference between the two is that the federal government is able to create net financial assets where as the banks create US dollar-denominated IOUs that have to be paid back.

[00:23:05.720] – Tymoigne

So, yeah, what we have here is… So we can do a pyramid and at the very top, you’ll have the most widely accepted IOU, financial instrument we call money. And what’s at the top is this money that is not convertible into anything else. So usually that means that you have there the state money like the US dollar, for example, like Federal Reserve notes you have in your pocket.

Those are not convertible today, at least they’re not convertible into anything else, and so they are widely accepted by people across the United States and actually across the world too. And in the nation, the key driver is the fact that people have the ability to make payments to the state.

[00:24:06.320] – Grumbine

OK.

[00:24:07.080] – Tymoigne

And they are all indebted to the state through tax, fees, fines, and other dues that are owed to the state. And people abroad also like to have US dollars because they have debt denominated in US dollars and they can buy things from the United States. And lots of people want to buy things from us as we produce things that are compelling, that we enjoy.

And below that, you have bank money. Bank money is your bank account. Banks actually used to be able to issue physical bills also in the past. But the United States government decided that banks are not to do that. And so it basically told banks that you can’t do it and we make sure you can’t do it by taxing anybody who has private banknotes. And in that case, people don’t have an incentive to hold those notes because they have to pay tax on them.

[00:25:07.680] – Grumbine

I’m so sorry. I hate to interrupt you on this, but I got to ask you the question. What you just stated to me is the banks are not in charge of the government, even though there may be some capture. The banks are subservient to Congress. The Congress alone can change their rules, can dictate what they can and can’t do.

[00:25:26.610] – Tymoigne

Right.

[00:25:26.920] – Grumbine

And in reality, even though it looks like Congress is feckless and weak and can’t do anything, that that’s a mirage, that in reality, Congress is absolutely able to control the banks if it chose to. Is that a fair statement?

[00:25:39.600] – Tymoigne

Right. Yeah.

[00:25:40.920] – Grumbine

OK.

[00:25:41.730] – Tymoigne

The government is in control of the monetary system. It determines monetary laws, determines financial laws. It determines who can issue monetary instruments in what form, and it regulates all that. And so, yeah, banks are at a lower level in the pyramid because they are convertible into Federal Reserve notes or state money. And so banks have to make sure that they have enough.

And the state usually helps banks, ensuring that convertibility can be done. And so government has worked with banks to help decentralize the financial system and make sure that you have private initiative that plays a role in financing the economic activity of the United States, while also guaranteeing that the banking system can work smoothly and that bank money can stay liquid by making sure that it’s convertible one-to-one into state money, and by making sure that Bank of America money has to be convertible in Citibank money, at par, one to one.

And that was not always the case. And again, here the state must play a role to make sure that that happens. And so, yeah, the state is there to not only set the laws and also make sure that this monetary system works smoothly while allowing for decentralization. Now, where the problem comes in is when you can have some regulatory capture and where the state becomes too friendly with finance and gets to accept the private finance narrative too readily. And that’s something we saw again one more time prior to the housing boom, where we had people in charge, like Christopher Cox at the S.E.C., Greenspan at the Federal Reserve.

[00:27:55.960] – Grumbine

Bill Clinton?

[00:27:57.620] – Tymoigne

That were pro-finance friendly, and Greenspan went as far as saying that fraud, we can’t do anything about fraud. That’s not our job, cannot prevent people from doing stupid mistakes. And the market anyway will tend to cleanse itself and remove bad apples. So regulators don’t have to do anything. Finance regulates itself. And so we should deregulate the system.

And if we have still regulation because finance is still highly regulated, it’s probably the most regulated sector in the United States. Even if you have laws, what we can do is not enforce them, OK? And so we just let it go, ok, be extremely lenient and close our eyes. And assume that the whole thing will cleanse itself.

[00:28:57.860] – Grumbine

Bill Black was very explicit in this, he said we have so few regulators, they have literally starved the government of actual players that can indeed regulate these things. Even though these things are on the books, there’s no one there to enforce it. And the complexity that they have created by making these silly rules that are really meant to obfuscate what’s going on.

There isn’t enough knowledgeable people to do that. And when knowledgeable people like Richard Bowen and Art Wilmarth can say, “I see something,” they are ultimately excommunicated from the industry. They can never work again because they called out what’s going on. And this is putting the microscope on this so you can see financial capture, regulatory capture, as you say. What the government’s done is they’ve taken that libertarian perspective and created a government so small it’s ineffective.

[00:29:53.930] – Tymoigne

Yeah, there is that. And there is also no protection of whistleblowers.

[00:29:59.660] – Grumbine

Absolutely.

[00:30:00.230] – Tymoigne

Because if you look throughout the crisis, people like Mark Freebairn or Eric Kolchinsky at Moody’s or Matthew Lee at Lehman Brothers, they basically wrote letters. They went to see their boss and told them, well, there is something fishy going on here.

We need to study this and we need to stop what we’re doing. And for being frank, they basically were fired and very humiliated and were never able to find a job. At least for Matthew Lee, they were never able to find a job in finance again. And this pattern repeats in the past.

[00:30:40.850] – Grumbine

And no one more qualified. These people are super qualified to have those jobs. But because they did their job effectively and then they raised their hand in an ethical way, they have been cut out of any future work similar to what happened with Colin Kaepernick kneeling down during the national anthem.

[00:31:00.470] – Tymoigne

And so, again, Bill Black in his book, The Best Way to Rob a Bank is to Own One, goes through the same thing with Edwin Gray, who was at the head of the Federal Savings and Loan Insurance Corporation. And he reluctantly did push for more enforcement. And through his action and the help, of course, of people under him, they were able to significantly lower the cost of the crisis. But after that, he was a pariah, was never able to find a job in finance.

[00:31:48.610] – Intermission

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[00:32:37.750] – Grumbine

So let me ask you, going back to the book that we’ve been talking about, you start to talk about the Great Moderation. And I hear that brought up quite frequently, but I don’t really, truly understand what it is. We went from management capitalism to money manager capitalism and then the great moderation and the growth of the Ponzi finance, which you just sort of touched on. Can you take us through that part of the book?

[00:33:05.210] – Tymoigne

Yeah. So this idea of Great Moderation start to come up in the early 2000s. And so you have some economists say, hey, look at the past 20 years. We had inflation that went down significantly and the volatility of inflation fell and also the volatility of upward growth fell. So we still had recessions, but from the mid-80s to the early 2000s, we still had a few recessions, but they were very mild.

And so Stock and Watson, who are the first ones to really bring that forward go and try to explain, well, why? So they bring forward several arguments, they’re the econometrics type, so they like to play with data and so they test different hypothesis. One is “oh well, it’s technological improvements,” so more the Greenspan type of argument that the economy has become much more technologically advanced and so we’re able to manage inventories much better.

And so that has made for a much smoother, dynamic process. That’s one view. The other one was more the Bernanke argument that, “well, we have had better management of the economy through monetary policy.” So the central bank is more independent, uses better judgment when trying to set interest rates. And so through that, we have had growth, but it was more smooth through time.

And we have seen inflation, but smaller level and less volatile levels of inflation. And so that’s another view. And another one that they bring forward – I think there are a few more – is “well, we don’t know; maybe it’s just luck.” What they come up as the end is probably luck. A good role to play in here. But that’s where that starts the debate of what caused the Great Moderation.

This is picked up in 2004 by Bernanke, where he has a speech on the Great Moderation, and he advanced that it’s all about mostly the central bank doing a great job, and so we have cracked the code and so we know how to manage the economy. Never mind that throughout this period of time, we had quite serious financial crises. We had the savings and loan crisis starting in the early 80s, going all the way to the early 90s.

We had this stock market crash of 1987. We had the South Asian crisis in the late 1990s. We had the dotcom bubble burst in early 2000s. And so we had quite a few serious crises three times here. But somehow they don’t make it into the picture of the Great Moderation. OK, where again, this is based on the theoretical framework that is used there where finance is a secondary issue.

It does not enter into the macroeconomic models that are used at the time. And it’s all real economy. And so finance is not in the picture of Bernanke in saying that there is great moderation and not in the picture also of the other macroeconomists that don’t look at the financial side and the crises we had there.

And so that’s the debate of the early 2000s, this idea of great moderation and what caused the Great Moderation and suddenly, boom! We have this crisis that comes in 2007, 2008, and starts really in late 2006, but grows and grows in importance, until we reach September 2008 with Lehman Brothers collapsing and the whole system almost falling down. And there they say, “Well, oops, maybe we forgot to include finance in our model.”

[00:37:50.080] – Grumbine

Let me ask you this, because one of the things that always comes up, and I think it’s just because we prop up the Fed, we get the Fed chairs on television, they talk to the camera, they go before Congress. We always hear that the Fed has quantitatively eased X, Y, Z. They’ve backstopped the banks. They’ve bailed out the banks. What is the role of the instability or stability, depending on your perspective, of the central bank in terms of these models? To what degree are they responsible and to what degree are they responsible for saving it?

[00:38:25.270] – Tymoigne

Well, the central banks, well, at least in the United States the central bank was created to establish an elastic currency at its core. If you look at the preamble of the Federal Reserve Act, it’s basically saying that it’s for the purpose of establishing of an elastic currency. And – and there is this second part that people tend to forget – and for the supervision and regulation of banking and finance.

OK, and so central banks are crucial today to squash a liquidity crisis. The idea that you have finance that freezes suddenly because nobody trusts anybody and everyone is in trouble, unable to pay their debt, or unwilling because they don’t know if the next day they will need the money they have. And so you need a central bank to help and say, “OK, guys, don’t worry, we will help you.” OK?

We have the ability to create as much money as we want. OK? Finding the money is not the problem. So if banks are indebted to each other and they’re unwilling or unable to pay each other, what we’ll do is help those banks that are creditors by providing money to the debtor banks that will pay the creditors, and then we’ll smooth things out. OK, so liquidity problem, that is a temporary issue in the financial system, is a problem with which the central banks are in a crucial role to solve that problem.

And so we need central banks here. But we also need central banks to do their job to deal with solvency issues and to make sure that banks, now that they know that they have a backstop from the central bank, don’t go too crazy in terms of their credit standards and the way they provide credit. And so that’s where regulation is important. And that’s where regulation, basically, logistically, if not disappeared, at least, was not applied thoroughly or well. And so we had the crisis.

[00:40:55.850] – Grumbine

Very good. So ultimately, at this point, we are now a bunch of people that have been buried inside of a pandemic, they’ve had years of propaganda and indoctrination into neoclassical thinking. They’ve been given a false scarcity narrative. They’ve been disciplined by the market and the leaders to believe that nothing is possible. And they watch all these horrible situations occur and they see everyone that makes these bad decisions at a business level getting bailed out, but they aren’t getting bailed out.

And it seems like this whole model leaves people with a lot more questions than answers. As you talked about regulating banking within the Federal Reserve mandate coming out of the Federal Reserve Act, they don’t typically do direct relief at the federal level because I guess you need accounts at the Fed for it to be used. Where is the power supposed to be used? Is it not in Congress?

[00:41:55.580] – Tymoigne

Well, to deal with solvency crisis, yes, you need fiscal policy. Monetary policy can only deal with liquidity crisis. But differently, if you want to prop up income and make sure that people have some money to spend, you have to go through the fiscal route. Monetary policy is not there to prop up income, it’s more to deal with an ability of short-term problems in terms of debtors unable to pay their debts and the banking system able to pay its debts to other banks.

That’s where the central bank is. So it deals with banks. It doesn’t deal with the rest of the economy directly. For that you need Congress to act. And again, this idea that we can’t do anything or that we should let the system operate and cleanse itself, again is owed… You can retrieve the same idea during the time of the Great Depression, where you have Secretary of State Andrew Mellon saying that exactly that: we should let the system cleanse itself.

We should liquidate farmers, liquidate workers, liquidate business, and through that process, we’ll come better off at the end because we’ll get rid of all the bad apples. People made bad decisions. And so now the market needs to cleanse that.

[00:43:35.390] – Grumbine

Same with the foreclosures, correct? I mean, this is exact same thing they were doing with the housing crisis as well.

[00:43:40.740] – Tymoigne

Yeah, yeah, yeah. People, it’s their fault. That’s it. What’s missing in that story, there are several things. First one is that among the banking system, there is strong competition. And so to keep up with competition over time, they have a tendency to loosen their credit standards because the pool of what is considered prime or creditworthy borrowers shrink at a point in time.

And so if you want to find new business, you’re going to have to look somewhere else and expand your horizon and say, OK, well, before we’d only lend to people if their income is only allocated 10 percent of the debt service of a mortgage. That’s what we consider prime. Now, we have lent to all these people that will only allocate 10 percent of their income to debt service.

Shall we close shop? No. Well, first of all, try to make refinancing deals with those people. But what about after that? Well, we’ll look into what about people that can afford with 20 percent of their income to debt service? Well, we’ll say it’s OK for those who are going to be prime. So here you are expanding your pool of potential clients.

And so you have competitive dynamics that push banking to seek new clients and to find new creative ways to finance economic activity and more and more exotic economic activities. And so if you don’t do it, you’re basically not keeping up with the competition. You lose business and in the end, you’ll be closed down too. That’s the first part. The second part is that during a crisis, the market is not something… I hate using the word “the market.”

[00:45:37.600] – Grumbine

One of many markets.

[00:45:40.240] – Tymoigne

The process is not something that is very clean, where this is someone who would behave badly and we’ll punish that person. What happens is that everybody get cleansed in periods of crisis. Doesn’t matter if you made good or bad decisions. The whole thing is going to basically fall apart during a period of deep financial crisis. And so when you’re cleansing, you’re basically destroying the entire thing, ultimately.

You’re not very selective. And so that’s the other aspect. If you go to the most recent crisis – again here, Bill Black is pretty good – it’s clear that the fraud and bad decisions were coming from the lenders side, not from borrowers, ok. There was a lot of pushing going on on the banking side to push people into exotic mortgages and to tell them, I think we can lower your monthly payment and now you’re paying $2,000 a month, we’ll be able to lower that to $1,000 a month.

OK, and behind this, you had also some clauses, well, maybe it’s $1,000 now, but in five years it’s going to go up to $3,000 a month. And so people who read those things more carefully say, “Oh, hold it. It’s a thousand dollars now, but it’s three thousand in five years. I can’t afford to pay three thousand dollars a month in mortgage service.” And then the bankers say, “Well, don’t worry, at that time we’ll refinance.

And so you will never have to pay three thousand. Trust us. We’ll make sure. Focus on the one thousand dollars. Much better for you.” And so there is this really “sell” strategy that push people to refinance in exotic forms of mortgages. Bankers also push people into houses, people could definitely not afford to do that. But again, the NINJA loans was one of the strategies.

Or they would say, “Oh, well, don’t worry, we’ll make the few first payments for you. Sign, sign. It’s OK.” And behind here, what you have is a change in the incentive strategies among loan officers where they were remunerated, not based on a fixed salary, but more based on loan volume that they provide. And so they had really an incentive to throw as much mortgages on households as possible.

1. And so this idea that it’s all people who made bad decisions and so we need to punish them. Well, you’re going to have to look a bit behind here. What’s going on?

[00:48:41.660] – Grumbine

It doesn’t seem like economists, people from the MMT community, have any such illusions. We can see clearly now the rain is gone. These people seem to be very into punitive politics, legal arrangements, financial arrangements. Everything seems to be predatory and very punitive. Where do you think that mindset comes from, that disciplining mindset?

[00:49:05.790] – Tymoigne

Well, it’s a belief that markets give you freedom, and also with freedom comes personal responsibility, and so you have to accept the decisions you made and stick with it. That’s it, basically. And government should not interfere there. So there are several ways to go at it. The idea that markets and freedom are related, we can push to that.

The idea that people made their own decisions, we just dealt with that a bit by showing that, well, there is more to just people making rational calculations and carefully deciding. You have bankers shoving down the throats of households exotic mortgages by promising them the moon basically and making them believe things that were not realistic.

And so, yeah, it’s the idea that, well, you are responsible, you make your own decisions, and so you should accept the consequences, whatever it is, a big reward or a big loss.

[00:50:13.750] – Grumbine

This final chapter of the book is Policy Implications for Employment and the Conclusion with the Minsky Half Century. Can you take us through how the book concludes? It seems like it ties up nicely with what we’ve just talked about.

[00:50:28.580] – Tymoigne

Yeah, so the last part of the book is… Well, first of all, chapter five focuses on employment. Chapter four also deals with some of the implications in terms of finance and looking at how finance should be regulated from a Minskian perspective. And so dealing first with that financial side, what we see is at the core of the regulatory process should be a recognition of, first, that crises don’t just occur.

They’re not just random events that occur like, as Greenspan put it, tsunamis. Tsunamis are natural occurrences that are random. And again, you find that a lot in finance models, ok? The starting point is how nature has two states. One is crisis. The other one is non-crisis. And there is a probability assigned to both of them. And so nature sometimes throw a fit and then, boom, we have a crisis.

So it’s a random approach to crisis. And so from that then the story goes that what we need to do then is to try to put buffers to protect the system against crises like you have seawalls that protect against tsunamis. We need to have capital buffers and liquidity buffers that help the banking system sustain random shocks. The problem is that, well, we can make seawalls high enough to sustain 99 percent of tsunamis.

But sometimes you have the 100-year tsunami that comes in and then, well, sorry, we tried and well, that was not good enough. OK, and so the perspective here is that crises are something out there that occur randomly. So the only thing you can do from a regulatory perspective really is buffer against that. And if you take the Minskian viewpoint, what you get is – no, no, currencies are not random.

They’re the result of the economic process that operates under a capitalist system. And so what you want to do is regulate financial practices. And so at the core here would be the categories we just talked about: the hedge, speculative, and Ponzi finance. That’s where you start your regulatory process, understanding the financial practices of economic agents and make sure that they don’t increase financial fragility.

So you want to make sure that they avoid Ponzi finance and you want to promote hedge finance as much as possible. You want to make sure that lending practices are based on income finance rather than collateral finance, where the only means to service is to sell assets that you have, OK? And so that’s a central way you would look at financial regulation.

Now, for the other side, you want to not only make sure that people don’t take on too much debt and businesses don’t take on too much debt and by too much, we mean that they stay within hedge finance, that is at stake in a framework where it’s expected their income will be high enough to service their debt. So that’s the financial side of the issue.

The employment side of the issue deals with sustaining income in periods of crisis. So that’s at least one aspect of the employment policy we advance, ok.  And the cure in the way we deal with a crisis is this one-off financial stimulus. And the narrative is we want to be careful of not to be making a too high stimulus because that would increase public debt and with that come all sorts of presupposed negative consequences that do not exist, but that’s narrative.

And so we want targeted small stimulus and we want to be the least bold possible to deal with a crisis when we want to try to deal with stabilizing income. And the view we have is, again, no here we have a systemic problem, the system is unstable and we want to make it much more stable by stabilizing income through fiscal components that act quickly and that can be strong very quickly.

And one of the ways you do that is through a job guarantee program because a job guarantee program is basically a program that says that the government will guarantee a job to everyone willing and able to work. And of course, you have to be willing and able to work. That means you can be fired from such a program. But as long as you’re willing and able to work, we’ll find you a job.

And so in periods of crisis, lots of people are out of a job. And what happens is their income tumbles and that makes the crisis even worse. And so a job guarantee program basically allows people to move from private sector to public sector job very quickly so that their income is stabilized. It might not be as high as the income they had in the private sector, but at least it’s not zero.

And so one of the benefits of a job guarantee program from the point of view of financial crisis is that it stabilized income. And so, again, help to promote hedge finance. Now, of course, there are many other benefits to a job guarantee program out there. Pavlina Tcherneva can speak about those very eloquently. And so I’ll leave that to that.

[00:56:58.650] – Grumbine

We love Pavlina. She’s awesome. So let me ask you to wrap this up. We are seriously in the middle of this pandemic and these survival checks have been slow coming.

[00:57:10.410] – Tymoigne

Right! It’s like a trickling thing and bit by bit, then again, with this narrative, all the debt is going to. Yeah, this is crazy.

[00:57:18.150] – Grumbine

Yes. And so one of the big things I want to make clear because I want people to be able to fight effectively, not just understand. This isn’t just head knowledge. I want them to take that information and then analyze what they see today. They see Joe Biden giving fourteen hundred instead of the two thousand. He’s once again going back on these promises.

And I believe that it’s based on the idea that the more money they give people, the less Wall Street and banks can make by having to put people into debt, into the disciplining that we had talked about. Biden is very much a fiscal conservative. He’s every bit as fiscally conservative as any number of Republicans and the people that we often point at as quote-unquote, “the bad guys.”

Biden’s pretty much behaving like a clone. He is behaving exactly like them. I’m curious as to how we can penetrate that aura so that we can get what we need as people and start making demands through that lens that helps us understand when they tell us that the kitty is bare, when they tell us we got to reduce those payments.

[00:58:25.140] – Tymoigne

Right.

[00:58:26.040] – Grumbine

How do we make people see that these people are all supporting industry that isn’t people?

[00:58:31.400] – Tymoigne

Again, there it’s going to have to be grassroots movements and the best experience we have regarding that is, again, the Great Depression, where basically the government had to cave to the demands of the population after extensive marches on Washington throughout the early 30s, basically where we had the Bonus March going to Washington and we know that didn’t end well.

We had workers, we had farmers. We had people working in all sectors of the economy striking and making their demands known. And by the time Roosevelt came in, there is really a sense that the economy and society is going down the toilet here and people are really angry and we need to do something about that. So you have to have grassroots movement that push and that pressures people at the top to do something.

And we had good outcomes, although limited but good outcomes during the crisis in the forms of the job programs of the New Deal program. We had the government buying off all the mortgage debt at the time and reissuing more sustainable forms of mortgages. We had extensive payments going to people in need. So we have past experience that show that it’s possible to bend the will of politicians because remember, Roosevelt ran on a fiscal conservative platform, but he was basically forced, OK, given the social unrest of the time to do something and to try things.

So those policy came out of that. Today, there is some. DSA is growing in membership, that is the last time I checked. There is groups of people like Alexandria Ocasio-Cortez and others that are popping up. But this discontent and this will of people to march and to have large strikes and basically make their voices known in the street is not there yet. I don’t know why we’re way more apathetic than we were in the past.

[01:01:06.300] – Grumbine

For my listeners, I want to make clear something. For my friends in the alternative media world that focus on everything but economics, they focus on the daily grind, they focus on every little bad tweet that goes out there. This is a long haul kind of activism that absolutely you must tend to. I’m pleading with my alternative media friends, stop ignoring this.

You must stay consistent. Appreciate having an MMT guest come on once in a while would be even better if you guys took the ball and ran with it and started learning this because so many of your listeners are required to make the changes we need to the system. And it’s not going to happen if they keep getting diverted by alternative media wars between each other and so forth.

It’s really vital that we empower activists to take to the streets to make real meaningful change. So with that, Eric, I want to thank you so much for joining me today. I look forward to having you back again. Last time you were on, we went through the Seven Deadly Innocent Frauds, which was absolutely spectacular, and MMT 101. Let me ask you, where can we find more of your work?

[01:02:21.010] – Tymoigne

Well, I put actually most of the drafts of my work on my web page at Lewis and Clark College so you can access all my work there basically.

[01:02:31.960] – Grumbine

Fantastic. Look, this was an absolutely mesmerizing interview for me. I learned a lot. And ironically, while you were talking, I literally bought two of your books. I just want to let you know. I’m not even joking. I am, like, so riled up because I’ve got the activism side down. I’m fired up. I’m ready to fight.

Now, I want to get the technical details even more firmly in place so I can be a force multiplier for the rest of the movement. So thank you for giving me that tool. And hopefully, folks that are listening, they’re able to take this tool and use it as well. So, Eric, once again, thank you so much. To our audience, thank you. This is Steve Grumbine with Macro N Cheese with Eric Tymoigne. We’re out of here.

[01:03:15.330] – Tymoigne

Yeah. Bye.

[01:03:22.320] – Ending credits

Macro N Cheese is produced by Andy Kennedy, descriptive writing by Virginia Cotts, and promotional artwork by Mindy Donham. Macro N Cheese is publicly funded by our Real Progressive Patreon account. If you would like to donate to Macro N Cheese, please visit patreon.com/realprogressives.