Karl Polanyi has often highlighted on the insight about the predicaments of the market. these perils realize that when the markets are left to their own devices, they are enough o cause attrition to the social relations and fabric. However, the social consequences of financial instability can be understood only by employing a Polanyian perspective on how processes of commodification and market expansion jeopardize social institutions. For someone like Hyman Minsky, equilibrium and stability are elusive conditions in markets with debt contracts. His financial instability hypothesis suggests that capitalist economies lead, through their own dynamics, to “the development over historical time of liability structures that cannot be validated by market-determined cash flows or asset values”. According to Minsky, a stable period generates optimistic expectations. Increased confidence and positive expectations of future income streams cause economic actors to decrease margins of safety in their investment decisions. This feeds a surge in economic activity and profits, which turns into a boom as investments are financed by higher degrees of indebtedness. As the economic boom matures, an increasing number of financial intermediaries and firms switch from hedge finance to speculative and Ponzi finance. Minsky argued that economists, misreading Keynes, downplay the role of financial institutions. In particular, he argued that financial innovation can create economic euphoria for a while before destabilizing the economy and hurling it into crises rivaling the Great Depression. Minsky’s insights are evident in the effects of innovations in mortgages and mortgage securities. Actors using speculative and Ponzi finance are vulnerable to macroeconomic volatility and interest rate fluctuations. A boom ends when movements in short-term and long-term interest rates render the liability structures of speculative and Ponzi finance unsustainable. The likelihood of a financial crisis (as opposed to a business cycle) depends on the preponderance of speculative and Ponzi finance in the economy under question.
Minsky regularly criticized economists for failing to grasp Keynes’s ideas. In his book Stabilizing an Unstable Economy Minsky argued that while economists assimilated some of Keynes’s insights into standard economic theory, they failed to grasp the connection between the financial and real sectors. Specifically, he argued that finance is missing from macroeconomic theory, with its focus on capital structure, asset-liability management, agency theory, and contracts. He wrote:
Keynes’s theory revolves around bankers and businessmen making deals on Wall Street … One of the peculiarities of the neoclassical theory that preceded Keynes and the neoclassical synthesis that now predominates economic theory is that neither allows the activities that take place on Wall Street to have any significant impact upon the coordination or lack of coordination of the economy…
Minsky’s work on financial crises builds on Keynes’s insights, using terms such as “euphoric economy”, and “unrealistic euphoric expectations with respect to costs, markets, and their development over time”. Yet Minsky considered the issues of rational prices and market efficiency as only the tip of an iceberg. His broad framework addresses issues related to the lending practices by financial institutions, central bank policy, fiscal policy, the efficacy of financial market regulation, employment policy, and income distribution. Financial institutions, such as banks, become increasingly innovative in their use of financial products when the business cycle expands, boosting their leverage and funding projects with ever increasing risk. Minsky’s words on financial innovation are striking, as if foretelling the recent crisis.
Over an expansion, new financial instruments and new ways of financing activity develop. Typically, defects of the new ways and the new institutions are revealed when the crunch comes.
Commercial banks sponsored conduits to finance long-term assets through special purpose entities such as structured investment vehicles (SIVs), something similar to the Indian version of Special Purpose Vehicles (SPVs). These were off balance sheet entities, subjecting them to lower regulatory capital requirements. Special purpose entities used commercial paper to raise funds they then used to buy mortgages and mortgage securities. In effect, banks relied on Minsky-type speculative and Ponzi financing, borrowing short-term and using these borrowed funds to buy long-term assets. Wrote Minsky,
The standard analysis of banking has led to a game that is played by central banks, henceforth to be called the authorities, and profit-seeking banks. In this game, the authorities impose interest rates and reserve regulations and operate in money markets to get what they consider to be the right amount of money, and the banks invent and innovate in order to circumvent the authorities. The authorities may constrain the rate of growth of the reserve base, but the banking and financial structure determines the efficacy of reserves…This is an unfair game. The entrepreneurs of the banking community have much more at stake than the bureaucrats of the central banks. In the postwar period, the initiative has been with the banking community, and the authorities have been “surprised” by changes in the way financial markets operate. The profit-seeking bankers almost always win their game with the authorities, but, in winning, the banking community destabilizes the economy; the true losers are those who are hurt by unemployment and inflation.
Combining Hyman Minsky’s insights on financial fragility with a Polanyian focus on commodification offers a distinct perspective on the causes and consequences of the foreclosure crisis. First, following Polanyi, we should expect to find commodity fiction applied to arenas of social life previously isolated from markets to be at the heart of the recent financial crisis. Second, following Minsky, the transformations caused by novel uses of commodity fiction should be among the primary causes of financial fragility. Finally, in line with a Polanyian focus on the effects of supply-demand-price mechanism, the price fluctuations caused by financial fragility should disrupt existing social relations and institutions in a significant manner. So, how does this all peter down to alt-right? Right-wing libertarianism is basically impossible. The “free” market as we know it today needs the state to be implemented – without reading Polanyi, you just know for example that without the force of the state, you just can’t have private property or all the legal arrangements that underpin property, labour and money. So it wouldn’t work anyway. Polanyi’s point is that if we want democracy to survive, we need to beware of financial overlords and their ideological allies peddling free-market utopias. And if democracy even stinks of stability, then stability is destabilizing as Minsky would have had it, thus corroborating the cross-purposes between the two thinkers in question, at least to the point of a beginning.
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