What Janet Yellen and Mark Carney could learn from macroeconomist Hyman Minsky

Gordon Brown, as Chancellor in the UK, and the Federal Reserve’s Alan Greenspan, notably, violated Minsky’s ideas - what will the new twin peaks of global finance do differently?

After the cold turkey of Christmas there is a good slice of humble pie being eaten for New Year dessert. One by one, and a little too easily for my liking, the über-bears of the financial system have been falling into line, accepting that things are OK and the bull market for equities can continue. Nouriel Roubini is only the latest voice to turn from a growl to an apologetic whimper. Hugh Henry did his exit stage right, pursued by his own personal bear, before Christmas. Only Marc Faber carries the torch now.

In any event, they are all being consistent with what the American economist Hyman Minsky (1919 - 1996) recognised, which is that investors have a tendency to exaggerate what is happening rather than seek under-valued investments as a home for their money. Most people follow the momentum of current thought and this is what leads to manias, bubbles and financial crises. In other words, financial institutions are by their very nature unstable, mainly because they are inhabited by faulted human beings whose conscious, rational, self is a slave to the subconscious and the chaotic id that powers it. Consequently, they need managing and regulating, actively, and cannot be left to the self-limiting actions of those involved in the financial system, mainly because they are unable to self-limit.

Although he didn’t live to see it, Minsky got a number of notable things right about the interaction between money and the psyche. It is a moot point whether he would have found any pleasure in watching his theories play out in the post-2000 era leading, eventually, to the ignominious collapse of once-useful financial institutions. But his theories have proved better models for what happened than any statistically-based piece of software that I have seen.

Gordon Brown, then Chancellor in the UK, and the Federal Reserve’s Alan Greenspan, notably, violated Minsky’s ideas. Brown advocated "light-touch" regulation (a euphemism for no regulation) while Greenspan looked on helplessly as the Glass-Steagall act (already ineffectual in many people’s eyes) was dismantled in front of him, allowing the walls to come down between commercial banks and securities firms. Brown took the revenues from the financial system and built up state spending. Greenspan had no such ideological or electoral agenda. But when the financial crisis struck all that was left for both of them was to cut interest rates to lower and lower levels while propping up failing financial institutions with unconventional policies like quantitative easing which have now become uncomfortably accommodated and habituated into our lives.

Minsky has powerful followers, not least of which is the soon-to-be Chair of the interest rate-setting Federal Reserve Open Market Committee, Janet Yellen. One of the conclusions of the Minsky approach is that policy makers need to follow "contra-cyclical" policies to take the mania out of the system. In other words, when the good times roll those in charge should be tightening regulation and rules around financial institutions to stop them from experiencing manic boom and bust.

So the Yellen Federal Reserve, like the Mark Carney Bank of England, will be fundamentally different animals from their predecessors. Not for them the macho rate setting and systematic policy making that has characterised the previous 30 years. We should be looking for something more administrative, more touchy-feely and circumstantial, gradualist even. Because if you were going to start placing the regulatory corset around a financial system you wouldn’t do it to this one and you wouldn’t start now, not with the current need for a bit of reckless lending.  And, as a final corollary, given that these are both most likely one-term governors of their institutions, maybe staying for just five years, sponsoring Minsky-esque regulatory change via the carrot of low interest rates means that neither of them may touch interest rates during their entire term of office.

Chair of the National Reserve, Janet Yellen. Photograph: Getty Images.

Head of Fixed Income and Macro, Old Mutual Global Investors

Photo: Getty Images/AFP
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Is Yvette Cooper surging?

The bookmakers and Westminster are in a flurry. Is Yvette Cooper going to win after all? I'm not convinced. 

Is Yvette Cooper surging? The bookmakers have cut her odds, making her the second favourite after Jeremy Corbyn, and Westminster – and Labour more generally – is abuzz with chatter that it will be her, not Corbyn, who becomes leader on September 12. Are they right? A couple of thoughts:

I wouldn’t trust the bookmakers’ odds as far as I could throw them

When Jeremy Corbyn first entered the race his odds were at 100 to 1. When he secured the endorsement of Unite, Britain’s trade union, his odds were tied with Liz Kendall, who nobody – not even her closest allies – now believes will win the Labour leadership. When I first tipped the Islington North MP for the top job, his odds were still at 3 to 1.

Remember bookmakers aren’t trying to predict the future, they’re trying to turn a profit. (As are experienced betters – when Cooper’s odds were long, it was good sense to chuck some money on there, just to secure a win-win scenario. I wouldn’t be surprised if Burnham’s odds improve a bit as some people hedge for a surprise win for the shadow health secretary, too.)

I still don’t think that there is a plausible path to victory for Yvette Cooper

There is a lively debate playing out – much of it in on The Staggers – about which one of Cooper or Burnham is best-placed to stop Corbyn. Team Cooper say that their data shows that their candidate is the one to stop Corbyn. Team Burnham, unsurprisingly, say the reverse. But Team Kendall, the mayoral campaigns, and the Corbyn team also believe that it is Burnham, not Cooper, who can stop Corbyn.

They think that the shadow health secretary is a “bad bank”: full of second preferences for Corbyn. One senior Blairite, who loathes Burnham with a passion, told me that “only Andy can stop Corbyn, it’s as simple as that”.

I haven’t seen a complete breakdown of every CLP nomination – but I have seen around 40, and they support that argument. Luke Akehurst, a cheerleader for Cooper, published figures that support the “bad bank” theory as well.   Both YouGov polls show a larger pool of Corbyn second preferences among Burnham’s votes than Cooper’s.

But it doesn’t matter, because Andy Burnham can’t make the final round anyway

The “bad bank” row, while souring relations between Burnhamettes and Cooperinos even further, is interesting but academic.  Either Jeremy Corbyn will win outright or he will face Cooper in the final round. If Liz Kendall is eliminated, her second preferences will go to Cooper by an overwhelming margin.

Yes, large numbers of Kendall-supporting MPs are throwing their weight behind Burnham. But Kendall’s supporters are overwhelmingly giving their second preferences to Cooper regardless. My estimate, from both looking at CLP nominations and speaking to party members, is that around 80 to 90 per cent of Kendall’s second preferences will go to Cooper. Burnham’s gaffes – his “when it’s time” remark about Labour having a woman leader, that he appears to have a clapometer instead of a moral compass – have discredited him in him the eyes of many. While Burnham has shrunk, Cooper has grown. And for others, who can’t distinguish between Burnham and Cooper, they’d prefer to have “a crap woman rather than another crap man” in the words of one.

This holds even for Kendall backers who believe that Burnham is a bad bank. A repeated refrain from her supporters is that they simply couldn’t bring themselves to give Burnham their 2nd preference over Cooper. One senior insider, who has been telling his friends that they have to opt for Burnham over Cooper, told me that “faced with my own paper, I can’t vote for that man”.

Interventions from past leaders fall on deaf ears

A lot has happened to change the Labour party in recent years, but one often neglected aspect is this: the Labour right has lost two elections on the bounce. Yes, Ed Miliband may have rejected most of New Labour’s legacy and approach, but he was still a protégé of Gordon Brown and included figures like Rachel Reeves, Ed Balls and Jim Murphy in his shadow cabinet.  Yvette Cooper and Andy Burnham were senior figures during both defeats. And the same MPs who are now warning that Corbyn will doom the Labour Party to defeat were, just months ago, saying that Miliband was destined for Downing Street and only five years ago were saying that Gordon Brown was going to stay there.

Labour members don’t trust the press

A sizeable number of Labour party activists believe that the media is against them and will always have it in for them. They are not listening to articles about Jeremy Corbyn’s past associations or reading analyses of why Labour lost. Those big, gamechanging moments in the last month? Didn’t change anything.

100,000 people didn’t join the Labour party on deadline day to vote against Jeremy Corbyn

On the last day of registration, so many people tried to register to vote in the Labour leadership election that they broke the website. They weren’t doing so on the off-chance that the day after, Yvette Cooper would deliver the speech of her life. Yes, some of those sign-ups were duplicates, and 3,000 of them have been “purged”.  That still leaves an overwhelmingly large number of sign-ups who are going to go for Corbyn.

It doesn’t look as if anyone is turning off Corbyn

Yes, Sky News’ self-selecting poll is not representative of anything other than enthusiasm. But, equally, if Yvette Cooper is really going to beat Jeremy Corbyn, surely, surely, she wouldn’t be in third place behind Liz Kendall according to Sky’s post-debate poll. Surely she wouldn’t have been the winner according to just 6.1 per cent of viewers against Corbyn’s 80.7 per cent. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.