How central bankers turned left wing

Economics may have ignored financial markets in the past but it has gone way too far in the opposite direction. Nowadays finance has become an obsession while there is little talk about the real economy.

I was reminded of this trend while listening to a recent BBC Radio 4 Analysis programme presented by Duncan Weldon. At the time the documentary was made he was a senior economist at the Trades Union Congress but he has recently been appointed to the role of economics editor at the BBC’s Newsnight programme.

The appointment brought predictable howls of outrage of left wing bias from publications such as the Daily Mail. Less commented upon was the fact that Weldon was evidently once a partner in a small fund management firm.

The focus of the programme was the work of Hyman Minsky, a heterodox American economist who died in 1996. He is best known for his financial instability hypothesis. Essentially this argues that stability creates conditions of instability.

Minsky essentially saw finance as going through three stages. In the first there is caution about lending as financial institutions remember the excesses of the past, then banks gain confidence as the economy expands, finally it reaches a “Ponzi” stage of speculative excess. Eventually the bubble has to burst before the cycle starts all over again.

In the aftermath of the financial crisis of 2008-9 the deceased economist has gained a new respectability. Janet Yellen, recently appointed as chairman of the Federal Reserve, gave a positive speech on Minsky back in 2009. The Analysis programme also included positive comments from Laurence Meyer, a former Fed board member and once a colleague of Minsky, and Adair Turner, a former chairman of the Financial Services Authority.

Minsky’s work has also found favour among prominent academics. Steve Keen, a professor of economics at the University of Western Sydney, and Wendy Carlin, a professor of economics at University College London, both praised his insights.

Two conclusions can be drawn from this sketch. First, Minsky’s hypothesis is strictly speaking not a theory at all. It is simply a description of the stages finance can go through in a boom and bust cycle. It does not even attempt to explain why finance has become so much more important in recent years. Nor does it probe the nature of the relationship between finance and the real economy.

Second, although Minsky’s theories were once considered unorthodox the central banking establishment has felt comfortable adopting them. As Adair Turner notes on the programme the hypothesis leads naturally to policy conclusions such as the need for more rules and macroprudential regulation.

This turn leads to a hypothesis of my own. We have apparently entered a peculiar world where the outlook of the state functionary is viewed as left wing. Although Minsky was an academic his essential concern was how the authorities could manage financial instability. He wrote a tract that naturally appealed to the preoccupations of central bankers.

This is a long way from the traditional left wing project of transforming society. The spectre of Duncan Weldon presenting items on Newsnight need not haunt even the most conservative BBC viewers.

This blog post was first published yesterday on Fundweb.