Stiglitz, Minsky, and Obama

<..>

I haven’t commented so far on the president’s economic speech, except to mock the journalists demanding “new ideas” for a very old-fashioned economic crisis. And as many people have pointed out, there weren’t any actual policy proposals.

What we got instead was a narrative, which is no small thing, since it was very much not the narrative that has been dominating Washington discourse — including Obama’s own pronouncements — for three and a half years. Gone was the deficit/Grand Bargain obsession; instead, this was about a depressed economy, suffering mainly from inadequate demand, and how to fix it.

<...>

The president came down pretty much for what we might call a Stiglitzian view (although it’s widely held): debt was driven by rising inequality. The rich were taking an ever-larger share of the pie, but not spending to match, while working Americans took on ever more debt to make ends meet.

What’s the alternative? Minsky: debt exploded because the Great Depression was receding into the mists of forgetfulness, and both lenders and borrowers — enabled and encouraged by financial deregulation — forgot the dangers of leverage...I’m more of a Minskyite than a Stiglitzian, although not 100%; although things like subprime lending were, I believe, mainly about forgetting the past, Elizabeth Warren’s old work on bankruptcy pretty clearly shows that at least some families took on excess debt as a result of rising inequality. But I’m inherently suspicious of any story that makes economics a morality play in which all bad results come from things you consider bad for other reasons too; making soaring inequality the cause of our macro woes too is a bit too, well, comfortable for us liberals.

- more -

http://krugman.blogs.nytimes.com/2013/07/25/stiglitz-minsky-and-obama/