I’ve been meaning to comment on this Peter Eavis essay in the New York Times since April. The instability of late spring and early summer for me made the months disappear.
Basically, Eavis argues that empowering government regulators to modify their rules and criteria for big banks on the fly allows them to hold off “Minsky moments”:
[Economist Hyman] Minsky pithily observed that stability gives rise to instability. As the economy grows steadily, banks and companies start to overreach. Banks lend too much, and companies and consumers overborrow, which ultimately makes the system fragile. And while financial regulation was necessary to limit excessive behavior during those stable times, Mr. Minsky observed that bankers eventually found ways around the rules.
This part of Mr. Minsky’s thinking was on my mind this week at the annual Minsky conference at the Levy Economics Institute of Bard College. The focus of the gathering was the Dodd-Frank Act, the sweeping overhaul of the financial system that Congress passed in 2010. Many of the speakers, being acolytes of Mr. Minsky, said they expected the bankers to find ways to dodge Dodd-Frank in the coming years.
I’m sure there’s more to Minsky’s pith than Eavis captures, but on the surface, it would appear one could simplify it further and observe that human society and the economy are fundamentally unstable ground on which structures are always under threat. We’d do well always to remember that our sense of stability is contingent on circumstances beyond our control and refrain from overreaching. But building up and out isn’t always a bad idea. A society that underreaches can be toppled by instability, too, if it doesn’t span beyond the boundaries of some sinkhole or other.
The irony of the essay is that it relies on the progressive assumption that regulators really are the well-meaning geniuses that progressive policies require them to be. After all, governments can overreach, too, and one of the reasons we’re well advised to limit government is that it is our repository for our collective power to tell people what to do and put them in prison or kill them if they transgress. When governments overreach and then fail, they can send millions of people straight to the grave without even stopping at the poorhouse and force them to march in a fatal direction even if individuals spot safer routes out of harm’s way.
If we truly want to build on our earned stability, we need to keep things basic, and as it turns out, human society has a mechanism for doing that: tradition. After an economic collapse, the culture learns from its mistakes and establishes truisms and traditions that far outlast regulations. Had things been permitted to take their natural course after the housing bubble popped, we might have renewed our belief that people who can’t afford to pay the bill shouldn’t borrow. Had the big banks not been propped up, we would have learned the lesson that bigger isn’t always better or more stable in the long term. Not surprisingly, that’s not a lesson the acolytes of big government and a ruling aristocracy want us to learn.
To be sure, cultural institutions are susceptible to Minskyesque instability just as economic and governmental institutions are, particularly when we forget the justifications for the traditions. Look at our difficulty articulating the reason for traditional marriage when social stability made it seem we could redefine it blithely. But government encourages people to think the structure is fixed and stable — that the patches repaired the problem and that our well-meaning geniuses have a careful eye on it all.
The wise will prepare for the consequences of the next round of overreaching, because the ground is now even farther below us.