Yes, “it” did happen again—a Minsky crisis happened in Asia 1

Abstract

The Asian financial crisis is doubly unfortunate, first of all because it has set income and wealth levels in these countries back some ten years. But, it is also unfortunate because Hy Minsky been alive to point out to policy makers that they were dealing with a debt deflation the worst excesses might have been prevented. Hy spent a good deal of time explaining why "It", that is, the Great Depression, Can't Happen Again. But, in this case of Asia it did. And this is also a lesson for why it might happen again, outside the Far East. First, Hy insisted on the beneficial impact of Big Government in providing a floor under aggregate demand. Free falls in asset prices could not happen if there was a guaranteed floor under incomes. The Bigger the Government, the firmer foundation and the stable the economy. Not that this didn't cause other problems, but it meant that you could only go down so far. If we take a look at the vital statistics of the Asian economies, we see in general that they have small governments. And those governments tend to run persistent surpluses. There are no firm foundations here. This is not to say that government played no role. We have heard a lot about ‘crony capitalism' in Asia. But, this sort of income support does not provide the kind of aggregate demand support that Hy thought was beneficial to avoiding instability. Hy also thought that a Big Bank, an active central bank willing to intervene actively by lending at the discount window in support of asset prices, and thus of bank solvency, was of crucial importance. Hy did not believe in tying one's hands or currency boards or other forms of shooting financial markets in the foot. It is true that central banks are common in Asia, and in some countries they are active on the policy front. But, in the current crisis a major portion of the lending to firms and financial institutions was in foreign currency, Yen and US dollars, which meant that the local central bank was constrained in its ability to act as lender of last resort by the size of its dollar reserves. They could not follow the Bagehot principle of lending without limit. Of course, they has the (non)-choice of adopting floating exchange rates, but this would have made their ability to act that much weaker.