Minsky on Central Banking
Selected quotes:
Central banking exists because Ponzi and speculative financing exist.
Central banking is a learning game in which the central bank is always trying to affect the performance of a changing system.
A minor, but not insignificant, structural reformwould have the specialized institutions –FDIC, the Comptroller of the Currency, and the specialist insurance and supervisory agencies for thrift institutions– become departments within the Federal Reserve.
The Federal Reserve should stop relying upon open-market operations to determine reserves of the banking system. As an alternative to open-market operations, the Federal Reserve can furnish bank reserves by discounting bank assets. I nthe discount technique, bank reserves are furnished when the central bank buys or lends on specified, eligible types of paper that are a rsult of financing business.
The discount window method for creating the reserve base induces favorable terms for the hedge financing of short-term positions and blunts the tendency toward fragile financing structures.
The Federal Reserve should have two controls over bank financing. One would be capital requirement, the second the reserve requirement. The capital requirement is a longer-run constraint, with a penalty on dividends and perhaps on the discount rate for falling below target, whereas the reserve requirement is a shorter-term control.
The more the Federal Reserve can tilt banking toward financing trade and production inventories with short time spans, the more stable the financial system and the smaller the special refinancing neded to prevent a full-blown crisis.
In Stablizing an Unstable Economy
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Minsky reloaded by George Magnus
May 21st, 2008 at 8:17 am
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