of Money

Manager
Capitalism:
Minskys Half
Century
Eric Tymoigne
Lewis & Clark College
Levy Economics Institute
Road Map
1- From Managerial Capitalism to Money
Manager Capitalism
2- Evolution of underwriting in loans and
securities during MMC: The rise of Ponzi
finance
3- Similarities with Finance Capitalism
4- Conclusion: the return of instability
5- Post-crisis
Stages of Capitalism
The evolution of the capitalism can be
analyzed by studying the evolution of the
role of finance:
Commercial Capitalism (17th -18th century): Bankers only
participate in the funding of commerce (bankers acceptances)
and not the funding of durable capital equipment: rise of
commercial banking
Finance Capitalism (19th century, early 20th century): in the US
and the UK, central role of financial markets in funding durable
capital equipment's (stocks, bonds): rise of investment banking
Managerial Capitalism (1930s-1970s): Rise of big government
that sustains asset prices, aggregate profit, and lending (FHA, VA,
SBA, etc.). Less role for bankers in the funding of economic
activity.
Money Manager Capitalism (since 1980s): Crucial role of
financial markets and funds managers. Balance sheets are highly
dependent on leverage and capital gains. Role of money
managers in the management of companies with focus on short-
term results.
Managerial Capitalism
In terms of banking:
Limited Competition: compartmentalization
Safe, low-cost refinancing source: stable interest rates, treasuries
holdings are large
Originate-and-Hold model: loan officers do their job diligently and are
paid a salary (remuneration not based on loan volumes)
Underwriting is done properly + loan officer gain plenty of experience +
promotion of safe financial instruments (i.e. well know and stable debt
service and strong margins of safety in terms of collateral, DSR, liquidity
requirements)
In terms of government:
Regulation and supervision
Government involvement in economic activity through purchase and
lending
Promotes stability
In terms of labor market:
Shared prosperity: wage rate go up with productivity gains, unions are
strong enough to obtain gains like paid vacations, on the job training,
etc.
All households see improvements in income
Limited need to use debt + income high is enough to service debt on safe
private debts
From Managerial to Money Manager
Capitalism
In terms of banking:
Golden age -> shared prosperity -> growth of savings
-> look for higher returns than deposits (subject to
Reg. Q)
Rise of pension funds
Rise of mutual funds
Fiscal surpluses + growth of asset positions -> Amount
of treasuries in banks is no longer adequate as
position-making operations with the Fed -> emergence
of new refinancing sources -> rise of fed funds market
and other non-Fed refinancing sources
=> Growing competition for funds and volatility of
funding sources: from depositors and discount window to
financial markets (CDs, eurodollars, etc.)
From Managerial to Money Manager
Capitalism
In terms of policy:
Growing worries about inflation -> Use of monetary
policy to fight inflation -> rising interest rate level and
volatility
Depository institutions (banks and thrifts) asked for
leveled playing field -> deregulation on their asset side
(broadening of possible asset positions toward riskier
assets) and liability side (elimination of reg Q)

Banking structure set up by Glass-Steagal no longer

works: No availability of stable, low cost refinancing
channel + rising competition
Money Manager
Capitalism
Financialization: Balance sheets become more
dependent on the financial industry:
Rising use of debt
Rising share of financial assets in assets
Rising share of financial income in income
=> Economic system becomes more sensitive to
problems in the financial industry
Banking structure
Globalization
Securitization: debt capitalization
Market concentration: Financial Holding Companies
Decline in role of loan officers: remuneration based on
bonus instead of salaries, less experienced
=> Layering of debts, systemic risk rises
Money Manager
Capitalism
Disengagement of the federal government:
Burden of government spending (G) has been mostly
shifted to state and local governments
Transfer becomes the major expense of the federal
government: only kicks in when things are already
bad.
Decrease in regulation: financial, environmental,
medical, labor
Decrease in supervision: fewer staff, less qualified
Decrease in enforcement: lenient, let frauds and
misconduct continue, business friendly or ex-
business managers
Capacity of the government to stabilize the
economy declines
Money Manager
Capitalism
Deregulation of labor market:
globalization and decline in strength of
unions: downward pressures on growth of
wages
Transfer of more financial burden on
households (education instead of on-the-job
training, defined-contribution plans,
healthcare cost)
Remunerations based on capital gains:
pension funds, managers stock options and
bonus (salary of CEOs only represents 17%
of remuneration in 2008 vs 42% in 1992)
Stagnation of income, and growing reliance of
Debt Relative to Asset (Percent)
Proportion of Financial Assets
(Percent)
Distribution of Financial
Assets
Distribution of Financial Assets Held
by the Financial Sector.
Market Concentration in
Banking (Percent)
Asset-Backed Securities in
US (Billions of dollars)
Mortgage-Backed
Securities
(Trillions of dollars)
Evolution of Underwriting
Underwriting of Loans:
Less verification of documentations -> NINJA
loans
Lower margins of safety -> LTV > 100%,
qualification based on teaser rate with no
amortization
Lower quality of financial products -> volatile
debt service with growing outstanding amount
(option-ARMs)
Emphasis on collateral value (or rising asset
prices) as expected source of funds to meet
debt service
Evolution of Underwriting
Underwriting of Securities:
Emphasis on market value: market value CDO,
EDS, LSS
Leverage on leverage: MBS, CDO, CDO2
No underlying interest: CDS, EDS
No underwriting: S&P Boss to one of his CDO
analyst: Any request for loan level tapes is
TOTALLY UNREASONABLE!!! Most investors dont
have and cant provide it. Nevertheless we MUST
produce a credit estimate.
Evolution of Securitization
Securitization = transforming illiquid assets into tradable
securities.
What types of illiquid assets?
1970s: mortgages (MBS: mortgage backed securities)
1980s: auto loans (CAR: certificate for automobile
receivables), student loans, credit card receivables (CARD:
certificates for amortizing revolving debts), etc.
1990s: rock-star royalties, US tobacco settlement
receivables, etc.

Resecuritization: securitizing securities

1980s: MBS (CMO: collateralized mortgage obligation),
Bond (CBO), etc.
1990s: CDO (CLO, CBO, CDO-squared, CDO-cubed, ABCDO),
credit protection (CDS: credit default swap)
2000s: market-value protection (EDS, CPPI), ABCDS,
Commodity options (COO), Super senior securities (LSS)
Evolution of Securitization
Change in
Purpose: Arbitrage instead of balance sheet
Source of cash flow: capital gains vs. debt service
Means to transfer risk: Generic (sale) vs. synthetic
(derivative)
Growing interrelation in the shadow banking: SPE
created by seller + buy from each other:

Data about CDO and CDO-squa

red
CDOs and Arbitrage CDOs
(Trillions of dollars (left axis) and Percent (right axis))
CDO issuance by Motives and
Structure
Conclusion: The Rise of Ponzi
Finance
Stagnant income with growing financial responsibility
on households (retirement, healthcare, education, etc.)
=> need to use more debt to sustain standard of living
Remuneration of managers more based on rising asset
prices => incentives to focus on short-term decision
that raise asset prices (use leverage, change
remuneration of lower-level employees to reach that
goal (bonus))
Decline in lending requirements allows growth of debt
based on capital gains instead of income => Debt-
Inflation emerges
Growing interdependence between debt and asset
prices on the upside: Ponzi finance
Rising asset prices allow rising debt (refinancing and
new debt possible because net worth goes up)
Rising debt allows rising asset price (more funds
Similarities and difference between
FC to MMC
Similarities Differences
Source of bank income Role of government
Use of debt by households Use of debt by financial
Role of capital gains in income businesses
Income inequalities
Role of investment banks
Share of financial income
Share of Financial Income
Debt
Proportion of Capital Gains in
Income
Source of Income of FDIC
banks
Income Inequalities
 Consequence: Return of
Instability
Economic Crises: The Great Recession
Longest contraction since the Great Depression but still
much shorter.
Deepest contraction since the Great Depression but still
much milder.
Return of debt-deflation forces and they are much
stronger than during the Great Depression.
Financial Crises:
Twin crises are highly destructive, similar to the interwar
period.
Independent currency and banking crises are not as
destructive as prior times but their frequency has
increased
 Consequence: Return of
Instability

Source: Bordo et al. (2001)

Post Crisis
There are three ways for a government to deal with a
debt-deflation
1- Do nothing (1929-1932): debt-deflation stop when debt
is simplified enough (bankruptcy, unemployment,
recession, etc.)
2- Do everything: help all regardless of economic state
3- Depression without a depression:
Intervene early to solve liquidity crisis: LLR to everybody
against specific assets at penalty rate
Deal with solvency crisis:
Close insolvent businesses in an orderly manner (1933 bank
holiday: thousands of banks analyzed in a week, 1980s-1990s: S&Ls
closure through FSLIC and FDIC)
Restructure debt (1933: Home Owners Loan Corporation)
Support income (1933: Job Guarantee programs)
Put fraudsters in prison
Regulate and supervise
Post Crisis
What was done:
Central bank: Lend to all against all assets, purchase
of toxic assets, lend at preferential interest rate
instead of penalty rate
Treasury: Capital injection, purchase of trouble
assets, minimum help to restructure mortgages,
limited help of economic activity (2009-2012
contribution of gov sector to economic growth is
zero, no employment program)
Regulators: no criminal charge
Consequences:
Huge increase in moral hazard: elastic currency
requires effective supervision (FRA preamble)
Major banks involved in trading more than ever
High and long-term unemployment
Share of trading revenues
Duration of
Unemployment
Employment recovery
Estimating the Cost of a Job Guarantee Program,
Experience from the New Deal Programs (Percent of GNP)

Less 5 to 10 to 15 to 20 or
Unemployment Rate
than 5 9.99 14.99 19.99 more
Earnings to GNP,
0.63 1.86 2.09 1.72
Actual 0.15
Earnings to GNP, FE 0.64 1.81 4.43 7.41 11.25
Earnings to GNP, FE
2.15 5.21 8.91 14.53
+ ELW 0.78
Earnings to GNP, FE
2.81 6.55 11.16 18.09
+ MLW 1.04
Total Cost to GNP,
1.03 2.42 2.64 2.12
Actual 0.34
Total Cost to GNP, FE 0.85 2.41 5.90 9.88 14.99
Estimated Average of
Total Cost to GNP, FE the Cost of JG for Four Different
2.87 6.95 11.88 19.37
Scenarios.
+ ELW 1.04
Total Cost to GNP, FE
All unemployed
+ MLW
are enrolled (only3.74
1.39
30% on 8.74
average14.88
during New
24.12
Deal). Paid two possible living wages.
Published Last Summer