Why Our Economic Numbers Distort Reality
Foreign Affairs, March/April 2014
The indicators invented in the twentieth century were among the most important innovations of their time. But in a world where anyone with a smartphone can access more data than a team of statisticians could in 1950, governments, businesses, and individuals must embrace the power to design their own bespoke indicators. The questions need to be specific, and the answers must take into account the limits of any data. But the result would be a welcome liberation from abstract and misleading notions about the economy.
BBC News Magazine, 23 March 2014
Minsky had a theory, the “financial instability hypothesis”, arguing that lending goes through three distinct stages. He dubbed these the Hedge, the Speculative and the Ponzi stages, after financial fraudster Charles Ponzi. In the first stage, soon after a crisis, banks and borrowers are cautious. Loans are made in modest amounts and the borrower can afford to repay both the initial principal and the interest. As confidence rises banks begin to make loans in which the borrower can only afford to pay the interest. Usually this loan is against an asset which is rising in value. Finally, when the previous crisis is a distant memory, we reach the final stage – Ponzi finance. At this point banks make loans to firms and households that can afford to pay neither the interest nor the principal. Again this is underpinned by a belief that asset prices will rise.