Bruce Greenwald on Structural Imbalances in the Economy
Bruce Greenwald likes to say that he is constituted to disagree with everybody about everything, and he was true to his word at the recent Hyman P. Minksy Conference in New York. Taking immediate exception with the virtually unanimous characterization of the economic crisis as a balance-sheet recession, Greenwald, a professor of finance at Columbia University, argued that, far from being unusual, balance-sheet recessions can in fact be found at the heart of almost all business cycles.
Greenwald’s talk reflected research he has done with Joseph Stiglitz, his colleague at Columbia and the 2001 Nobel Prize recipient in economics.
The upshot of Greenwald’s talk was that, although we are technically out of recession, troubling structural imbalances remain and continue to drag down growth and employment. I’ll discuss Greenwald’s current sentiments more later, but first let’s examine the general outlook that led Greenwald to his conclusions – his views, true to his contrarian image, are unconventional.
A Minskian view of recessions
Greenwald’s view of recessions coincides with the outlook of Minsky – the late namesake of the conference at which he spoke, who was most famous for arguing that financial stability, fragility, and even crisis are all parts of the natural economic cycle.
Recessions occur in Minskian fashion, Greenwald argued as risk-taking ratchets up as euphoria grows, until the cyclical nature of expansion causes it to tail off. The gap between excess capacity and demand widens, and businesses begin to pay the costs of overleveraged balance sheets. Equity profit-taking accelerates the cycle’s turn, eventually triggering panic and significant market sell-offs.
The classic Minsky recession, therefore, is a short sharp recession followed by a long, slow recovery. Companies reduce investment in working capital – physical plant, equipment, and hiring – which cuts output, Greenwald said. Over time, losses slow and cash flow improves as balance sheet health gets restored. Then, according to Greenwald, as firms recover and get better recapitalized, they look to sail close to the wind again, until the next shock occurs.
This is why recessions will always be a fact of life.
But hold on. Is this crisis – marked by protracted high unemployment, even as corporations have gotten healthier and accumulated soaring cash reserves – a Minskian balance sheet crisis?
Greenwald concluded no. “There is something much more striking going on,” he said.