Minsky didn’t say “Bubbles which aren’t popped early are destabilising” He said the fundamental state of “Stability is destabilizing.” Macro Prudential is an improvement but won’t stop boom/bust. We must tolerate small downturns to “clear out the deadwood”. So if macroeconomic policy isn’t compression of business cycle, what is it?
Is it causing predetermined recessions (interest rate goes up to 8% once every 7 years), what if we get a supply shock during this cleansing? What is the appropriate way to cause a recession, monetary/fiscal? How much is a toleration – will politicians use as an excuse? Government is slow in responding so we could just think we’re tolerating then end up being pro-cyclical. How the hell will you sell “we’re trying to close down your business for the good of the economy” politically speaking?
These are all very difficult questions and it’s much easier to say Macroeconomics policy should be be anti-cyclical to keep the economy stable and we’ll tweak it a bit with macroprudential to stop those nasty bubbles. Well no I’m afraid not. Minsky and the financial crisis questions macroeconomics objective much more fundamentally than that, we have to face these challenging questions head on. Economics is hard.