I thought I'd probably posted enough Minsky quotes to last a year, but then I stumbled upon a nice paragraph the other night where he talks about the ideas that sit behind financial regulation. I'm not going to post it up because I have posted far too much from his book already, but basically he says that the regulatory environment is inevitably (if not explicitly) influenced by some view of how markets work.
This background view of how markets work which influences how we design regulation is itself informed by economic experience, so from the 1930s onwards the regulatory framework was informed by the Great Crash and following depression. In contrast the deregulatory impulse of the 70s and 80s was based in a view of markets formed in a period when there had been no systemic crisis of comparable size.
Inevitably there will be a change in regulatory stance in coming years as a result of the current crisis, so presumably this also indicates that our view of markets has also changed in some way. Certainly it isn't difficult to find quotes these days from recanting former true believers. Joseph Ackerman perhaps put it best when he said last year "I no longer believe in the market’s self-healing power."
But what new belief system is going to replace the very liberal view of market operation (at least financial markets) that appears to have been discredited? It presumably will be different from the post-Great Crash view because, although we're in for a rough time, people in the developed world aren't likely to be starving like their grandparents were. If that were the case then John Thain might have more to worry about than a subpoena and few nasty headlines. So I don't expect to see a shift towards anti-capitalism.
But equally we must be in for a significant shift in thinking, and one that will change the way we think about markets (at least in the back of our minds) for a prolonged period, until our kids have forgotten the experience that shaped the background views.
Personally I think if we take the current crisis and the experience of the TMT bubble not long before it this must point us in the direction of a view of markets that is more informed by psychology. The emergence of behavioural economics was already bringing this perspective to our understanding, but recent events must push us further in this direction. Or are there other competing alternatives out there?