Perspective on Risk - April 11, 2025 (Kindleberger, Minsky, Keynes and Friedman)
A play in two acts by ChatGPT, prompting by Brian Peters
Setting
It was a quiet afternoon in the Café des Économistes—a place known only to the dead and the deeply theoretical. A breeze rustled the pages of an open copy of The General Theory, as John Maynard Keynes stirred his tea, gazing skeptically over round spectacles. Across from him, Milton Friedman, jacket off and sleeves rolled up, tapped a pencil against his coffee mug, his expression fixed somewhere between bemused and incensed.
They were joined, as they often were, by Charles Kindleberger—still bearing the air of a man with the League of Nations on his mind—and Hyman Minsky, who seemed perpetually on the verge of saying “I told you so.” The topic, this afternoon, was tariffs—or more precisely, the most recent bout of market turbulence touched off by Donald Trump’s renewed trade crusade.
Act 1
Keynes (sipping tea):
Ah, tariffs again. When uncertainty reigns, investment retreats. Trump’s erratic trade policies strike not only at trade flows but at the very heart of business confidence.
Friedman (shaking his head):
No, John. The problem isn’t uncertainty—it's intervention. Tariffs are simply taxes. A government-induced distortion of prices. They hurt consumers, full stop. The market would adjust just fine if the government got out of the way.
Minsky (leaning forward):
Milton, the issue isn't just the tariffs themselves, it's when they strike. We've built up a fragile financial structure—debt-fueled asset prices, high leverage, speculation. Add a shock like tariffs, and it can trigger a systemic unwinding.
Kindleberger (adjusting his glasses):
Quite right, Hyman. But let’s not ignore the geopolitical lens. The international order relies on leadership. When the U.S. flirts with protectionism, it abdicates its hegemonic responsibility. This is how confidence in global coordination erodes—and that’s when crises deepen.
Friedman:
You all keep talking about coordination, fragility, and expectations. But let’s be clear: the only coordination markets need is price. Let individuals act freely, and prices will adjust.
Keynes (with a sly smile):
Except when they don’t. When prices are volatile and expectations become irrational, businesses stop investing. We saw it in the 1930s. Tariffs then, like now, send the wrong signals. They raise costs, reduce demand, and lower the marginal efficiency of capital.
Minsky:
This isn’t about rationality—it’s about psychology. Periods of stability breed complacency. So when a policy shock like tariffs hits, it exposes the overextension. Suddenly firms and lenders become risk-averse, asset values drop, credit tightens. That’s how downturns begin.
Kindleberger:
And don’t forget contagion. One country’s tariffs become another’s retaliation. Global trade contracts. Confidence breaks down. The lesson of the 1930s is that in the absence of a stabilizing leader, each nation acts selfishly—and everyone ends up worse off.
[The conversation turns to the financial markets]
Keynes:
Markets are not merely driven by fundamentals. They’re driven by "animal spirits." When tariffs confuse expectations, markets lurch—not because they’re irrational, but because the future is suddenly unknowable.
Minsky:
And when asset prices fall, the real economy follows. Margin calls, fire sales, banking stress. We’ve constructed a system where small shocks can have outsized effects.
Friedman (firmly):
Markets are reacting to bad policy. The volatility isn’t a market failure—it’s a government failure. If you want stability, start with rules-based policy and fewer distortions. Let the market breathe.
Kindleberger:
But Milton, even you must acknowledge that markets alone don’t create international stability. Who provides liquidity in a crisis? Who keeps trade open when protectionist instincts rise? That’s not something markets do—that’s leadership.
Keynes:
The tariff shock has unsettled markets because it reflects a deeper political uncertainty. When the world’s largest economy signals it may act unilaterally, everyone hesitates.
Minsky:
And that hesitation becomes contraction. Not because the tariffs were large, but because the system was brittle.
Friedman:
And yet, had we let prices adjust freely all along, avoided artificial support, and kept government small, the system wouldn’t be brittle.
Kindleberger:
Gentlemen, perhaps it is not about large or small government—but about responsible leadership. In moments of instability, someone must coordinate, absorb distress, and restore trust.
Act 2
[The roundtable grows quiet as Stanley Fischer walks in, coffee in hand. The four titans glance up, slightly amused to see a policymaker among theorists.]
Fischer (smiling dryly):
Well, I suppose it’s only fitting that someone who’s had to implement policy amid these dynamics joins the conversation. May I?
Keynes (nodding):
Please, Stanley. We could use a touch of central bank realism.
Fischer:
To state the obvious: the tariffs created significant uncertainty. Not just because they distorted prices—as Milton rightly points out—but because they were unpredictable and unilateral. Markets hate that.
Friedman (gruffly):
Then why don’t central banks step back and let markets work? The volatility reflects bad policy. It’s not the Fed’s job to clean up after every political decision.
Fischer (calmly):
We don’t have the luxury of theory in central banking. When markets seize up and credit spreads widen, we act—not because we want to control markets, but because stability matters. That’s something both Minsky and Kindleberger understood well.
Minsky (nodding):
Indeed. The central bank must intervene—not to prevent all volatility, but to prevent a liquidity shock from becoming a solvency crisis.
Fischer:
Exactly. During the tariff episodes, we saw tightening financial conditions—higher corporate borrowing costs, emerging market capital outflows, a dollar squeeze. The market wasn’t just “signaling disapproval”—it was transmitting risk.
Kindleberger:
Stanley, do you think the U.S. is still acting as the global stabilizer?
Fischer (pauses):
Increasingly less so. We still provide dollar liquidity and leadership in crises, but we’re less predictable, less cooperative, and more insular. That weakens the architecture we built after Bretton Woods. And yes—confidence suffers.
Keynes:
That’s the tragedy of our time. We forget that markets run on trust. The moment that breaks down, the economic machine loses its rhythm.
Friedman:
You speak of rhythm, John, but you all seem too comfortable with intervention. How much uncertainty, I wonder, is caused not by tariffs—but by the expectation of endless backstops and central bank meddling?
Fischer:
That’s a fair concern, Milton. But in our experience, markets can overreact. When political actors throw rocks in the gears, someone has to keep the machinery running. We prefer not to intervene—but we must be prepared to.
Minsky (to Fischer):
You’ve seen firsthand how a small shock reveals a fragile financial structure. Are you suggesting that we’ve built a system that now requires constant central bank vigilance?
Fischer (softly):
I’m suggesting that financial stability is no longer a passive condition—it’s a policy objective. And when political shocks like tariffs destabilize expectations, markets look not just to prices, but to institutions.
Kindleberger (smiling faintly):
Then we’ve come full circle. The system needs a leader. Perhaps even a steward.
[The table falls quiet again, everyone briefly absorbing the layers of tension between theory and practice. Then, Keynes lifts his cup.]
Keynes:
To leadership in uncertain times—however imperfect it may be.
All:
Cheers.