Before you read on: what did Hyman Minsky think was the main cause of financial crises?
Minsky argued that a market economy breeds its own crises. The longer a boom lasts, the more debt people take on, until they cannot repay it.
- Lived
- Born 23 September 1919 in Chicago; died 24 October 1996 in Rhinebeck, New York
- Nationality
- American
- Work
- Assistant to Alvin Hansen at Harvard (PhD 1954); taught at Brown and Berkeley; professor at Washington University in St Louis, 1965 to 1990; then the Levy Economics Institute until his death
- Key works
- The book John Maynard Keynes (1975), Can "It" Happen Again? (1982), Stabilizing an Unstable Economy (1986), and the paper The Financial Instability Hypothesis (1992)
- School
- A Keynesian outside the mainstream, who called himself a financial Keynesian
What Minsky was reacting to
Minsky spent his career asking why financial crises happen, a question the Great Depression of his youth had raised. In the decades after the Second World War most economists saw markets as tending towards balance, and their models found little room for debt.
Minsky rejected the efficient market hypothesis, the idea that prices already reflect all available information. He also read Keynes in his own way. In his view Keynes's General Theory was at heart a theory of how finance makes a market economy unstable.
Minsky's key ideas
Can you name Minsky's three types of finance and the idea that links them?
A borrower whose income covers every payment due, both interest and repayment of the loan. Minsky saw this as the safe end of the scale.
Can you think of an example?
A household whose salary comfortably covers the full payment on a repayment mortgage.
A borrower whose income covers the interest but not the repayment, so it must roll the debt over with a new loan when the old one falls due.
Can you think of an example?
A firm that pays interest on its bonds from profits, and repays each bond by issuing a new one.
A borrower whose income covers neither interest nor repayment. It keeps going by borrowing more or selling assets, betting that their prices will keep rising.
Can you think of an example?
Janet Yellen pointed to US subprime mortgages before 2007 that borrowers could only keep up by refinancing, which needed rising house prices.
Minsky argued that a long boom shifts an economy from hedge finance towards speculative and Ponzi finance. Calm makes borrowers, lenders and regulators relaxed about debt.
Can you think of an example?
When prices start to fall, stretched borrowers must sell, pushing prices lower still. This rush to sell came to be called a Minsky moment.