L. Randall Wray gives a quick description of Hyman Minsky’s financial instability hypothesis (FIH) (Minsky 1982; 1986; 1992; 2008 [1975]), which took up ideas from Irving Fisher (Fisher 1933). This has been further developed in Post Keynesian economics, most notably by Steve Keen.
The good news is that the Fisher–Minsky approach has filtered through to New Keynesians like Krugman, even if Krugman does not understand it properly, by failing to see the role debt plays in aggregate demand and the endogeneity of credit money, as shown by Steve Keen (see “‘Like a Dog Walking on its Hind Legs’: Krugman’s Minsky Model,” Debtdeflation.com, March 4th, 2011).
BIBLIOGRAPHY
Fisher, I. 1933. “The Debt-Deflation Theory of Great Depressions,” Econometrica 1.4: 337–357.
Minsky, H. P. 1982. Can “It” Happen Again?: Essays on Instability and Finance, M.E. Sharpe, Armonk, N.Y.
Minsky, H. P. 1986. Stabilizing an Unstable Economy, Yale University Press, New Haven and London.
N.B. Steve Keen thinks this is Minsky’s worst book. Consult Minsky (1982) and (2008) [1975] instead for the best statements of the FIH.
Minsky, H. P. 1992. The Financial Instability Hypothesis, Working papers (Jerome Levy Economics Institute) ; no. 74.
Minsky, H. P. 2008 [1975]. John Maynard Keynes, McGraw-Hill, New York and London.
LK,
ReplyDeleteA nice summation. I am probably one among many catching up on my Minsky in the wake of the financial crisis...
A question: Since large, public financial institutions implicitly contribute to larger system instability -- by softening the blow in the event of a recession and bolstering (over) confidence -- do you think that there is some room for a non-intervention-type argument within the Minsky framework?
Of course, Minsky's central position was that (regulatory) prevention was infinitely preferable to (bailout) cure... as far as I am aware, at least. However, I am more interested in what you take to be the correct Minksian stance, given that the crisis has occurred.
Bailout followed by strict regulatory measures to stem the tide of overconfidence?
"Since large, public financial institutions implicitly contribute to larger system instability -- by softening the blow in the event of a recession and bolstering (over) confidence -- do you think that there is some room for a non-intervention-type argument within the Minsky framework?"
ReplyDeleteMinsky, as far as I know, favoured strict financial regulation, and Post Keynesians follow him in that.
"Bailout followed by strict regulatory measures to stem the tide of overconfidence?"
I would say modern Post Keynesians want more than that:
(1) a thorough reform of the structure of the financial sector;
(2) cleaning it up: purging it of bad assets and non-performing loans;
(3) and even large-sacle wrtting off or restructing of unsustainable private debt.
The private debt is drowing under the weight of debt: it is causing debt deflationary pressures. We are in much the same position as Japan in the 1990s. Unless that debt is cleaned and private sector balance sheets made much better, we will be mired in a lost decade, like Japan.
To get out of a lost decade, we need (1) to (3), and then large stimulus packages and direct employment programs.
Unfortunately, it will probably take another financial crisis and recession before we get this.
Correction:
ReplyDelete"The private SECTOR is drowing under the weight of debt"