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Minsky Mania: a Raincheck

Posted by on December 29, 2011 in Capitalism, Economic Theory, Financial Crisis | 2 comments

The American economist Hyman Minsky is currently very fashionable, especially amongst those who are sympathetic to the idea of more government intervention in the economy.

Minsky argued that financial crises were an inevitable feature of capitalism, unless governments stepped in through regulation and central bank action.

He hypothesised that in prosperous times, when the corporate cash position became strong, exuberance developed which translated into a speculative bubble in asset and property markets. Private sector debt rose as borrowing increased to fuel the speculation, and at the ‘Minsky moment’ a crisis would occur. Following this, banks tighten credit, and even companies which are fundamentally sound may be driven out of business because of an unwillingness to roll over debt.

His theory is very seductive in the light of the experience since 2007.

But the theory does not explain why, over the past 80 years, we have only had two major financial crises, the early 1930s and the recent one from 2007. It is the dog which has not barked which causes fundamental problems for the hypothesis as it stands.

For example, in the United States, private sector debt relative to the size of the economy reached a peak of 2.1 in 1932. From a low point of only 0.4 in 1945, it rose almost without interruption to a new peak of nearly 2.2 in 2001. But there was no crisis.It reached 2.6 in 2006, much higher than its peak in the 1930s Great Depression. But again, no crisis.

The Minsky story is good at telling us after the event what happened in a crisis. It does not tell us why crises do not happen, even when the objective facts suggest they should.

2 Comments

  1. I am very much at the mercy of your superior learning, however, after having read the work of Prof. Steve Keen, one is easily confused having become aware of your citicism of Minsky.
    Surely it is the mark of true billiance that you can share your insights with fellows of goodwill in a manner that can be properly understood by the most basic, yet dedicated, student of this crucial aspect of current human history.
    Thank you for your attention,
    Sean

  2. “The Minsky story is good at telling us after the event what happened in a crisis. It does not tell us why crises do not happen, even when the objective facts suggest they should.”

    This guy hasn't read Minsky. Minsky is quite clear in his book ('Stabilizing an Unstable Economy') that 'Big Government' is able to prevent smaller financial crises from becoming system threatening. However, this leads to underlying instability increasing — and so paves the way for a larger crisis.

    His main analysis is in Chapter 2 'A Deep Recession But Not a Depression in 1975: The Impact of Big Government'. There he is quite clear on all this. And honestly, it's only a few pages into the book. Perhaps it might be productive to actually read it?

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