Hyman Minsky was an American economist most famous for his work on price bubbles and financial instability. Unfortunately, Minsky’s theories were largely ignored until, after his death, the 2008 subprime mortgage crisis revived interest in them.
Minsky claimed that “a fundamental characteristic of our economy, is that the financial system swings between robustness and fragility, and these swings are an integral part of the process that generates business cycles”. Minsky proposed that financial market fragility is linked to speculative investment bubbles which are endogenous to financial markets. Minsky’s argument is that in a boom, corporate cash flow increases beyond what is required to pay off debt, leading to a speculative euphoria. This soon turns into a situation where debts exceed what borrowers can pay off, creditors worrying about defaults on loans, credit being tightened and, subsequently, a financial crisis. The movement of the financial system from stability to fragility, and consequent crisis, has been termed a ‘Minsky moment’.
Minsky supported government intervention in financial markets, criticised financial deregulation, stressed the importance of the Federal Reserve as a ‘lender of last resort’ and warned against the over-accumulation of private debt.
“Stability leads to instability. The more stable things become and the longer things are stable, the more unstable they will be when the crisis hits.”
“Success breeds a disregard of the possibility of failure.”
– Hyman Minsky