Why Minsky Matters by Wray L. Randall

Author:Wray, L. Randall
Language: eng
Format: epub, pdf
Publisher: Princeton University Press
Published: 2015-06-15T00:00:00+00:00

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Minsky and the Global Financial Crisis

At the annual banking structure and competition conference of the Federal Reserve Bank of Chicago in May 1987, the buzzword heard in the corridors and used by many of the speakers was “that which can be securitized, will be securitized.”

—Minsky, 19871

There is a symbiotic relation between the globalization of the world’s financial structure and the securitization of financial instruments. Globalization requires the conformity of institutions across national lines and in particular the ability of creditors to capture assets that underlie the securities.

—Minsky, 19872

Securitization reflects a change in the weight of market and bank funding capabilities: market funding capabilities have increased relative to the funding abilities of banks and depository financial intermediaries. It is in part a lagged response to monetarism. The fighting of inflation by constraining monetary growth opened opportunities for nonbanking financing techniques.

—Minsky, 19873

The emergence of money manager capitalism means that the financing of the capital development of the economy has taken a back seat to the quest for short run total returns.

—Minsky, 1992, p. 324

When the GFC (Global Financial Crisis) struck, many commentators called it the “Minsky crisis” or “Minsky moment,” recognizing the work of Minsky who—as discussed earlier—had developed the “financial instability hypothesis” that described the transformation of an economy from a “robust” financial structure to a “fragile” one. A “run of good times” would encourage ever-greater risk-taking, and growing instability would be encouraged if financial crises were resolved by swift government intervention.

As Minsky insisted “stability is destabilizing”5—and this seemed to perfectly describe the last few decades of U.S. experience, during which financial crises became more frequent and increasingly severe. We could list, for example, the savings and loan crisis of the 1980s, the stock market crash of 1987, the developing country debt crises (1980s to early 1990s), the Long Term Capital Markets (1998) and Enron (2001) fiascoes, and the dot-com collapse (2000–2001) as precursors to the final “great crash” in 2007.6

Each of these crises led to U.S. government intervention that prevented a downward spiral of financial markets or of the economy (although in some cases, recessions followed the crises); indeed, after the dot-com crisis, the belief was that a new Great Moderation7 had taken hold in the United States, making serious downturns impossible. This notion encouraged more risk, more financial layering, and more leveraging (debt issued against debt, with little net worth backing it up). All of this dangerous financial structure fits Minsky’s arguments about growing financial instability.

So, though it is completely appropriate to give credit to Minsky’s foresight, we also need to look at Minsky’s later writings, which developed a “stages” approach to the longer term transformation of the financial system. This approach went well beyond the “financial theory of investment and investment theory of the cycle” that Minsky had begun to develop in the 1950s.

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