Why Minsky Matters

minskyAmerican economist Hyman Minsky died in 1996, but his theories offer one of the most compelling explanations of the 2008 financial crisis. His key idea is simple enough to be a t-shirt slogan: “Stability is destabilising”.

BBC Radio 4’s Analysis program has an episode on Minsky and looks at topics such as:

  • In the aftermath of the financial crisis, why did Minsky die an outsider?
  • What do his ideas say about the response to the 2008 crisis and current policies like Help to Buy?
  • And has mainstream economics done enough to respond to its own failure to predict the crisis and the challenge posed by Minsky’s ideas?

7 responses to “Why Minsky Matters

  1. Minsky challenged the fundamental postulates of modern neoliberal thought: that human beings are on the whole rational and are well-informed about the future in equal measure. These postulates are used to justify the conclusion that private enterprise and private markets, left to their own devices, will generate a stable and prosperous economic order.

    Minsky understood that when it comes to the granting and taking of credit and thinking about the future, people are prone to make very irrational decisions, and that the longer things go without trouble, the more irrational these decisions become.

    One thing I don’t think Minsky emphasized enough, however, is that people are not just irrational, they are also crooked and predatory.

    • Nice comment, Dan. We are all very rational indeed except when it comes to pursuit of money things. We do fool ourselves with our very intelligent rumblings. Or is it the scoundrels who mess it all up?

  2. Edward Allen

    A general insight may encompass Minsky’s “Stability is destabilizing”: “Nothing fails like success.”

  3. The answer to the third question is quite clearly, and sadly, no. I havn’t heard any real response honestly. In the immediate aftermath of the GFC I heard almost nothing about the why? It just wasn’t touched upon, instead we got a hurried bailout and since then debate about “Should we reduce deficits now, or later?”
    Unfortunately, the only discussion about WHY this crisis came about, and continues to hang around, have come from Austrians, which is why I think they’ve gained popularity amongst the people, it actually provides an answer…but it’s of course a wrong and fairly dangerous answer. Seems mainstream economics is shielded, even though I’ve seen a bit more about Minsky, private debt, and mainstream models being near bunk.

  4. The explanations for the 2008 financial crisis are very, very simple, and the Abacus CDO and Magnetar Capital are perfect examples of it: ultra-leveraging, ultra-leveraged speculation (such as Goldman Sachs and Morgan Stanley speculating up oil futures on ICE) and ultra-leveraged insurance swindles, as in John Paulson (for his hedge fund along with Goldman Sachs) purchasing credit default swaps, or naked swaps, at $1.4 million a pop against a trash Abacus CDO put together by him and GS, with each CDS payout at $100 million, and Paulson and GS bought plenty.

    The same was true for Magnetar Capital, with 96% failure rate of their deals, they still walked away with billions for doing the exact same thing Paulson (and Greenspan was with Paulson’s hedge fund at that time, I believe) did!

    And they weren’t the only ones doing that: On Bear Stearns’ external debt of $190 billion, there was the amount of $2 trillion in swaps (with unimaginable payouts if BS went under). The CDS payouts on credit events triggered when AIG/Financial Prouducts sold $460 billion of CDSes, would have been from a potential $20 trillion to over $40 trillion payout (and the global GDP was $50 billion then, with America’s GDP at $15 billion, if memory serves).

    All of this was done by a slow, laborious process of lobbying for passage of legislation at the national level (Private Securities Litigation Reform Act of 1995) and the state level (Chris Christie was a lobbyist who successfully lobbied New Jersey to exclude securities fraud from their criminal acts legislation), then KABOOM! in 2007-2008.

    Such ultra-leveraging has the logical outcome of ultra-deleveraging.

  5. Steven Greenberg

    I learned my economics around 1963. They taught us Keynesian economics back then. This is why I am so mystified that people didn’t figure this out in 2000. Or why what Minsky said would be so surprising. When the Bush administration kept pumping the economy while it was roaring hot, it just seemed so insane to me, and anti-Keynesian. Irrational Exuberance was such a dumb phrase from Alan Greenspan. Keynes had explained quite well why the exuberance on a micro scale was completely rational, but a big problem on the macro scale. Keynes explained that when the depression was coming on, it was completely rational for the individual to try to save more. The individual with shallow pockets has no other choice. It is just that this rational individual action when aggregated on a macro scale is disastrous. Only a collective action from a deep pocketed entity could reverse the trend that was absolutely rational for each individual. It would have been crazy for an individual to go deeper and deeper into debt to hope that he or she could turn the economy around before he or she lost his or her job and ran out of money.

    All through the late 90s, I watched my fellow techies making gobs of money investing in the .com economy while I doggedly adhered to my traditional investing strategies. I kept telling myself, it’s not how much you make on paper, but how much you get to keep when all is said and done. I just never could understand how a company like Amazon could sell product for less than the traditional stores and yet deliver their product to their customers in the most inefficient way imaginable, and still make a profit. Well, it turns out that they couldn’t. The sales were being subsidized by the investors. I wasn’t going to be one of those investors subsidizing the customers to buy cheap goods. When the bubble burst, I kept most of the gains that I had made, while others were losing more than the gains that they had made. I also didn’t have big debts for leased luxury cars and over financed mortgages.

    With the advent of ebooks, that does change the equation at least for books. And Amazon has learned not to sell things quite so cheaply now that they have driven out the competition.

  6. WayneMcMillan

    Excellent program, but would have loved to hear someone from the MMT school represented or someone who has studied Minsky in depth like Steve Keen.