In brief: the economics of Hyman Minsky

MinskyAs the 2008 financial crisis broke, the term ‘Minsky moment’ became widely used by commentators and financiers (it was originally coined in 1998), as the work of this relatively obscure economist came into fashion. Since then, his major works have been reprinted, and his ideas widely cited, especially among those critical of the financialization of recent decades.

Once again, from Michael Hudson‘s heterodox ‘dictionary’ of economics J is for Junk Economics (p.154-5):

Minsky, Hyman (1919-1996): Economist who pioneered Modern Monetary Theory (MMT) and explained the three stages of the financial cycle in terms of rising debt leveraging:

(1) In the hedge phase, most borrowers are able to able to pay interest as well as principle. This was the case with 30-year self-amortizing mortgages provided from the late 1940s to the late 1970s.

(2) In the interest-only [speculative] phase, debtors are only able to pay interest. This was the case with interest-only mortgages extended in the years leading up to the 2008 junk mortgage crash.

(3) In the “Ponzi” phase, debtors need to borrow the interest as it accrues, adding it onto the debt exponentially. That is how Latin American countries rolled over their debts in the 1960s leading up to Mexico’s 1972 breakdown, which quickly spread throughout the Third World. And it is how real estate mortgages were rolled over until 2008.

When debts grow too far beyond the ability to pay, the “Minsky moment” occurs: a financial crisis. As an alternative, Minsky advocated regulating the credit system to prevent speculative and fraudulent over-lending. He urged central banks to create enough credit to sustain a full-employment economy, in large part by public works spending, not to bail out banks for their bad loans. Minsky’s approach is taught primarily at the University of Missouri (Kansas City) and applied at the Levy Institute at Bard College in Annandale-on-Hudson, New York. The economist Steve Keen has applied Minsky’s ideas in his “Minsky mathematical model” of the economy.”

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