Hyman Minsky: Man of the Moment

There has been quite a bit of talk about Hyman Minsky recently, and for good reason. In particular, this week's New Yorker leads off with an article by John Cassidy about Hyman Minsky.

Minsky was a Post Keynesian economist who I read years ago. I think in particular of his book John Maynard Keynes, which I thought quite good. I do not recall the five business-cycle stages John Cassidy mentions (displacement, boom, euphoria, profit taking, and panic). The elements I do recall lie elsewhere. I'm currently reading a couple of articles to help my recollection.

As I recall, Minsky emphasizes that Keynes' General Theory was set in a business cycle context. He thinks this context important in understanding Keynes' idea of an unemployment equilibrium. Minsky also points out the tendency under capitalism to continually evolve new financial instruments and new markets for trading in second-hand debt. (Thus, a regulatory regime will also need to evolve if a recurrence of debt-deflation is to be avoided.) In a sense, Minsky's view is that the supply of money is endogenous and non-neutral in the long run.

Minsky makes a tripartite distinction among types of finance:

• Hedge Finance: The returns to an investment both cover interest charges and allow the principal to be paid off.
• Speculative Finance: The returns cover interest charges, but the principal must be rolled over when it comes due.
• Ponzi finance: The returns do not even cover interest charges and one must take on a growing burden of debt.

Businesses take on finance for leverage.

As memories of the last downturn fade, pressure grows to become more highly leveraged. Speculative and ponzi finance grow at the expense of hedge finance. Notice that unexpected events can convert hedge finance to speculative finance and speculative finance to ponzi finance. The returns to an investment might not be as expected. Perhaps an institution from which you were expecting a cash flow goes bankrupt. So if returns were previously expected to cover more than interest charges, one might now find that returns can only be expected to cover interest charges. Or perhaps the interest rate is higher than expected when the principal comes due. A speculator can only roll over the principal in the hope that later refinancing will improve his situation. At any rate, the financial system is endogenously unstable.

Do these observations speak to the current mortage problems and their potential for affecting the broader economy?

On-Line References

• John Cassidy, "The Minsky Moment (4 Feb. 2008)
• Hyman P. Minsky, "The Financial Instability Hypothesis" (May 1992)
• L. Randall Wray, "Lessons from the Subprime Meltdown" (Dec. 2007)