I picked it back up last year and read more than half of it but also abandoned it before I finished. I still have it on the nightstand, just in case though. I have not fully given up. In between 2009 and 2018. I learned a lot and studied a lot, but I think part of why I put the book down last summer was that in that time span, Minsky went from being a marginal figure to someone who did have a good understating of the crisis mechanism. Krugman said that we’re all Minskyites now, and the Economist was writing up articles on him. I think the fact that the basics of the financial instability hypothesis had become so ingrained in the discourse to stop being novel, and thus reading more seemed redundant. Who knows why books are abandoned? I knew r>g and still read the new Capital twice, but I digress.
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| Photo by Tim Mossholder from Pexels |
What is the financial instability hypothesis of Minsky? Well, it is a view of the business cycle, or as he says, “the readily observed empirical aspect is that, from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control” (1). To describe this, Minsky uses a framework that is based on a theory of the economy as an allocation of resources, but the economy as a developer of capital, one where there is an exchange of present money for future money (2). Thus, the ownership of capital is a claim on money, not of real assets themselves: “in a capitalist economy the past, the present, and the future are linked not only by capital assets and labor force characteristics but also by financial relations” (4). This is an economy not as a snapshot, but as part of a process in time. So much for your comparative statics! Investment happens, Minsky claims, because businessmen expect investment to continue to happen in the future (6).
The nut of the financial instability hypothesis is based around this debt relationship with banks as middlemen. Here firms are not just trading with firms, but there is a model where the financial sector is a profit-seeking entity itself, and these “merchants of debt” (6) do what they can to innovate the products they sell. Minsky described three different kinds of debt relationships. In hedge financing, the debt can be paid with working cash flows. In speculative finance, the interest is paid out of cash flows, but the principle is not paid down. Finally, in what he calls Ponzi units, cash flows are not enough to pay any of the debt. The only way to pay off your liabilities are to keep borrowing or to sell off your assets (7). For Minsky, there are two modes of being for the financial system. One is that the hedge finance relationship can be predominate, and the economic system will be stable. The second mode is that continued stability sows the seeds for a movement from a stable system to an unstable one where Ponzi financing predominates. It is these Ponzi systems that set the stage for the crash because growth by leverage helps triggers inflation which pulls once more stable structures into the Ponzi mode. And if liquidation is forced on the most highly leveraged, then they will help crash asset values (8).
Thus, long steady growth develops the conditions for the crash.
And of course, this was compelling to people trying to make sense of the crisis in 2008. People got over leveraged in both the consumer sector and in the financial sector. The music was playing, so every had to dance. And then the punchbowl was taken away and the emperor had no clothes. The question is what’s brewing now to create the conditions of the next crisis that will seem inevitable in retrospect. What it also makes me wonder is what is the proper point for intervention in the economy if you want to prevent crashes or to make them shallower. You could argue that what must be prevented is long growth, so intervene to keep interest rates high and jobs scarce, but that is not going to win you any elections. Maybe I should finish that book.
Cited:
https://www.economist.com/economics-brief/2016/07/30/minskys-moment
https://jacobinmag.com/2018/11/the-minsky-millennium
Hyman P. Minsky, The Financial Instability Hypothesis (1992)
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