HOME

TheInfoList



OR:

Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an
American American(s) may refer to: * American, something of, from, or related to the United States of America, commonly known as the "United States" or "America" ** Americans, citizens and nationals of the United States of America ** American ancestry, pe ...
economist An economist is a professional and practitioner in the social sciences, social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this ...
, a
professor Professor (commonly abbreviated as Prof.) is an academic rank at universities and other post-secondary education and research institutions in most countries. Literally, ''professor'' derives from Latin as a "person who professes". Professo ...
of
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research attempted to provide an understanding and explanation of the characteristics of financial crises, which he attributed to swings in a potentially fragile financial system. Minsky is sometimes described as a
post-Keynesian economist Post-Keynesian economics is a school of economic thought with its origins in ''The General Theory'' of John Maynard Keynes, with subsequent development influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor, Sidney W ...
because, in the Keynesian tradition, he supported some government intervention in financial markets, opposed some of the financial deregulation of the 1980s, stressed the importance of the Federal Reserve as a lender of last resort and argued against the over-accumulation of private debt in the financial markets. Minsky's economic theories were largely ignored for decades, until the subprime mortgage crisis of 2008 caused a renewed interest in them.


Education

A native of
Chicago, Illinois (''City in a Garden''); I Will , image_map = , map_caption = Interactive Map of Chicago , coordinates = , coordinates_footnotes = , subdivision_type = Country , subdivision_name ...
, Minsky was born into a family of Menshevik emigrants from
Belarus Belarus,, , ; alternatively and formerly known as Byelorussia (from Russian ). officially the Republic of Belarus,; rus, Республика Беларусь, Respublika Belarus. is a landlocked country in Eastern Europe. It is bordered by ...
. His mother, Dora Zakon, was active in the nascent
trade union A trade union (labor union in American English), often simply referred to as a union, is an organization of workers intent on "maintaining or improving the conditions of their employment", ch. I such as attaining better wages and benefits ...
movement. His father, Sam Minsky, was active in the Jewish section of the
Socialist party Socialist Party is the name of many different political parties around the world. All of these parties claim to uphold some form of socialism, though they may have very different interpretations of what "socialism" means. Statistically, most of ...
of
Chicago (''City in a Garden''); I Will , image_map = , map_caption = Interactive Map of Chicago , coordinates = , coordinates_footnotes = , subdivision_type = List of sovereign states, Count ...
. In 1937, Minsky graduated from George Washington High School in New York City. In 1941, Minsky received his B.S. in
mathematics Mathematics is an area of knowledge that includes the topics of numbers, formulas and related structures, shapes and the spaces in which they are contained, and quantities and their changes. These topics are represented in modern mathematics ...
from the University of Chicago and went on to earn an M.P.A. and a Ph.D. in
economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics anal ...
from
Harvard University Harvard University is a private Ivy League research university in Cambridge, Massachusetts. Founded in 1636 as Harvard College and named for its first benefactor, the Puritan clergyman John Harvard, it is the oldest institution of highe ...
, where he studied under Joseph Schumpeter and Wassily Leontief.


Career

Minsky taught at Brown University from 1949 to 1958, and from 1957 to 1965 was an Associate Professor of Economics at the University of California, Berkeley. In 1965 he became Professor of Economics of
Washington University in St Louis Washington University in St. Louis (WashU or WUSTL) is a private research university with its main campus in St. Louis County, and Clayton, Missouri. Founded in 1853, the university is named after George Washington. Washington University is r ...
and retired from there in 1990. At the time of his death he was a Distinguished Scholar at the Levy Economics Institute of Bard College. He was a consultant to the
Commission on Money and Credit A national Commission on Money and Credit (CMC) was established November 21, 1957, by Donald K. David, Chairman of the Committee for Economic Development (CED) to make the first extensive investigation of the U.S. monetary system since the Aldrich ...
(1957–1961) while at Berkeley.


Financial theory

Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. Minsky stated that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and
lender A creditor or lender is a party (e.g., person, organization, company, or government) that has a claim on the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some propert ...
s tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts. This slow movement of the financial system from stability to fragility, followed by crisis, is something for which Minsky is best known, and the phrase " Minsky moment" refers to this aspect of Minsky's academic work. "He offered very good insights in the '60s and '70s when linkages between the financial markets and the economy were not as well understood as they are now," said
Henry Kaufman Henry Kaufman (born October 20, 1927) is president of Henry Kaufman & Company, Inc., a firm established in April 1988, specializing in economic and financial consulting, and is known by the nickname "Dr. Doom." Early life Henry Kaufman was born on ...
, a Wall Street
money manager Investment management is the professional asset management of various securities, including shareholdings, bonds, and other assets, such as real estate, to meet specified investment goals for the benefit of investors. Investors may be institut ...
and economist. "He showed us that financial markets could move frequently to excess. And he underscored the importance of the
Federal Reserve The Federal Reserve System (often shortened to the Federal Reserve, or simply the Fed) is the central banking system of the United States of America. It was created on December 23, 1913, with the enactment of the Federal Reserve Act, after a ...
as a lender of last resort." Minsky's model of the credit system, which he dubbed the "financial instability hypothesis" (FIH), incorporated many ideas already circulated by John Stuart Mill, Alfred Marshall,
Knut Wicksell Johan Gustaf Knut Wicksell (December 20, 1851 – May 3, 1926) was a leading Swedish economist of the Stockholm school. His economic contributions would influence both the Keynesian and Austrian schools of economic thought. He was married to t ...
and Irving Fisher. "A fundamental characteristic of our economy," Minsky wrote in 1974, "is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles." Disagreeing with many mainstream economists of the day, he argued that these swings, and the booms and busts that can accompany them, are inevitable in a so-called free market economy – unless government steps in to control them, through
regulation Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. ...
, central bank action and other tools. Such mechanisms did in fact come into existence in response to crises such as the Panic of 1907 and the
Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...
. Minsky opposed the deregulation that characterized the 1980s. It was at the University of California, Berkeley, that seminars attended by Bank of America executives helped him to develop his theories about lending and economic activity, views he laid out in two books, ''John Maynard Keynes'' (1975), a classic study of the economist and his contributions, and ''Stabilizing an Unstable Economy'' (1986), and more than a hundred professional articles.


Further developments

Minsky's theories have enjoyed some popularity, but have had little influence in mainstream economics or in central bank policy. Minsky stated his theories verbally, and did not build mathematical models based on them. Minsky preferred to use interlocking balance sheets rather than mathematical equations to model economies: "The alternative to beginning one's theorizing about capitalist economies by positing utility functions over the reals and production functions with something labeled K (called capital) is to begin with the interlocking balance sheets of the economy." Consequently, his theories have not been incorporated into mainstream economic models, which do not include private debt as a factor. Minsky's theories, which emphasize the
macroeconomic Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, an ...
dangers of speculative bubbles in asset prices, have also not been incorporated into central bank policy. However, in the wake of the financial crisis of 2007–2010 there has been increased interest in policy implications of his theories, with some central bankers advocating that central bank policy include a Minsky factor.


Minsky's theories and the subprime mortgage crisis


Minsky's financial instability-hypothesis

Hyman Minsky's theories about debt accumulation received revived attention in the media during the subprime mortgage crisis of the first decade of this century. ''
The New Yorker ''The New Yorker'' is an American weekly magazine featuring journalism, commentary, criticism, essays, fiction, satire, cartoons, and poetry. Founded as a weekly in 1925, the magazine is published 47 times annually, with five of these issues ...
'' has labelled it "the Minsky Moment". Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt:
hedge A hedge or hedgerow is a line of closely spaced shrubs and sometimes trees, planted and trained to form a barrier or to mark the boundary of an area, such as between neighbouring properties. Hedges that are used to separate a road from adjoi ...
borrowers, speculative borrowers, and Ponzi borrowers. The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" (named for
Charles Ponzi Charles Ponzi (, ; born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi; March 3, 1882 – January 15, 1949) was an Italian swindler and con artist who operated in the U.S. and Canada. His aliases included ''Charles Ponci'', ''Carlo'', and ''Cha ...
, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat. These 3 types of borrowers manifest into a 3 phased system: Hedge Phase: This phase occurs right after a financial crisis and after recovery, during a point at which banks and borrowers are overly cautious. This causes loans to be minimal ensuring that the borrower can afford to repay both the initial principal and the interest. Thus, the economy is most likely seeking equilibrium and virtually self-containing. This is the “not too hot not too cold” Goldilocks phase of debt accumulation. Speculative phase: After some progression in the Hedge phase, the Speculative period emerges as confidence in the banking system is slowly renewed. As banks continue this observation, they continue this risky process. Rather than issue loans to borrowers that can pay both principal and interest; loans are issued where the borrower can only afford to pay the interest. This begins the decline to instability Ponzi Phase: As confidence continues to grow in the banking system and banks continue to believe that asset prices will continue to rise, the third stage in the cycle, the Ponzi stage, begins. In the final stage of the FIH, the borrower can neither afford to pay the principal nor the interest on the loans which are issued by banks leading to foreclosures and vast debt failures. If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.


Application to the subprime mortgage crisis

Economist Paul McCulley described how Minsky's hypothesis translates to the subprime mortgage crisis. McCulley illustrated the three types of borrowing categories using an analogy from the mortgage market: a hedge borrower would have a traditional mortgage loan and is paying back both the principal and interest; the speculative borrower would have an interest-only loan, meaning they are paying back only the interest and must refinance later to pay back the principal; and the ponzi borrower would have a negative amortization loan, meaning the payments do not cover the interest amount and the principal is actually increasing. Lenders only provided funds to ponzi borrowers due to a belief that housing values would continue to increase. McCulley writes that the progression through Minsky's three borrowing stages was evident as the credit and housing bubbles built through approximately August 2007. Demand for housing was both a cause and effect of the rapidly expanding
shadow banking system The shadow banking system is a term for the collection of non-bank financial intermediaries (NBFIs) that provide services similar to traditional commercial banks but outside normal banking regulations. Examples of NBFIs include hedge funds, in ...
, which helped fund the shift to more lending of the speculative and ponzi types, through ever-riskier mortgage loans at higher levels of leverage. This helped drive the housing bubble, as the availability of credit encouraged higher home prices. Since the bubble burst, we are seeing the progression in reverse, as businesses de-leverage, lending standards are raised and the share of borrowers in the three stages shifts back towards the hedge borrower. McCulley also points out that human nature is inherently pro-cyclical, meaning, in Minsky's words, that "from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes, the economic system's reactions to a movement of the economy amplify the movement – inflation feeds upon inflation and debt-deflation feeds upon debt-deflation." In other words, people are momentum investors by nature, not
value investor Value or values may refer to: Ethics and social * Value (ethics) wherein said concept may be construed as treating actions themselves as abstract objects, associating value to them ** Values (Western philosophy) expands the notion of value bey ...
s. People naturally take actions that expand the high and low points of cycles. One implication for policymakers and regulators is the implementation of counter-cyclical policies, such as contingent capital requirements for banks that increase during boom periods and are reduced during busts.


Minsky's periods of capitalism

Though Minsky's research in the 1980s depended on Keynesian analysis, he thought that changes in the structure of the US economy by then required new analysis, and for this he turned to Schumpeter. Both Schumpeter (and Keynes), Minsky argued, believed that finance was the engine of investment in capitalist economies, so the evolution of financial systems, motivated by profit-seeking, could explain the shifting nature of capitalism across time. From this, Minsky split capitalism into four stages: Commercial, Financial, Managerial and Money Manager. Each is characterized by ''what is being financed'' and ''who is doing the financing.''


Commercial Capitalism

Minsky's first period correlated to
Merchant Capitalism Some economic historians use the term merchant capitalism to refer to the earliest phase in the development of capitalism as an economic and social system. However, others argue that mercantilism, which has flourished widely in the world without ...
. In this period, banks use their privileged knowledge of distant banks and local merchants to gain a profit. They issued bills for commodities, essentially creating credit for the merchants and a corresponding liability to themselves, so in the case of unexpected losses they guaranteed to pay. When a credit contract was fulfilled, the credit was destroyed. Banks financed the inventories of merchant, but not capital stock ––this means that the primary source of profit was through trade, and not expanding production as in later periods. As Minsky explained, "commercial capitalism might well be taken to correspond to the structure of finance when production is by labor and tools, rather than by machinery and labor."


Financial Capitalism

The industrial revolution put more importance on employing machinery in production, and the non-labor costs that came with it. This required 'durable assets' and so brought about the corporation as an entity, with limited liability for investors. The main source of financing shifted from commercial banks to investment banks, especially with the proliferation of stocks and bonds in security markets. As competition between firms could lead to a decline in prices, threatening their ability to fulfill existing financial commitments, investment banks started promoting a consolidation of capital by facilitating trusts, mergers and acquisition. The Stock Market Crash of 1929 ended their dominance of the economy.


Managerial Capitalism

Relying on the profit theory of Michal Kalecki, Minsky argues that level of investment determines aggregate demand and thus the flow of profits (i.e ''investment finances itself.'') According to Minsky, the Keynesian deficit spending of post-depression economies guaranteed the flow of profits, and allowed for the return of firms financing themselves out of profits (something that hadn't been widespread since the first period of capitalism.) Management in firms became more independent on the investment banker and the shareholder, leading to longer time horizons in business decisions, which Minsky believed was potentially beneficial. He offsets this, however, by pointing out that firms became bureaucratized, lacking the dynamic efficiency of earlier capitalism, such that they became "prisoners of tradition." Government spending decisions shifting to underwriting consumption rather than the development of capital assets also contributed to stagnation, although stable aggregate demand meant there was an absence of depressions or recessions.


Money Manager Capitalism

Minsky argues that due to tax laws and the way markets capitalized on income, the value of equity in indebted firms was higher than conservatively financed ones. This led to a shift, as explained by Minsky,
A market in the control of firms developed: the fund managers whose compensation was based on the total returns earned by the portfolio they managed were quick to accept the higher price for the assets in their portfolio that resulted from the refinancing that accompanied changes in the control of firms. In addition to selling the equities that led to the change in control, the manager of money were buyers of the liabilities (bonds) that came out of such a refinancing. The independence of operating corporations from the money and financial markets that characterized the managerial capitalism was thus a transitory stage. The emergence of return and capital-gains-oriented blocks of managed money resulted in financial markets once again being a major influence in determining the performance of the economy. However, unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather the upon the quick turn of the speculator, upon trading profits.
Minsky noted that the rise of money management, trading huge multi-million dollar blocks every day, led to an increase in securities and people taking financial positions to gain a profit. This positioning itself was financed by banks. Minsky noted that financial institutions had become so far removed from the financing of capital development at this point, but rather committed large cash flows to 'debt validation.' Further economists such as Charles Whalen and Jan Toporowski have discussed Minsky's periods of capitalism. Both suggest an intermediary stage between commercial and financial capitalism, what Whalen calls "industrial capitalism" and what Toporowski calls "classic capitalism." This was characterized by the traditional capitalist-entrepreneur, the full proprietor of their firm whose was particularly focused on the expansion of production through developing capital assets. Whalen contrasts this expansion with the consolidation of capital under Financial Capitalism. Toporowski links money manager capitalism to current trends in globalization and financialization.


Views on John Maynard Keynes

In his book ''John Maynard Keynes'' (1975), Minsky criticized the neoclassical synthesis' interpretation of '' The General Theory of Employment, Interest and Money''. He also put forth his own interpretation of the ''General Theory'', one which emphasized aspects that were de-emphasized or ignored by the neoclassical synthesis, like
Knightian uncertainty In economics, Knightian uncertainty is a lack of any quantifiable knowledge about some possible occurrence, as opposed to the presence of quantifiable risk (e.g., that in statistical noise or a parameter's confidence interval). The concept acknow ...
.


Selected publications

* (2013) ''Ending Poverty: Jobs, Not Welfare''. Levy Economic Institute, New York. * (2008) st. Pub. 1975 ''John Maynard Keynes''. McGraw-Hill Professional, New York. * (2008) st. Pub. 1986 ''Stabilizing an Unstable Economy''. McGraw-Hill Professional, New York. * (1982) ''Can "It" Happen Again?''. M.E. Sharpe, Armonk. * (Winter 1981–82
"The breakdown of the 1960s policy synthesis"
New York: Telos Press. Archived at Hyman P. Minsky Archive. 166.


See also

*
2008–2009 Keynesian resurgence Following the global financial crisis of 2007–2008, there was a worldwide resurgence of interest in Keynesian economics among prominent economists and policy makers. This included discussions and implementation of economic policies in accordance ...
* Rudolf Hilferding, whose writings on 'Finance Capitalism' anticipated Minsky's elaboration on Financial Capitalism


References


Further reading

* Robert Barbera (2009). ''The Cost of Capitalism''. McGraw-Hill Professional. * George Cooper (2008). ''The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy''. Vintage; 1st Edition. * Gary Dymski, Gerald Epstein,
Robert Pollin Robert Pollin (born September 29, 1950) is an American economist, and self described socialist. He is a professor of economics at the University of Massachusetts Amherst and founding co-director of its Political Economy Research Institute (PE ...
(1993). ''Transforming the U.S. Financial System: An Equitable and Efficient Structure for the 21st Century (Economic Policy Institute)''. Routledge. * Steven M. Fazzari, Dimitri B. Papadimitriou (1992). ''Financial Conditions and Macroeconomic Performance: Essays in Honor of Hyman P.Minsky''. Routledge. * Jannatul Islam (2014). ''Hyman P. Minsky Hypothesis to Evaluate Credit Crunch''. LAP LAMBERT Academic Publishing. * Robert Pollin, Gary Dymski (1994). ''New Perspectives in Monetary Macroeconomics: Explorations in the Tradition of Hyman P. Minsky''. University of Michigan Press. * Jan Toporowski, Daniela Tavasci (2010). ''Minsky, Crisis and Development''. Palgrave Macmillan. * L. Randall Wray (2015). ''Why Minsky Matters: An Introduction to the Work of a Maverick Economist''. Princeton University Press.


External links


Hyman Philip Minsky, Distinguished Scholar, The Levy Economics Institute of Bard College, Blithewood, Bard College, Annandale-on-Hudson, New York

Marc Schnyder: ''Die Hypothese finanzieller Instabilität von Hyman P. Minsky''
Thesis, University of Fribourg, Switzerland, (German)
In Time of Tumult, Obscure Economist Gains Currency
* John Cassidy,
The Minsky Moment'
''The New Yorker'', 4 February 2008.
Minsky Archive
* (Available only to subscribers). Stephen Mih
"Why Capitalism fails,"
boston.com (September 13, 2009).
Optimistic for a more humane economy
*
The Fed discovers Hyman Minsky'
''The Economist'', 7 Jan 2010. * Thomas I. Palley
"The Limits of Minsky’s Financial Instability Hypothesis as an Explanation of the Crisis,"
Monthly Review, Volume 61, Issue 11 (April 2010). * Thomas I. Palley
“A Theory of Minsky Super-Cycles and Financial Crises,”
''Contributions to Political Economy'', 30 (1), 31 – 46. {{DEFAULTSORT:Minsky, Hyman 1919 births 1996 deaths People from Chicago Economists from Illinois Post-Keynesian economists Harvard University alumni University of Chicago alumni Washington University in St. Louis faculty American people of Belarusian-Jewish descent 20th-century American economists Brown University faculty