Minsky’s moment: He gets props for describing bubble

hyman-minskySPRINGFIELD, Ill. (Oct. 27) — Hyman P. Minsky died in 1996, but today the Chicago-born economist is getting credit for anticipating the current financial crisis. To be precise, Minsky’s “financial instability hypothesis,” refined in the ’70s, describes how bubbles form in capitalist economies, with potentially disastrous consequences.

For most of his career, Minsky taught economics at Washington University in St. Louis; when he retired in 1990, he joined the Jerome Levy Economics Institute of Bard College as a distinguished scholar.

Minsky’s financial-instability model has three stages.

At first, investors only borrow what they can repay based on anticipated cash flows. Then, as asset prices rise, they start to speculate, expecting to be able to refinance. By the third stage, optimism turns to recklessness, and borrowers engage in what Minsky called “Ponzi borrowing” — unable to pay either principal or interest, they gamble that ever-climbing asset prices will allow them to keep refinancing. Debts pile up faster than they can handle, and collapse becomes inevitable. Read more of this post