The Anatomy of a Typical Crisis

Abstract

Hyman Minsky’s model successfully describes credit-fueled booms and financial crises. A ‘displacement’ that flags a novel profit opportunity can lead to speculation, credit expansion, and euphoria; financial distress follows and then crisis that ends in a panic and crash. Minsky emphasizes that pro-cyclical nature of the supply of credit, increasing during the boom and decreasing during the bust. The model draws on the early classical ideas of ‘over-trading’ followed by ‘revulsion’ and ‘discredit’—musty terms used by earlier generations of economists including Adam Smith, John Stuart Mill, Knut Wicksell, and Irving Fisher. The model provides an account of the credit-fueled property boom in the United States between 2002 and 2007, with its parallels in Britain, Ireland, Spain, and Iceland.