Minsky Crisis

Abstract

This entry examines the approach of Hyman P. Minsky to financial crisis. Minsky famously developed an ‘investment theory of the cycle and a financial theory of investment’. His thesis was that, over the course of the cycle, behaviour changes in such a way that financial fragility develops. This makes a financial crisis more likely. When the global financial crisis hit in 2008, many commentators returned to the theories of Minsky, calling it a ‘Minsky crisis’ or a ‘Minsky moment’. This entry agrees that Minsky deserves credit for identifying the processes that led up to the crisis. However, it is not sufficient to narrowly constrain the analysis to the transition that occurred over the past decade or so. Beginning in the 1980s and through to his death in 1996, Minsky had been arguing that a new form of capitalism had appeared, which he called ‘money manager capitalism’. In important respects it reproduced the conditions that Hilferding had called ‘finance capitalism’ in the early 20th century – a form of capitalism that collapsed into the Great Depression. What Minsky was arguing was that an extremely unstable form of capitalism had emerged – one based on what is often called financialisation of the economy. He (rightly) feared that it would ultimately lead to a great crash. The rest of the entry looks at Minsky’s proposals for reforms that would help to promote stability. Yet, as Minsky always said, stability is destabilising.