Hyman Minsky
Hyman Minsky was an American economist and professor at Washington University in St. Louis. He is best known for his work on financial instability and his theory of financial crises, which came to be known as the "Minsky hypothesis." Minsky argued that financial markets are inherently unstable and that periods of economic prosperity can ultimately lead to financial crises. He believed that this instability is caused by a combination of factors such as external financing, short-term liabilities, rolling debt, and the development of exotic financial instruments. He also believed that financial institutions have an excessive risk appetite and that this can contribute to financial instability. Minsky's work has been influential in the fields of macroeconomics, finance, and financial regulation. He passed away in 1996.
He was a supporter of State intervention, an opponent of the deregulation of financial markets. He pointed out the causes of depression and instability of the financial markets:
- external financing of enterprises and households (credits, loans, debt)
- to much short-term liabilities in the portfolio of liabilities (due to less the cost of short-term liabilities servicing)
- "Rolling" of debt - repayment depends on the capacity to enter into another commitment
- dynamic development of "exotic" financial instruments
- excessive risk appetite of financial institutions
Minsky hypothesis
Hyman Minsky's theory of financial instability, also known as the "Minsky hypothesis," states that periods of economic prosperity can ultimately lead to financial crises. The hypothesis is based on the idea that over time, as the economy grows and interest rates fall, investors become increasingly willing to take on more risk. This leads to a buildup of debt and an increase in the use of leverage, or borrowing to invest. As the economy continues to expand, investors become increasingly confident and begin to take on even more risk. However, eventually a "tipping point" is reached, and a crisis occurs as the debt becomes unsustainable and investors are unable to meet their obligations.
Minsky argued that the instability of financial markets is a result of this "financial fragility" created by the accumulation of debt and leverage, which in turn is driven by the "euphoria" of economic prosperity. He believed that the government's role in the economy should be to regulate and stabilize the financial system to prevent these crises from occurring.
Minsky's hypothesis is a dynamic theory of capitalism and it emphasizes the interplay between the economy, the financial system and the state. It argues that the economy goes through different stages of growth and development, and that each stage is characterized by a different level of financial stability.
The model is based on the assumption that the volatility of demand for credit and its excessive creation.
The stages of speculative bubble formation and the financial statements collapse:
- Development of economy by the after upheaval of war, internal shocks, new technologies, new investment opportunities.
- Funds begin to be invested in new areas. Demand rises in this area, but supply does not satisfy the demand of the market, the consequence is rising prices.
- The tendency to indebtedness of companies and households increases. First, the purpose of consumption, then investment, and then speculative. The emergence of the so-called: "Herd Behavior"
- Aversion to risk decreases, increasing the saturation of the market and its overvaluation - the emergence of a "speculative bubble", which quickly bursts.
| Hyman Minsky — recommended articles |
| Currency crisis — Expansionary monetary policy — Interventionism — Foreign exchange reserves — Austrian business cycle theory — Money emission — Emerging market economy — Milton Friedman — Currency Convertibility |
References
- Wioletta Nawrot, Globalny Kryzys finansowy XXI wieku, Wydawnictwo Fachowe CeDeWu.PL, Warszawa 2010, p. 11-14
- Hyman Minsky @ Wikipedia.
