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The Limits of Minsky’s Financial Instability Hypothesis as an Explanation of the Crisis

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  • Thomas I. Palley

    ()
    (New America Foundation, Washington DC)

Abstract

The financial crisis has been widely interpreted as a Minsky crisis. This paper argues that interpretation is misleading. The processes identified in Minsky's financial instability hypothesis played a critical role in the crisis, but that role was part of a larger economic drama involving the neoliberal growth model. The neoliberal model inaugurated an era of wage stagnation. In place of wage growth spurring demand growth, it relied on borrowing and asset price inflation. That arrangement was always unsustainable but financial innovation and deregulation warded off the model's stagnationist tendencies far longer than expected. These delay mechanisms is where Minsky's financial instability hypothesis enters the narrative. The interpretation of the financial crisis and Great Recession has enormous significance for economic policy. If interpreted as a purely financial crisis, in the spirit of a pure Minsky crisis, the policy implication is simply to fix the financial system. However, there is no need for reform of the real economy because that is not the source of the problem. If instead, the crisis is interpreted through a new Marxist - Structural Keynesian lens the policy implications are deeper and more challenging. Financial sector reform remains needed to deal with the problems of destabilizing speculation and political capture. However, it does not address the root problem which is the neo-liberal growth model. Restoring stable shared prosperity requires replacing the neoliberal model with a new model that restores the link between wage and productivity growth. That will require adoption of a new labor market agenda, re-fashioning globalization, reversing the imbalance between market and government, and restoring the goal of full employment. Financial sector reform without reform of the neoliberal growth model will leave the economy stuck in an era of stagnation. That is because stagnation is the logical next step of the neoliberal model given current conditions. Ironically, financial sector reform alone may worsen stagnation since financial excess was a major driver of the neoliberal model and that driver would be removed.

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Bibliographic Info

Paper provided by IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute in its series IMK Working Paper with number 11-2009.

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Length: 29 pages
Date of creation: 2009
Date of revision:
Handle: RePEc:imk:wpaper:11-2009

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Cited by:
  1. Russo, Alberto, 2013. "Financial Fragility and Macroeconomic Instability in a Heterogeneous Interacting Agents Framework," MPRA Paper 46578, University Library of Munich, Germany.
  2. Thomas Goda, 2013. "The role of income inequality in crisis theories and in the subprime crisis," Working Papers PKWP1305, Post Keynesian Economics Study Group (PKSG).
  3. Russo, Alberto, 2012. "Elements of novelty, known mechanisms, and the fundamental causes of the recent crisis," MPRA Paper 41088, University Library of Munich, Germany.
  4. Paulo Nakatani & Rémy Herrera, 2013. "Notes sur Keynes et la crise," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00829891, HAL.
  5. Sunanda Sen, 2011. "The Global Crisis and the Remedial Actions: A Nonmainstream Perspective," Economics Working Paper Archive wp_677, Levy Economics Institute.
  6. Paulo Nakatani & Rémy Herrera, 2013. "Notes sur Keynes et la crise," Documents de travail du Centre d'Economie de la Sorbonne 13048, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.

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