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Minsky’s Cushions of Safety: Systemic Risk and the Crisis in the U.S. Subprime Mortgage Market

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  • Jan Kregel

Abstract

The current crisis in the financial systems of developed countries is often explained in terms of Hyman P. Minsky’s financial fragility hypothesis. Minsky was an economist at the Levy Institute and the foremost expert on credit crunches. His hypothesis was that the structure of a capitalist economy becomes more fragile over a period of prosperity; that is, endogenous processes breed financial and economic instability. In this brief, Senior Scholar Jan Kregel explains how the current crisis differs from the traditional Minsky hypothesis. He reviews Minsky’s concept of a margin or “cushion” of safety, financial fragility, and debt deflation. He concludes that, while the current subprime mortgage crisis involves both Ponzi financing and declining margins of safety, these conditions are not the result of endogenous processes. Rather, the crisis is the result of insufficient margins of safety based on how credit worthiness is assessed (the undervaluation and mispricing of risk) in the new “originate and distribute” financial system.

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Paper provided by Levy Economics Institute in its series Economics Public Policy Brief Archive with number ppb_93.

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Date of creation: Jan 2008
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Handle: RePEc:lev:levppb:ppb_93

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Cited by:
  1. Eric Tymoigne, 2010. "Detecting Ponzi Finance: An Evolutionary Approach to the Measure of Financial Fragility," Economics Working Paper Archive wp_605, Levy Economics Institute.
  2. Soon Ryoo, 2009. "Long waves and short cycles in a model of endogenous financial fragility," UMASS Amherst Economics Working Papers 2009-03, University of Massachusetts Amherst, Department of Economics.
  3. Hyman P. Minsky & L. Randall Wray, 2008. "Securitization," Economics Policy Note Archive 08-2, Levy Economics Institute.
  4. Nikola Kojucharov & Clyde F. Martin & Robert F. Martin & Lili Xu, 2009. "The subprime mortgage crisis: irrational exuberance or rational error?," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
  5. Alessandro Vercelli, 2011. "A Perspective on Minsky Moments: Revisiting the Core of the Financial Instability Hypothesis," Review of Political Economy, Taylor & Francis Journals, vol. 23(1), pages 49-67.
  6. Silipo, Damiano B., 2011. "It happened again: A Minskian analysis of the subprime loan crisis," Journal of Economics and Business, Elsevier, vol. 63(5), pages 441-455, September.
  7. L. Randall Wray, 2010. "What Do Banks Do? What Should Banks Do?," Economics Working Paper Archive wp_612, Levy Economics Institute.
  8. Ognjen Radonjić & Miodrag Zec, 2010. "Subprime Crisis and Instability of Global Financial Markets," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(2), pages 209-224, June.
  9. L. Randall Wray, 2012. "Global Financial Crisis: A Minskyan Interpretation of the Causes, the Fed's Bailout, and the Future," Economics Working Paper Archive wp_711, Levy Economics Institute.
  10. Passarella, Marco, 2012. "A simplified stock-flow consistent dynamic model of the systemic financial fragility in the ‘New Capitalism’," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 570-582.
  11. Marco, Passarella, 2011. "Systemic financial fragility and the monetary circuit: a stock-flow consistent approach," MPRA Paper 28498, University Library of Munich, Germany.
  12. Charles Whalen, 2011. "Minsky Goes to Buffalo—and Takes on the Economics Establishment," Forum for Social Economics, Springer, vol. 40(2), pages 273-280, July.
  13. L. Randall Wray, 2008. "Financial Markets Meltdown: What Can We Learn from Minsky," Economics Public Policy Brief Archive ppb_94, Levy Economics Institute.
  14. Jan Kregel, 2011. "Will restricting proprietary trading and stricter derivatives regulation make the US financial system more stable?," PSL Quarterly Review, Economia civile, vol. 64(258), pages 227-247.
  15. Rex A. McKenzie, 2011. "Casino Capitalism with Derivatives: Fragility and Instability in Contemporary Finance," Review of Radical Political Economics, Union for Radical Political Economics, vol. 43(2), pages 198-215, June.
  16. Sheila Dow, 2009. "History of Thought and Methodology in Pluralist Economics Education," International Review of Economic Education, Economics Network, University of Bristol, vol. 8(2), pages 41-57.

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