Why the subprime crisis is different: a Minskyian approach

Minsky's financial-instability model suggests that financial crises can be resolved efficiently with lender-of-last-resort and big-government interventions. The crisis that began in 2007 (hereafter, the "2007 crisis") has been different: it has been more profound and resistant to policy interventions. This paper examines why. Our approach is to expand Minsky's balance-sheet approach in several ways. First, we incorporate two factors Minsky missed because he built his model in the 1970s: the impact of racial exclusion and U.S. cross-border imbalances on U.S. financial dynamics. In addition, we draw out the analytical implications of the systematic differences between banks' and non-banks' balance-sheets. Minsky didn't do this; but because of the transformation of banking after 1980, these differences have become deeply significant. One key effect of so doing is to see that asset-liability balances as well as cash-flows are crucial in financial dynamics. This paper concludes that the 2007 crisis has been so profound and unresponsive to policy intervention for several reasons: banks no longer bear as well as originate credit risk; banks made exploitative loans to minority borrowers and then generalized these loans as housing prices rose; and subprime homeowners and structured investment vehicles became more leveraged than banks. Copyright The Author 2009. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved., Oxford University Press.