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Minsky and Economic Policy: A Minskyan Analysis of the Subprime Crisis


  • Luisa Fernandez


The paper uses Minsky’s financial instability hypothesis as an analytical framework for understanding the subprime mortgage crisis and for introducing adequate reforms to restore economic stability. We argue that the subprime crisis has structural origins that extend far beyond the housing and financial markets. We further argue that rising inequality since the 1980s formed the breeding ground for the current financial markets meltdown. What we observe today is only the manifestation of the ingenuity of the market in taking advantage of moneymaking opportunities, regardless of the consequences. The so-called "democratization of homeownership" rapidly turned into record-high delinquencies and foreclosures. The sudden turn in market expectations led investors and banks to reevaluate their portfolios, which brought about a credit crunch and widespread economic instability. The Federal Reserve Bank's intervention came too late and failed to usher in adequate regulation. Finally, the paper argues that a true democratization of homeownership is only possible through job creation and income-generation programs, rather than through exotic mortgage schemes.

Suggested Citation

  • Luisa Fernandez, 2008. "Minsky and Economic Policy: A Minskyan Analysis of the Subprime Crisis," Economics Working Paper Archive wp_548, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_548

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    References listed on IDEAS

    1. Mark Gertler, 1988. "Financial structure and aggregate economic activity: an overview," Proceedings, Federal Reserve Bank of Cleveland, pages 559-596.
    2. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    3. Hyman Minsky, 1993. "On the non-neutrality of money," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 77-82.
    4. Allen, William R, 1993. "Irving Fisher and the 100 Percent Reserve Proposal," Journal of Law and Economics, University of Chicago Press, vol. 36(2), pages 703-717, October.
    5. William R. Allen, 1977. "Irving Fisher, F. D. R., and the Great Depression," History of Political Economy, Duke University Press, vol. 9(4), pages 560-587, Winter.
    6. Stephanie Bell & L. Randall Wray & L. Randall Wray, 2004. "The War on Poverty Forty Years On," Challenge, Taylor & Francis Journals, vol. 47(5), pages 6-29.
    7. Barber,William J., 2006. "Designs within Disorder," Cambridge Books, Cambridge University Press, number 9780521034319, March.
    8. Pavlina R. Tcherneva, 2008. "Keynes's Approach to Full Employment: Aggregate or Targeted Demand?," Economics Working Paper Archive wp_542, Levy Economics Institute.
    9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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