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A Perspective on Minsky Moments--The Core of the Financial Instability Hypothesis in Light of the Subprime Crisis

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  • Alessandro Vercelli

Abstract

This paper aims to help bridge the gap between theory and fact regarding the so-called "Minsky moments" by revisiting the "financial instability hypothesis" (FIH). We limit the analysis to the core of FIH--that is, to its strictly financial part. Our contribution builds on a reexamination of Minsky's contributions in light of the subprime financial crisis. We start from a constructive criticism of the well-known Minskyan taxonomy o f financial units (hedge, speculative, and Ponzi) and suggest a different approach that allows a continuous measure of the unit's financial conditions. We use this alternative approach to account for the cyclical fluctuations of financial conditions that endogenously generate instability and fragility. We may thus suggest a precise definition of the "Minsky moment" as the starting point of a Minskyan process--the phase of a financial cycle when many financial units suffer from both liquidity and solvency problems. Although the outlined approach is very simple and has to be further developed in many directions, we may draw from it a few policy insights on ways of stabilizing the financial cycle.

Suggested Citation

  • Alessandro Vercelli, 2009. "A Perspective on Minsky Moments--The Core of the Financial Instability Hypothesis in Light of the Subprime Crisis," Economics Working Paper Archive wp_579, Levy Economics Institute.
    • Handle: RePEc:lev:wrkpap:wp_579
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    1. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2008. "Heterogeneity, Market Mechanisms, and Asset Price Dynamics," Research Paper Series 231, Quantitative Finance Research Centre, University of Technology, Sydney.
    2. Riccardo Bellofiore & Joseph Halevi, 2011. "A Minsky Moment? The Subprime Crisis and the ‘New’ Capitalism," Chapters, in: Claude Gnos & Louis-Philippe Rochon (ed.), Credit, Money and Macroeconomic Policy, chapter 1, Edward Elgar Publishing.
    3. Philip Arestis, 2002. "Financial crisis in Southeast Asia: dispelling illusion the Minskyan way," Cambridge Journal of Economics, Oxford University Press, vol. 26(2), pages 237-260, March.
    4. Desai, Meghnad, 1973. "Growth cycles and inflation in a model of the class struggle," Journal of Economic Theory, Elsevier, vol. 6(6), pages 527-545, December.
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    6. Jan Kregel, 2009. "It's That 'Vision' Thing: Why the Bailouts Aren't Working, and Why a New Financial System Is Needed," Economics Public Policy Brief Archive ppb_100, Levy Economics Institute.
    7. Sordi, Serena & Vercelli, Alessandro, 2006. "Financial fragility and economic fluctuations," Journal of Economic Behavior & Organization, Elsevier, vol. 61(4), pages 543-561, December.
    8. Paul Davidson, 2008. "Is the current financial distress caused by the subprime mortgage crisis a Minsky moment? or is it the result of attempting to securitize illiquid noncommercial mortgage loans?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 30(4), pages 669-676, July.
    9. L. Randall Wray, 2008. "Financial Markets Meltdown: What Can We Learn from Minsky," Economics Public Policy Brief Archive ppb_94, Levy Economics Institute.
    10. Vercelli,Allessandro, 1991. "Methodological Foundations of Macroeconomics," Cambridge Books, Cambridge University Press, number 9780521392945.
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    Cited by:

    1. Shazia Ghani, 2011. "A re-visit to Minsky after 2007 financial meltdown," Post-Print halshs-01027435, HAL.
    2. Yulia Vymyatnina & Mikhail Pakhnin, 2014. "Application of Minsky's Theory to State-Dominated Economies," EUSP Department of Economics Working Paper Series 2014/03, European University at St. Petersburg, Department of Economics.
    3. Marco Passarella, 2012. "Systemic financial fragility and the monetary circuit: a stock-flow consistent Minskian approach," Working Papers (-2012) 1202, University of Bergamo, Department of Economics.
    4. Monika Bucher & Diemo Dietrich & Achim Hauck, 2019. "Implications of bank regulation for loan supply and bank stability: a dynamic perspective," The European Journal of Finance, Taylor & Francis Journals, vol. 25(16), pages 1527-1550, November.
    5. Yulia Vymyatnina & Mikhail Pakhnin, 2014. "Application of Minsky's Theory to State-Dominated Economies," EUSP Department of Economics Working Paper Series Ec-03/14, European University at St. Petersburg, Department of Economics.
    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.

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    More about this item

    Keywords

    Financial Instability; Financial Fragility; Financial Fluctuations; Subprime Crisis; Minsky Moments; Minsky Meltdown; Speculative Units; Hedge Units; Ponzi Units;
    All these keywords.

    JEL classification:

    • B50 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - General
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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