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The Financial Instability Hypothesis Applied to the 2007 Financial Crisis

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  • Lim, Chen

Abstract

The serious dysfunctions observed in the financial markets following the collapse of the mortgage market in the United States have given new life to the ideas of Hyman Minsky,a post-Keynesian economist. Indeed, there are many who believe that thanks to his work, the current financial crisis could have been anticipated. The key mechanism that drives an economy to a crisis is the accumulation of debt during the boom period. The economy becomes more and more fragile. Financial innovations and deregulation in a context of globalization are responsible for this situation. This is an important point of his analysis. This is one of the aspects of the "financial instability hypothesis" (FIH). The other aspect is that during periods of growth, banks and other financial intermediaries try to convince investors to buy debts through sophisticated financial innovations. The role major of financial intermediaries in the crisis process is thus highlighted. Finally, it is possible to show that the current crisis is an application of the Minsky model.

Suggested Citation

  • Lim, Chen, 2018. "The Financial Instability Hypothesis Applied to the 2007 Financial Crisis," MPRA Paper 92142, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:92142
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    References listed on IDEAS

    as
    1. Hyman P. Minsky, 1977. "The Financial Instability Hypothesis: An Interpretation of Keynes and an Alternative to“Standard” Theory," Challenge, Taylor & Francis Journals, vol. 20(1), pages 20-27, March.
    2. Dimitri Papadimitriou & L. Randall Wray, 1998. "The Economic Contributions of Hyman Minsky: varieties of capitalism and institutional reform," Review of Political Economy, Taylor & Francis Journals, vol. 10(2), pages 199-225.
    3. Hyman P. Minsky, 1980. "Capitalist Financial Processes and the Instability of Capitalism," Journal of Economic Issues, Taylor & Francis Journals, vol. 14(2), pages 505-523, June.
    4. Douglas W. Diamond & Raghuram G. Rajan, 2001. "Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking," Journal of Political Economy, University of Chicago Press, vol. 109(2), pages 287-327, April.
    5. Kirrane, Christopher, 2017. "Looking Back to the Asian Crisis," MPRA Paper 89104, University Library of Munich, Germany.
    6. Olivier Brossard, 1998. "L'instabilité financière selon Minsky : l'incertitude et la liquidité au fondement du cycle ?," Revue Économique, Programme National Persée, vol. 49(2), pages 407-435.
    7. Dominique Plihon, 2008. "Lutter contre l’instabilité financière : pour un aggiornamento de la théorie et de la régulation financières," Revue d'Économie Financière, Programme National Persée, vol. 7(1), pages 433-437.
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    More about this item

    Keywords

    Financial crisis;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises

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