Hyman Minsky - Can It Happen Again?: Essays on Instability and Finance

Can It Happen Again?

Today, his views are reverberating from New York to Hong Kong as economists and traders try to understand whats happening in the markets Indeed, the Minsky moment has become a fashionable catch phrase on Wall Street.

Wall Street Journal

In the winter of 1933, the American financial and economic system collapsed. Since then economists, policy makers and financial analysts throughout the world have been haunted by the question of whether It can happen again. In 2008 It very nearly happened again as banks and mortgage lenders in the USA and beyond collapsed. The disaster sent economists, bankers and policy makers back to the ideas of Hyman Minsky whose celebrated Financial Instability Hypothesis is widely regarded as predicting the crash of 2008 and led Wall Street and beyond to dub it as the Minsky Moment.

In this book Minsky presents some of his most important economic theories. He defines It, determines whether or not It can happen again, and attempts to understand why, at the time of writing in the early 1980s, It had not happened again. He deals with microeconomic theory, the evolution of monetary institutions, and Federal Reserve policy. Minsky argues that any economic theory which separates what economists call the real economy from the financial system is bound to fail. Whilst the processes that cause financial instability are an inescapable part of the capitalist economy, Minsky also argues that financial instability need not lead to a great depression.

With a new foreword by Jan Toporowski.

Hyman P. Minsky (19191996) was Professor of Economics at Washington University St Louis and a distinguished scholar at the Levy Economics Institute of Bard College, USA. His research attempted to provide an understanding and explanation of the characteristics of financial crises, which he attributed to swings in a potentially fragile financial system. Minsky taught at Brown University, the University of California, Berkeley and in 1965 he became Professor of Economics of Washington University in St Louis and retired from there in 1990.

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Hyman

Minsky

Can It Happen Again?

Essays on Instability and Finance

With a new foreword by Jan Toporowski

First published in Routledge Classics 2016

by Routledge

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Hyman P. Minsky 1982, 2016

Foreword 2016 Jan Toporowski

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First published by M.E. Sharpe 1982

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ISBN: 978-1-138-64195-2 (pbk)

ISBN: 978-1-315-62560-7 (ebk)

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CONTENTS

This volume of essays represents the early thinking of Hyman P. Minsky, one of the most original economists to have come out of the United States in the twentieth century. The essays reveal the themes that emerged from his graduate studies at Harvard University and, as the title of the volume indicates, his abiding preoccupation with the financial crisis that gripped the United States at the start of the 1930s. Nearly a century later we commonly think of that crisis as being the 1929 Crash. However, as Minskys title essay indicates, the crisis that was to haunt him through to his intellectual maturity and beyond was the 19323 financial crisis, rather than the crash in the stock market that preceded it by more than three years. The difference is important: in 1929, the stock market crashed; in 19323, in response to Herbert Hoovers attempts to balance the United States Federal budget, the stock market and the banking system started to fail, to be rescued only by Franklin Roosevelts extended bank holiday, new financial regulations, including the GlassSteagall Act and the extension of deposit insurance, and the New Deal. As these essays make clear, for Minsky avoiding It was not just a matter of supporting the stock market and refinancing banks. It had to involve fiscal stimulus to prevent a fall in aggregate demand, but also to provide the financial system with government securities whose value was stable.

At the time of the crisis Minsky was entering his teenage years. He had been born in 1919 to parents who were Menshevik refugees from Russia. They engaged with socialist politics and the trade union movement in

After graduating from Harvard, Minsky taught at Brown University, and then the University of California in Berkeley, before being appointed in 1965 to a professorship at Washington University in St. Louis. After his retirement in 1990, he was appointed a Senior Scholar at the Levy Economics Institute of Bard College, where he worked until he died in 1996.

The essays in this volume include his first published works (Central Banking and Money Market Changes and Monetary Systems and Accelerator Models) which clearly came out of his doctoral researches. By the 1960s, reinforced by his work as a consultant to the Commission on Money and Credit, Minsky was concerned with showing how an accommodating policy of the Federal Reserve and countercyclical fiscal policy were essential to avoid financial instability. This appears in his title essay Can It Happen Again? A credit squeeze in 1966, headed off by the provision of liquidity by the Federal Reserve, confirmed for Minsky that the dangers of financial instability remained ever imminent. But the lessons were not learnt, and subsequent credit crunches became full-scale recessions of increasing magnitude, culminating in the 1979 Reagan recession (Finance and Profits: The Changing Nature of American Business Cycles).

After Henry Simons, the Chicago critic of liberal banking policies, Minsky was perhaps most influenced in his financial theories by Irving Fishers views on debt deflation. His earliest attempts to analyze financial crisis take the form of examining responses to what would nowadays be called shocks, affecting expectations of profit from investment. Such shocks would then induce increases, or decreases, in investment and the financing required for such undertakings. Changes in investment were almost universally regarded as the active expenditure variable in the business cycle. Credit conditions were the crucial circumstances that determined the financing of investment and often investment itself.