Hyman Minsky
From Wikipedia, the free encyclopedia
| Post-Keynesian economics | |
| Birth | September 23, 1919 Chicago, Illinois |
|---|---|
| Death | October 24, 1996 (aged 77) Rhinebeck, New York |
| Nationality |  United States |
| Field | Macroeconomics |
| Alma mater | Harvard University (M.A.) University of Chicago (B.A.) |
| Influences | Joseph Schumpeter Wassily Leontief John Maynard Keynes |
| Influenced | Laurence Meyer Paul McCulley |
| Contributions | Minsky moment |
Hyman Minsky (September 23, 1919 – October 24, 1996), was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises. Minsky was sometimes described as a post-Keynesian economist, because, in the Keynesian tradition, he supported some government intervention in financial markets and opposed some of the popular deregulation policies in the 1980s, and argued against the accumulation of debt. His research, nevertheless, endeared him to Wall Street.[1]
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[edit] Education
A native of Chicago, Illinois, Minsky received a bachelor of science degree from the University of Chicago. He went on to earn a master's degree in public administration and a doctorate from Harvard University, where he studied under Joseph Schumpeter and Wassily Leontief.
[edit] Career
Minsky taught at Brown University from 1949 to 1958, and from 1957 to 1965 was an Associate Professor of Economics at the University of California, Berkeley. In 1965 he became Professor of Economics of Washington University in St Louis and retired from there in 1990.[2] At the time of his death he was a Senior Scholar at the Levy Economics Institute of Bard College.
[edit] Financial theory
Dr. Minsky proposed theories linking financial market fragility, in the normal life cycle of an economy, with speculative investment bubbles endogenous to financial markets. Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts.
This slow movement of the financial system from stability to crisis is something for which Minsky is best known, and the phrase "Minsky moment" refers to this aspect of Minsky's academic work.
"He offered very good insights in the '60s and '70s when linkages between the financial markets and the economy were not as well understood as they are now," said Henry Kaufman, a Wall Street money manager and economist. "He showed us that financial markets could move frequently to excess. And he underscored the importance of the Federal Reserve as a lender of last resort."
Minsky's model of the credit system, which he dubbed the "Financial Instability Hypothesis" (FIH), incorporated many ideas already circulated by John Stuart Mill, Alfred Marshall, Knut Wicksell and Irving Fisher[3]. "A fundamental characteristic of our economy," Minsky wrote in 1974, "is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles."
Disagreeing with many mainstream economists of the day, he argued that these swings, and the booms and busts that can accompany them, are inevitable in a free market economy, unless government steps in to control them, through regulation, central bank action and other tools; such mechanisms, in fact, came into existence in response to crises such as the Panic of 1907 and the Great Depression. He opposed the deregulation that characterized the 1980s.
It was at the University of California at Berkeley that seminars attended by Bank of America executives helped him to develop his theories about lending and economic activity, views he laid out in two books John Maynard Keynes (1975), a classic study of the economist and his contributions, and Stabilizing an Unstable Economy (1986), and more than a hundred professional articles.
[edit] Minsky's theories and the subprime mortgage crisis
[edit] Understanding Minsky's Financial Instability Hypothesis
Hyman Minsky's theories about debt accumulation received revived attention in the media during the Subprime mortgage crisis of the late 2000s.[4]
Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt. He identified 3 types of borrowers that contribute to the accumulation of insolvent debt: Hedge Borrowers; Speculative Borrowers; and Ponzi Borrowers.
The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower" (named for Charles Ponzi, see also Ponzi scheme) borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.
In Minsky's words,
Three distinct income-debt relations for economic units, which are labeled as hedge, speculative, and Ponzi finance, can be identified.
Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit. Speculative finance units are units that can meet their payment commitments on 'income account' on their liabilities, even as they cannot repay the principal out of income cash flows. Such units need to 'roll over' their liabilities: (e.g. issue new debt to meet commitments on maturing debt). Governments with floating debts, corporations with floating debts of commercial paper, and banks are typically hedge units [sic?].[nb 1]
For Ponzi units, the cash flows from operations are not sufficient to fill either the repayment of principal or the interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stocks lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts.
It can be shown that if hedge financing dominates, then the economy may well be an equilibrium-seeking and containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system. The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system.
In particular, over a protracted period of good times, capitalist economies tend to move to a financial structure in which there is a large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make positions by selling out positions. This is likely to lead to a collapse of asset values. [5]
The inevitable disillusionment of the Ponzi borrower, when the bubble pops, i.e., the asset price ceases to increase, can lead to seizure of the credit system. The speculative borrower, who needed no more than debt rollover, can no longer refinance the principal despite the borrowers ability to cover interest payments. The collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments.
[edit] Applying the Hypothesis to the Subprime Mortgage Crisis
Economist Paul McCulley described how Minsky's hypothesis translates to the subprime mortgage crisis.[6] McCulley illustrated the three types of borrowing categories using an analogy from the mortgage market: a hedge borrower would have a traditional mortgage loan and is paying back both the principal and interest; the speculative borrower would have an interest-only loan, meaning they are paying back only the interest and must refinance later to pay back the principal; and the ponzi borrower would have a negative amortization loan, meaning the payments do not cover the interest amount and the principal is actually increasing. Lenders only provided funds to ponzi borrowers due to a belief that housing values would continue to increase.
McCulley writes that the forward progression through Minsky's three borrowing stages was evident as the credit and housing bubbles built through approximately August 2007. Demand for housing was both a cause and effect of the rapidly-expanding shadow banking system, which helped fund the shift to more lending of the speculative and ponzi types, through ever-riskier mortgage loans at higher levels of leverage. This helped drive the housing bubble, as the availability of credit encouraged higher home prices. Since the bubble burst, we are seeing the progression in reverse, as businesses de-leverage, lending standards are raised and the share of borrowers in the three stages shifts back towards the hedge borrower.
McCulley also points out that human nature is inherently pro-cyclical, meaning, in Minsky's words, that "from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes, the economic system's reactions to a movement of the economy amplify the movement--inflation feeds upon inflation and debt-deflation feeds upon debt deflation." In other words, people are momentum investors by nature, not value investors. People naturally take actions that expand the apex and nadir of cycles. One implication for policymakers and regulators is the implementation of counter-cyclical policies, such as contingent capital requirements for banks that increase during boom periods and are reduced during busts.
[edit] Views on John Maynard Keynes
Minsky was also identified as one of very few authors who (with Donald Markwell) discussed Keynes's belief that his economics was likely to be more conducive to peace than the old economic system had been.[7]
[edit] See also
[edit] Notes
- ^ This appears to be a typo for "speculative units".
[edit] References
- ^ Uchitelle, Louis (October 26, 1996). "H. P. Minsky, 77, Economist Who Decoded Lending Trends". New York Times. http://www.nytimes.com/1996/10/26/us/h-p-minsky-77-economist-who-decoded-lending-trends.html.
- ^ http://record.wustl.edu/archive/1996/10-31-96/8447.html
- ^ pg. 14, Manias, Panics, and Crashes, 4th Ed. by Charles P. Kindleberger
- ^ The Credit Crisis: Denial, delusion and the "defunct" American economist who foresaw the dénouement
- ^ The Financial Instability Hypothesis by Hyman P. Minsky, Working Paper No 74, May 1992. pages 6-7-8
- ^ McCulley-PIMCO-The Shadow Banking System and Hyman Minsky's Economic Journey
- ^ Hyman P Minsky, John Maynard Keynes, Columbia University Press, 1975. Donald Markwell, John Maynard Keynes and International Relations: Economic Paths to War and Peace, Oxford University Press, 2006. [1]
Robert Barbera, 2009, The Cost of Capitalism, McGraw-Hill Professional. ISBN 978-0-07-162844-0
[edit] Selected Publications
- (2008) John Maynard Keynes, McGraw-Hill Professional. ISBN 978-0-07-159301-4
- (2008) Stabilizing an Unstable Economy, McGraw-Hill Professional. ISBN 978-0-07-159299-4
- “The Breakdown of the 1960s Policy Synthesis”. Telos 50 (Winter 1981-82). New York: Telos Press.
[edit] External links
- Major Works of and Resource on Minsky
- Marc Schnyder: Die Hypothese finanzieller Instabilität von Hyman P. Minsky Thesis, University of Fribourg, Switzerland, (German)
- In Time of Tumult, Obscure Economist Gains Currency
- New Yorker article on Minsky
- Securitization by Hyman Minsky
