Minsky is now all the rage. A year ago, an influential Financial Times columnist confided to readers that rereading Minsky’s 1986 “masterpiece” - “Stabilizing an Unstable Economy” - “helped clear my mind on this crisis.” Others joined the chorus. Earlier this year, two economic heavyweights - Paul Krugman and Brad DeLong - both tipped their hats to him in public forums. Indeed, the Nobel Prize-winning Krugman titled one of the Robbins lectures at the London School of Economics “The Night They Re-read Minsky.”
Today most economists, it’s safe to say, are probably reading Minsky for the first time, trying to fit his unconventional insights into the theoretical scaffolding of their profession. If Minsky were alive today, he would no doubt applaud this belated acknowledgment, even if it has come at a terrible cost. As he once wryly observed, “There is nothing wrong with macroeconomics that another depression [won’t] cure.
Funny. The Minsky financial hypothesis goes a little something like this
- keynesian magic
- out of crisis
- lending is risk averse
- so lending works
- so those that lever on top show better return
- so more lever comes
- so more risk is taken on
- generalized monetary inflation ensues
- risk quality deteriorates
- there are speculators, ponzi investors and crooks
- the system is then very fragile, a little asset price variation will trigger a generalized run on assets as people deleverage.
- go to step 1
Interestingly the solution to number 2, the keynes part did not involve sending money to highly skilled unionized workers but sending money to the very poor and unskilled. The article then points out that most neo-cons would get sick at the thought of reversing trickle down economics in a bubble-up economics. But again, instead of giving made up money to guys like me, give it to the poor! to someone who really needs it! So straight-forward! Obama! do it! do it! do it, dollface! do it!
I have been studying this field since Aug 2007 (has it been 2 years already? sheesh) on a semi serious basis. It is hard for me to do anything seriously these days. Retro-fitting the FIH in some models is something that has been in the back of my mind for the past few months. It has to be a flow of funds, the levels of debt need to be computed with something that incorporates the FIH, probably somewhere in the expected volatility of returns. But enough bla bla bla, probably the time for some math...