The Great Recession

The Great Moderation

Carry Trade

Martin Wolf

The shadow banking system

News Home

Home - Index - News - Kronkursförsvaret 1992 - EMU - Cataclysm
Wall Street Bubbles

Hyman Minsky

Behind the tendency towards economic growth lie two powerful forces:
innovation at the frontier of the world economy, particularly in the US, and catch-up by laggard economies.

The two are linked: the more the frontier economies innovate, the greater the room for catch-up.
Martin Wolf, FT 3 January 2017

One of the policy achievements since the second world war has been to make growth more stable.
This is partly because the world has avoided blunders on the scale of the two world wars and the Great Depression.
It is also, as the American economist Hyman Minsky argued, because of active management of the monetary system,
greater willingness to run fiscal deficits during recessions
and the increased size of government spending relative to economic output.

Levy Economics Institute

Full text

Factor-price equalization - Faktorprisutjämning

Top of page

Minsky’s moment
The second article in our series on seminal economic ideas looks at
Hyman Minsky’s hypothesis that booms sow the seeds of busts The Economist 30 July 2016

From the start of his academic career in the 1950s until 1996, when he died, Hyman Minsky laboured in relative obscurity.
His research about financial crises and their causes attracted a few devoted admirers but little mainstream attention:
this newspaper cited him only once while he was alive, and it was but a brief mention.

So it remained until 2007, when the subprime-mortgage crisis erupted in America.

Suddenly, it seemed that everyone was turning to his writings as they tried to make sense of the mayhem

Minsky wanted to understand why financial crises occurred. It was an unpopular focus.
The dominant belief in the latter half of the 20th century was that markets were efficient.

Full text

(Robert Lucas)

Top of page

I was one of the many economists who had barely heard of Hyman Minsky, still less read any of his work, before the financial crisis.
One of the many who, seeking to understand, quickly devoured his Stabilizing an Unstable Economy. And found it pretty sensible.
There didn’t seem to be anything in that book a sensible mainstream macro person should have objected to.
Should being the operative word.
Because of course everyday, mainstream DSGE models in use in 2008 ruled out the very possibility of a crisis,
whereas Minsky believed in their inevitability in some shape.
The Enlightened Economist, 12 January 2016

The later chapters of Wray’s primer set out Minsky’s views on specific issues, starting with his now-famous financial instability hypothesis: that market forces must be constrained in finance to prevent instability, but the consequent stability is itself destabilizing.

Full text

Why Minsky Matters: An Introduction to the Work of a Maverick Economist Hardcover – 10 Nov 2015
by L. Randall Wray (Author)

Top of page


The Case of the Missing Minsky
Bagehot, Keynes, Gavyn Davis, Mark Thoma
Paul Krugman, NYT, 1 June 2015

Gavyn Davis has a good summary of the recent IMF conference on rethinking macro; Mark Thoma has further thoughts. Thoma in particular is disappointed that there hasn’t been more of a change

The questions then are how and why each of these things can/did happen.

I think of these as the Minsky question — why do economies grow vulnerable over time ;
the Bagehot question — why does all hell break loose now and then;
and the Keynes question — how economies can stay depressed, and how such depressed economies work.

Why is Minsky still mostly missing?
Partly because asking how we got here may be less urgent than the question of what we do now. But also, I’d guess, because it’s hard.
Bubbles, excessive leverage, and all that probably have a lot to do with the limits of rationality, and behavioral economics doesn’t provide anything like as much guidance as it should.

Full text

Top of page


Those in charge saw little danger in the rapid growth of credit; they were largely unconcerned by rising leverage; they thought financial innovation added to rather than reduced stability;
and they believed it was easier to clean up after asset-price bubbles burst than to prevent them from growing in the first place.
On all this they were proved wrong, as the late and disregarded Hyman Minsky had sought to warn them.

The financial crises and the years of economic malaise that followed represent profound failures of the economy and of policy.
Above all, they were failures of understanding.
We have learnt much since. But we have not learnt enough to avoid a repeat of this painful experience.
As I argue in a new book, we retain unbalanced and financially fragile economies.
Martin Wolf, Financial Times, September 3, 2014

The Great Moderation, Version 2.0
“Great Moderation” – was invented to describe the stable period from 1984-2008, when the variability of real GDP growth and inflation both fell markedly
Gavyn Davies, FT blog April 13, 2014

Minsky’s Financial Instability Hypothesis
The longer the period of stability, the higher the potential risk for even greater instability when market participants must change their behavior.
Its source turns out to be a rather unprepossessing five-page paper Dr. Minsky published at Bard College in 1992.
John Mauldin 27 March 2014
Highly Recommended

Minsky’s work was roundly ignored by the economics profession and policy makers alike
… until all hell broke loose in the financial industry and then the global economy in 2008.
At the time (in Dec. 2007), I described Minsky’s thesis like this:

Minsky points out that stability leads to instability.
The more comfortable we get with a given condition or trend, the longer it will persist and then when the trend fails, the more dramatic the correction.
The problem with long-term macroeconomic stability is that it tends to produce unstable financial arrangements.
If we believe that tomorrow and next year will be the same as last week and last year, we are more willing to add debt or postpone savings in favor of current consumption.
Thus, says Minsky, the longer the period of stability, the higher the potential risk for even greater instability when market participants must change their behavior.

The term Minsky moment was coined in 1998 by my good friend Paul McCulley

Full text

Top of page

Bookmark and Share

Did Hyman Minsky find the secret behind financial crashes?
Minsky's main idea is so simple that it could fit on a T-shirt, with just three words:
"Stability is destabilising."
BBC 24 March 2014

The "Minsky moment", a term coined by later economists, is the moment when the whole house of cards falls down.
Ponzi finance is underpinned by rising asset prices and when asset prices eventually start to fall
then borrowers and banks realise there is debt in the system that can never be paid off.

Full text

Centralbanker skall INTE vara förutsägbara.
Rolf Englund blog 10 mars 2014

Top of page

The world still does not fully understand how financial markets work,
according to investor George Soros speaking at the World Economic Forum in Davos

He said there was a risk of a credit bubble forming, which was "the big, unresolved issue"
BBC 26 January 2013

In a sea of academic economic literature, there are a handful of essays that provide lifelong analytical anchors.
Some Unpleasant Keynesian-Minsky Logic
Paul McCulley June 2010

In a sea of academic economic literature, there are a handful of essays that provide lifelong analytical anchors. One of these, at least for me, is the famous 1981 paper by Tom Sargent and Neil Wallace titled “Some Unpleasant Monetarist Arithmetic,” published in the Minneapolis Fed Quarterly Review.

I wrote about that article on these pages back in February 2003, recalling that it had a profound impact on me while in graduate school, enlightening me to the concept of the sustainability of any given monetary/fiscal policy mix.

Sargent and Wallace argued, using simple arithmetic, that sustainability came down to the relationship between three variables:

The level for short-term real interest rates maintained by the monetary authority.
The real growth rate of the economy.
The growth path for the real stock of debt incurred by the fiscal authority, as determined by real fiscal deficits as a share of real GDP.

The authors demonstrated that it is not possible for
(1) the monetary authority to sustainably peg real short-term interest rates above the real growth rate of the economy
if (2) the fiscal authority insists on running a fiscal deficit as a percent of GDP that is higher than the growth rate of real GDP.

Such a combination implies exponentially rising growth for real fiscal interest costs as a share of real GDP, which is axiomatically unsustainable.

But, when Sargent and Wallace wrote their essay, that’s what Volcker and Reagan were doing,
implying that in the fullness of time,
either the monetary authority would have to loosen up
or the fiscal authority would have to tighten up.

Ever since that super-secular victory over inflation, the dominant secular risk has been deflation, not inflation, as evidenced by the Fed’s extraordinary – and successful! – preemptive fight against deflation in the recession of 2001 and its even more extraordinary – and so far successful! – fight against deflation in the recession that started in December 2007, which presumably ended last summer.

And in both of these most recent cases, Fed Chairman Greenspan and Fed Chairman Bernanke openly welcomed old-fashioned Keynesian fiscal stimulus

Which Brings Us to Euroland
The ECB was part of the shock-and-awe package of policy steps announced last month to arrest the very real risk of a debt-deflationary spiral in Europe.
The ECB is buying government bonds of troubled members of the monetary union, taking on their credit risk, paying for them with newly created money.
So it is ineluctably the case that the ECB has ventured into the fiscal policy realm, de facto monetising the debt of the troubled members.
If there is any doubt about that, the fact that the Bundesbank opposed the action should end that doubt. It was and is what it was and is, and the Bundesbank’s objection speaks directly to that reality.

Full text

The second, more worrying step is a European Central Bank decision to buy government bonds “to address... malfunctioning... securities markets”.
With this it caved in to pressure from eurozone sovereigns not to tolerate a bond strike against one of their number.
Financial Times editorial May 10 2010 20:41


Top of page

A year later, the evidence is in: Depression 2.0 has indeed been avoided.
No, I haven’t yet bought that second home. In fact, I actually sold my only one, at a good level, as I was no longer using it, preferring to live in a little rental house on the water where I have my 32-foot fishing boat, named the Moral Hazard, and my 18-foot electric Duffy boat, named the Minsky Moment. Yes, I am sorta non-normal.
Paul McCulley April 2010

The biggest intermediate-term risk for risk assets is not that the big-V doesn’t unfold, but that it does, inciting the Fed to bring the extended period of a near-zero policy rate to a close.
But again, you retort, doesn’t that imply that in the absence of the big-V, risk asset prices could levitate into bubble valuation space?
Yes, it does mean that.
Paul McCulley November 2009

Hyman Minsky, points out that stability leads to instability.
The longer a given condition or trend persists (and the more comfortable we get with it), the more dramatic the correction will be when the trend fails.
The problem with long-term macroeconomic stability is that it tends to produce highly unstable financial arrangements. If we believe that tomorrow and next year will be the same as last week and last year, we are more willing to add debt or postpone savings for current consumption.
Thus, says Minsky, the longer the period of stability, the higher the potential risk for even greater instability when market participants must change their behavior.
John Mauldin 26/3 2010

And that's exactly what happened in the recent credit crisis. Consumers all through the world's largest economies borrowed money for all sorts of things, because times were good.

Home prices would always go up and the stock market was back to its old trick of making 15% a year. And borrowing money was relatively cheap. You could get 2% short-term loans on homes, which seemingly rose in value 15% a year, so why not buy now and sell a few years down the road?

Full text

Top of page

The Shadow Banking System and Hyman Minsky’s Economic Journey
How did financing get so creative? It didn’t happen within the confines of a regulated banking system,
which submits to strict regulatory requirements in exchange for the safety of government backstopping.
Instead, financing got so creative through the rise of a “shadow banking system,” which operated legally,
yet almost completely outside the realm of bank regulation.

Paul McCulley, May 2009

The rise of this system drove one of the biggest lending booms in history, and collapsed into one of the most crushing financial crises we’ve ever seen.

I coined the term “shadow banking system” in August 2007 at the Fed’s annual symposium in Jackson Hole.

The bottom line is that the shadow banking system created explosive growth in leverage and liquidity risk outside the purview of the Fed. And it was all grand while an ever-larger application of leverage put upward pressure on asset prices.
There is nothing like a bull market to make geniuses out of levered dunces.

Building from the work of many economists before him, most notably Keynes, Minsky articulated a theory on financial instability that describes in almost lurid detail what happened in the shadow banking system, the housing market, and the broader economy that brought us to the depths of financial crisis – and he published this theory in 1986! So the first thing we do when we discuss Prof. Minsky is show reverence. He studied at Harvard and taught at Brown, Berkeley and Washington University in St. Louis. After his retirement in 1990, he continued writing and lecturing with the Levy Institute, which now hosts an annual symposium in his honour.

Minsky may well have considered himself a Keynesian economist – he published his analysis and interpretation of Keynes in 1975 – but Minsky’s own theories headed off in a new direction. Keynes is, of course, a solid place to start any adventure in economic theory. Remember that Keynes effectively invented the field of macroeconomics, which is founded on the proposition that what holds for the individual does not necessarily hold for a collection of individuals operating as an economic system. This principle is sometimes called the “fallacy of composition,” and sometimes called the “paradox of aggregation.”

Full text

Top of page

Keynes offers us the best way to think about the financial crisis
The ghost of John Maynard Keynes, the father of macroeconomics, has returned to haunt us.
With it has come that of his most interesting disciple, Hyman Minsky
We all now know of the “Minsky moment” – the point at which a financial mania turns into panic.
Martin Wolf, Financial Times, December 23 2008

Top of page

Minsky moment
In 2009, the world was in a state of shock.
Now, despite successful efforts at stabilising economies, people are closer to despair.

Something seems to be wrong with the system. But what, and what needs to be done?
Martin Wolf, FT, January 22, 2012

One of the biggest debates in economics is whether a modern capitalist economy is inherently stable. Before the crisis, the orthodox view was that it would be if one had a competitive economy and a central bank that anchored inflation expectations. Events have disproved this view.

The late Hyman Minsky, in his masterpiece, Stabilizing an Unstable Economy, provided incomparably the best account of why this theory is wrong.

Full text


Minsky moment
IMF's Christine Lagarde warns of '1930s moment'
BBC 23 January 2012

"And today, it has to be an opportunity of our own making. Otherwise, we could easily slide into a 1930s moment.

"A moment where trust and co-operation break down and countries turn inward. A moment, ultimately, leading to a downward spiral that could engulf the entire world."

Full text


Over the past few weeks three experiences have helped clear my mind on this crisis.
First, I reread Hyman Minsky’s masterpiece, Stabilizing an Unstable Economy.
Martin Wolf, Financial Times, September 16 2008

Hyman Minsky’s masterpiece, Stabilizing an Unstable Economy

Kindleberger och Minsky menar att en finansiell kris kan omfatta en skarp korrigering av tillgångspriser, konkurser i finansiella och icke-finansiella företag, valutakriser eller en kombination av dessa.
Urban Bäckström i Ekonomisk Debatt nr 1/98

Top of page

Our economic predicament is not a temporary or traditional condition.
The economic model that drove the long boom from the 1980s to 2008, has broken down.
The 2008/09 financial crisis has bequeathed a once-in-a-generation crisis of capitalism
George Magnus, FT 12 September 2011

Full text


Top of page


Is there time to avert a Minsky meltdown?
The point at which a Minsky moment becomes a Minsky meltdown has arrived.
Named after the economist, Hyman Minsky, this is the point where financial instability has become so acute that only an exceptional, immediate and global government attack on the causes of instability is likely to
avert a systemic banking failure, in which non-financial companies could rapidly fail too.
George Magnus, Financial Times, October 13 2008

The absence of a formal recapitalisation scheme was also a missed opportunity. However, Hank Paulson, US Treasury secretary, is thought to be considering spending some of his $700bn authority to inject capital into banks under certain conditions. Half would be about right for now. This would be far better than buying up pieces of paper that glow in the dark.

RE: Papers that glow in the dark? It is toxic waste, stupid.

Full text

Kindleberger och Minsky menar att en finansiell kris kan omfatta en skarp korrigering av tillgångspriser, konkurser i finansiella och icke-finansiella företag, valutakriser eller en kombination av dessa.
Urban Bäckström i Ekonomisk Debatt nr 1/98

Top of page

Policy makers have slowly recognised the Minsky Moment followed by the unfolding Reverse Minsky Journey.
But I want to emphasise “slowly,”
Part of the reason is human nature: to acknowledge a Reverse Minsky Journey, it is first necessary to acknowledge a preceding Forward Minsky Journey
Paul McCulley, April 2008

That is difficult for policy makers to do, especially ones who claim an inability to recognise bubbles while they are forming and, therefore, don’t believe that prophylactic action against them is appropriate. Nobody likes to admit they were blind, dumb, or asleep at the switch. Or all three.

/Jag har hittat på en lag, den har inget namn ännu, vi får kalla den för Englunds lag och den lyder så här:
”Har man sagt A, måste man säga B, och har man sagt B är det svårt att säga att A var fel.”
ESO-seminarium på Rosenbad onsdagen den 17 mars 1999/

That’s not to say that Minsky had confidence that regulators could stay out in front of short-term profit-driven innovation in financial arrangements. Indeed, he believed precisely the opposite:

“In a world of businessmen and financial intermediaries who aggressively seek profit, innovators will always outpace regulators; the authorities cannot prevent changes in the structure of portfolios from occurring. What they can do is keep the asset-equity ratio of banks within bounds by setting equity-absorption ratios for various types of assets. If the authorities constrain banks and are aware of the activities of fringe banks and other financial institutions, they are in a better position to attenuate the disruptive expansionary tendencies of our economy.”

Minsky wrote those words in 1986! Twenty-two years later, we can only bemoan that his sensible counsel was ignored. To be sure, he presciently envisioned Basel I and now Basel II. But neither of those arrangements fundamentally addresses the explosive growth of the shadow banking system, or what Minsky cleverly called “fringe banks and other financial institutions.” Indeed, much of the growth of the shadow banking system in recent years was driven by profit-seeking bankers using off balance sheet vehicles, levered to the eyeballs, so as to arbitrage the capital strictures of Basel I.

Full text

It was the 1988 Basel Accord that first created the opportunity for regulatory arbitrage
whereby banks could shunt loans off the balance sheet.
John Plender, FT November 6 2007

Shadow banking system

Tell me once again just who this Minsky fellow is and why it’s his moment
Paul McCulley, January 2008

We are not talking about rationality here but human nature. They are not one and the same thing. Adam Smith’s invisible hand is actually attached to human forearms, and humans are not only momentum investors, rather than value investors, but also inherently both greedy and suffering from hubris about their own smarts.

It’s sometimes called a bigger fool game, with each individual fool thinking he is slightly less foolish than all the other fools.

More by Paul McCulley

A “sizeable” number of them, he observed, probably presumed that they could exit their positions before any sell-off.
“History tells us that this is generally not a successful strategy,” he warned.
“The exits tend to get jammed unexpectedly and rapidly.”
Gillian Tett, FT October 16, 2014

Top of page

The U.S. Credit Crunch Of 2007
Despite the arrival of a Minsky moment, a meltdown is not likely to follow.
On both sides of the Atlantic Ocean, central banks have stepped in as "lenders of last resort" to help maintain orderly conditions in financial markets and
to prevent credit dislocations from adversely affecting the broader economy.
John Mauldin 2007-11-12

A credit crunch is an economic condition in which loans and investment capital are difficult to obtain. In such a period, banks and other lenders become wary of issuing loans, so the price of borrowing rises, often to the point where deals simply do not get done. Financial economist Hyman P. Minsky (1919-1996) was the foremost expert on such crunches, and his ideas remain relevant to understanding the current situation.

Throughout the summer of 2007, more and more financial-market observers warned of the arrival of a Minsky moment. In fact, "We are in the midst of [such a moment]," said Paul McCulley, a bond fund director at Pacific Investment Management Company, in mid-August.

McCulley, whose remarks were quoted on the cover of the Wall Street Journal, should know about a Minsky moment: he coined the term during the 1998 Russian debt crisis (Lahart 2007).

McCulley may have originated the term, but George Magnus, senior economic advisor at UBS, a global investment bank and asset management firm, offers perhaps the most succinct explanation of it.


The U.S. Credit Crunch of 2007 - A Minsky Moment
At the heart of that viewpoint is what Minsky called the “financial instability hypothesis,” which derives from an interpretation of John Maynard Keynes’s work and underscores the value of an evolutionary and institutionally grounded alternative to conventional economics
Charles J. Whalen, The Levy Economics Institute, October 2007

Well-anchored inflationary expectations are not – repeat not – the end all and be all of life.
Accordingly, they should not be the end all and be all of monetary policy,
despite the huge volume of written and oral rhetoric offered by a chorus of policy makers to that effect.

Paul McCulley, Pimco July 2007

The “Minsky moment” in financial markets – the point where credit supply starts to dry up,
systemic risk emerges and the central bank is obliged to intervene – has duly arrived.

George Magnus, Financial Times August 22 2007 19:14

The writer is senior economic adviser, UBS Investment Bank

But while equity markets have stabilised temporarily in anticipation of policy loosening by the Fed, credit markets remain deeply troubled. The immediate focus is on short-term funding, financing flows and counterparty risk.

Hypothetical scenarios revolve around whether declines in interest rates will spur a new round of risk-taking and debt, or whether we will be left pushing on that wretched piece of string.

In my view, two main propositions define the outlook.

First, the flight from debt in this downswing may be as potent as the rush towards it was on the upswing. In the US, the credit share of gross domestic product rose from 270 per cent in 2000 to 340 per cent in early 2007, mainly as households and financial institutions relied on borrowed money or leverage to increase spending on goods and services and assets. It is most likely that the reduced availability of cheap credit is going to lead to a sharp reverse in spending.

Second, current credit cycle concerns are about solvency, not liquidity per se as was the case in 1998, after which the world economy recovered quite promptly. This time the problem is about solvency among homeowners, builders, mortgage providers and financial institutions. Despite the fact that aggregate corporate balance sheets are in reasonably good shape, the rapid deterioration in financial conditions and rising cost of capital will almost certainly lead to higher default rates. Currently, most people are focused on the availability of capital. But in due course the price of capital will become more significant and tend to depress borrowing, capital raising and capital spending and employment.

Full text

Fear makes a welcome return
This is not new. It is as old as financial capitalism itself.
The late Hyman Minsky, who taught at the University of California, Berkeley, laid down the canonical model.
Martin Wolf, Financial Times 15/8 2007

The process starts with “displacement”, some event that changes people’s perceptions of the future. Then come rising prices in the affected sector.
The third stage is easy credit and its handmaiden, financial innovation.
The fourth stage is over-trading, when markets depend on a fresh supply of “greater fools”.
The fifth stage is euphoria, when the ignorant hope to enjoy the wealth gained by those who came before them. The warnings of those who cry “bubble” are ridiculed, because these Cassandras have been wrong for so long.
In the sixth stage comes insider profit-taking.
Finally, comes revulsion.

Panic follows mania as night follows day. The great 19th-century economist and journalist, Walter Bagehot, knew this better than anybody. Lombard Street, his masterpiece, is dedicated to the phenomenon. It is devoted, too, to how central banks should deal with its results.

Full text

If, for example, banks have incentives to maximise profits by selling as many junk mortgages as possible to borrowers who cannot conceivably repay the loans, then something has gone wrong in our risk-sharing world.
(My favourite are the so-called Ninja loans – no income, no job, no assets).
Wolfgang Münchau, FT 23/4 2007

What masquerades as the sharing of risk is in fact a system malfunctioning, with the potential to undermine the integrity of the financial system. Sharing risk can under certain circumstances be inherently destabilising.
One person who would have had a field day with this discussion is Hyman Minsky, the US economist who died in 1996 and whose writings have recently enjoyed a renaissance.
One of his contributions is the financial instability hypothesis – a theory about the impact of debt on the financial system. In contrast to much of modern macroeconomics, Minsky treats banks and investors as the most important economic actors.

He classifies investors in three categories. The first are hedge investors, not to be confused with modern hedge funds. Minsky’s hedge investors are risk-averse, and can meet their payment obligations out of current cash flows;
the second category are speculative investors, who can do the same in the long run, but not necessarily in the short run.
The third are Ponzi investors, named after Charles Ponzi, one of the most notorious swindlers in US history, who lived in the early 20th century.

The critical part of Minsky’s theory is that during an economic boom, an increasing number of investors gradually move from the first category to the second and third. In a Minsky economy, instability is not due to some external shock, but is inherent in the system itself.

Raghuram Rajan, former director of research at the International Monetary Fund, made another equally compelling instability argument in a remarkable 2005 paper*, in which he said investors, eager to outperform the markets, take on two different types of risk during a boom. The first is a so-called “tail risk”, the kind of risk that caused the default of Long Term Capital Management almost 10 years ago. These are high risks with a very low probability of occurring, which offer high rewards. The second risk is herd behaviour, as investment managers do not want to underperform their competitors.

Full text

Raghuram Rajan: Has financial development made the world riskier?
NBER working paper 11728

Do We Still Need Commercial Banks?
Raghuram G. Rajan

A Minsky Meltdown in the most important asset in most Americans' asset portfolio is not a minor matter.
Paul McCulley at Johan Mauldin 12/3 2007

Urban Bäckström om Minsky
Ekonomisk Debatt nr 1/1998

More about Minsky
Click here

There is no such thing as Rational expectations
Rolf Englund

Början på sidan - Top of page