Credit Writedowns » Hyman Minsky

Don’t Fight the Last War: Lessons from the Battlefields of Risk Management

Niels Jensen — Tue, 08 May 2012 17:41:25 +0000

Our brains are not calibrated to deal with the unexpected. Most of us believe we are good risk managers but in reality we are not. Most of us trust that risk can always be quantified and expressed through some fancy modelling whereas, often, it cannot. The world is not normal, yet universities continue to teach our young students the wisdom of Markowitz and Sharpe which brought us modern portfolio theory and, more specifically, the capital asset pricing model. Garbage In, Garbage Out, as they say. One of the fundamental assumptions behind modern portfolio theory is that asset returns are normally distributed random variables. The return profile of US equities fairly closely matches that of a normal distribution with the exception of large negative returns. They have come about more frequently than one would or should expect

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What is this “Financial Instability Hypothesis” by Hyman Minsky really about?

Randall Wray — Mon, 16 Apr 2012 19:57:37 +0000

In his publications in the 1950s through the mid 1960s, Minsky gradually developed his analysis of the cycles. First, he argued that institutions, and in particular financial institutions, matter. This was a reaction against the growing dominance of a particular version of Keynesian economics best represented in the ISLM model. At the same time, he examined financial innovation, arguing that normal profit seeking by financial institutions continually subverted attempts by the authorities to constrain money supply growth. This is one of the main reasons why he rejected the LM curve’s presumption of a fixed money supply. With his 1975 book, Minsky provided an alternative analysis of Keynes’s theory. This provides his most detailed presentation of the “financial theory of investment and investment theory of the cycle”. Minsky continually developed his financial instability hypothesis to incorporate the extensions made to his investment theory over the course of the 1960s, 1970s, and 1980s. The Kalecki equation was added; the two-price system was incorporated; and a more complex treatment of sectoral balances was included. Minsky also continued to improve his approach to banks, recognizing the futility of Fed attempts to control the money supply

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Keen: Instability in Financial Markets 15 Apr 2012
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Minskian Perspective on Instability in Financial Markets

Steve Keen — Mon, 16 Apr 2012 12:44:52 +0000

Yesterday, we highlighted the talk that Steve Keen gave at the INET conference as our only post. Today, we present the full and in-depth version including his written analysis via Steve Keen's DebtWatch website. Steve ends with two innovative solutions to this and future debt crises

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Keen: Instability in Financial Markets 15 Apr 2012
James Galbraith: How financial stability creates instability 1 Dec 2009

Keen: Instability in Financial Markets

Edward Harrison — Sun, 15 Apr 2012 18:54:49 +0000

Steve Keen's talk at INET is now up on the web (hat tip BT). His talk is billed as a primer on Hyman Minsky. In it, Steve argues that one cannot model Minsky using a New Keynesian or traditional neoclassical approach because of the reliance of these modelling approaches on the economic equilibrium assumption. Keen sees this assumption as the major flaw that cannot be remedied using standard modelling approaches

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James Galbraith: How financial stability creates instability 1 Dec 2009
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More on why Minsky matters

Randall Wray — Mon, 02 Apr 2012 15:46:31 +0000

In Paul Krugman’s view, banks are not very important since all they do is to intermediate between savers and investors, taking in deposits and packaging them into loans. Now, I know that Krugman’s own specialty is not money and banking, so one would not expect him to have a deep understanding of all the technical details. However, he is an important columnist and textbook writer, so if he is going to expound upon “what banks do”, he should at least have the basics more-or-less correct. But he doesn’t. we need Minsky—whose views even from the 1950s are far more relevant to today’s real world banks than are Krugman’s

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Why Minsky Matters 27 Mar 2012

Ludwig von Mises on Austrian Business Cycle Theory

Edward Harrison — Fri, 30 Mar 2012 17:36:15 +0000

Yesterday, John Carney at CNBC had a nice little post comparing Hyman Minsky's Financial Instability Hypothesis with some of the thinking by Friedrich von Hayek behind Austrian Business Cycle Theory. John rightly points to this passage as "a theory about banking as an endogenous destabilizer of the economy." And this certainly fits with the Minsky view of the world. von Mises takes the view that it is in having "bank notes without gold backing or current accounts which are not entirely backed by gold reserves, the banks are in a position to expand credit considerably". Nevertheless, whether you believe the genesis of the credit expansion is Federal Reserve interest rate policy, animal spirits, fiat currency or fractional-reserve banking, what should be clear is that it is the lower rate of interest that creates the credit growth. The question is whether this lowering of rates is beneficial over the long-term. Vom Mises argues it is not

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On debt’s centrality to modelling complex economic systems

Edward Harrison — Wed, 28 Mar 2012 21:36:49 +0000

My view as developed in that post is that debt is central to understanding economic systems, and not just because it has a redistributive element in apportioning losses between creditors and debtors when recession forces credit writedowns. More importantly, debt accumulation adds to an economy's ability to sutain economic growth (and malinvestment) by adding to aggregate demand. The video in this post gets to why this. matters

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Why Minsky Matters

Randall Wray — Tue, 27 Mar 2012 20:52:21 +0000

My friend Steve Keen recently presented a “primer” on Hyman Minsky. In his piece, Steve criticized the methodology used by Paul Krugman and argued that Krugman could learn a lot from Minsky. In particular Krugman’s equilibrium approach and primitive dynamics was contrasted to Minsky’s rich analysis. Finally, Krugman’s model of debt deflation dynamics left out banks–while banks always played an important role in Minsky’s approach. This post is to help explain why Hyman Minsky matters by quickly summarizing Minsky’s main areas of research. Next week I will post up more on Minsky’s view of “money and banking”

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Minsky: Turning neoclassical economics on its head 21 Jul 2009
A Primer on Minsky 26 Mar 2012

A Primer on Minsky

Steve Keen — Mon, 26 Mar 2012 14:30:32 +0000

Minsky's “Financial Instability Hypothesis” is one of the key foundations of Steve Keen's approach to economics. Minsky has come into vogue these days of course, but to people who’ve known his work for several decades rather than ever since the “Minsky Moment” of late 2007, a better expression would be that he’s “come into vague”

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Minsky: Turning neoclassical economics on its head 21 Jul 2009
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Private savings in a post-bubble world

Edward Harrison — Mon, 05 Mar 2012 03:37:18 +0000

I caught this comment by Scott Fulwiler on a blog post a 3spoken: the notion that firms can spend and reduce net saving in order to increase net saving of the household sector–while theoretically true and true in an accounting sense–doesn’t hold up well empirically. Across business cycles (i.e., trend as opposed to cycles), firm

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