Minsky Redux

Many commentators have noted the relevance of Hyman P. Minsky's financial fragility hypothesis to understanding the current crisis in the financial systems of developed countries. Indeed, Minsky has recently appeared in the pages of traditional financial media such as the Economist, the Wall Street Journal, and the Financial Times. He is often described as the “obscure economist” who identified highly speculative “Ponzi finance” as an underlying factor in such crises. But Ponzi finance is not the most important contribution Minsky has made to our understanding of the logic of repeated financial crises under capitalism. His analysis was based on the idea of endogenous instability—that stability in the economic system generates behaviors that produce fragility, and increasing fragility makes the system more prone to an unstable response to change in financial or other conditions that are relevant to the return on investment projects. Minsky expressed this idea in terms of a declining “margin” or “cushion” of safety in financial transactions and an increase in financial leverage that he called “layering.” However, the current crisis differs in important respects from the traditional analysis of a Minsky crisis. These differences have had a significant impact on the way the crisis has evolved.