What Have We Learnt?
Edited by Steven Kates
Chapter 6: Hindsight on the Origins of the Global Financial Crisis?
Steve Keen As one of the handful of economists who anticipated the crisis (Bezemer, 2009; Fullbrook, 2010), my hindsight explanation of the crisis is the same as my foresight prediction of it in December 2005: it was a copybook manifestation of the final debt-deflationary stage in Hyman Minsky’s ‘Financial instability hypothesis’. Our real world economy is essential monetary, innately cyclical, and subject to fundamental uncertainty – unlike the mythical world of neoclassical ‘rational expectations’ macroeconomics, in which the economy is essentially ‘real’ or barter in nature, varies stochastically around its longrun equilibrium, and is inhabited by agents who can accurately predict the future.1 Given that investors must make decisions despite uncertainty about the future, they do so in the manner captured by Keynes: they act on the basis of the convention of ‘assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change’ (Keynes, 1936: 152). Minsky extended this insight to assert that, given the inherently cyclical nature of economy, a period of economic tranquillity after a financial crisis – like the bursting of the dot.com bubble in 2001 – will lead to rising expectations by both borrowers and lenders. The economy will then pass from a period of tranquility into one of euphoria, in which ‘Financial institutions . . . accept liability structures – their own and those of borrowers – that, in a more sober expectational climate, they would have rejected’ (Minsky, 1982: 122–3). This euphoric period drives the debt to income level...
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