- New Directions in Modern Economics series
Edited by Riccardo Bellofiore and Giovanna Vertova
Chapter 7: Speculation, financial fragility and stock-flow consistency
Minsky argued that, under the conditions imposed by modern capitalism, it is impossible for households, firms and banks to avoid speculative decision making when financing their expenditures: ‘speculation cannot be avoided—to decide is to place a bet’ (Minsky 1975/2008, p. 75). Building on the theoretical system of Keynes’s General Theory, Minsky’s analysis incorporates changing perceptions of financial risk into the investment decisions of firms to develop a theory of the business cycle based on financial fragility. This chapter argues that Minsky’s theory relies on the macroeconomic assumption that, during an investment boom, the firms sector as a whole operates with an increasing financial deficit which is matched by the saving of the household sector. Firms’ investment in capital goods is thus financed, via the intermediation of the banking system, by household savings. In such a system, the speculative decisions made by each sector are summarised as follows: [S]peculation has three aspects: (1) the owners of capital-assets speculate by debt-financing investment and positions in the stock of capital-assets; (2) banks and other financial institutions speculate on the asset mix they own and the liability mix they owe; (3) firms and households speculate on the financial assets they own and on how they finance their position in such assets (Minsky 1975/2008, p. 121).
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