Edited by Dimitri B. Papadimitriou and L. Randall Wray
Chapter 2: What Would Minsky Have Thought of the Mortgage Crisis?
Jan Kregel Introduction Many financial commentators who anticipated the difficulties in subprime mortgage lending before the 2007 market meltdown have credited their insight to their knowledge of the work of Hyman Minsky. Many noted that what came to be called a ‘Minsky Moment’ could be understood by what he had called a ‘Ponzi’ financing scheme. But how would Minsky himself have analyzed the developments in the mortgage market in the new millennium? And what would he have identified as the greatest potential source of financial instability going into 2006? We will never know for sure, but he might have written something like this: At present real estate assets seem to be a more important source of financial distress than stock exchange assets. . . . real estate assets are collateral for an extensive amount of debt, both of households and of business firms, owned by financial institutions. . . . If the price of real estate should fall very sharply, not only will the net worth of households and business firms be affected, but also defaults, repossessions, and losses by financial intermediaries would occur. (Minsky 1964, pp. 180–81) Of course, this passage was not written in 2006, rather nearly 50 years earlier at the beginning (summer 1960) of the ‘soaring sixties’. Nonetheless, his analysis of financial conditions in the early 1960s did leave some very clear, one might say prescient, markers as to how he would have interpreted the conditions that provided the increasing financial fragility that laid the basis for the current financial market...
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