Edited by Dimitri B. Papadimitriou and L. Randall Wray
Chapter 5: Rational and Innovative Behaviors at the Core of Financial Crises: Banking in Minsky’s Theory
Eric Nasica Introduction The 2007 subprime mortgage crisis underlined the central role played by banks in generating a financial crisis. While this crisis surprised most economists and practitioners, a rereading of Hyman P. Minsky’s writings on banking would have probably allowed anticipating a great part of the current dramatic events on money, credit and financial markets. As is well known, starting in the middle of the 1950s, and for the next 40 years, Hyman P. Minsky developed an original business cycle theory based on a financial conception of economic fluctuations, and more specifically, on the ‘Financial Instability Hypothesis (FIH)’ (Minsky 1975, 1982 and 1986). This theory is mainly based on the succession of two phases during the business cycle: first, a process of transition toward greater financial fragility of the economy which builds up in the expansionary phase; second, the transition from a financially fragile situation to a situation of recession and then of large amplitude economic crisis. The aim of this chapter is to specify the nature and the role played by the Minskyan banker in each of the phases of the business cycle. More precisely, we show that financial instability in the Minsky sense is a consequence of specific behaviors adopted by banks along the business cycle and neglected by other banking theories. The chapter is organized as follows. First, the decision-making environment and the induced rationality of the Minskyan banker are highlighted. We show how the specific banks’ rationality explains the process of pro-cyclical financial fragility...
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