Edited by Dimitri B. Papadimitriou and L. Randall Wray
Marshall Auerback, Paul McCulley and Robert W. Parenteau Hy Minsky’s framework has a very simple core thesis. Stability is destabilizing, because market participants, or economic agents, behaving as human beings do in the face of fundamental uncertainty, will tend to extrapolate stability well into the future. And, if stability is extrapolated into the future, then there will be a tendency for economic agents to assume ever more risky debt structures. In this sense, the world of financial and economic decision making is inherently momentum-driven – human beings are inherently reflexive. Intellectually, we know we are supposed to buy low and sell high. Emotionally, we can’t bring ourselves to do that. Rather, we tend to do the exact opposite, which imparts an intense procyclical character to capitalism. Perhaps even worse, it imparts procyclicality to regulatory structures. While in the financial press, reference to the ‘Minsky Moment’ – the dramatic point when a financial crisis erupts – has become increasingly popular, it is important to understand that Minsky described financial fragility as an inherent process that builds over time, and not just a random event. For the past several years, we have traversed an economic expansion fueled by debt and accompanied by leveraged speculation of unprecedented proportions. While some central banks expressed concern, we have witnessed the development of a parallel, largely unregulated financial system dominated by hedge funds, private equity funds, and investment banks employing derivatives and structured finance vehicles. The concern was rooted in the knowledge that throughout history, when debt financed speculation...
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