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Edited by Dimitri B. Papadimitriou and L. Randall Wray
Chapter 11: Growth Cycles and the Financial Instability Hypothesis (FIH)
11 Growth cycles and the Financial Instability Hypothesis (FIH) Piero Ferri* Introduction: Minsky and the economics of extreme events There is a strict correlation between the presence of some kinds of turbulence in the economy and the rediscovery of Minsky’s contributions. This anti-cyclical pattern between the state of the economy and Minsky’s fame occurred when Minsky was still alive (for instance during the October, 1987, crisis, when the speed of the stock market decline took investors and market makers by surprise) and it has continued. Whether the crises hit individual firms (as in 1998 Long-Term Capital Management (LTCM) case), particular countries (Russia and Mexico in 1998), special markets (as the 2001 technological bubble) or pivotal sectors (as the sub-prime 2007 case), Minsky’s analysis attracts attention in the most influential financial newspapers and academic journals. In other words, when some extreme events occur (using Barro’s terminology, 2006), they become Minsky moments. In such periods of time, a particular ‘homo economicus’ emerges that is more complex than the usual maximizer of the neo-classical tradition. Ponzi, the deus ex-machina agent, engages in some profitable activities by becoming indebted. What is more, for a not well-defined length of time, he pays interest by incurring additional debt in the hope that profits and capital gains will be available to repay the commitments when they become due. This behavior is not typical of a market economy, but it can emerge in particular environments that turn the financial system into a ‘Ponzificating’ mode (see the Economist, March...
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