Few economists have jumped from periphery to mainstream in as spectacular fashion as Hyman Minsky.
The American economist, born in 1919, spent his formative teenage years in the Great Depression that so marred the inter-war period. He went on to sandwich his military service in the Second World War in between spells at Chicago, Brown and Harvard, during which he achieved an undergraduate degree in Mathematics, taught, and gained a Master’s in Public Administration followed by a PhD in Economics, respectively.
However, it was during his time as Professor of Economics at the University of Washington in St. Louis that Minsky produced his most famous works of scholarship. Pre-eminent among these works was his Financial Instability Hypothesis.
This particular idea, which he claimed was, to some extent, an extension of Keynes’ ideas as outlined in his General Theory of Employment, Interest and Money, outlines the way in which financial instability grows inexorably from financial stability. He labelled three stages of financial decision-making with particular reference to the way in which agents appreciate future debt, and their ability to repay it. Minsky called these three stages hedge, speculative and Ponzi finance.
The hedge phase details a financial arrangement whereby cash flow is sufficient to “fulfill all of their contractual obligations” – i.e. meet interest repayments. The speculative phase actively relies on future growth in order to meet repayments, whether that comes in the form of company profits or individual asset growth, future gains are necessary to stay in the black. Ponzi finance is altogether more reckless, and borrowing is necessary merely to continue to finance current repayments.
His mathematical mind might have compared speculative and Ponzi finance scenarios to series whose terms diverge – as he himself says “the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation amplifying system.”
Such a viewpoint perfectly encapsulated what many perceived to be the cause of the crisis – low central interest rates propagated by the Fed under Greenspan in the early 2000s, which led to expansionary finance practices, and investors seeking super-normal returns in ever more complicated ways, and competition between financiers driving them to reckless practices.
Consequently, Minsky is currently heralded as one of the key thinkers with respect to the analysis of economic bubbles, and for good reason. Although he didn’t quite live to see his school of thought so beautifully vindicated, dying in 1996, he nevertheless has the posthumous honor of being referenced by some of the most important contemporary literature.