CONTEMPORARY ECONOMICS 301
incomes fell, and the demand for
new houses weakened. As house
price increases began to slow, the
first of an increasing number of
defaults was triggered since
borrowers saw their debts grow
rather than shrink. Rising numbers
of repossessed houses came onto
the market, and prices tumbled.
In 2007, the US economy reached
what has become known as the
“Minsky moment.” This is the point
at which the unsustainable
speculation turns into crisis. The
collapse of the housing market left
banks with enormous debts and,
since no one knew who had bought
the toxic mortgage debt, institutions
stopped lending to each other.
As a result banks began to fail,
most famously Lehmann Brothers
in 2008. As Minsky had foretold,
a near-catastrophic collapse of the
financial system beckoned because
a period of stability had generated
enormous levels of debt that
created the conditions for
enormous instability.
The three possible actions taken
to halt the fatal instability, and the
problems associated with making
these corrections, had also been
predicted by Minsky.
First, the central bank could act
as the lender of last resort, bailing
out the failing banking system.
Minsky saw that this might further
increase instability in the system
in the future because it would
encourage banking firms to take
greater risks, safe in the knowledge
that they would be saved.
Second, the government could
increase its debt to stimulate
demand in the economy. However,
even governments have problems
financing debts in times of crisis.
Third, the financial markets could
be subject to stricter regulation.Minsky strongly believed that, in
the long run, this was necessary.
However, the speed at which
innovation takes place in the
money markets would make
increased regulation very difficult.
For Minsky financial instability
is key to explaining modern
capitalism. Money is no longer
a veil that hides the real workings
of the economy; it has become
the economy. His ideas are now
drawing increasing attention. ■The peculiar
behavioral attributes
of a capitalist economy
center around the
impact of finance
upon system behavior.
Hyman MinskyIn 2009, financier Bernard Madoff was
convicted of the largest Ponzi scheme
fraud in history. He took more than $18
billion from investors over the course of
40 years before the scheme collapsed.Hyman Minsky
An economist of the political
Left, Hyman Minsky was born
in Chicago to Russian-Jewish
immigrant parents who had met
at a rally to honor Karl Marx
(p.105). He studied mathematics
at Chicago University before
switching to economics.
Minsky had a vision of a better
world and yet was equally
fascinated by the practical
world of commerce, and worked
as an adviser and director of an
American bank for 30 years.After a period overseas with
the US army during World
War II he returned home to spend
most of his working life
as a professor of economics at
Washington University.
An original thinker and
natural communicator, Minsky
made friends easily. Academically,
he was more interested in the
idea than mathematical rigor.
The notion that pervades all his
work is the flow of money. During
his lifetime, partly by choice, he
remained on the margins of
mainstream economic thought,but since his death, and
particularly since the crash
of 2007–08 that he predicted, his
ideas have become increasingly
influential. Married with two
children, he died of cancer
in 1996, aged 77.Key works1965 Labor and the War
against Poverty
1975 John Maynard Keynes
1986 Stabilizing an Unstable
Economy