tailieunhanh - The Financial Instability Hypothesis by Hyman P. Minsky*

The US subprime turmoil that first emerged in August 2007 and morphed into an international financial crisis following the bankruptcy of Lehman Brothers in September 2008 was a shock that affected output globally (BIS (2009)). Long before Lehman’s failure, fear of counterparty defaults had disrupted interbank funding markets, including both secured and unsecured money markets. The fall in US housing prices that started in 2006 generated large losses during late 2007 and early 2008 on bank holdings of subprime-related assets which were propagated to European banks directly through their subprime investments and indirectly through their counterparty exposures to US. | The Financial Instability Hypothesis by Hyman P. Minsky Working Paper No. 74 May 1992 The Jerome Levy Economics Institute of Bard College Prepared for Handbook of Radical Political Economy edited by Philip Arestis and Malcolm Sawyer Edward Elgar Aldershot 1993. The financial instability hypothesis has both empirical and theoretical aspects. The readily observed empirical aspect is that from time to time capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes the economic system s reactions to a movement of the economy amplify the movement--inflation feeds upon inflation and debt-deflation feeds upon debt-deflation. Government interventions aimed to contain the deterioration seem to have been inept in some of the historical crises. These historical episodes are evidence supporting the view that the economy does not always conform to the classic precepts of Smith and Walras they implied that the economy can best be understood by assuming that it is constantly an equilibrium seeking and sustaining system. The classic description of a debt deflation was offered by Irving Fisher 1933 and that of a self-sustaining disequilibrating processes by Charles Kindleberger 1978 . Martin Wolfson 1986 not only presents a compilation of data on the emergence of financial relations conducive to financial instability but also examines various financial crisis theories of business cycles. As economic theory the financial instability hypothesis is an interpretation of the substance of Keynes s General Theory . This interpretation places the General Theory in history. As the General Theory was written in the early the great financial and real contraction of the United States and the other 1 capitalist economies of that time was a part of the evidence the theory aimed to explain. The financial instability hypothesis also draws upon the credit view of money and finance by Joseph Schumpeter 1934 Key works .