Financial crisis, a phenomena or a part of an economic and financial cycle which occurs when “…bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze.” (Cassidy, 2008)
In the following we will take a closer look on the “Financial Instability Hypothesis” (FIH), it will be examined in what extent Hyman Philip Minsky (H.P.M.) predicted the financial crises in his theories and whether it can be proved or not by setting his theoretical aspects in comparison to the late occurrences of the Sub-prime crises.
After giving the most important facts about H.P.M., his Financial Instability Hypothesis will be summarized and illuminated with its main aspects.
Subsequently this hypothesis will be analyzed concerning essential theories that had much impact on his instability thesis, for instance “The General Theory” (TGT) of the economist John Maynard Keynes. Additionally the formation of financial crises will be illustrated with regard to Minsky’s assumption of three different types of asset holders. The Hedge-, the Speculative- and the Ponzi-debtor will be defined and explained concerning how they influence the business-cycle and could lead to a destabilized financial market. With hindsight the Sub-prime crises of 2007, which can also be defined as a financial crisis, main aspects of the development on the financial market and within the economy will be indicated to illustrate the so called “Minsky Moment”.
In the end the conclusion implies not only Hyman Minsky’s advice and solution to avoid another financial crisis in the future but also our opinion upon Minsky’s Instability Hypothesis and its significance with regard to the overall question of: How far does Hyman P. Minsky’s Instability Hypothesis elucidate a financial crisis.
Table of Contents
1 INTRODUCTION
2 BIOGRAPHY
3 MINSKY’S THEORY
4 ANALYSIS
4.1 Essential theories: Marx and Keynes
4.1.1 Keynes
4.2 The Financial Instability Hypothesis
4.2.1 Three types of finance
4.2.2 Instability and business-cycle
4.3 The Sub-prime crisis 2007 – A “Minsky Moment”?
4.3.1 The late 2000s financial crisis
4.3.2 Was it a “Minsky Moment”?
5 CONCLUSION
Objectives and Research Themes
The primary objective of this research paper is to evaluate the validity and predictive power of Hyman P. Minsky’s "Financial Instability Hypothesis" (FIH) in the context of the 2007 subprime mortgage crisis. The research aims to determine whether Minsky’s theoretical framework regarding the inherent instability of capitalistic systems can effectively elucidate the mechanisms behind modern financial market collapses.
- The theoretical foundations of Hyman P. Minsky’s Financial Instability Hypothesis.
- The historical and economic influence of John Maynard Keynes on Minsky’s work.
- The classification of asset holders into Hedge, Speculative, and Ponzi finance units.
- An empirical analysis of the 2007 U.S. subprime crisis as a potential "Minsky Moment."
- Governmental and central bank intervention strategies in stabilizing unstable economic cycles.
Excerpt from the Book
4.2.1 Three types of finance
Asset holders such as (producing) enterprises and banks play the key roles of the FIH. Minsky differentiates them by their behavior of managing finance in three groups (Minsky, 1992, p. 7) which are to be defined as following:
1. HEDGE FINANCE (Soest, 2009, pp. 8-9) (Minsky, 1992, p. 7)
- THE DEBTOR EXPECTS HIGHER CASH-FLOW (EACH PERIOD) THEN HE NEEDS TO FULFILL ALL PAYMENT OBLIGATIONS
- THIS RESULTS A LOW DEMAND FOR FINANCING
- USUALLY BANKS ARE NO HEDGE FINANCING UNITS
2. SPECULATIVE FINANCE (Soest, 2009, pp. 8-9) (Minsky, 1992, p. 7)
- THE DEBTOR’S EXPECTED INFLOWS CANNOT FULFILL ALL PAYMENT OBLIGATIONS ON A SHORT-TERM
- HIGHER INFLOW OVER THE ENTIRE CREDIT-DURATION THAN THE PAYMENT OBLIGATIONS
- NEED TO “ROLL-OVER” THEIR LIABILITIES
- TYPICALLY GOVERNMENTS WITH FLOATING DEBTS AND BANKS
3. PONZI FINANCE (VERY CARELESS, NAMED AFTER THE FRAUD CHARLES PONZI) (Soest, 2009, pp. 8-9) (Minsky, 1992, p. 7)
- HIGHER COSTS OF FINANCING THAN THE EXPECTED INFLOWS; CASH-FLOWS INSUFFICIENT TO PAY-OFF EITHER INTEREST OR REPAYMENT
- BORROWING OR ASSET-SELLING TO PAY INTEREST
- SPECULATIVE CAN CHANGE TO PONZI WHEN THE CASH-FLOW IS TO LOW (AND THE OTHER WAY AROUND)
Summary of Chapters
1 INTRODUCTION: This chapter outlines the research motivation, specifically examining Minsky’s FIH in relation to the 2007 financial crisis, and establishes the overarching research question.
2 BIOGRAPHY: This section provides a biographical overview of Hyman P. Minsky, highlighting his academic career and his evolution into a prominent post-Keynesian economist.
3 MINSKY’S THEORY: This chapter introduces Minsky’s departure from mainstream equilibrium-based economics, emphasizing his view of capitalism as an inherently unstable system prone to endogenous crises.
4 ANALYSIS: This extensive chapter analyzes the core theoretical components of the FIH, including the influence of Keynes, the classification of finance types, and the application of these concepts to the 2007 subprime crisis.
5 CONCLUSION: This final chapter synthesizes the findings, affirming that Minsky’s hypothesis offers a compelling explanation for the financial crises and discussing potential policy solutions for economic stabilization.
Keywords
Hyman P. Minsky, Financial Instability Hypothesis, Subprime Crisis 2007, Minsky Moment, Keynesian Economics, Hedge Finance, Speculative Finance, Ponzi Finance, Credit Cycle, Economic Instability, Financial Markets, Capitalist System, Debt-Deflation, Banking Crisis, Asset Bubbles.
Frequently Asked Questions
What is the primary focus of this paper?
The paper examines the "Financial Instability Hypothesis" developed by Hyman P. Minsky and assesses its applicability to the events of the 2007 subprime mortgage crisis.
What are the central themes discussed in the work?
The central themes include the inherent instability of capitalistic financial systems, the cyclical nature of credit-driven economies, and the role of debt in fueling market volatility.
What is the core research question?
The paper addresses how far Hyman P. Minsky’s Instability Hypothesis serves to accurately elucidate the nature and cause of a financial crisis.
Which scientific methodology is employed?
The authors employ a qualitative theoretical analysis, comparing established economic theories—specifically Minsky’s and Keynes’—against the historical empirical data of the late 2000s financial crisis.
What topics are covered in the main section of the paper?
The main section covers Minsky's biographical background, the interpretation of Keynes' General Theory, the categorization of financial actors, and a detailed look at the burst of the U.S. housing bubble.
Which keywords best characterize the research?
The research is characterized by terms such as Minsky Moment, Financial Instability Hypothesis, Ponzi Finance, Credit Cycle, and Systemic Risk.
How does Minsky distinguish between different types of finance?
Minsky differentiates asset holders into Hedge, Speculative, and Ponzi finance based on their ability to meet payment obligations from cash flows, interest payments, or the need for constant new borrowing.
What is defined as a "Minsky Moment" in the text?
A "Minsky Moment" is defined as the sudden collapse of asset values occurring at the transition point when investors and debtors are no longer able to meet their obligations, leading to a shift from enthusiasm to market panic.
- Arbeit zitieren
- Thomas Hillen (Autor:in), Marlene Klußmann (Autor:in), 2012, The Hyman P. Minsky Hypothesis. An analysis and the effect on the subprime crisis 2007, München, GRIN Verlag, https://www.hausarbeiten.de/document/274939
