This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.
A. Massive Financial Price Bubbles Seem to Occur – Regularly – Over the Decades.
What famous economist warned about the instability and excesses in financial markets most?
When we talk about famous economists who most prominently warned about the inherent instability and excesses in financial markets, leading to price bubbles and crises, one name stands out above almost all others…
B. Hyman Minsky
Minsky (1919-1996) was an American economist who developed the Financial Instability Hypothesis (FIH).
Many other economists and policymakers have found his framework highly insightful for understanding how the housing and credit bubbles developed and ultimately burst.
Other economists who have also warned about financial excesses (e.g., John Kenneth Galbraith on the 1929 crash, Robert Shiller on speculative housing finance bubbles and behavioral economics, and John Maynard Keynes who noted the speculative nature of financial markets and the dangers of professional investors focusing on "anticipating what average opinion expects the average opinion to be").
However, Hyman Minsky is most directly and comprehensively associated with a theory explaining how financial markets inherently create their own instability, and lead to bubbles and crises.
His FIH argues that periods of economic stability and prosperity can paradoxically lead to greater financial instability.
Here's a breakdown of his core ideas:
Endogenous Instability: Unlike many mainstream economic theories that view crises as external shocks, Minsky believed that instability is built into the very structure of capitalist financial systems. Good times sow the seeds of future crises.
Phases of Debt: Minsky described a progression of financing types:
Hedge Finance: Borrowers can repay both principal and interest from their current cash flow (most stable).
Speculative Finance: Borrowers can only cover interest payments with current cash flow, relying on refinancing or asset appreciation to repay principal (less stable).
Ponzi Finance: Borrowers cannot even cover interest payments from cash flow and must borrow more or sell assets just to service their debt (highly unstable).
The "Minsky Moment": As an economy moves from hedge to speculative to Ponzi finance during a prolonged boom, the financial system becomes increasingly fragile. A "Minsky Moment" occurs when this speculative bubble bursts, typically when lenders lose confidence, asset prices stop rising, and highly leveraged borrowers can no longer roll over their debts. This leads to forced selling, a collapse in asset prices, and a potential financial crisis.
Role of Complacency: Minsky argued that "stability breeds instability." Long periods of economic growth and low volatility lead investors and lenders to become complacent, take on more risk, and increasingly rely on speculative and Ponzi financing.
Minsky's work was largely overlooked by mainstream economics during his lifetime. But gained significant recognition and relevance after major financial crises like the Asian Financial Crisis.
The term "Minsky Moment" was coined by Chief Economist Paul McCulley of PIMCO who referenced it especially the 2008 Global Financial Crisis.
C. His Brief Bio?
Hyman Philip Minsky (1919 to 1996) was an American economist teaching first
- At Brown University, then
- At the University of California at Berkely, followed by
- A long stint at Washington University in St. Louis
- Finally, he ended his academic career as a distinguished scholar at the Levy Economics Institute of Bard College
He was a consultant to the Commission on Money and Credit (1957–1961) while at UC-Berkeley.
His research intent was providing explanations to characteristics of financial crises.
As I have already shared, he attributed them to swings in a fragile finance system.
Bitcoin anyone?
Furthermore, Hyman Minsky stated his theories verbally, and did not build mathematical models based on them.
Minsky preferred to use interlocking balance sheets rather than mathematical equations to model economies -- aka Blockchains!
Anyone else make that connection?
“A fundamental characteristic of our economy," Minsky wrote in 1974, "is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles."
Long periods of economic growth and low volatility lead investors and lenders to become complacent, take on more risk, and increasingly rely on speculative and Ponzi financing.
Minsky closed by arguing that "stability breeds instability."
D. Evolving Capitalism
Minsky argued profit-seeking could explain the shifting nature of capitalism — across time.
In this, Minsky split capitalism into 4 stages:
- Commercial
- Financial
- Managerial, and
- Money Manager
Each is characterized by what is being financed and who is doing the financing.
Minsky noted the ultimate rise of money management, that is, trading huge multi-million dollar blocks each day.
This led to an increase in securities and people taking financial positions to gain profit.
All financed by banks.
Minsky then noted financial institutions had become so far removed from financing physical capital development --- at this point in the capitalist cycle timeline.
A "Minsky Moment" occurs when a speculative bubble bursts, typically when lenders lose confidence, asset prices stop rising, and highly leveraged borrowers can no longer roll over their debts.
This leads to forced selling, a collapse in asset prices, and a potential financial crisis.
E. Endogenous Instability
Unlike many mainstream economic theories that view crises as external shocks, Hyman Minsky believed instability is built into the very structure of capitalist financial systems.
Good times sow the seeds of future crises.
Again, there is a Minsky progression to follow:
- Hedge Finance: Borrowers can repay principal and interest from current cash flow (stable).
- Speculative Finance: Borrowers can only cover interest with current cash flow (less stable).
- Ponzi Finance: Borrowers can't cover either interest from cash flow. So, they must borrow or sell their assets (highly unstable).
This Minsky model of the credit system, which he had dubbed the "financial instability hypothesis" (FIH), incorporated many ideas already circulated by famous economists in history, like John Stuart Mill, Alfred Marshall, Knut Wicksell and Irving Fisher.
F. Government Regulation?
In short, Hyman Minsky supported:
- Some government intervention in financial markets
- Opposed some financial deregulation seen in the 1980s S&L debacle, and
- Argued generally, against the over-accumulation of private debt
G. My Conclusions
There you go.
I am "a dinosaur" from an earlier pre-Internet age, focused on learning about famous economists and their ideas.
Writing to this "new generation" of Bitcoin acolytes?
Hyman Minsky is totally and completely clairvoyant.
He called you out and saw you coming.
Image: Shutterstock
Hyman Minsky's Concept
This is an excerpt from our most recent Economic Outlook report. To access the full PDF, please click here.
A. Massive Financial Price Bubbles Seem to Occur – Regularly – Over the Decades.
What famous economist warned about the instability and excesses in financial markets most?
When we talk about famous economists who most prominently warned about the inherent instability and excesses in financial markets, leading to price bubbles and crises, one name stands out above almost all others…
B. Hyman Minsky
Minsky (1919-1996) was an American economist who developed the Financial Instability Hypothesis (FIH).
Many other economists and policymakers have found his framework highly insightful for understanding how the housing and credit bubbles developed and ultimately burst.
Other economists who have also warned about financial excesses (e.g., John Kenneth Galbraith on the 1929 crash, Robert Shiller on speculative housing finance bubbles and behavioral economics, and John Maynard Keynes who noted the speculative nature of financial markets and the dangers of professional investors focusing on "anticipating what average opinion expects the average opinion to be").
However, Hyman Minsky is most directly and comprehensively associated with a theory explaining how financial markets inherently create their own instability, and lead to bubbles and crises.
His FIH argues that periods of economic stability and prosperity can paradoxically lead to greater financial instability.
Here's a breakdown of his core ideas:
Endogenous Instability: Unlike many mainstream economic theories that view crises as external shocks, Minsky believed that instability is built into the very structure of capitalist financial systems. Good times sow the seeds of future crises.
Phases of Debt: Minsky described a progression of financing types:
Hedge Finance: Borrowers can repay both principal and interest from their current cash flow (most stable).
Speculative Finance: Borrowers can only cover interest payments with current cash flow, relying on refinancing or asset appreciation to repay principal (less stable).
Ponzi Finance: Borrowers cannot even cover interest payments from cash flow and must borrow more or sell assets just to service their debt (highly unstable).
The "Minsky Moment": As an economy moves from hedge to speculative to Ponzi finance during a prolonged boom, the financial system becomes increasingly fragile. A "Minsky Moment" occurs when this speculative bubble bursts, typically when lenders lose confidence, asset prices stop rising, and highly leveraged borrowers can no longer roll over their debts. This leads to forced selling, a collapse in asset prices, and a potential financial crisis.
Role of Complacency: Minsky argued that "stability breeds instability." Long periods of economic growth and low volatility lead investors and lenders to become complacent, take on more risk, and increasingly rely on speculative and Ponzi financing.
Minsky's work was largely overlooked by mainstream economics during his lifetime. But gained significant recognition and relevance after major financial crises like the Asian Financial Crisis.
The term "Minsky Moment" was coined by Chief Economist Paul McCulley of PIMCO who referenced it especially the 2008 Global Financial Crisis.
C. His Brief Bio?
Hyman Philip Minsky (1919 to 1996) was an American economist teaching first
He was a consultant to the Commission on Money and Credit (1957–1961) while at UC-Berkeley.
His research intent was providing explanations to characteristics of financial crises.
As I have already shared, he attributed them to swings in a fragile finance system.
Bitcoin anyone?
Furthermore, Hyman Minsky stated his theories verbally, and did not build mathematical models based on them.
Minsky preferred to use interlocking balance sheets rather than mathematical equations to model economies -- aka Blockchains!
Anyone else make that connection?
“A fundamental characteristic of our economy," Minsky wrote in 1974, "is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles."
Long periods of economic growth and low volatility lead investors and lenders to become complacent, take on more risk, and increasingly rely on speculative and Ponzi financing.
Minsky closed by arguing that "stability breeds instability."
D. Evolving Capitalism
Minsky argued profit-seeking could explain the shifting nature of capitalism — across time.
In this, Minsky split capitalism into 4 stages:
Each is characterized by what is being financed and who is doing the financing.
Minsky noted the ultimate rise of money management, that is, trading huge multi-million dollar blocks each day.
This led to an increase in securities and people taking financial positions to gain profit.
All financed by banks.
Minsky then noted financial institutions had become so far removed from financing physical capital development --- at this point in the capitalist cycle timeline.
A "Minsky Moment" occurs when a speculative bubble bursts, typically when lenders lose confidence, asset prices stop rising, and highly leveraged borrowers can no longer roll over their debts.
This leads to forced selling, a collapse in asset prices, and a potential financial crisis.
E. Endogenous Instability
Unlike many mainstream economic theories that view crises as external shocks, Hyman Minsky believed instability is built into the very structure of capitalist financial systems.
Good times sow the seeds of future crises.
Again, there is a Minsky progression to follow:
This Minsky model of the credit system, which he had dubbed the "financial instability hypothesis" (FIH), incorporated many ideas already circulated by famous economists in history, like John Stuart Mill, Alfred Marshall, Knut Wicksell and Irving Fisher.
F. Government Regulation?
In short, Hyman Minsky supported:
G. My Conclusions
There you go.
I am "a dinosaur" from an earlier pre-Internet age, focused on learning about famous economists and their ideas.
Writing to this "new generation" of Bitcoin acolytes?
Hyman Minsky is totally and completely clairvoyant.
He called you out and saw you coming.