Minsky’s Contribution to Theory of Asset Market Bubbles
byBelow is the abstract of a presentation to be delivered by Frank Veneroso on Monday April 30th (1:30pm) at the Levy Institute:
Most orthodox explanations of what we call asset bubbles and financial crises attribute them to exogenous shocks to the economy. For example, a Fed monetary policy error supposedly caused the Great Depression with its three great banking crises, and a Greenspan monetary policy excess led to the asset bubbles and eventual financial crisis of the last two decades.
For Hyman Minsky financial fragility and eventual financial crisis was endogenous to capitalist economies. Minsky saw this process occurring over two time frames. First, over the course of a single business cycle, fading memories of the cash flow shortfalls of the most recent recession led to more positive profit expectations, greater fixed investment, a higher reliance on debt finance, and an overall condition of greater financial fragility. In addition to this “financial instability” hypothesis appropriate to a single business cycle, Minsky also saw an endogenous process of ever greater financial fragility from business cycle to business cycle throughout the post war period. This endogenous process resulted from ever greater bailouts by Big Government and the Big Central Bank in the recurrent post war recessions that threatened financial crisis and debt deflation. In effect, an interplay between private risk taking and public sector bailouts resulted in mounting moral hazard across business cycles which distorted risk perceptions to an ever greater degree. This led to ever increasing private indebtedness and consequent financial fragility.
Hyman Minsky largely limited his focus on these two endogenous processes that fostered rising financial fragility to the world of banks and their corporate borrowers. In his later writings on money manager capitalism, he transferred this thinking to the realm of markets in traded securities. His principal focus was the market for traded debt securities. He discussed stock markets and exchange markets only tangentially and commodity markets not at all.
Over the last twenty years we have seen the emergence of extreme financial fragility and subsequent financial crisis. Traded asset markets have been paramount. Stock markets and commodity markets have played critical roles. How does Hyman Minsky’s thinking about the endogeneity of financial instability within economic cycles and across successive economic cycles help explain the rise of speculation and bubbles in traded asset markets like those for stocks and commodities over the last two decades?
One can start with Minsky’s writings on money manager capitalism and fold into them complimentary contributions from many other notable economic theorists to flesh out a Minsky-like theory of an endogenous process of speculation and asset bubble propagation in such traded asset markets. This broadens the scope of Minsky’s seminal thinking on the financial instability process and helps explain the entire serial bubble era of the last two decades as well as all the facets of the Great Crisis of 2008-2009 which followed.