Lessons from the Subprime Meltdown

This paper uses Hyman P. Minsky’s approach to analyze the current international
financial crisis, which was initiated by problems in the American real estate market.
In a 1987 manuscript, Minsky had already recognized the importance of the trend
toward securitization of home mortgages. This paper identifies the causes and
consequences of the financial innovations that created the real estate boom and
bust. It examines the role played by each of the key players—including
brokers, appraisers, borrowers, securitizers, insurers, and regulators—in
creating the crisis. Finally, it proposes short-run solutions to the current
crisis, as well as longer-run policy to prevent “it” (a debt deflation)
from happening again.