Analysis Of Minsky's Financial Instability Hypothesis

F. A. Hayek, the "other" economic thinker of the twentieth century, believed that the way to stabilize a broken economy was to find solution from the boom that preceded the current bust. The Hayek-supported Austrian theory sought a connection among business cycles, capital theory, and monetary theory. Hayek believed an economy started going downhill when people did not coordinate their actions. The spontaneous order of the free market and price system usually does a fantastic job of coordinating people's actions. Hayek said that the credit market becomes distorted when the money supply increases, interest rates go down, and the credit becomes artificially cheap (Friedrich). This causes an artificially high rate of investment and malinvestment." [Malinvestment is ]...too much investment in long-term projects relative to short-term ones, and the

The United States has always funded the opportunistic financial well-being of its citizens. There has never been a financial crisis worse than that of the Great Depression until the 2008 financial crisis. Even though times were much tougher within the 20’s than that of the late 2000’s, policies were much different, condensing the absence of hope of happiness. There is always room for improvement among any economic standpoint of the ladder, but sometimes it’s just very hard to make some. Times are always tough and people functioning as a society always focus upon the short term involvements of the stock(s), but never seem to concentrate on the long run. However, with mistakes come lessons learned and improvements to economic ventures. Both the 2008 financial crisis and the Great Depression has taught us many things about our own markets and budget capabilities. Upon coincidental financial crises, times and polices were much different, but the reasoning upon the doubt can and will alter the course of economic futures and endeavors.

14. Why would most investments in the economy fail to take place if there were no financial institutions?

In the late 1990’s, there was a boom and bust on information technology stocks. Because of that, a mild recession happened in 2001. The mild recession made people have over confidence to the stability of financial system and the whole economy. Therefore, the authorities started to ignore the work of keeping financial stability.

On September 15th 2008, Lehman Brothers, one of the United States’ largest investment banks, declared bankruptcy. This event occurred during the Great Recession, a time period where economic activities in the United States had significantly declined in the early 21st century. The Great Recession occurred for numerous reasons; however the primary reasons are due to the housing bubble as well as the subprime mortgage backed securities. What made matters worse during the recession was the day September 29, 2008 when congress could not come in agreement to pass a bailout plan that would have otherwise saved Lehman Brothers. The period of its collapse is an interesting part of United States’ finance industry’s history; this is primarily due to the frequency that which this sort of event can occur actually occur in real world economics. The United States’ housing bubble is an example that is applicable to the black swan theory. This theory is summarized as, “An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict.” (“Black Swan Theory”). The severity of the housing bubble effect had rendered the Fed’s primary tool of open market operations to be ineffective. The Fed had to rely on other measures that are infrequently used; in this case was quantitative easing. Quantitative easing is the injection of reserves into circulation to promote economic activity as well as decrease the unemployment rate. This

On the other does Minsky theory tell us the whole story about the financial crisis, most notably from Engelbert Stockhammer and his theory of “Rising inequality as a cause of the present crisis” (Stockhammer, 2012). His theory has four main points why growing inequality has led to the financial crisis. Firstly, with growing inequality can have an adverse effect on aggregate demand because consumer’s marginal propensity to consume (MPC) will increase. By deregulation, occurring it allows governments to have a larger deficit for a longer period creating two new modules, which are a debt lead model and an export lead model. The penultimate cause was that with the new debt lead model, households are maintain the same consumption even though real

Like many other financial crisis, observers believe that even the Great Depression was a cause of a major market and government failure. Due to adopting

However, Bernanke admonished investors by the book that even though banking regulation and supervision protect investors as always, if some particular events or financial crisis happened, like housing bubble and mortgage markets crisis, either or both of these two system work. The example in the book is booming house prices in 2000s. After the sharply increasing of housing prices, risky mortgage lending likes subprime lending trouble began surfacing in 2006 and 2007. The risky mortgage comes with more demand for housing, which will again push the housing prices higher and higher, reinforcing a vicious cycle. As a result, because of the nominate housing price is much higher than the real price, the careful lenders who have good credit step out the market, the rest of borrowers are subprime lenders, “some borrowers were defaulting on loan after making only a few, or even no, payments.” (318) In the book, Bernanke conceded that Fed responded the trouble slowly and cautiously. When Board in Washington determined to make supervision of bank more centralized, he still overconfidently believe that Reserve Bank staff were better informed about condition in their districts. Another Bernanke’s conceit is that the financial regulatory system was not as stable and comprehensive as he thought before the financial crisis. In

Upon analyzing the root causes of the financial crisis, I believe that the crisis could have been prevented by assuming the possibility it occuring, rather than projecting it as a far-fetched phenomenon. This is so as every aspect of the crisis, ranging from real estate agents selling clients homes they could not afford to investors partaking in questionable hedging activities was the result of individuals assuming that they could generate a profit without considering the consequences of their actions. Economist Phillip Das, as cited in a 2009 report by the Munich Personal RePec Archive elaborates on this theory by stating that “[f]inancial risks, particularly credit risks, are no longer borne by banks. They are increasingly moved

The withdrawal of the liquidity could have caused a misunderstanding. In addition, there were also random events as well as economic conditions, which made people to begin hoarding cash (Bernanke, 2000). As such, the ultimate source of the fragility of the role of the financial institutions. In the end, financial obtained most of the funds from short term loans and then the funds were given out in the long-term. In addition, the business models of the financial institutions made an assumption that the depositors will on average deposit the money in banks; hence as some customers withdraw their money, the funds would be replaced by bank deposits by other customers. As such, the financial institutions, especially the banks could have a permanent pool of replaced money by the bank deposits. Such as in case a run occurred, a financial model would be

HFM’s experience as a hedge fund manager gives value into this information and the authority to describe what started the crisis. The advantage that follows from the source regarding this idea is that it recorded information that described the creation of the mortgage bubble in the financial market, and the damage dealt to the financial system when the mortgage market crashed from a finance expert. The disadvantage is that the subprime market might not be the only reason of the misallocation of resources, given the fact that HFM’s hedge fund was involved in the subprime market which might have formed a biased opinion on that matter (18-19). The nature of the source does not complicate the idea of the cause of the crisis, although concluding that the subprime market was the main cause could complicate the subject. This clearly shows that the idea of the misallocation of resources within the book had negatively impacted the financial system that built the momentum of the economic decline.

There are many economic schools of thoughts, which have different take on financial institutions, economic instruments and their use. Keynesian economists believe that capitalist system is inherently flawed and because of that, it is imperative for government and state’s financial institutions to interfere regularly to avoid economic collapse/depression. However, classical or Austrian economists believe that it is government intervention and the desire of financial institutions to manipulate economic realities, which cause depressions.

Sometime in late 1950’s Minsky started warning about the gradual shift of the economy from a very robust financial system that was stable and with no financial crisis in the early postwar period. He had called with his analysis that gradually over time debts in the private sector would tend to build up and increasingly risky financial innovations would increase over time. He is very famous for the statement that stability itself is destabilizing. Although things seem very stable today, gradually over time that stability would build confidence in individuals to take increasingly risky positions in assets.

capture and quantify the relative importance of the finance shock to the economic health of

Numerous economists emphasize the importance of price stability. They argue that it eliminates potential drag on resources’ efficient allocation, and thus promotes economic growth. It also promotes financial stability since unstable price levels lead to bad forecasts of investments’ real returns and, hence, to unprofitable borrowing and lending decisions. Additionally, Business decisions based on expectations of continuing inflation often turn out badly when inflation drops, causing rising default rates and business deficiencies.