Current Crisis Predicted in 1986

Hyman Minsky was an economist who developed a theory about financial markets that seems to nearly perfectly describe the path of this crisis.

In fact he wrote extensively about it in 1986, right before Greenspan became our Fed chairman. It is too bad that Greenspan apparently hadn’t read Minsky or didn’t put enough weight on his teachings or the problem might not have become so large.

Currently there are countless descriptions, speculations and rantings about the causes of the financial crisis and what should or should not be done.

Many are good.

Many more are bad, often due to ideological beliefs and/or lack of understanding money and financial systems.

The following article is perhaps the best I have read so far. It comes from Paul McCulley of PIMCO. In it he describes how Minsky’s hypothesis applies to the current crisis.

On Our Way

Paul points out that we are likely well on our way to resolving the current crisis, and he calls for a less pro-cyclical regulatory framework which could help to reduce the size and impact of future speculative bubbles.

Of course, without going through this Minsky journey there would be lots of people who would claim that implementing a counter-cyclical policy that is more symmetrical towards asset prices (one that looks to limit speculative financing rather than just cleaning up the mess afterwards) was a growth inhibitor and therefore an anathema.

Actually I’m sure there are, and will be more of those claims even after going through this Minsky journey.

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