"The man who saw the meltdown coming had another troubling insight: it will happen again. [...] a few more cerebral commentators started to speak about the arrival of a "Minsky moment," and a growing number of insiders began to warn of a coming "Minsky meltdown." "Minsky" was shorthand for Hyman Minsky, a hitherto obscure macroeconomist who died over a decade ago. [...] "Instability," he wrote, "is an inherent and inescapable flaw of capitalism." [...Minsky studied with his advisor] Joseph Schumpeter, the noted Austrian economist now famous for documenting capitalism’s ceaseless process of "creative destruction." But Minsky spent more time thinking about destruction than creation. In doing so, he formulated an intriguing theory: not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability that would set the stage for monumental crises. Minsky called his idea the "Financial Instability Hypothesis." In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, "Success breeds a disregard of the possibility of failure."Read the rest. Minsky proposed interesting solutions too.
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