The Financial Instability Hypothesis & The 2007–2008 Financial Crisis.
What is the financial instability hypothesis of Hyman Minsky? It is a theory of the business cycle, a theory where he describes “the readily observed empirical aspect is that, from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control” (1). In his paper “The Financial Instability Crisis”, Minsky uses a framework that is based on a theory of the economy not with the Knightian version where the purpose of the economy is based on an allocation of resources, but the Minsky model of the economy is one where the economy exists in time as a developer of capital, one where there is an exchange of present money for future money (2). For Minsky in his model, the ownership of capital is a claim on money, not of real assets themselves: “in a capitalist economy the past, the present, and the future are linked not only by capital assets and labor force characteristics but also by financial relations” (4). This is an economy not as a snapshot, but as part of a process in time. Investment happens, Minsky claims, because businessmen expect investment to continue to happen in the future (6). The animal spirits are alive on the ground.
The core relationship of the financial instability hypothesis is based around this debt relationship. Banks act not only as middlemen…
