MINSKY MOMENT Prof. Carles Manera

A visionary economist

Who is Hyman Minsky? American economist Hyman Minsky, who died in 1996, grew during the years of the Great Depression, an event that shaped your thinking and prompted him to investigate its causes , and reflect on how they could prevent a repeat .

"Stabilizing an unstable economy" Minsky's life went to the margins of the economy, but his ideas suddenly gained popularity with the financial crisis of 2007/8. For many, his work provided one of the most plausible explanations of why it had happened. The demand for his books , exhausted for years, suddenly soared. Copies of the texts changed hands for hundreds of dollars, a fairly acceptable for endless books with titles like "Stabilizing an unstable economy " value.

1 - Stability is destabilizing The main idea of ​​Minsky is so simple to explain needed only four words: stability is destabilizing. Most macroeconomists work with what they call “equilibrium models”. The idea is that a modern market economy is basically stable. That does not mean that nothing will ever change, but grows steadily. For an economic crisis or a sudden boom it has to happen some sort of external shock, either an increase in oil prices, war or the invention of internet occurs.

Complacent economic agents Minsky did not agree with this postulate. He believed that the system itself can cause shocks by its own internal dynamics. He thought that during periods of economic stability, banks, firms and other economic agents became complacent. They assume that the good times are here to stay and begin to take greater risks to increase their profits. For this reason, the seeds of the next crisis are planted in good times.

2 - Three stages of debt Ponzi schemes Charles Ponzi It is similar to a pyramid scheme, a company in which funds from new investors profits are used to pay the high profits from current investors. Its name comes from the Italian fraudster Charles Ponzi (1882-1949). These schemes are destined to collapse just reduce new investments or when a significant number of investors decide to withdraw their funds simultaneously.

"financial instability hypothesis” Minsky has a theory - the "financial instability hypothesis”- which states that the loans through three different stages. The coverage called speculative, and Ponzi, referring to the Italian fraudster Charles Ponzi. In the first stage, shortly after a crisis, banks and borrowers are cautious. Loans are for modest amounts and the borrower can repay the initial loan and interest. With increasing confidence, banks begin to offer loans which the applicant can only pay interest. Usually, the borrower offers an asset as collateral whose value is rising. Finally, when the previous crisis is already a thing of the past, we reached the final stage. At this point, banks make loans to firms or individuals who can not pay the initial money or interest. All this is done with the belief that property prices will increase. The easiest way to understand this situation is compared with a typical mortgage. A hedging transaction is equivalent to a common mortgage, in which one pays interest and capital, a speculative operation is like a mortgage in which one only pays the interest and Ponzi operation is something beyond. It's like asking a mortgage, do not make any payments for several years and fingers crossed that the value of the house rises enough to cover the sale of the initial loan payments and the payments were not made. This model is a fairly accurate description of the kind of loans that led to the financial crisis.

3. “Minsky moment" The “Minsky moment" is a term coined by economists describing the time when the house of cards collapses. The Ponzi operations are based on the increased value of the goods and when it eventually begins to fall, borrowers and banks realize that there are debts in the system that may never recover. People rush to sell goods which causes an even greater fall in prices.

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…The next impact It's like a cartoon character falls off a cliff. She keeps running for a while believing they are on a solid surface. But suddenly, he realizes that something happens -the Minsky- moment, looks down and sees only emptiness. Immediately plummets to the ground. That was the 2008 crisis .

4. Financial Matters Crisis in 2008 The 2008 crisis brought to the fore the inner workings of the financial system. Until relatively recently, most macroeconomists were not very interested in the finer details of banking and financial systems. They saw them as an intermediary who transferred the money they saved those who borrowed. Something like most people who are not interested in the details of the pipes and other structures while showering them work. While there is hot water and water do not miss , no need to understand the minutiae of their operation. For Minsky, banks were not just pipes but rather something like a motor. That is, not only intermediaries to move money through a system but profit institutions concerned with an incentive to lend. This is the part of the mechanism that causes unstable economies.

5. Best words that mathematics and models Since World War II, economic theory has become more mathematical, based on formal models that explain how it works. To model complex need to make certain assumptions, and critics argue that as mathematical models and become more complex, speculation about which they are based, increasingly they divorced from reality. The models end up becoming an end in themselves. While he trained in mathematics, Minsky preferred what economists call a narrative approach. He was inclined to express their ideas in words. Many of the greats, from Adam Smith to John Maynard Keynes or Friedrich Hayek, worked well. While mathematics is more precise, words allow one to express complex ideas that are difficult to model. We refer to ideas like uncertainty, irrationality and exuberance. Minsky's followers say this helped to create a vision of the much more realistic than other economic theories economy.