1. From Bubble to Bust: A Minsky Moment in the Age of Schumpeter Charles J. Whalen Department of Business and Economics February 20, 2008 Copyright Charles J. Whalen 2008

2. From Bubble to Bust: Outline History of Economic Ideas Recent Economic Developments Public Policy Implications

3. Adam Smith Author of The Wealth of Nations (1776) Suggested that Prices Adjust According to an “Invisible Hand” Ideas Translated into Theories Ill-Equipped to Explain a Dynamic World

4. Joseph Schumpeter Rediscovered by Economists Looking to Understand a Rapidly Changing Economy Suggested that Economies are Driven by “Creative Destruction” Shifts the Focus of Economics from Price Adjustment to Innovation

5. Hyman Minsky Stressed that Financial Innovation is at the Heart of Economic Change Linked Schumpeter’s Emphasis on Innovation with Keynes’s Recognition of Business Cycles Result: Minsky’s “Financial Instability” Hypothesis

6. Financial Instability Hypothesis: Key Elements Financial Innovation Tends to Produce Sectoral Bubbles Bubbles Tend to Eventually Burst The Fallout from Bursting Bubbles Often Threatens to Trigger an Economy- wide Recession

7. Key Recent Economic Developments from a Minsky Perspective “Securitization” -- Bundling and Selling of Debt, Such as Mortgages Unconventional Mortgages Globalization of Finance

8. Public Policy Implications Economic Policy to Prevent a Serious Recession (Federal Reserve interest rate cuts, tax rebates, etc.) Financial Market Oversight, Reform and Supervision

9. A Minsky Moment “ Minsky’s views are reverberating from New York to Hong Kong as economists and traders are trying to understand what’s happening in the markets.” (The Wall Street Journal, August 18, 2007) “ Minsky’s hypothesis is well worth revisiting.” (The New Yorker, February 4, 2008)