Customer Reviews

Can "It" Happen Again?: Essays on Instability and Finance

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This great book is composed of thirteen essays restating and elaborating Minsky's great contribution to economics: the Financial Instability Hypothesis (FIH). The basic idea is that because the realized returns on any investment project are uncertain (and not merely risky), the contractual debts firms and entrepreneurs incur in financing these investments are inherently unstable. The "subjective state of expectations" will give rise to three different methods of financing: hedge, speculative, and ponzi. Hedge financing occurs when there are considerable margins of safety between fixed payments and *expected* returns. Speculative financing is defined by a project which over the course of its operations will generate *expected* revenue that will be greater than fixed payments, even though in the short-term these payments will be larger than initial realized returns. This gives rise to refinancing, which occurs if both parties to the agreement (lender and borrower) agree on the expected rates of return. Ponzi financing is a very unstable state in which the *expected* realized returns are not even sufficient in paying either the interest or principal on loans.

Now one moves from hedge to speculative and then to ponzi finance according to the general mood of the market. If the market is experiencing a "state of tranquility," then the typical margins of safety that characterize hedge finance will be displaced by speculative finance which is still considered safe according to entpreneurial optimism. This is all subject to change, however. The performance of the market, interest rate changes, rapid changes in animal spirits, etc. etc. are all conditions which give rise to market instability.

In so many words, this is basically Minsky's FIH. Minsky believed that this concept was a logical implication of Keynes' work, although he is careful to point out that the FIH stands on its own even if it is interpreted as being inconsistent with Keynes' message.

Minsky is a pleasure to read and I recommend this book to anyone interested in "endogenous instability". Minsky believed that all market disruptions are *systemic* and not merely accidental. This sets his work apart from most professional economists.

Minskys analysis the inherent instability of the capitalist economy has long been ridiculed by the naive believers of market efficiency and permanent equilibrium. Reading Minsky in the light of the current credit crisis is a haunting experience. His analysis is both original and flawless.

Minsky demonstrates that the major determinant of inflation and deflation problems in capitalist economies is the private banking industry's funding of speculation on Wall Street,be it the balloon payment mortgage loans and margin account stock market credit arrangements of the 1920's or the subprime mortgages and derivatives of the 1980's-2000's.The primary goal of all Wall Street speculators is to generate profits without the physical production of goods and services.Minsky improves upon Adam Smith's 1776 analysis in The Wealth of Nations and J M Keynes's 1936 analysis in the GT by breaking the analysis of speculation up into three separate parts or stages.The last part-Ponzi finance-is the most dangerous because it means that the economy is definitely going to be subjected to a major economic downturn as firms enter bankrutcy in mass.

The only criticism I have is that Minsky missed the chance to completely nail down his financial fragility hypothesis by making explicit reference to the detailed analysis of Adam Smith,Keynes and Mandelbrot.

Some rent seeking editor seems to have collected a pile of Professor Minsky's papers and wrapped them in a snazzy title for public consumption. Although unintelligible to the lay reader, Minsky is justly renowed for his financial instability hypothesis, which holds more or less that investment demand is hostage to the varying price of long lived capital assets and shifts in the debt carrying capacity of financial actors. He divides financial techniques as Julius Caesar divided Gaul: there is Hedge Finance, Speculative Finance and Ponzi Finance (guess which is unsustainable). Exactly how this works is largely a matter of faith and of course calculus for the initiated. The important thing to know is that equilibrium is unsustainable, crisis a recurring theme. Those who read the newspapers already know that. Rather than wasting money on this book, those interested should Google 'Financial Instability Hypothesis'. Excellent two page summaries abound.