Apparently, economists have known for decades that the kind of financial crisis we now are experiencing could happen. In the 1960’s a banker turned Harvard economist named Hyman Minsky put forth the “financial instability hypothesis.” Minsky predicated that when interest rates are lowered to make the borrowing of money easier, a euphoria overtakes bankers and investors that makes them irrationally giddy. Eventually, the financial institutions where these bankers and investors work overextend themselves to the point of collapse. When that happens, we have reached the “Minsky Moment.” Unfortunately, we have arrived at the place old Hyman predicted. When he first put forth his views, Minsky was viewed as a financial crackpot. Now we know he was a prophetic genius of market economics.
Years of financial market deregulation have set us up for this crash; we now know that. What Minsky believed was that markets need vigilance and regulation. He believed that capitalism run wild would collapse on itself.
Our new president should go back a dig up some of Minsky’s papers. Barack Obama is right to call for tighter regulation of financial markets and holding institutions accountable. If he decides to help the auto industry, he ought to do so with strict guidelines to build more fuel efficient cars. The short term thinking of so many companies and the desire to simply focus on the bottom line have led to a way of doing business that is anti-community, anti-environment, and self-destructive. Only as corporations regain a sense of their original charter –which is to serve the common good – can long term stability return. Because the human propensity for greed is so strong, regulation will have to force some corporations be those good citizens. Hopefully, others will see that such a move is not only in their best interest, but in the best interest of the communities they are supposedly called to serve.
Unfortunately Minsky is not here to see his predications come true (he died in 1996), although I doubt he would take much solace in saying “I told you so.” Even so, we must take this time to learn a hard lesson. So let’s start by reading and heeding Hyman Minsky’s words. If you want to a get a glimpses of what he said you can read about his theory here.