The Current Financial Crisis: an Application of Minsky Model?

The currently observed turmoil in financial markets, which is believed to have been ignited by the collapse of the American subprime mortgage market, has recently brought to prominence the ideas of Hyman Minsky, member of the post-Keynesian school of economics. Many commentators are of the view that Minsky’s framework of thinking accurately anticipated the current financial crisis. The key mechanism that pushes the economy towards a crisis is the accumulation of debt during the period of prosperity. So, the economy becomes more and more fragile. Financial innovations and deregulation in a context of globalisation are responsible of this situation. It’s an important point of his analysis. It’s an aspect of the “Financial Instability Hypothesis” (FIH). Another aspect of FIH is that during good times, banks and other intermediaries try to lure investors to buy debt by means of sophisticated innovations. So the major role of financial intermediaries in a process of crisis is showed. Definitively, it’s possible to show that the current crisis is an application of Minsky’s model.