Hyman Minsky, the clairvoyant black sheep
Deceased in 1996, Hyman Minsky was an economist who was barely known at all during his lifetime. Only certain enlightened minds – unorthodox ones, of course – were interested in his research which focused on the causes of financial crises. He owed his hour of glory to the subprime implosion in 2007 and it’s as if the whole – totally flummoxed – worlds of finance, economics and politics only then found out about his work. All of a sudden, central bankers couldn’t stop citing him in their speeches, and the media couldn’t stop calling the crisis a “Minsky moment”. Never mentioned – not even briefly – by the press during his lifetime, The Economist, however, cited him more than 30 times just in 2007!
In truth, Minsky’s approach was in no way conventional since in his works he avoided using mathematics, almighty in economic science, as much as possible. Moreover, the fundamental objective of his research – the deep-seated roots of crises – was highly unpopular at a time when the dominant ideology of the 20th century consisted of a blind faith in the efficiency and rationality of markets. His unpopularity – or rather his total absence from the picture – came from his stock in trade – the study of crises – at a time when nearly all actors from all sectors considered financial markets to be the supreme arbitrator. With modern, so-called “integrated” economies meant to have vanquished the most cunning of their demons, any crisis could by definition only be short-lived and have only a limited impact on the economy.
It is in this economic climate, fashioned by an almost complete denial of the harm that markets can do, that Minsky developed his hypothesis on financial instability and showed that economic torments are caused precisely by long periods of prosperity. He described situations where private individuals and companies would frantically jump at the chance to borrow without even having the liquidities needed to afford the sole interest of their debts, justified simply by the speculation that their assets would appreciate without interruption. Such a phenomenon of collective contamination obviously makes the financial system extremely weak when a tightening of rates, a generally insignificant incident, or even a tiny snowflake can weigh in on the valuation of these same assets, thus provoking an avalanche of forced sales. These investors’ overexposure, as they make the most of their gigantic leverage in the hope that their valuations will only soar, is exacerbating a whole system that no longer owes – for a time – its prosperity only to debt.
It’s easy to understand why Minsky was a black sheep during his lifetime because his conclusions are very worrying. Economic stability brings with it the germs of instability, since periods of great fragility are only an echo of periods of prosperity. So, why not forever keep on borrowing more when growth seems unsinkable? In such an economic climate, isn’t the temptation for banks to be less cautious when granting credit too great? Minsky’s works on the harmful effects of debt – although essential to understanding the processes of economic prosperity – were nevertheless widely ignored, only to conveniently reappear during the major crisis of 2007 and 2008. Now, in 2017, we are again seeing the rush to borrow in an environment of generally relaxed regulation. As a result, Minsky’s shadow is fading…until the next eruption.