Behav­ioral Finance Lec­ture 10: Minsky’s Finan­cial Insta­bil­ity Hypoth­e­sis

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In the first half of this lec­ture, I dis­cuss the econ­o­mists who influ­enced Minsky–Marx, Fisher, Schum­peter and Keynes–as a pre­lude to out­lin­ing Minsky’s Finan­cial Insta­bil­ity Hypoth­e­sis. (PPT File: Debt­watch Sub­scribers; CfESI Mem­bers).

In the lec­ture I inad­ver­tently slan­dered Eugene McCarthy while explain­ing the McCarthy­ist “Com­mu­nist Witch Hunt” days in the USA to my stu­dents. It would have been career sui­cide for Min­sky to acknowl­edge that he had read Marx by cit­ing him in an aca­d­e­mic paper. I meant Joe McCarthy of course.

Hav­ing out­lined Minsky’s Finan­cial Insta­bil­ity Hypoth­e­sis, I explain the math­e­mat­i­cal model I devel­oped of it, on the foun­da­tion of Richard Goodwin’s “Growth Cycle” model of cap­i­tal­ism.  (PPT File: Debt­watch Sub­scribers; CfESI Mem­bers)

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Glenn Ier­ley

    Minor cor­rec­tion in Lec­ture 10: you note absence of cita­tions in Min­sky due to McCarthy era in US, but you then refer your stu­dents to “Sen­a­tor Eugene McCarthy”. I’m afraid poor Eugene is rolling over in his grave at his rep­u­ta­tion being tra­duced. It’s Joseph McCarthy, the dip­so­ma­niac you meant.

  • Doh! My bad! Will make amends in the text. Those are the sort of stuff-ups one can make when impro­vis­ing in a talk.

  • alain­ton

    I’ll repeat an anec­dote about how Say derived his ‘law’ I was told many years ago when it went in one ear and out the other. Although the idea was in the air in the late 18th C. 

    The story was how Say won­dered how colo­nial agri­cul­tur­al­ists could afford to buy expen­sive man­u­fac­tured prod­ucts imported from europe if they had not yet sold their years pro­duce and the ships would not come back for a year.

    The answer as he saw it was that in effect the sur­plus would be ‘swapped’ for the imported prod­ucts and shipped back on the same ship. It was effec­tively barter with money as a very tem­po­rary inter­medium, if used at all

    But that begs a ques­tion, where did the agri­cul­tur­al­ist get the money for that years invest­ment, it had to come from a line of credit if it did not come from a pre­vi­ous years sur­plus.

    You can see how the 18th cen­tury model of ships holds being loaded and unloaded pro­duced a model of an econ­omy of barter where over­pro­duc­tion would be impos­si­ble. How­ever it can­not answer the ques­tion of how and why the first ship and first colony was set up.

  • @ Steve Keen
    @ Lyon­wiss

    Bank­ing Fraud — Is a busi­ness model — Orig­i­na­tors of Loans — the begin­ning of the end all is a short sim­ple UTube video:

    http://www.zerohedge.com/contributed/steven-j-baum-foreclosure-mill-fraud-busted-susan-chana-lask-mers-and-mortgage-fraud-det?

  • Lyon­wiss

    @ Peter­jbolton Octo­ber 31, 2011 at 11:05 am

    Susan Chana Lask is a hero. As I said before, many default­ing mort­gages can­not be legally fore­closed, because of the orig­i­nate and dis­trib­ute debt cre­ation process. Own­ers of the mort­gages do not have the doc­u­ments and the doc­u­ments do not spec­ify the right own­ers. Now the fore­clo­sure mills have to forge doc­u­ments to pro­ceed, and being sued for fraud. How could macro­eco­nomic solu­tions such as bank bailouts and debt jubilee solve such prob­lems? Gary North (link in a pre­vi­ous LCTesla post) has a good cri­tique.

  • Fraud, Theft and Infla­tion: UTube Inter­view with James Turk — Excel­lent

    Why “lead­er­ship” and Econ­o­mists pre­fer gov­ern­ing by fraud and theft!

    When Money Dies — by Adam Fer­gus­son

    … we all know what has to be done; what we don’t know is how to get re-elected once we done it.” Jean-Claude Juncker, prime min­is­ter of Lux­em­bourg

    http://www.zerohedge.com/news/when-money-dies-author-adam-fergusson-and-james-turk-discuss-hyperinflation-past-present-and-fu

  • @ Lyon­wiss Octo­ber 31, 2011 at 11:52 am | #

    Bank and mort­gage fraud in the US (and else­where) appears to have the sup­port of most of the 50 Attor­ney Gen­er­als plus the Fed­eral US AG. The are some dis­senters but few are lis­ten­ing — so much for being a Con­sti­tu­tional Repub­lic.

    Sim­ply defined: This is Fas­cism in the state of con­sen­sual silence. Party time.

  • alain­ton

    Jeff Rndall — who pre­dicted the finan­cial cri­sis in 2003 on how UK per­sonal debt is fore­cast to increase by 50% by 2015 — and how that can only end in tears.

    http://www.telegraph.co.uk/finance/comment/jeffrandall/8859082/The-debt-trap-time-bomb.html

  • Lyon­wiss

    @ Alain­ton Octo­ber 31, 2011 at 7:58 pm

    You don’t have to be a genius to know that sav­ing is hard and bor­row­ing-and-spend­ing is easy. It is warped Key­ne­sian logic to pun­ish savers and reward bor­row-and-spenders. (Merv King knows that he is screw­ing savers.) The idiots don’t seem to know that bor­row-to-invest-and-pro­duce is fine, but bor­row-to-spend is not. Bor­row-to-spend will stop before or when debt ser­vice cost equals
    income. We will soon see the debauch­ery of the British pound, in a race to the bot­tom.

  • @ Lyon­wiss Octo­ber 31, 2011 at 11:23 pm | #
    “debauch­ery”

    An ety­mo­log­i­cal def­i­n­i­tion:

    lecher
    late 12c., from O.Fr. lecheor “one liv­ing a life of debauch­ery,” espe­cially “one given to sex­ual indul­gence,” lit. “licker,” agent noun from lechier “to lick, to live in debauch­ery or glut­tony,” from Frank. *likkon, from P.Gmc. *likko­jan “to lick” (see lick).

    The priests had excel­lent cause to for­bid us lech­ery: this injunc­tion, by reserv­ing to them acquain­tance with and abso­lu­tion for these pri­vate sins, gave them an incred­i­ble ascen­dancy over women, and opened up to them a career of lubric­ity whose scope knew no lim­its. [Mar­quis de Sade]
    debauch­ery

    1640s, from debauch + –ery. With a vari­ety of spellings in 17c., e.g. debaush-, deboich-, debosh-.
    regency 

    early 15c., from M.L. regen­tia, from L. regens (see regent). Notable instances were: France 1715–1723 (under Philip, Duke of Orleans), Britain 1810–1820 (under George, Prince of Wales, Prince Regent), “in each case with sug­ges­tion of debauch­ery” [Week­ley]. In ref­er­ence to the style of that time, attested from 1880 (there is an unex­plained use in Jane Austen from 1793). Cf. French equiv­a­lent Régence, attested in Eng­lish from 1919. U.S. Albany Regency refers to dom­i­nant polit­i­cal fac­tion in New York state c.1820–1850.
    riot (n.)

    early 13c., “debauch­ery, extrav­a­gance, wan­ton liv­ing,” from O.Fr. riote (masc. riot) “dis­pute, quar­rel,” per­haps from Prov. riota, of uncer­tain ori­gin. Mean­ing “pub­lic dis­tur­bance” is first recorded late 14c. Mean­ing “some­thing spec­tac­u­larly suc­cess­ful” first recorded 1909 in the­ater slang. The verb is attested from late 14c. Run riot is first recorded 1520s, a metaphoric exten­sion from M.E. mean­ing in ref. to hounds fol­low­ing the wrong scent. The Riot Act, part of which must be read to a mob before active mea­sures can be taken, was passed 1714 (1 Geo. I, st.2, c.5). Riot girl and alter­na­tive form riot grrl first recorded 1992.

    end/quote

    An arte­fact from a prim­i­tive time; per­haps a legacy of the dead that exist and remain amongst us:

    Let the dead bury the dead.”

  • Pingback: Behavioral Finance Lecture 10: Minsky’s Financial Instability Hypothesis | Economics for People()

  • The major dif­fer­ence here in Aus­tralia com­pared to the rest of the devel­oped world is that peo­ple here are con­vinced that they deserve to make a profit on every­thing, real estate, retire­ment funds, basi­cally every­thing they put their money into. I put this down to the fact that Aus­tralia is such an amaz­ing coun­try that peo­ple have lost com­plete real­ity of how good they have it here, peo­ple have become arro­gant and simplistic/stupid in the way they per­ceive eco­nom­ics and life in gen­eral. We too will have dev­as­tat­ing fall­out as a con­se­quence of our arro­gant atti­tude. I am truly look­ing for­ward to the next decade, a great depres­sion that will bring a lot of new oppor­tu­ni­ties and impor­tant things such as hard work instead of gam­bling in ponzi schemes, mod­esty, cus­tomer ser­vice, humil­ity and lots of peo­ple liv­ing in card­board boxes. Also some of us will find this com­ing decade a time of most fer­tile ground to set them­selves up for life.
    Kind regards, kalman.

  • Bhaskara II

    @Alainton On Trade With­out Money

    RE: “But that begs a ques­tion, where did the agri­cul­tur­al­ist get the money for that year’s invest­ment, it had to come form a line of credit if it did not come from a pre­vi­ous year’s sur­plus.”

    I think the answers are in the how mer­chants did busi­ness which is directly shown in how they did book­keep­ing.

    From the mer­chants’ point of view they would want goods flow­ing in a round trip or to the next des­ti­na­tion. This is because the markup was so high if there was much more to gain trad­ing goods in more direc­tions than one. If the mark up was 8 times, run­ning goods in both direc­tions would make the gross mark up 64 times from the begin­ning. No use hav­ing the square root of pos­si­ble gross markup for the same period of time. It would be fool­ish to wait a trip for your specie to come back. 

    With such oppor­tu­ni­ties one would also not miss oppor­tu­ni­ties for profit on a lack of money on either side. This is where skills and knowl­edge of book­keep­ing come in handy, which so many of us lack today. They were per­fectly able to make lines of credit with each other with out requir­ing the aid of oth­ers. I think the mech­a­nism they used were notes and bills of exchange. There prob­a­bly are many more meth­ods.

    Notes are just an IOU con­tract to pay on a spe­cific future date often with an inter­est rate or a dis­count. They both record the notes in their books for the amount in two accounts each. One of them in records the value in their notes col­lec­table account the other party records it in their notes payable account. (In dou­ble entry there is also a record for value of the goods pro­vided or received.) In addi­tion each party also has an appos­ing account to record dis­counts. These notes could also be traded or sold to oth­ers with the orig­i­na­tor hav­ing to pay the new party if the note was endorsed by the owner. If the note was not payed at the right time the endorser was respon­si­ble to make good.

    A bill of exchange is like a boomerang note or much like COD of today but a note is col­lected or accepted instead of actual pay­ment. Some one in Eng­land (the drawer, she drew it up) sends goods with a bill to a planter in the new world along with a bill for the same value of the goods exchanged. The planter accepts the bill (a con­tract for the planter to pay in the future) by accept­ing and endors­ing it. That paper can now also be exchanged. The planter has the oblig­a­tion to make good on it ear­lier than the date tak­ing the dis­count or pay the full value to who ever it has been signed over to when it is pre­sented to him on or after the date agreed upon. The drawer can now ask that pay­ment be made to some one else who, he or his agent might trade the bill for the value of goods with some one who has goods to imme­di­ately ship to a more prof­itable shore or high pay­ing cus­tomer.

    So these are some of the mech­a­nisms of doing over­seas or land trade with­out money up front. Even­tu­ally the paper should be made good, which is eas­ier the higher every one’s mark up is. High profit tends to help ones notes payable to tend to be less than ones notes receiv­able.

    So the idea is to trade goods at a profit thus min­i­miz­ing the money flows back and forth in the process.

    All this paper can have hand writ­ten copies in case the oth­ers get lost. If they have to be sent by ship they can be sent on dif­fer­ent ships and more impor­tantly copies left on that shore for exchange into goods. 

    Here is the inter­est­ing part. If all the bills are cleared indi­vid­u­ally, through­out a clear­ing process or through some of the his­tor­i­cal money exchange process like in the east whole sums of money or notes don’t need to be shipped back and forth. The only paper or specie that needs to be shipped back and forth for the trade is the dif­fer­ence between the val­ues of the goods. Is that the trade deficit or cur­rent account to econ­o­mists?

    The smart mer­chant will want to move the most goods the the next high­est pay­ing cus­tomer as fast as pos­si­ble. The paper I believe is used as a cat­a­lyst for trans­ac­tions. Unlike a cat­a­lyst the paper is redeemed (used up) but one can always pro­duce more paper for the expec­ta­tion of new rev­enues and prof­its to cover it. The more the prof­its the more likely the paper can be made good.

    So, a mer­chant or merchant’s agent, or who she has con­signed the goods to, who has just received the accepted bills and notes can sell them at a dis­count on the same shore or send them back. If notes and bills are not imme­di­ately turned into trade goods the mer­chant has fun­gi­ble doc­u­men­ta­tion of credit on that shore that he can instruct pay­ment in the future or exchange for goods. Instruc­tion could be done quicker through an agent on site. But, with the object max­i­miz­ing of profit the value is bet­ter left there to be shortly turned into goods one could profit from through trade and mark up as often as pos­si­ble in a period. 

    Almost no money or specie has to move on ships for the trade reduc­ing the pos­si­bil­ity for loss or theft. Also, very lit­tle money has to be phys­i­cally exchange for other types of money. The goods and ships could be eas­ily insured. 

    Credit can be got­ten for goods, notes, and bills of exchange accepted. 

    There must be other ele­gant and inge­nious ways of car­ry­ing on the trade that I am obliv­i­ous too.