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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13 Responses to Behavioral Finance Lecture 10: Minsky’s Financial Instability Hypothesis

  1. Glenn Ierley says:

    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.

  2. Steve Keen says:

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

  3. alainton says:

    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.

  4. peterjbolton says:

    @ Steve Keen
    @ Lyonwiss

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

  5. Lyonwiss says:

    @ 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.

  6. peterjbolton says:

    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

  7. peterjbolton says:

    @ 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.

  8. alainton says:

    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.

  9. Lyonwiss says:

    @ 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.

  10. peterjbolton says:

    @ Lyonwiss October 31, 2011 at 11:23 pm | #

    An etymological definition:

    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]

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

    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.


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

    “Let the dead bury the dead.”

  11. Pingback: Behavioral Finance Lecture 10: Minsky’s Financial Instability Hypothesis | Economics for People

  12. kalman says:

    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.

  13. Bhaskara II says:

    @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.

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