Yes­ter­day the RBA (Aus­trali­a’s Cen­tral Bank) cut its reserve rate by three quar­ters of a per­cent, to 5.25 per­cent. This is the third cut in 3 months, bring­ing the cumu­la­tive reduc­tion since Sep­tem­ber to 2 per­cent

This is a far cry from the RBA’s expec­ta­tions in 2007, that in 2008 it would be rais­ing rates to con­strain a boom­ing econ­o­my and bring infla­tion back down to its tar­get range.

Infla­tion is still above its tar­get, but clear­ly that’s a bulls eye the RBA is no longer aim­ing for. What on earth went wrong with the RBA’s pre­dic­tions for 2008?

Steve Keen’s DebtWatch No 23 June 2008

RBA Assis­tant Gov­er­nor Guy Debelle and I spoke at a con­fer­ence on Sub­primes in Ade­laide last month. One aspect of my analy­sis that Guy queried was my empha­sis upon the Debt to GDP ratio. He not­ed that this appeared sus­pect, because it was com­par­ing a stock (the out­stand­ing lev­el of debt) to a flow (annu­al GDP).

It’s a valid point to make. The engi­neer-turned-econ­o­mist Mick­al Kalec­ki once caus­ti­cal­ly observed that “eco­nom­ics is the sci­ence of con­fus­ing stocks with flows”, and I’m a stick­ler myself for not mak­ing that mis­take. So mak­ing a song and dance about a stock to flow com­par­i­son like debt to GDP has to be jus­ti­fied by a sound argu­ment.

The cur­rent tur­moil on the Stock Market—and espe­cial­ly the sud­den col­lapse of many once high-flyers—has tak­en a lot of peo­ple by sur­prise.
One per­son who, were he alive today, would­n’t be the least bit sur­prised, is Hyman Min­sky, who pre­dict­ed that events like this would be a reg­u­lar fea­ture of a dereg­u­lat­ed finan­cial sys­tem.
He devel­oped what he called “The Finan­cial Insta­bil­i­ty Hypoth­e­sis”, and any­one who wants to under­stand today’s events needs to know about it.
The fol­low­ing is an extract from an arti­cle by Min­sky in Chal­lenge in 1977—well before even the 1987 Stock Mar­ket Crash—that pro­vides a nut­shell-sized pre­cis of his the­o­ry.