Lessons from the Subprime Meltdown

Abstract

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Detecting Ponzi Finance: An Evolutionary Approach to the Measure of Financial Fragility

“…This type of Ponzi process is fully collateral-driven and usually involves the funding of assets that do not produce any cash flows from operation (e.g., home of residence) or that generate cash flows over which the owner has very minimal or no control (e.g., shares of companies) and so cannot be adjusted to meet the demands of debt services. Examples of those processes are the mortgage practices of the 2000s and the Madoff scheme (Wray 2007;Kregel 2008;Tymoigne 2009b A fourth implication is that levels of cash flow determine the financial position of an economic unit. Some authors have defined Ponzi finance in a dynamic framework and in relation to the debt-to-income or debt-to-asset ratios; they have defined Ponzi finance as a situation in which the ratio grows forever.…”

Institutional Prerequisites of Financial Fragility within Minsky’s Financial Instability Hypothesis: A Proposal in Terms of 'Institutional Fragility'

“…This analysis leads Minsky to explain the differences observed in terms of stability and growth between the pre-and post-1945 periods and to judge the financial situation, the institutions and economic policies of the US in the 1990s, an age, for him, of "money manager capitalism." 13 Wray (2008) illustrates this and emphasizes its relevance in the present context. Wray (2008) does not formally mobilize all of the institutional factors examined here.…”

“…13 Wray (2008) illustrates this and emphasizes its relevance in the present context. Wray (2008) does not formally mobilize all of the institutional factors examined here. However, he does concur in the need to give ample scope to the historical context.…”

“…Minsky's contributions in analyzing the mechanisms of the crisis, some publications also emphasize the value of his work on institutional mechanisms for examining the origins of this crisis (Whalen 2007;Wray 2008;Dimsky 2010). It may seem surprising that the institutional foundations of the Financial Instability Hypothesis (FIH) feature little in the literature, especially in view of the importance Minsky himself attributed to them:…”

Untitled

“…Minsky had warned of the coming of 'money-manager capitalism' (Minsky 1996) before his death in 1996. When the subprime crisis came, Wray (2007) and others elaborated Minskyian analyses of events. As James Galbraith (2009) notes, a number of heterodox economists foresaw the housing market meltdown.…”