Why the subprime crisis is different: a Minskyian approach

Abstract

Minsky's financial-instability model suggests that financial crises can be resolved efficiently with lender-of-last-resort and big-government interventions. The crisis that began in 2007 (hereafter, the ''2007 crisis'') has been different: it has been more profound and resistant to policy interventions. This paper examines why. Our approach is to expand Minsky's balance-sheet approach in several ways. First, we incorporate two factors Minsky missed because he built his model in the 1970s: the impact of racial exclusion and U.S. cross-border imbalances on U.S. financial dynamics. In addition, we draw out the analytical implications of the systematic differences between banks' and non-banks' balance-sheets. Minsky didn't do this; but because of the transformation of banking after 1980, these differences have become deeply significant. One key effect of so doing is to see that asset-liability balances as well as cash-flows are crucial in financial dynamics. This paper concludes that the 2007 crisis has been so profound and unresponsive to policy intervention for several reasons: banks no longer bear as well as originate credit risk; banks made exploitative loans to minority borrowers and then generalized these loans as housing prices rose; and subprime homeowners and structured investment vehicles became more leveraged than banks.

Financial Fragility in the Current European Crisis

“…5 There is a wide recognition of the process of deleveraging occurring in the European banking system, see The Economist 2012, Puhr et al2012. flow variables rather than stocks. This point was emphasized by Tymoigne (2011) and Dymski (2010) 6 . In fact, the process of debt reduction was associated with increased layering due to the greater weight of derivatives in the portfolios (see Mediobanca 2012).…”

Minsky and the Subprime Mortgage Crisis: The Financial Instability Hypothesis in the Era of Financialization

“…A rather similar perspective is put forward by Dymski (2010). However the author iden-tifies exclusively in the deregulation the cause of the shift of banks' business, not taking into account the role of firms.…”

“…Our perspective differs substantially. We believe that the analysis of Minsky goes far beyond his theory of investment and that it is possible to use his analysis as a framework to understand how the financial system can overcome its limits and how this can affect the real economy (as Bellofiore and Halevi, 2009;Dymski, 2010 ;and Wray, 2012 appear to have done).…”

The International Dimension of Financialization in Developing and Emerging Economies

“…The changing financial relations and practices of economic agents in contemporary capitalism -a phenomenon often characterized as financialization -has received considerable attention over recent years in both the academic literature and the policy debate. The aspects investigated include the increased holdings of financial assets and market funding by large nonfinancial corporations (NFCs) (Orhangazi, 2008;Stockhammer, 2004); the importance of shareholder value (Lazonick and O'Sullivan, 2000); the rising involvement of households in predatory debt relations (Aalbers, 2008;Dymski, 2010;Montgomerie, 2009); the changing income pattern of banks, from deposits and lending to fees and commissions (Erturk and Solari, 2007;dos Santos, 2009); the rise in bank funding from markets rather than from deposit taking (Lapavitsas, 2009); and the financialization of everyday life (Langley, 2008). Similar phenomena have also been highlighted in DEEs: see Bonizzi (2013) and Karwowski and Stockhammer (2017) for overviews.…”