Can “It” Happen Again? “Today, his views are reverberating from New York to Hong Kong as economists and traders try to understand what’s happening in the markets … Indeed, the Minsky moment has become a fashionable catch phrase on Wall Street.” Wall Street Journal In the winter of 1933, the American financial and economic system collapsed. Since then economists, policy makers and financial analysts throughout the world have been haunted by the question of whether “It” can happen again. In 2008 “It” very nearly happened again as banks and mortgage lenders in the USA and beyond collapsed. The disaster sent economists, bankers and policy makers back to the ideas of Hyman Minsky – whose celebrated “Financial Instability Hypothesis” is widely regarded as predicting the crash of 2008 – and led Wall Street and beyond to dub it as the “Minsky Moment.” In this book Minsky presents some of his most important economic theories. He defines “It,” determines whether or not “It” can happen again, and attempts to understand why, at the time of writing in the early 1980s, “It” had not happened again. He deals with microeconomic theory, the evolution of monetary institutions, and Federal Reserve policy. Minsky argues that any economic theory which separates what economists call the “real” economy from the financial system is bound to fail. Whilst the processes that cause financial instability are an inescapable part of the capitalist economy, Minsky also argues that financial instability need not lead to a great depression. With a new foreword by Jan Toporowski. Hyman P. Minsky (1919–1996) was Professor of Economics at Washington University St Louis and a distinguished scholar at the Levy Economics Institute of Bard College, USA. His research attempted to provide an understanding and explanation of the characteristics of financial crises, which he attributed to swings in a potentially fragile financial system. Minsky taught at Brown University, the University of California, Berkeley and in 1965 he became Professor of Economics of Washington University in St Louis and retired from there in 1990. Routledge Classics contains the very best of Routledge publishing over the past century or so, books that have, by popular consent, become established as classics in their field. Drawing on a fantastic heritage of innovative writing published by Routledge and its associated imprints, this series makes available in attractive, affordable form some of the most important works of modern times. For a complete list of titles visit www.routledge.com/classics Hyman Minsky Can “It” Happen Again? Essays on Instability and Finance With a new foreword by Jan Toporowski First published in Routledge Classics 2016 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © Hyman P. Minsky 1982, 2016 Foreword © 2016 Jan Toporowski All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. First published by M.E. Sharpe 1982 British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data A catalog record for this book has been requested. ISBN: 978-1-138-64195-2 (pbk) ISBN: 978-1-315-62560-7 (ebk) Typeset in Joanna MT by RefineCatch Limited, Bungay, Suffolk To Esther CONTENTS FOREWORD TO THE ROUTLEDGE CLASSICS EDITION PREFACE INTRODUCTION: CAN “IT” HAPPEN AGAIN?: A REPRISE 1 Can “It” Happen Again? 2 Finance and Profits: The Changing Nature of American Business Cycles 3 The Financial Instability Hypothesis: An Interpretation of Keynes and an Alternative to “Standard” Theory 4 Capitalist Financial Processes and the Instability of Capitalism 5 The Financial Instability Hypothesis: A Restatement 6 Financial Instability Revisited: The Economics of Disaster 7 Central Banking and Money Market Changes 8 The New Uses of Monetary Powers 9 The Federal Reserve: Between a Rock and a Hard Place 10 An Exposition of a Keynesian Theory of Investment 11 Monetary Systems and Accelerator Models 12 The Integration of Simple Growth and Cycle Models 13 Private Sector Assets Management and the Effectiveness of Monetary Policy: Theory and Practice INDEX FOREWORD TO THE ROUTLEDGE CLASSICS EDITION This volume of essays represents the early thinking of Hyman P. Minsky, one of the most original economists to have come out of the United States in the twentieth century. The essays reveal the themes that emerged from his graduate studies at Harvard University and, as the title of the volume indicates, his abiding preoccupation with the financial crisis that gripped the United States at the start of the 1930s. Nearly a century later we commonly think of that crisis as being the 1929 Crash. However, as Minsky’s title essay indicates, the crisis that was to haunt him through to his intellectual maturity and beyond was the 1932–3 financial crisis, rather than the crash in the stock market that preceded it by more than three years. The difference is important: in 1929, the stock market crashed; in 1932–3, in response to Herbert Hoover’s attempts to balance the United States Federal budget, the stock market and the banking system started to fail, to be rescued only by Franklin Roosevelt’s extended bank holiday, new financial regulations, including the Glass–Steagall Act and the extension of deposit insurance, and the New Deal. As these essays make clear, for Minsky avoiding “It” was not just a matter of supporting the stock market and refinancing banks. It had to involve fiscal stimulus to prevent a fall in aggregate demand, but also to provide the financial system with government securities whose value was stable. At the time of the crisis Minsky was entering his teenage years. He had been born in 1919 to parents who were Menshevik refugees from Russia. They engaged with socialist politics and the trade union movement in Chicago. Minsky was bright and entered Chicago University to study mathematics. There he met the Polish Marxist Oskar Lange, who encouraged Minsky to study economics. After military service, at the end of World War II, Minsky spent some months working for a finance company in New York, before proceeding to Harvard to research for a PhD under the supervision of Joseph Schumpeter and, after Schumpeter’s death in 1950, Wassily Leontief. His PhD thesis was a critique of the accelerator principle that had become a key element of business cycle theory, in the version put forward by Paul Samuelson. Minsky criticized not only the accelerator 1 principle, but also the absence of financial factors in business cycle theory.