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Critique of the New Consensus Macroeconomics and Implications for India pp 193–204Cite as

The Crisis: A Minsky Moment?

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Part of the book series: India Studies in Business and Economics ((ISBE))

Abstract

Hyman Minsky, in several notable contributions, developed an elaborate theory of how and why capitalist economies endogenously develop tendencies towards systemic financial instability. The following key elements of Minsky’s crisis theory may be identified: (i) financial theory of investment, (ii) systemic development of financial fragility, (iii) disruption by a “not unusual” event, (iv) possibility of debt deflation and (v) floors and ceilings. We attempt to show how Minsky’s theory contributes considerably towards an understanding of several features of the global crisis.

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Notes

  1. 1.

    Minsky died in 1996, a full decade before the eruption of the crisis. With his remarkable prescience, he could foresee the general direction in which the US economy and especially its financial sector were headed, though, of course, not the details of innovations like CDOs and CDS, and their devastating potential impacts.

  2. 2.

    This identity is fully discussed in the Appendix to Chap. 1.

  3. 3.

    Real factors like competition or technical progress can only redistribute aggregate profits, but not increase its quantum. This explains why Minsky termed his investment theory as “financial” but also lays the theory open to the charge of ignoring the “real” side of the business cycle narrative (see, e.g. Crotty 1986; Lavoie and Seccareccia 2001; Toporowski 2008).

  4. 4.

    Note that this view of fiscal deficits is in direct opposition to the mainstream views of “crowding out” and Ricardian equivalence (see Barro 1974; Blanchard 1985; Mankiw 2003, etc.).

  5. 5.

    Robert Rubin and Henry Paulson, both senior executives from Goldman Sachs, were US Treasury Secretaries from 1995 to 1999 and 2006 to 2009, respectively.

  6. 6.

    Synthetic CDOs are not bundles of MBS (mortgage-based securities) but simply represent bets on a bunch of MBS as to whether they will go toxic or not. Shorting or short selling simply refers to dealing in securities that one does not own.

  7. 7.

    In an effort to bridge this gap, the SEC in 2004 created a voluntary programme, the Consolidated Supervised Entities (CSE) programme. Many policymakers believe that the CSE programme was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. This loophole rendered the CSE largely ineffective.

  8. 8.

    We have already seen in Chap. 5, Sect. 3.2, that ARM loans had a significant contribution role in the global crisis.

  9. 9.

    The reduction in budget deficit is usually attributed to three factors: (i) the passage of the Omnibus Budget Reconciliation Act of 1993 which raised income tax rates for top tax brackets from 31 to 36% for income taxes and from 31 to 38% for corporate taxes, (ii) an exceptionally strong economy that generated considerably additional taxes from several avenues (GDP growth soared from −0.74% in 1991 to 4.69% in 1999 and 4.10% in 2000) and (iii) a shrinking military budget (from 4.54% of GDP in 1991 to 2.93% in 2000).

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  1. Indira Gandhi Institute of Development Research, Mumbai, India

    Dilip M. Nachane

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Nachane, D.M. (2018). The Crisis: A Minsky Moment?. In: Critique of the New Consensus Macroeconomics and Implications for India. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-3920-8_8

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  • DOI: https://doi.org/10.1007/978-81-322-3920-8_8

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