Hyman Minsky's maverick ideas about market cycles were disregarded in his lifetime. But they enjoyed a significant revival during the Great Recession of the mid-2000s, and may have even greater relevance today.
"Stability is destabilising".
Oxymoron, paradox, irony. Call it what you will. For the financial economist Hyman Philip Minsky, stability was the key reason why financial market crises occur.
During periods of economic stability, banks, firms and other economic agents become complacent, he argued. They assume that the good times will last and as a result they begin to take ever greater lending risks in pursuit of profit. This is how the seeds of the next crisis are sown.
In fact, Minsky maintained, periodic swings between boom and bust are "a fundamental characteristic of our economy" and pretty much inevitable - unless government steps in to control them.
Minsky's work was considered important enough to win him teaching posts at both Brown and Berkley universities, as well as a professorship in economics at Washington University, St Louis, before his retirement in 1990. He was also a Levy Institute distinguished scholar at Bard College in the state of New York until his death in 1996.
But in the freewheeling 1970s and 1980s, Minsky's ideas about the causes of speculative bubbles gained little traction with the financial mainstream, which preferred to attribute market downturns to external "shocks" or policymaker incompetence.
A Wall Street obsessed with deregulation had no time for his conviction that government intervention was both necessary and unavoidable. His approach to making his point, which shunned fashionable mathematical modelling in favour of an old-school narrative or verbal approach, compounded his marginalisation.
By the time he died, a few detractors had conceded that his views on market excesses had some validity, and that his work underscored the importance of the Federal Reserve as the lender of last resort. For the most part, however, he was still considered an economic outsider.
Then came the subprime-mortgage-driven financial crisis of 2007, and the worst global recession since the Great Depression. Suddenly, everyone was talking about a "Minsky moment".
The Chicago-born economist's books, many of them long out of print, were exchanging hands for hundreds of dollars. The Nobel laureate Paul Krugman named a high profile talk about the financial crisis "The Night They Re-read Minsky". And in a 2009 speech Janet Yellen, then president of the Federal Reserve Bank of San Francisco, declared Minsky's work "required reading".
Since then, the expression "Minsky moment" - generally defined as a sudden collapse of asset values after a long period of growth, sparked by unsustainable levels of debt or speculative pressures - has entered the financial lexicon.
Born in 1919 to Jewish socialists who had met at a gala to celebrate the centenary of Karl Marx's birth, Minsky was a self-acknowledged "red-diaper baby".
Yet although he attributed his decision to study economics to his radical upbringing and youth, the influences that shaped his economic ideas were rather more moderate.
He was an admirer (indeed a biographer) of J.M. Keynes, whose ideas about the need for government intervention in times of crisis he endorsed. But he also believed that Keynes needed updating for the late 20th century, and for this he turned to Joseph Schumpeter, who coined the phrase "creative destruction" to describe the continuous waves of innovation that characterise modern capitalism.
Schumpeter, indeed, was Minsky's first thesis adviser at Harvard University, where he studied for a PhD in economics after graduating in mathematics from the University of Chicago in 1941, and serving with the US military in post-WW2 Berlin. When Schumpeter died in 1950, Minsky's new thesis adviser was the Soviet-American economist, Wassily Leontief, whose work on the interdependence of economic sectors won a Nobel Prize in 1973.
Schumpeter, Keynes, and somewhat surprisingly the early 20th century financial fraudster Charles Ponzi, were all instrumental in helping Minsky develop his trademark "financial instability hypothesis", which runs roughly as follows:
The entire structure is underpinned by the deluded belief that asset prices will continue to rise, and when these finally fall and both borrowers and lenders realise there is debt in the system that can never be repaid, people rush to sell assets, causing an even bigger price slump and triggering a Minsky moment.
The Great Recession of 2007/08 may have been the biggest Minsky moment to date - but it was far from the only one. Indeed, we may well be living in a Minsky era.
Consider, for example, the 1997 Asian financial crisis, which started with the collapse of the Thai baht and spread to other East Asian economies, exacerbated by high levels of private debt.
Think back also to the collapse of China's real estate market in 2021, which was prompted by rising debt levels, inflamed by the effects of the covid pandemic on overleveraged balance sheets, and culminated in the bankruptcy of the Evergrande property group.
As global debt levels continue to rise the preconditions for another Minsky moment appear to be strengthening. Only time will tell if his prescriptions for coping with the fallout: swift central bank interventions to provide liquidity, government bailouts to stabilise key financial institutions, and international cooperation to manage cross-border financial crises, can prevail.
