The inherently destabilizing property of stability…

A few months ago I would not have been aware of the late economist, Hyman Minsky (1919-19960.) His theory, known as the “Financial Instability Hypothesis (FIH)” was not a matter of public discussion as we watched our economy go directly into the toilet and the recession grow and get more dismal.

Had I known about Minsky, however, I would have seen this coming in the 1980s when the Reaganites began to dismantle government regulation of banks and the investment markets. FIH says hat stability is inherently unstable.

Here’s an example. For 60 years the housing market did nothing but go up. No reversals. No leveling off. If you bought a property for $100,000.00 in 2000, it was highly likely, indeed expected, to be worth $200,000.00 in 2003. So people increased their taking out of mortgages, even to the point that the mortgage debt was more than their current income could afford… the assumption was that the value of the property would rise so fast and so high that it’s increased value could be borrowed against, increasing debt, but keeping the investor in a growing market. Minsky called this “Ponzi borrowing”, sort of an inversion of the well known “Ponzi Scheme” (Bernard Madoff’s little game was a Ponzi Scheme)… and when the mortgage crisis exploded in the faces of the banks and financial institutions who, in their euphoria for increased profit, had lent way beyond their means to survive if ongoing housing sales stopped and values dropped proportionately.

If Minsky were alive today, he would be somewhat of a hero, as his theory seems just about right. And his solution of increased government intervention and regulation is what is happening, has to happen, to start us out of the devastating hole we are now in.

When the Reagan Republicans, egged on by Alan Greenspan and the Monetarists of the Chicago School, started to, and nearly succeeded in, eliminating all government regulation, with the help of Moderate Democrats like Bill Clinton, the eventual fall of the economy was set in place. And here we are today.

You may ask, isn’t this the same picture as the 1930s? Didn’t the euphoria of investing in the 1920s, egged on by money borrowed against the assumption of an always growing stock market, what led us to the Great Depression? The increase of Debt when we feel most stable is the key to oncoming instability.

If we have learned our lesson, we should take less and less risk as we become more and more successful. But just the opposite seems to be human nature.

I wish Minsky were here to see this.

Under The LobsterScope