"The Minskyan System, Part I: Properties of the Minskyan Analysis and How to Theorize and Model a Monetary Production Economy"

This is the first part of a three-part analysis of the Minskyan framework. Via an extensive review of the literature, this paper looks at 12 essential elements necessary to get a good understanding of Minsky's theory, and argues that those elements are central to comprehend how a monetary production economy works. This paper also shows how important these 12 elements are for the modeling of the Minskyan framework, and how the omission of one of them may be detrimental to an understanding of the essential dynamics that Minsky put forward: the Financial Instability Hypothesis.

"Minskyan Perspective, Part II--Treasury, CRMPG Reports, Financial Stability Forum"

This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky's framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes--more precisely, pyramid Ponzi processes--should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a "bubble" or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of "prudence." Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be. See also, Working Paper Nos. 574.1, 574.3, and 574.4.

"A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part I--Key Concepts and Main Points"

This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky's framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes--more precisely, pyramid Ponzi processes--should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a "bubble" or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of "prudence." Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be. See also, Working Paper Nos. 574.2, 574.3, and 574.4.

"An Inquiry into the Nature of Money: An Alternative to the Functional Approach"

The paper argues that the functional approach of money does not provide a good method to study monetary history and monetary mechanisms. An alternative approach is developed and illustrated by analyzing the role of tobacco and cowry shells in past monetary systems. It is shown that any monetary system has specific properties that most students of money do not take into account when theorizing about money or analyzing its history. This leads them to miss some important points, and to see monetary systems where none exist. Hence, one can doubt some of the past research on the subject, at least until further investigation is conducted that is based, not on what we think "money" is, but on what its essential properties are. By comprehending what the main characteristics of a monetary system are, one is able to improve regulation of the system and get some insights into the financial mechanisms of sovereign governments.

"The Minskyan System, Part II: Dynamics of the Minskyan Analysis and the Financial Fragility Hypothesis"

This is the second part of a three-part analysis of the Minskyan framework. It studies in detail the dynamics at the root of the endogenous financial weakening of capitalist economic systems. This part combines the properties presented in part I with other important concepts, such as the paradox of leverage and conventional expectations, to explain the Financial Instability Hypothesis. It is demonstrated that the signs of fragility are not always visible and that financial weakening can take many different (even though well-defined) routes. This is used to draw some conclusion about the appropriate way to test for this hypothesis and the limit of data.

"A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part III--Summary Tables"

This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky's framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes--more precisely, pyramid Ponzi processes--should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a "bubble" or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of "prudence." Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be. See also, Working Paper Nos. 574.1, 574.2, and 574.3.

"Minsky and Economic Policy: 'Keynesianism' All Over Again?"

Recently, national newspapers all over the world have suggested that we should reread John Maynard Keynes, and that Hyman P. Minsky provides a valuable framework for understanding the world in which we live. While rereading Keynes and discovering Minsky are noble goals, one should also remember the mistakes that were made in the past. The mainstream interpretation and implementation of Keynes's ideas have been very different from what Keynes proposed, and they have been reduced to simple "fiscal activism." This led to the 1950s and 1960s "Keynesian" era, during which fine-tuning was supposed to be a straightforward way to fix economic problems. We know today that this is not the case: just playing around with taxes and government expenditures will not do. On the contrary, problems may worsen. If one wants to get serious about Keynes and Minsky, one should understand that the theoretical and policy implications are far-reaching. This paper compares and contrasts Minsky's views of the capitalist system to the tenets of the New Consensus, and argues that there never has been any true Keynesian revolution. This is illustrated by studying the Roosevelt and Kennedy/Johnson eras, as well as Keynes's reaction to the former and Minsky's critique of the latter. Overall, it is argued that the theoretical framework and policy prescriptions of Irving Fisher, not Keynes, have been much more consistent with past and current government policies.

" A Critical Assessment of Seven Reports on Financial Reform: A Minskyan Perspective, Part III--G30, OECD, GAO, ICMBS Reports"

This four-part study is a critical analysis of several reports dealing with the reform of the financial system in the United States. The study uses Minsky's framework of analysis and focuses on the implications of Ponzi finance for regulatory and supervisory policies. The main conclusion of the study is that, while all reports make some valuable suggestions, they fail to deal with the socioeconomic dynamics that emerge during long periods of economic stability. As a consequence, it is highly doubtful that the principal suggestions contained in the reports will provide any applicable means to limit the worsening of financial fragility over periods of economic stability. The study also concludes that any meaningful systemic and prudential regulatory changes should focus on the analysis of expected and actual cash flows (sources and stability) rather than capital equity, and on preventing the emergence of Ponzi processes. The latter tend to emerge over long periods of economic stability and are not necessarily engineered by crooks. On the contrary, the pursuit of economic growth may involve the extensive use of Ponzi financial processes in legal economic activities. The study argues that some Ponzi processes--more precisely, pyramid Ponzi processes--should not be allowed to proceed, no matter how severe the immediate impact on economic growth, standards of living, or competitiveness. This is so because pyramid Ponzi processes always collapse, regardless how efficient financial markets are, how well informed and well behaved individuals are, or whether there is a "bubble" or not. The longer the process is allowed to proceed, the more destructive it becomes. Pyramid Ponzi processes cannot be risk-managed or buffered against; if economic growth is to be based on a solid financial foundation, these processes cannot be allowed to continue. Finally, a supervisory and regulatory process focused on detecting Ponzi processes would be much more flexible and adaptive, since it would not be preoccupied with either functional or product limits, or with arbitrary ratios of "prudence." Rather, it would oversee all financial institutions and all products, no matter how new or marginal they might be. See also, Working Paper Nos. 574.1, 574.2, and 574.4.

"It Isn't Working: Time for More Radical Policies"

The Obama administration has implemented several policies to "jump-start" the American economy--efforts that have largely focused on preserving the financial interests of major banks. The authors of this new policy brief believe that maintaining the status quo is not the solution, since it overlooks the debt problems of households and nonfinancial businesses--and re-creating the financial conditions that led to disaster will simply set the stage for a recurrence of the Great Depression or a Japanese-style "lost decade." They recommend a more radical policy agenda, such as federal spending programs that directly provide jobs and sustain employment, thereby helping to restore the creditworthiness of borrowers, the profitability of firms, and the fiscal position of state and federal budgets.

"Macroeconomics Meets Hyman P. Minsky: The Financial Theory of Investment"

Expanding on an approach developed by financial economist Hyman Minsky, the authors of this new working paper present an alternative to the standard "efficient markets hypothesis"--the relevance of which Minsky vehemently denied. Minsky recognized that, in a modern capitalist economy with complex, expensive, and long-lived assets, the method used to finance asset positions is of critical importance, both for theory and for real-world outcomes—one reason his alternate approach has been embraced by Post Keynesian economists and Wall Street practitioners alike. Coauthors L. Randall Wray and Eric Tymoigne argue that the current financial crisis, which began with the collapse of the U.S. subprime mortgage market in 2007, provides a compelling reason to show how Minsky's approach offers us a solid grounding in the workings of financial capitalism. They examine Minsky's extension to Keynes's investment theory of the business cycle, which allowed Minsky to analyze the evolution, over time, of the modern capitalist economy toward fragility--what is well known as his financial instability hypothesis. They then update Minsky's approach to finance with a more detailed examination of asset pricing and the evolution of the banking sector, and conclude with a brief review of the insights that such an approach can provide for analysis of the current global financial crisis.