Chapter Six - Hyman Minsky meets secular stagnation

Abstract

Hyman Minsky's contribution to macroeconomics is best known for describing how financial instability explains the cyclical nature of capitalism. This chapter provides a basic exposition of Minsky's financial instability theory focusing on two key concepts: “validation” of more risky financial practices during an expansion and rising “fragility” of the financial structure as validation proceeds. Eventually, rising fragility causes a macroeconomic crisis. The crisis purges fragility and resets the stage for another cycle of the validation-fragility process. Although Minsky's theory focuses on business finance, this chapter shifts the locus of financial instability to the household sector and applies this framework to the financial dynamics of US households and conditions leading to the Great Recession of 2007–2009. Minsky's insights explain the source of this dramatic crisis effectively and the Minsky theory, coupled with the dramatic rise of income inequality, also helps explain US secular stagnation in the aftermath of the Great Recession.