From Bubble to Bust:
A Minsky Moment in the Age of
Schumpeter
Charles J. Whalen
Department of Business and
Economics
February 20, 2008
Copyright Charles J. Whalen 2008
From Bubble to Bust:
Outline
• History of Economic Ideas
• Recent Economic Developments
• Public Policy Implications
Adam Smith
• Author of The Wealth
of Nations (1776)
• Suggested that Prices
Adjust According to
an “Invisible Hand”
• Ideas Translated into
Theories Ill-Equipped
to Explain a Dynamic
World
Joseph Schumpeter
• Rediscovered by
Economists Looking to
Understand a Rapidly
Changing Economy
• Suggested that
Economies are Driven by
“Creative Destruction”
• Shifts the Focus of
Economics from Price
Adjustment to
Innovation
Hyman Minsky
• Stressed that Financial
Innovation is at the
Heart of Economic
Change
• Linked Schumpeter’s
Emphasis on Innovation
with Keynes’s
Recognition of Business
Cycles
• Result: Minsky’s
“Financial Instability”
Hypothesis
Financial Instability
Hypothesis:
Key Elements
• Financial Innovation
Tends to Produce
Sectoral Bubbles
• Bubbles Tend to
Eventually Burst
• The Fallout from
Bursting Bubbles
Often Threatens to
Trigger an Economywide Recession
Key Recent Economic
Developments from a Minsky
Perspective
• “Securitization” -- Bundling and Selling
of Debt, Such as Mortgages
• Unconventional Mortgages
• Globalization of Finance
Public Policy Implications
• Economic Policy to Prevent a Serious
Recession (Federal Reserve interest rate
cuts, tax rebates, etc.)
• Financial Market Oversight, Reform and
Supervision
A Minsky Moment
• “ Minsky’s views are reverberating from
New York to Hong Kong as economists
and traders are trying to understand
what’s happening in the markets.” (The
Wall Street Journal, August 18, 2007)
• “ Minsky’s hypothesis is well worth
revisiting.” (The New Yorker, February 4,
2008)