As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans, and the economy subsequently contracts.
[5] "He offered very good insights in the '60s and '70s when linkages between the financial markets and the economy were not as well understood as they are now," said Henry Kaufman, a Wall Street money manager and economist.
"[6] Minsky's model of the credit system, which he dubbed the "financial instability hypothesis" (FIH),[7] incorporated many ideas already circulated by John Stuart Mill, Alfred Marshall, Knut Wicksell and Irving Fisher.
"[9] Disagreeing with many mainstream economists of the day, he argued that these swings, and the booms and busts that can accompany them, are inevitable in a so-called free market economy – unless government steps in to control them, through regulation, central bank action and other tools.
It was at the University of California, Berkeley, that seminars attended by Bank of America executives[citation needed] helped him to develop his theories about lending and economic activity, views he laid out in two books, John Maynard Keynes (1975), a classic study of the economist and his contributions, and Stabilizing an Unstable Economy (1986), and more than a hundred professional articles.
[11] Hyman Minsky's theories about debt accumulation received revived attention in the media during the subprime mortgage crisis of the first decade of this century.
Demand for housing was both a cause and effect of the rapidly expanding shadow banking system, which helped fund the shift to more lending of the speculative and ponzi types, through ever-riskier mortgage loans at higher levels of leverage.
One implication for policymakers and regulators is the implementation of counter-cyclical policies, such as contingent capital requirements for banks that increase during boom periods and are reduced during busts.
[15] Both Schumpeter (and Keynes), Minsky argued, believed that finance was the engine of investment in capitalist economies, so the evolution of financial systems, motivated by profit-seeking, could explain the shifting nature of capitalism across time.
They issued bills for commodities, essentially creating credit for the merchants and a corresponding liability to themselves, so in the case of unexpected losses they guaranteed to pay.
As competition between firms could lead to a decline in prices, threatening their ability to fulfill existing financial commitments, investment banks started promoting a consolidation of capital by facilitating trusts, mergers and acquisition.
Management in firms became more independent on the investment banker and the shareholder, leading to longer time horizons in business decisions, which Minsky believed was potentially beneficial.
Government spending decisions shifting to underwriting consumption rather than the development of capital assets also contributed to stagnation, although stable aggregate demand meant there was an absence of depressions or recessions.
Minsky argues that due to tax laws and the way markets capitalized on income, the value of equity in indebted firms was higher than conservatively financed ones.
The emergence of return and capital-gains-oriented blocks of managed money resulted in financial markets once again being a major influence in determining the performance of the economy.
Minsky noted that the rise of money management, trading huge multi-million dollar blocks every day, led to an increase in securities and people taking financial positions to gain a profit.
Minsky noted that financial institutions had become so far removed from the financing of capital development at this point, but rather committed large cash flows to 'debt validation.'
[17] In his book John Maynard Keynes (1975), Minsky criticized the neoclassical synthesis' interpretation of The General Theory of Employment, Interest and Money.