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“At the annual banking structure and competition conference of the Federal Reserve Bank of Chicago in May 1987, the buzzword heard in the corridors and used by many of the speakers was ‘that which can be securitized, will be securitized.’” So notes Hyman Minsky in a prescient memo on the nature, and the implications, of securitization, written 20 years before an explosion in the securitization of home mortgages helped create the current financial crisis. This memo, which served as the basis for a lecture in Minsky’s monetary theory class at Washington University, has not been widely circulated. It is published here in its entirety, with a preface and an afterword by Senior Scholar L. Randall Wray that places Minsky’s work in context.

Hyman P. Minsky. Introduction by Dimitri B. Papadimitriou and L. Randall Wray

The late American economist and Distinguished Scholar Hyman P. Minsky first wrote about the inherent instability of financial markets in the late 1950s, and accurately predicted a transformation of the economy that would not become apparent for nearly a generation. In 2007, interest in his work suddenly exploded as the financial press recognized the relevance of his analysis to the meltdown of the mortgage-backed securities market. Indeed, in this book, first published in 1986, Minsky examined a number of financial crises in detail, several of which involved similar financial instruments, such as commercial paper, municipal bonds, and real estate and investment trusts. More important, he explained why the economy tends to evolve in such a way that these crises become more likely.

Minsky insisted that there is an inherent and fundamental instability in our sort of economy that tends toward a speculative boom. Unlike other critical analyses of capitalist processes, which emphasize the crash, Minsky was more concerned with the behavior of agents during the euphoric periods. And unlike other analyses that blame "shocks," "irrational exuberance," or "foolish" policy, he argued that the processes that generate financial fragility are "natural," or endogenous to the system.

Stabilizing an Unstable Economy is Minsky's seminal work, and it has been reissued so that it may be broadly available to a new generation of economists, analysts, and investors. The book covers, among other topics, the effect of speculative finance on investment and asset prices; booms and busts as unavoidable results of high-risk lending practices; government's role in bolstering consumption during times of high unemployment; and the need to increase Federal Reserve oversight of banks.

Published By: McGraw-Hill

In this working paper, Distinguished Scholar Hyman P. Minsky and Visiting Scholar Charles Whalen search for reasons to account for the split in post-World War II economic performance—that is, the difference in performance between the 1946–66 period and the 1966–96 period. The authors discuss a number of economic problems that have arisen during the past quarter of a century, including slower growth, stagnant earnings, rising financial instability, and increasing inequality. Minksy and Whalen concede that factors such as globalization and technological change have undoubtedly played a role in the split performance. An additional important and often overlooked element is the evolution of the US financial structure. The authors explain that a key component influencing the evolution of the financial sector during recent decades has been the rise of "money manager" capitalism. Important features of money manager capitalism are increased financial fragility (lower margins of safety in indebtedness and a greater reliance on debt relative to internal finance) and the introduction into the financial structure of a new layer of intermediation. In particular, managers of pensions, trusts, and mutual funds currently control the largest share of the liabilities of corporations. These managers are judged by only one criterion: how well they maximize the value of funds. As a result, business leaders have become increasingly sensitive to the stock market valuation of their firm.

A Proposal to Establish a Nationwide System of Community Development Banks

This brief proposes that the establishment of a nationwide system of community development banks (CDBs) would advance the capital development of the economy. The proposal is based on the notion that a critical function of the financial system is not being adequately performed by existing institutions for low-income citizens, inner-city minorities, and entrepreneurs who seek modest financing for small businesses. The primary goals of the CDBs are to deliver credit, payment, and savings opportunities to communities not well served by banks, and to provide financing throughout a designated area for businesses too small to attract the interest of the investment banking and normal commercial banking communities.