The Minsky-Kindleberger Framework for Economic Bubbles

 

 

In a prior post on Theories of Great Depressions, the major input variable to the Systems Model was a "Shock". The shock could just be non-random "innovations" or it could be the outputs of some other system. Shocks themselves are "explained" by the Minsky-Kindleberger Framework, diagramed above.

During periods of Economic Stability, lending institutions start to expand credit. Expanded credit leads to more Speculation. When some trigger (shock) comes along (e.g., a bank failure, war, etc.) sellers panic sets in which leads to an Economic Crash, implementation of tighter Regulation and a return to Stability. 

The Crash can be prevented if Lenders of Last Resort (Central Banks, Governments, or International Institutions such as the IMF) step in to provide liquidity and soak up non-performing assets. The model seems to fit the 1929 Great Depression, the 1997 Asian Financial Crisis, the 2000 Dot-com Bubble, the 2008 Global Financial Crisis and the Eurozone sovereign debt crisis (2009-2018).

Notes

Perry Mehrling (2023) The Minsky-Kindleberger Connection and the Making of Manias, Panics, and Crashes

Wikipedia Links

• Stability Theory In mathematics, stability theory addresses the stability of solutions of differential equations and of trajectories of dynamical systems under small perturbations of initial conditions. In qualitative writing, stability is often used imprecisely, however, random deviations from the Attractor Path capture some of the meaning.
• Financial Crises any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. A broader reduction of economic activity affecting the whole economy is known as an economic crisis.
• Credit the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt), but promises either to repay or return those resources (or other materials of equal value) at a later date.
• Speculation the purchase of an asset (a commodity, goods, or real estate) with the hope that that asset will become more valuable in a brief amount of time.
• Shock an unexpected or unpredictable event that affects an economy, either positively or negatively. Technically, it is an unpredictable change in exogenous factors—that is, factors unexplained by an economic model—which may influence endogenous economic variables.
• Lender of Last Resort a financial entity, generally a central bank, that acts as the provider of liquidity to a financial institution which finds itself unable to obtain sufficient liquidity in the interbank lending market when other facilities or such sources have been exhausted.
• Financial Panic a large-scale selling of an investment that causes a sharp decline in prices.
• Stock Market Crash a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. They often follow speculation and economic bubbles.
• Financial Regulation a broad set of policies that apply to the financial sector in most jurisdictions, justified by two main features of finance: systemic risk, which implies that the failure of financial firms involves public interest considerations; and information asymmetry, which justifies curbs on freedom of contract in selected areas of financial services, particularly those that involve retail clients and/or principal–agent problems.

Bog Roll

• Did the Smoot-Hawley Tariff Cause the Great Depression? No!
• War and Normalcy: 1914-29 Post-WWI Euphoria led the a Speculative Bubble that was popped by the Stock Market Crash of 1929.
• What I've Learned About Bubbles: 2011-2012.
• Will There Always be Bubbles? Bubbles are deviations from an Attractor Path and could be controlled if Stabilizing Institutions could identify the Bubble starting.
• Should the Fed Pop Bubbles? Yes, but...
• This Time is Not Different. Debt Bubbles.

Summary

References

• Minsky, Hyman (1986) Stabilizing and Unstable Economy 
• Kindleberger, Charles  (2015) Manias, Panics and Crashes: A History of Financial Crises What causes departures from the Attractor Path.