Chapter 2: Hyman Minsky on Financial Crises

This chapter explains the 2008 financial crisis with the help of the work of Hyman Minsky on instability. He explained financial crises as the consequence of over-optimism and over-borrowing, leading to unsustainable debt. A crash happens when the bubble bursts (the ‘Minsky Moment’). Both the demand side and the supply side of financial markets in the US in the period 1990–2008 can be explained with Minsky’s theory of instability or, to use his own term, financial fragility. The lesson is that an increasingly financialized economy requires stabilizing institutions. This requires a smaller FIRE-sector preventing too-big-to-fail banks, higher buffers and less money creation by commercial banks, for example, through the introduction of central bank digital currency.