by Josef A

Created on: March 21, 2009   Last Updated: May 10, 2009

Mainstream economics mostly claims the existence of equilibria that are regularly disturbed by external shocks and therefore the economy is in disequilibrium at certain points in time. To give an example: a sudden tax increase brings the economy in disequilibrium and it takes a while until it reaches the new equilibrium. Since such shocks are quite frequent economies are rarely in equilibrium. However, there is such a tendency towards it that is merely constantly disturbed by external events.What was the event that brought the disequilibrium this time? The fall of Lehman brothers? If so, is this really an external event/shock? There is a maybe not widely known scholar, Hyman P. Minsky (1919-1996), and his work explains why disequilibria (this is actually more a euphemism for crisis as used in that context) are caused endogenously, that is to say, the system creates them itself and not something external.

Minsky illustrates that in prosperous times the financial sector gets more and more lenient with its credit policies. He distinguishes between three types of credit collateralization: a hedged credit, a speculative credit, and a Ponzi credit. Hedged credits are secured by assets; if the borrower defaults the risk is limited as the lender obtains the collateral. Speculative credits are riskier and rely on the productivity of the borrower who has to generate enough revenue with the underlying business to fulfill credit obligations.

The most extreme form is what Minsky calls "Ponzi" finance, that became famous lately again through Bernard Madoff and goes back to 1920 when a Mr. Ponzi created a similar fraud. A "Ponzi" scheme is the tip of the iceberg and the ability to pay interest and pay back the loan is solely based on taking on new debt or sellng existing assets. There is small edge with this practice and it easily becomes fraudulent and criminal as it often ends in default and the last lenders or investors lose most of their money if not all. Minsky claims that the financial sector has a tendency to go into the direction of "Ponzi" credit and does this in increasingly innovative ways. The reason is simply a desire to grow and exploit all possible revenue channels. As said at the beginning this happens during prosperous times, so the development may continue over an extended period and even fuel further positive growth rates. This works well until somebody starts to claim back their debt for whatever reason some call this a "Minsky" moment. Asset prices

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