Samir’s Selection 03/24/2014 (p.m.)
Did Hyman Minsky find the secret behind financial crashes?
Here are five of his ideas: 1. Stability is destabilising: … He thought that the system itself could generate shocks through its own internal dynamics. He believed that during periods of economic stability, banks, firms and other economic agents become complacent. They assume that the good times will keep on going and begin to take ever greater risks in pursuit of profit. So the seeds of the next crisis are sown in the good time.2. Three stages of debt: Minsky had a theory, the “financial instability hypothesis”, arguing that lending goes through three distinct stages. He dubbed these the Hedge, the Speculative and the Ponzi stages, after financial fraudster Charles Ponzi…3. Minsky moments: The “Minsky moment”, a term coined by later economists, is the moment when the whole house of cards falls down. Ponzi finance is underpinned by rising asset prices and when asset prices eventually start to fall then borrowers and banks realise there is debt in the system that can never be paid off. People rush to sell assets causing an even larger fall in prices…4. Finance matters: To Minsky, banks were not just pipes but more like a pump – not just simple intermediaries moving money through the system but profit-making institutions, with an incentive to increase lending. This is part of the mechanism that makes economies unstable…5. Preferring words to maths and models: Although he trained in mathematics, Minsky preferred what economists call a narrative approach – he was about ideas expressed in words… While maths is more precise, words might allow you to express and engage with complex ideas that are tricky to model – things like uncertainty, irrationality, and exuberance. Minsky’s fans say this contributed to a view of the economy that was far more “realistic” than that of mainstream economics.
Behavioural economics and public policy
1. “social proof” – Social proof describes our tendency to run with the herd; why else are books marketed as “bestsellers”?
2. Other trials have shown that clearly-written letters with bullet-point summaries provoke higher response rates.
Posted from Diigo. The rest of my favorite links are here.