In an interview on Keynes

What about Minsky?

Minsky. Minsky died in 1986 and he taught at an obscure university in St Louis. When he died there were some reverential notices but he was not generally well-known. However, he made a very important contribution to Keynesian economics. He thought that financial systems ought to be a way of transforming money, a conduit between people who had a bit of money to invest and others who needed to borrow that money. But what he pointed out was that, in fact, financial systems are just speculation, that some people are making huge amounts of money for themselves by speculating. So, suddenly now people are asking: Is this a Minsky moment? And I think it is. He got the financial system very, very right by emphasising its speculative nature. People like George Soros and Warren Buffet believe the same thing, that people get excited about speculating and go too far in one direction, leading to collapse. They think: “Oooh, we can make lots of money,” and you get what become toxic securities. Once, the bank would lend money to someone so that they could buy a house and the loan would be their mortgage. If they defaulted on the mortgage the bank would take the house. It was a straightforward relationship. But now the bank sells the money on and speculates on it. Minsky saw how this might happen. He had something he called a Ponzi scheme where people borrow a lot of money against something they assume will appreciate in value and they borrow more and more but it’s all a big scam. Minsky’s very good on all that – the financial system that should be serving the needs of the real economy actually causes great instability. He deserves credit for that.