Stabilizing an Unstable Economy

Category: Business & Finance
Author: Hyman P. Minsky
4.3
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Comments

by riggins   2018-12-13
"not one person responsible for crashing the economy"

https://www.amazon.com/Stabilizing-Unstable-Economy-Hyman-Mi...

The incentives in capitalism "crash the economy". Yes, there was bad behavior. However focusing on individual behavior misses the forest for the trees.

Here's how it works.

Banks start off conservative. Banks only offer loans that pay themselves off. There's a run of good years. The incentive in capitalism is to make more money, and based off the recent history of good years, Bank A realizes they can offer more aggressive loans (e.g. interest only), take market share, and make more money. So Bank A does that.

Bank B now has the choice of matching Bank A, or losing market share (and maybe their business). So Bank B matches and maybe also offers less money down. This cycle continues with progressively more aggressive loan offerings until there's a run of bad years and things and people are stuck with too aggressive financing.