A Minsky-Kindleberger Perspective on the Financial Crisis
A MINSKY-KINDLEBERGER PERSPECTIVE ON THE FINANCIAL CRISIS
J. Barkley Rosser, Jr. (contact)
Professor of Economics, James Madison University
Tel: 540-568-3212, email: rosserjb@jmu.edu
Marina V. Rosser, Professor of Economics
James Madison University
Tel: 540-568-3094, email: rossermv@jmu.edu
Mauro Gallegati, Professor of Economics
Università Politecnica delle Marche, Ancona, Italy
Email: Mauro.gallegati@gmail.com
January, 2012
Abstract:
Hyman Minsky and Charles Kindleberger discussed three different patterns of speculative bubbles. One is when price rises in an accelerating way and then crashes very sharply after reaching its peak. Another is when price rises and is followed by a more a similar decline after reaching its peak. The third is when price rises to a peak, which is then followed by a period of gradual decline known as the period of financial distress, to be followed by a much sharper crash at some later time. All three patterns occurred during the financial crisis of 2008-09. Oil prices during 2008 showed the first pattern (peaking in July, 2008); housing prices over nearly a decade showed the second (peaking in 2006), and stock markets showed the third pattern (peaking in October, 2007). Policy directed at containing such bubbles should not use overly broad tools such as general monetary policy, but should be crafted to aim at specific bubbles. Whereas buffer stocks may be useful for commodity bubbles, limits on leverage or taxes on transactions may be more useful for financial markets.
JEL Codes: G01, G12, G18
Keywords: speculative bubbles, period of financial distress, financial crisis, leverage limits, Tobin taxes
Introduction: The Three Types of Bubbles
The three types of speculative bubbles are most clearly laid out in Charles Kindleberger’s Manias, Panics, and Crashes (1978, 2000), with the first explanation of the most widespread third type based on work of Hyman Minsky (1972, 1982), whose discussion more generally
J. Barkley Rosser, Jr. (contact)
Professor of Economics, James Madison University
Tel: 540-568-3212, email: rosserjb@jmu.edu
Marina V. Rosser, Professor of Economics
James Madison University
Tel: 540-568-3094, email: rossermv@jmu.edu
Mauro Gallegati, Professor of Economics
Università Politecnica delle Marche, Ancona, Italy
Email: Mauro.gallegati@gmail.com
January, 2012
Abstract:
Hyman Minsky and Charles Kindleberger discussed three different patterns of speculative bubbles. One is when price rises in an accelerating way and then crashes very sharply after reaching its peak. Another is when price rises and is followed by a more a similar decline after reaching its peak. The third is when price rises to a peak, which is then followed by a period of gradual decline known as the period of financial distress, to be followed by a much sharper crash at some later time. All three patterns occurred during the financial crisis of 2008-09. Oil prices during 2008 showed the first pattern (peaking in July, 2008); housing prices over nearly a decade showed the second (peaking in 2006), and stock markets showed the third pattern (peaking in October, 2007). Policy directed at containing such bubbles should not use overly broad tools such as general monetary policy, but should be crafted to aim at specific bubbles. Whereas buffer stocks may be useful for commodity bubbles, limits on leverage or taxes on transactions may be more useful for financial markets.
JEL Codes: G01, G12, G18
Keywords: speculative bubbles, period of financial distress, financial crisis, leverage limits, Tobin taxes
Introduction: The Three Types of Bubbles
The three types of speculative bubbles are most clearly laid out in Charles Kindleberger’s Manias, Panics, and Crashes (1978, 2000), with the first explanation of the most widespread third type based on work of Hyman Minsky (1972, 1982), whose discussion more generally
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