The Minsky Model of Financial Instability and the Politics of Regulation

The reregulation of the financial system is often presented as a panacea for financial crises, and the one we are going through most especially. I don’t want to discuss here the details of the inadequate response to the global financial crisis in that regard here, save to note that in the absence of strong labour and social movements it is difficult to imagine the sufficient mobilisation of countervailing political power to achieve the level of reregulation needed to stabilise the global financial system.

But, imagine, that we did get significant reregulation.

Minsky’s justly famed model of financial instability is divided into three distinct periods; (1) dominated by “hedge” finance (2) dominated by “speculative” finance and (3) dominated by “Ponzi” finance.

Regulation is something that is associated with period (1). However, as the appetite for risk grows in financial markets so political pressure from the financial sector, but also the corporate sector more broadly, to institute deregulation increases and rising corporate profits, especially in the financial sector, is translated into rising corporate political and ideological power. So the sentiment for deregulation increases as we move from hedge finance to speculative and Ponzi finance, and the ability to translate that sentiment into policy also increases.

On the Minsky model then regulation is no panacea; it would be the form of financial governance intrinsic to hedge finance. Political considerations so become important features of the financial instability hypothesis. They imply that regulation is not a panacea for financial instability in capitalist society.

Minsky himself, and the Post Keynesians, argued that investment in capitalist society needs to socialised. The interesting question then becomes, given these considerations; can you have a socialised system of investment in a capitalist society that itself is immune to these political considerations? For example, other sectors of the economy might take the view, as the appetite for risk grows in the corporate sector, that the financial sector should be privatised so that this growing appetite can be translated into higher profits. So the corporate sector would go on the political and ideological offensive such that privatisation is affected.

Which brings the Minsky model again into play.