Question

Minsky stated that stability was destabilizing. Explain what he meant by this.

Answer 1

“stability is destabilizing”explained by Minsky’s two theorems of financial fragility in the FIH:

(I) the economy has financing regimes under which it is stable (hedge) and financing regimes in which it is unstable (speculative and Ponzi); and

(II) over periods of prolonged prosperity, the economy transitions from financial relations that make for a stable system to financial relations that make for an unstable system.

In other words, the economy tends to move from a financial structure with abundant units engaged in hedge finance to a structure dominated by speculative and Ponzi units. The natural shift from hedge positions to speculative to Ponzi is a required condition for instability to arise, and, as explained above, the move (and the erosion of margins of safety) happens during periods of economic stability and prosperity. One of Minsky’s most important contributions was to point out that the process leading to an unstable system is an inevitable, endogenous, and evolutionary process of the modern capitalist economy.

The periods of economic instability and recessionary episodes emerge naturally out of the normal functioning of a prosperous modern capitalist economy.

He emphasized on deviation amplifying system from robust financial structure by hedge to abundant speculative and Ponzi financing units.it mainly happens in capitalist economy as financial stability is losing and entering into a most fragile economy.