Written by:
Zach Liebmann

Old Theory for New Times

Few of us have heard of his name and even fewer know about his contribution to economics. But the economic theory of Hyman Minsky is making its triumphant return thanks to the current financial crisis.

A recent article in The Economist discusses Minsky's theory's that "the financial system played a big role in exaggerating the economic cycle, one that was understated by conventional theory."

The Economist writes:

"Minsky divided the process into three phases. In the first, investors take on little enough debt that they have no trouble meeting their capital and interest payments. In the second, they stretch their finances so they can only afford the interest. In the third, or Ponzi, phase they take on debt levels that require rising prices to be safely financed; the homebuyers who took on 125% mortgages at the peak of the property boom were a classic example."

And guess what happens when the debt bubble pops? The government is forced to step in and save the financial system (and the rest of the economy).

Sound familiar?

Read the full article here.