Lessons from the Subprime Meltdown

Abstract

This paper uses Hyman P. Minsky's approach to analyze the current international financial crisis that was initiated by problems in the U.S. real estate market. In a 1987 manuscript, Minsky had already recognized the importance of the trend toward securitization of home mortgages. This paper identifies the causes and consequences of the financial innovations that created the real estate boom and bust. It examines the role played by each of the key players - including brokers, appraisers, borrowers, securitizers, insurers, and regulators - in creating the crisis. Finally, it proposes short-run solutions to the current crisis, as well as longer-run policy to prevent it (a debt deflation) from happening again.

Keywords: Hyman Minsky, Financial Instability, Mortgage-backed Securities, Subprime

JEL Classification: E12, E32, E44, E58, E63