Examining How The Theories of Minsky and Keynes Predicted to 2008 Financial Crisis

Level: Masters | Grade: Masters Pass | Approx. Word Count: 1,800

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Focusing predominantly on the impact of the crisis on the UK economic and financial policies, the aim of the proposed dissertation is to evaluate to what extent, if any, the two theories identified may have provided earlier indications that the global financial crisis was likely to occur.

July 2007 saw the commencement of a banking crisis that was to have a devastating impact on the global financial markets (Cooper 2010). This crisis, stated to be “The worst in human history” (Monaghan 2008), resulted in national and international being forced to provide billions of dollars in the form of bail-outs, simply to “maintain the ability of the financial system” (Winnett 2008, n.p.). Subsequent events have also shown that the crisis caused one of the deepest periods of recession that had been experienced for decades (Editorial 2009), from which some nations are still recovering. In the subsequent wake of this crisis, it was not surprising to find that there has been a considerable amount of debate between economic and academic observers over the causal factors of the banking collapses that caused this event (Cooper 2010). While recognising that the sub-prime housing market precipitated the crisis, it has been argued that weakness in financial regulatory controls and the uncontrolled development of the credit derivatives market had allowed the fault lines that led to banking crisis to go unnoticed (Chung et al 2008). However, relatively few observers during this period have focused on what could be described as failures of governmental economic policy (Wolfson 2002). It is this apparent gap in the literature that sought to explain the causes of the financial crisis that has formed the inspiration for the proposed dissertation. In particular, the aim of the proposed study will be to examine how a better understanding of two economic theories could have been used to predict this crisis, and may indeed have prevented its occurrence. The theories to be focused on in this respect are Keynes’ (1936: 1) “General Theory of Employment, Interest and Money” and Minsky’s (1992: 1) “Financial Instability Hypothesis” (FIH). The discussion will be concentrated on whether these provided a preferable approach to fiscal/economic policy than Fama’s (1970) Efficient Market Hypothesis (EMH) which had been preferred by most western governments, including the UK.