Inside the Black Box

Stock Market Concepts

Elham Saeidinezhad in Phenomenal World:

We live in a period of unparalleled financial complexity, and, as the history of recent decades has demonstrated, unparalleled financial risk. The recurring crises which plague the global economy have brought theorists of systemic instability to the fore. Key among them has been Hyman Minsky, whose framework for understanding financial market fragility takes a cyclical form. In his model, an excessive credit expansion (“displacement”) fuels a speculative bubble (“mania” ) and causes “financial distress,” leading to credit contraction and the bursting of the bubble (“panic” ).

The appeal of Minsky’s model lies, in part, in its “structural” perspective. In contrast to the general tendency to disregard financial market practices, Minsky leveraged institutional and legal structures of the financial markets to develop his views. A classic example is his interpretation of the 1980s debt crisis—unlike orthodox theories of profit determination based on productivity and market power, Minsky linked firms’ performance to the developments of the financial market. Specifically, he focused on the 1980s merger and acquisition mania and the structure of junk bonds. Whereas neoclassical theories priced cash flows based on profitability, Minsky analyzed them as claims on firms’ tangible assets, which were often used as collateral for junk bond loans. In the ‘80s, financial distress thus enabled issuers to refrain from making payments, generating a liquidity crisis that neoclassical frameworks could not understand.

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