The Global Financial Crisis, credit crunches and deleveraging

The proposition that the Global Financial Crisis was inherently unpredictable is a recurrent theme amongst those charged with preventing such events. It is also a convenient untruth. A Netherlands academic did a rather better survey of the literature than Governor Stevens, to identify 12 economists and market analysts who did foresee this crisis?of whom I was one (Bezemer 2009: Table 1). More importantly, he identified common elements to the analyses that led these researchers to foresee what neoclassical economists in particular failed to anticipate. My own analysis extends Hyman Minsky?s ?financial instability hypothesis? (Minsky 1977; Keen 1995), using a theory of monetary dynamics known as Circuit Theory, which originated in Europe (see Graziani 2003). Both perspectives played a key role in helping identify that a crisis was imminent. Minsky emphasised the importance of the debt to GDP ratio as the key indicator of financial fragility; while the Circuit School?s insights enabled the development of a purely monetary model of the economy in which changes in debt play a crucial role in determining the level of aggregate demand.