Essay: Minsky’s Theory of Financial Fragility
Hyman Minsky actually proposed the concept of post-Keynesian explanation in the scenario of economic crisis and he believed that it is applicable in the closed economy. The theory of this researcher revolves around the scenario that a typical feature of capitalist economy is financial fragility that is present in the economy. High fragility in the market results in financial crisis and the probability of financial crisis are more in high fragile situations. That is the reason why he stressed on the fact that people and organizations should adopt certain approaches to minimize the risk factor that is associated with this fragile behaviour of the market (Wolfson 1995). These approaches are given below:
- In the concept of hedging the finance the income flows are actually expected to meet the financial obligations in each and every period and it would include both the principal and the loan.
- In the scenario of speculative finance an organization must develop a habit of rolling its debt because the income flows would only cover the interest costs and the entire principal amount in this scenario is not paid off.
The business cycle and the financial fragility are associated with each other and in the periods of recessions organizations usually not opt for financing and they can only hedge in this scenario which is considered as the safest approach. But since the economical conditions of the world are changing that is the reason why people are moving towards the concept of speculative financing. In this scenario the profits of an organization would not cover the interest’s payments. However, a scenario is developed in which more and more loans leads to more investments and in this scenario the economy directly grows. Lenders also have an idea that they will get the money back and they start believing in the economic conditions of the economy.
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