The Corona Crisis: Mapping and Managing the (Western?) Financial Turmoil — A Minskyan Approach — Leonardo Burlamaqui and Ernani T. Torres Filho publicado por IE/UFRJ (2020).
This article uses Minsky’s insights to analyze the fragilization processes related to the Coronavirus crises. To achieve this aim, it expands Minsky’s thoughts in two innovative ways. The first one is bringing clarity to the distinction between financial fragility and financial instability, despite their close connection. Financial fragility is permanently operating in a capitalist economy and opens the ground in some circumstances to the unfolding of financial instability. Instability is a different situation in which the financial market becomes dysfunctional menacing the operation of the liquidity markets and the pricing of assets. The second contribution is related to the three intertwined fragilization processes that started with the corona crisis: a sharp increase in market liquidity risk, the collapse of cash inflows, and the insolvency problem related to impaired balancesheets. This third process is not described by Minsky but plays an essential role in the crisis and can be integrated into his framework. The article also describes the coronavirus crises from the American and the Global Financial System and suggests policy measures to reduce its negative impacts.
“The Corona-virus crisis has paralyzed huge parts of the planet in weeks1 . It not only infected the population but injected a gargantuan dose of uncertainty into the system. In that regard, as in many others, it is a phenomenon without precedent. As the time of writing (May-June 2020), we are witnessing, simultaneously, a health crisis, an economic crisis, and a crisis of global governance as well. In the forthcoming months, it can well turn into a financial, social, and political set of crises for which most governments and international organizations are ill-prepared to handle.
In this paper, what concerns us is the financial dimension of the crisis. This crisis has not run its full course, but its economic contours are visible and, we submit, can be mapped and managed to a certain extent. We adopt here a Minskyian analytical framework, starting from his “Wall-street paradigm” (Minsky:1982, especially chapters 3 and 5). That means we understand capitalism inherently as a financial system whose “deeper flaw centers around the way the financial system affects the prices and demands of outputs and assets” (Minsky, 1994: 19).
A key insight provided by Minsky’s analysis of financial fragility, is that: “A financial system is robust when debt servicing can be readily satisfied by income cash flows and when portfolios contain sufficient cash and other financial assets not required by operations to absorb temporary shortfalls in cash receipts. A financial system evolves towards fragility as the cash flows on liabilities increase relative to the relevant cash receipts and as units are “stripped” of liquidity”3 (Minsky: 1975, 4).
From this perspective, capitalism is essentially a system where finance is key, and “stability breeds instability” (Minsky: 1986). Furthermore, we understand that from a Minskyan point of view, all economic crises are essentially “Minskyan crises,” since although they might not start as financial crises, they are bound to develop, endogenously, into financial disorders4 . In this framework, financial fragility, financial instability, cash-flow shortfalls, liquidity crunches, insolvency threats and asset-liability restructuring processes are central elements, and they will take their place as we proceed.
Taking Minsky’s analysis as our departing point, we extend it in two ways. The first relates to the distinction between financial fragility and financial instability. As far as we know, Minsky himself never made a clear distinction between those two concepts, using them, often, interchangeably. However, he ofttimes linked the emergence of the latter with the behavior of the financial system5 . Here we propose a way to sharpen the distinction between them analytically, although they are interconnected…”
