Asset Bubbles and Minsky Crises in East Asia: A Spatialized Minsky Approach

Abstract

Some economists have suggested that the economic crises in East Asia were preceded by asset bubbles because of some nations ’ inadequate bank supervision and myopic (or even criminal) bank lending behavior. Others have developed an alternative approach based on Hyman Minsky’s financial instability hypothesis: in this view, these nations have experienced boom-bust financial cycles, with asset-price booms generating Minsky crises and eventually a series of crashes. Minsky’s policy prescriptions for financial cycles — “big banks ” and “big government”—then present remedies for these nations’ ills. This paper also applies Minsky’s ideas to the Asian financial crisis, but modifies them to to incorporate cross-border financial flows. Ironically, this modification is based on earlier work done by Minsky himself in the mid-1960s. This extension of Minsky’s framework shows first that asset bubbles can arise whenever cross-border inflows of financial claims on capital exceeds the growth rate of real asset production. Since crossborder imbalances occur frequently, asset bubbles and/or asset-price deflations are everpresent tendencies. Second, shifting cross-border flows can bring about Minsky crises even without Minsky cycles. Finally, this paper shows that Minsky’s “big bank ” and “big government ” prescription for recovery is more difficult to apply when cross-border constraints matter. Japan’s ability to apply these remedies in the current Asian crisis is complicated in ways that do not arise in the U.S. case highlighted in Minsky’s work. The research reported here was supported by the Pacific Rim Research Program of the

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