G. TAKAHASHI
Open Acces s
the financial market of Jap an. Japanese Prime minister Abe also
expects dev alu ati on o f the Yen , an d in crease in Jap anes e expo rt.
Later in this paper, we will see that the amount of Japanese
base money had been decreased by the Central Bank of Japan
before the global finan cial crisis of 2007.
This paper proved in consideration of the finance crisis in
2007 to 2008, a great quantity of increase in base money was
deeply connected with the finance crisis. In order to avoid a
finance crisis beforehand, it is necessary to research about a
reasonable quantity of base money.
Financial Crisis
Recently, the world economy has been rocked by crises.
Crises are categorized into many types: economic crisis, finan-
cial crisis, monetary crisis, stock crisis, foreign currency crisis,
business crisis and so on. Economic crisis embraces financial
crisis, monetar y crisis and oth er crises. The definition of finan-
cial crisis is not so rigid. It is defined generally as the situation
in which the value of financial institutions or assets drops ra-
pidly. A financial crisis is often associated with a panic or a run
on the banks, in which investors sell off assets or withdraw
money from savings accounts with the expectation that the
value of those assets will drop if they remain at a financial in-
stitution. If a financial situation like this continues, it will cause
an econo mic crisis (Christianoa et al ., 2004; Sau nd er s, A. et al.,
2010).
Financial crisis is currently the most serious problem in the
world with regard to the economy (Jean-Philippe et al., 2000).
The so called Pound crisis of 1992, Dollar crises in the 70’s and
80’s, also financial crises in the 60’s, 70’s and 80’s provoked
by the Dollar crisis, “Black Monday” in 1987, the bursting of
the bubble economy of Japan in the 90’s, Asian financial crisis
in 1997, US sub-prime financial Crisis in 2007, “Lehman
Shock” in 2008 and the financial crisis of European countries
are crises which seem to co ntinue up to the present. This p aper
focuses on a particular financial crisis among various kinds of
economic crises.
According to theory of Economics, government deficit plus
current account surplus means surplus of savings in the private
sector of the country. Currently, most countries with big-scale
economy have big deficits in their national accounts. But there
is enough money in the business sector. If the lack of money is
the reaso n for fin ancial cri sis, th en we hav e never met with an y
financial crisis, because most leading countries have much
money in the financial market in nowadays. If enough money in
the money market flows to the treasury account, the govern-
ment gets national fiscal balance. But it is not easy for most
governments to create the balance. Many countries and com-
munities are facing problems with the flow of money from the
private sector to th e government.
Cause of Financial Crisis
Minsky’s Theory
Hyman P. Minsky’s hypothesis explains the reason behind a
financial crisis.
“The first theorem of the financial instability hypothesis is
that the economy has financing regimes and financing regimes
in which it is the second theorem of the financial instability is
that over periods of prolonged prosperity, the eco nomy transit s
from financial relations that make for a stable system to finan-
cial relations that make for an unstable system” (Minsky, 1992).
Minsky’s theories emphasize the macroeconomic dangers of
speculative bubbles in asset prices which were not incorporated
into the central bank policy. However, in the wake of the finan-
cial crises of 2007-2010, there was an increased interest in the
policy implications of his theories. Some central bankers had
begun to support Minsky’s theories since that time.
“Suffice it to say that, with the financial world in turmoil,
Minsky ’s work has become required reading. It is getting the
recognition it richly deserves. The dramatic events of the past
year and a half are a classic case of the kind of systemic
breakdown that he—and relatively few others—envision ed”
(Yellen, 2009).
Minsky postulates that a key factor to provoke a crisis is the
accumulation of debt by the non-government sector. He said
that three types of borrowers contribute to the accumulation of
insolvent debt: 1) “hedge borrowers”; 2) “speculative borrow-
ers”; and 3) “Ponzi borrowers”. Ponzi means one kind of pyra-
mid selling.
According to Minsky, the financial crises are provoked by
highly developed capitalism of after World War II. Moreover,
there are five stages of a credit cycle in highly developed
economies. He also says that there is an essential instability in a
market economy, which means that financial instability is ne-
cessary. H e describes the instability stages as fo llows:
1) When an economic condition is good, investors take risk.
2) Risk will continue to increase.
3) When taking the risk exceeds a certain level, it becomes
impossible to obtain the benefits associated to the risks.
4) A risk expands with some economic shocks.
5) The p anicked investors sell off their asset s .
6) Assets price will slump.
7) Investors fall into a negative net worth which goes to
bankruptcy.
8) The banks lend to investors who go bankrupt.
9) The cen tral ban k r elieves banks (“Minsky Momentum”).
10) Return to stage a) (M i ns k y, 1992).
He, ho wever, di d exp lain thi s claim; he was not able to prove
his great hypothesis. The reason is not so complicated. Minsky
did not find out the fact that financial crisis is provoked by the
flood of money. Most financial crises do not occur in the stage
where there is shortage of money. It is not only Minsky who
made a mistake but also most financial research ers.
One typical researcher who made similar mistake was Pro-
fessor Milton Friedman. During the 1960s, he promoted an
alternative macroeconomic policy known as “mon et ar i sm”. He
argued t hat the Phillips curve was not stable and predicted what
would come to be known as stagflation. Though opposed to the
existence of the Federal Reserve, Friedman argued that, given
that it does exist, a steady, small expansion of the money
supply was the only wise policy (Brian, 1995).
Many researchers have criticized Minsky’s assertion in part.
They say that the current financial market turmoil has been
ignited by the collapse of the sub-prime mortgage market. And
they believe it has been brought by the ideas of Hyman Minsky.
Many commentators view that Minsky’s framework of thinking
accurately anticipated the current financial crisis. The heart of
Minsky’s framework is that capitalism is inherently un-stable
and has self-destructive tendencies. An important mechanism
for this destructive tendency is the accumulation of debt. Con-
trary to Minsky, an analysis shows that the existence of the
central b an k makes the cap it alism unstable. This is the only one
factor which is responsible for the current financial instability
