Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis

By Thomas H. Stanton | Go to book overview

8
Hyman Minsky:
WILL IT HAPPEN AGAIN?

Over an expansion, new financial instruments and new ways of financing
activity develop. Typically, defects of the new ways and the new
institutions are revealed when the crunch comes.

—HYMAN MINSKY

Underlying the bubble and its collapse was a dynamic that had been predicted several decades ago by a little-known economist, Hyman Minsky. He observed that financial boom-and-bust cycles, such as he studied from the Great Depression, were a natural consequence of the financial markets. Understanding these cycles helps to place governance and risk management into context. In the aftermath of a crisis, lenders and borrowers both become cautious. At that point, governance and risk management, whatever their quality, are unlikely to lead to overlending and systemic risk. Problems arise largely as memories fade, the economy enters a period of apparent prosperity, leverage increases, and lending standards become more lax. That is when good governance and strong risk management count most. Badly managed firms can fail in strong economic times, but the chances of systemic risk are smaller then. The key is to manage firms well during good times so that they can survive when circumstances change.

For Minsky, there are three types of lending: (1) loans based on the ability of the borrower to repay them, (2) loans based on anticipated cashflows from assets, sufficient to make timely interest payments but not the original principal, and (3) loans based on future increases in the value of collateral. As prosperity flourishes, banks and other lenders take on greater leverage as a way to increase their returns to shareholders, and to the managers who are rewarded with stock options.

Because asset values such as the value of homes securing mortgage loans increase, lenders begin to relax their standards. They move away from loans based on the borrower’s ability to repay, or even on ability to repay interest, to

-172-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this book

This book has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this book

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited page

Bookmark this page
Why Some Firms Thrive While Others Fail: Governance and Management Lessons from the Crisis
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen
/ 278

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.