According to Minsky, the major cause of financial crisis is catalyzed by non-government sector hence called for government regulation financial institutions. He therefore identified three types of borrowers; namely, hedge, ponzi and speculative borrower. The hedge finance borrower in the one who repays the loans (debt) using the investment’s current assets (current cash flow). The speculative finance borrower is one who services the loans from the cash flows from investment while ponzi finance borrower beliefs that the appreciation of assets are enough to repay a debt, however, the cash flow from the investment is not enough to repay a debt.
The memories of previous financial crisis reveals that the government needs control the financial institutions rather than set policies to deregulate the other players within an economy. The lender of the last resort encourages speculation hence bring about financial crisis since the firms already in financial problems take more risk even though the financial problem may have been caused by market failures.
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