Liberals, specifically Keynesian thinkers such as Minsky, hold a convincing interpretation for causes of the financial crisis. One of the causes can be explained by Minsky’s financial instability hypothesis (Docherty, 2005). Post-Keynesian economists hold that capitalism in its raw form is inherently unstable (Varoufakis, Halevi, Theocarakis, 2012, p.210). They argue that the classic capitalist view when designing regulations is that the financial markets lead to the best outcomes, instead of the assumption that the financial markets are destabilizing (Dullien et al., 2017). Therefore, post-Keynesian economists argue that capitalist regulators should be designing regulations assuming that something will go wrong, rather than assuming that a financial crisis is unlikely as the market will regulate itself (Wolff, Resnick, 2012). Minsky (2008) in particular sees that real and financial variables are interdependent, meaning that any problems in the financial sector will have repercussions for the real economy. This was one of the causes of the global financial crisis as this is exactly what occurred when lenders started giving out subprime mortgages (Zandi, 2008). Minsky (2008) looks at the cyclical past of economies and argues that the capitalist view of a stable growing economy is a myth. This is because history shows a cycle, whereby financial agents suffer from ‘myopic insight’ (Levitt, 2008). Galbraith (1994) also places emphasis on ‘speculative euphoria’ in a crisis and how this want for success ‘breeds a disregard of the possibilities of failure’. Those who try and intervene to warn of impending difficulties are silenced when speculative euphoria happens, as happened in the 2008 global financial crisis (Keen, 2011). As Keynes said, ‘worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally’ (Azzopardi, 2010). This is because a bank can create loans easily, as long as it has the trust of other clients and banks that agree to provide liquidity to banks whose loan portfolio is increasing rapidly (Rajan, 1996 p.1-3). Post-Keynesians argue the fear of losses will slowly vanish in good times. Successful validation of previous decisions leads to an overconfident financial sector, and this is how securitisation was allowed to prosper which was arguably one of the main factors of the crisis (Kates, 2010 p.232). Models of household debt developed by scholars such as Palley (1996) and Brown (1997) concluded that the effect of household debt are positive in the short term and negative in the long run and this therefore was a key cause in the global financial crisis, as household debt was a factor that US banks capitalised on.
Post-Keynesians would also argue that the prevalence of endogenous money was a key cause of the 2008 global financial crisis (Minsky, 2008). This was because central banks had little control over the stock of money. Keynesian thinkers believe that banks tried to create innovative ways to avoid regulations and restrictions that were put on them by other monetary authorities (Keynes, 2017). Therefore, the money in the global financial crisis was an endogenous variable, as it could not be determined by the decisions of the central bank (Barro, 2007, p.8). This is based on reverse causation. Godley and Cripps (1993) states that ‘governments can no more “control” stocks of either bank money or cash than a gardener can control the direction of a hosepipe by grabbing at the water jet’. Post-Keynesian thinkers claim that banks are not just financial intermediaries, transforming short term liabilities, in this case the deposits of households, into medium or long term assists (the loans made to firms) (Minsky, 2008), but that banks create these loans and deposits out of nothing. This explains the reverse causality as it is not the deposits of economic state agents that allow banks to make more credit, it is the decision of the banks to grant more credit to borrow that leads to the creation of the money deposits (Perelman, 1989). Commercial banks therefore create money, in the form of bank deposits by making new loans. This is a factor that led to the financial crisis because people often mistake saving as investment.