Minsky's financial-instability model suggests that financial crises can be resolved efficiently with lender-of-last-resort and big-government interventions. The crisis that began in 2007 (hereafter, the “2007 crisis“) has been different: it has been more profound and resistant to policy interventions. This paper examines why. Our approach is to expand Minsky's balance-sheet approach in several ways. First, we incorporate two factors Minsky missed because he built his model in the 1970s: the impact of racial exclusion and U.S. cross-border imbalances on U.S. financial dynamics. In addition, we draw out the analytical implications of the systematic differences between banks’ and non-banks’ balance-sheets. Minsky didn't do this; but because of the transformation of banking after 1980, these differences have become deeply significant. One key effect of so doing is to see that asset-liability balances as well as cash-flows are crucial in financial dynamics. This paper concludes that the 2007 crisis has been so profound and unresponsive to policy intervention for several reasons: banks no longer bear as well as originate credit risk; banks made exploitative loans to minority borrowers and then generalized these loans as housing prices rose; and subprime homeowners and structured investment vehicles became more leveraged than banks.

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