It is probably fortunate for Elinor Ostrom and Oliver Williamson that Nobel prizes are only given to living recipients. Yesterday, the two American academics won the 2009 prize in economics for their work on co-operation and economic governance. But although the pair are no doubt worthy laureates, it could well have occurred to them yesterday that if Nobels were awarded posthumously, then this year's prize would very likely have gone to the late Hyman Minsky, who died in 1996. Described as a radical Keynesian at a time when the theories of British economist John Keynes were deeply out of fashion, Minsky spent much of his career examining the causes of financial crises. Unfortunately, his work was largely ignored during his lifetime. If more people had paid attention, it's just possible we might have been spared the subprime crisis and the whole global economic train wreck that followed. Unlike most of his contemporaries, Minsky had little time for the efficient market theories. Instead, he developed his own 'financial instability hypothesis', which argued pretty much the exact opposite. In recent decades, the majority of economists have accepted that financial markets are self-limiting systems, which regulate themselves through negative feedback mechanisms. So, for example, if a stock looks cheap, investors buy it. As the price rises, the stock begins to look more expensive and the buying tapers off. As a result, the price automatically adjusts to fair value, and the system moves towards equilibrium. In sharp contrast, Minsky maintained that free financial markets are inherently unstable and that apparently balanced conditions will actually tend to give rise to crises. Minsky argued that during periods of economic and financial stability, lenders get lulled into a false sense of security and relax credit standards, while financial regulators grow complacent and loosen supervision. At the same time, encouraged by low borrowing costs, investors begin to leverage up in the hope of earning higher returns. The result, warned Minsky, is a credit-fuelled asset bubble. The subprime crisis was a classic example. As economists praised 'the great moderation' of low interest rates, low inflation and increasing wealth, 'hedge' borrowers, who could repay their debts from cash flow, were joined by 'speculative' borrowers, who could make interest payments but were unable to repay principal. Finally, 'Ponzi' borrowers entered the market, those who could make neither interest nor principal payments. These were the notorious Ninja (no income, no job, no assets) homebuyers, who relied on overly easy credit and ever-rising asset prices just to stay afloat. Of course, credit-fuelled asset bubbles can't last forever. As Minsky explained, sooner or later, the authorities are forced to tighten monetary policy to head off inflation, and the bubble bursts. This has been dubbed the 'Minsky moment', when collapsing asset prices trigger a contraction in credit, which further depresses asset prices; exactly what happened to the US property and stock markets in 2007 and 2008 (see the charts below). The end result is a painful recession as the economy deleverages. Few listened in his lifetime, but Minsky outlined the whole process. Encouragingly, they are paying attention now. Not only have central banks adopted Minsky's recommendations for dealing with financial collapses by acting as lenders of last resort to the banking system, they are also considering his prescriptions for avoiding Minsky moments in the first place, for example by introducing counter-cyclical measures requiring banks to build up their capital ratios during economic upswings. More than a dozen years after his death, Minsky is finally getting the recognition he deserves. If he were still alive, he would surely have been a safe bet for yesterday's Nobel prize.