Minsky craze over done –

The strategist world is now captivated by Hyman Minsky. Some pundits are calling this credit crisis a Minsky moment. The Wall Street journal had a long story concerning the now dead economist on Saturday. http://online.wsj.com/article/SB118736585456901047.html The FT had a story on who discussed Minsky first in 2007. http://ftalphaville.ft.com/blog/2007/08/20/6687/economist-idol-minskys-new-found-fame/ We all seem to have a good explanation for what is happening now, but there are problems with the whole premise of declaring a Minsky moment. Minsky noted that long periods of stability will lead to complacency in markets so that any problem or shock will cause a higher level of instability. How can you prove this hypothesis? If there is no instability, the Minskyites could argue that it has not yet occurred. If we move to a state of higher volatility or instability, it would be argued that the moment has arrived. This to some degree represents the worst type of forecasting. Argue for some calamity. It may eventually occur. There have been blog writers warning about Minsky moments since 2001. Are they right because they have been arguing for the fall for over 5 years? I am not arguing that Minsky is not useful. I am suggesting that more care has to be taken in trying to understand this crisis.

While this may be an over simplification, we have to look at the root causes of problems and trace through the structure of the economy the potential problems. The writings of Minsky are extensive, but hard to obtain. In general, the key focus is that that during periods of long-term stability there will be a movement from traditional hedge funding to Ponzi financing where more money has to be borrowed or assets sold at a higher price to pay-off existing debt. Borrow money to buy a home under the hope that it will appreciate and the profits will be able to pay-off the loan. The scheme only works if the price increase is faster than the loan rate. This Ponzi financing environment will lead to instability if there is a decline in asset price or the inability to find new financing. Why does this occur? Minsky would argue that bankers are actually “Merchants of Debt” who need to find new ways of making a profit and that will often lead to financing of riskier projects because the profit margin in traditional lending are driven down to low levels. This process can continue for a relatively long-time while we wait for the event that will slow asset price increases. Even then, there will be a lag before the markets are affected.

This is a good story and the current crisis fits the facts, but Minsky does not tell us when a crisis will occur or how to solve the problem. That book has not been written.