"Our Very Own 'Minsky Moment'”
by Addison Wiggin
"Whereas all capitalisms are flawed,
not all capitalisms are equally flawed.”
- Hyman Minsky
“The mere mention of a ‘Minsky moment’,” Enda Curran wrote in a Bloomberg piece last week, “is enough to send shudders through the spines of policy makers.” The Minsky Moment is defined as “a sudden crash of markets and economies that are hooked on debt.” Curran: "The theory stems from the work of Hyman Minsky, a US economist who specialized in how excessive borrowing fuels financial instability. Sky-high debt levels around the world, coupled with towering financial market valuations, have kept Minsky’s theory prominent, drawing warnings from the International Monetary Fund and others. US Treasury Secretary Janet Yellen once described his work as “required reading.”
What, we wonder, has Janet Yellen learned? Yellen is a disciple of Ben Bernanke, himself a disciple of Alan Greenspan. She is also the mentor to San Francisco Fed CEO Marcy Daly, who, while keeping an eye on banking equity, diversity and climate change… forgot to look at the risk posed by rising interest rates at banks like Silicon Valley Bank.
It’s puzzling, obviously. Fortunately, it’s one we’re actively engaged in trying to solve. Or… at least… trying to recognize what pieces we’ll need to have on hand in order to solve the puzzle. Below is an excerpt from our 2003 best-seller Financial Reckoning Day where we first described the “Minsky Moment.” We’re on deadline with John Wiley & Sons to produce an updated edition of FRD that will encompass the past 15 years since the 2008 crisis. We hope you’ll forgive us for having Minsky on the brain at the moment.
From the chapter in Financial Reckoning Day titled, “Progress, Perfectibility and the End of History”: "The obvious “flaw” in capitalism is that both the capitalists and the proletariat are all too human. They are not Digital Men: They do not calmly measure the risk and calculate the return. Instead, they make their most important decisions - such as where to live, what to do, and with whom they will do it - not with their heads, but with their hearts.
A man gets married, for example, not after carefully toting up the pluses and minuses, as a machine might, but as a dumb beast of burden following instincts he will never understand. He lumbers into church as if he were going to war—that is, without a clue. Men do not usually go to the altar or to war after much rational calculation and reflection. Instead, they are swept along by whatever emotional currents come their way, and they risk their lives and their comforts for causes that, in the calm of retrospect, usually seem absurd. Caught up in whatever madness is fashionable, men do the most amazing things. But that is this vale of tears that we live in.
Minsky’s financial instability hypothesis sets out to show how capitalism is inherently unstable. He might as well have set out to show that beer goes bad if you leave it to sit out too long or that children get cross if they do not get enough sleep. For capitalism, like life and death, is a natural thing; and like all things natural, it is unstable.
But what is interesting in Minsky’s oeuvre is a little insight that might have been useful in the late 1990s. Among the delusions suffered by investors at the time was the notion that American capitalism had reached a stage of dynamic equilibrium and was constantly inventing new and more exciting means of making people rich. Booms and busts were thought to be a thing of the past for two reasons: First, because better information made it possible for businesses to avoid inventory buildups; and second, because the science of central bank management had attained a new level of enlightenment. It could now figure out precisely how much credit the economy wanted at any moment and make sure it got what it needed.
In the absence of the normal down phases of the business and credit cycles, the economy seemed more stable than ever before. But Minsky noted that profit-seeking firms always try to leverage their assets as much as possible. He might have added that consumers do the same thing. Without fear of a recession or credit crunch, Homo sapiens, whether in the office or the den, were likely to overdo it. “Stability is destabilizing,” Minsky concluded. Nothing fails like success, in other words.
Minsky refers to Keynes’s concept of a “veil of money” between real assets and the ultimate owner of the wealth. Assets are often mortgaged, financed, leveraged, or otherwise encumbered. This veil of money gets thicker as financial life becomes more complex and makes it hard to see who is actually getting rich and who is not. When house prices rise, for example, it seems that the homeowner should be the beneficiary. But homeowners now own much less of their homes than they did a few years ago.
Banks, we noted during the run up to the housing bubble, had a strong stake in home values. Fannie Mae had worn a veil of money as sticky as flypaper. The hapless homeowners hardly had a chance. They got stuck almost immediately. In the end, they were hopelessly glued and could not get away. Instead of coming up with innovative new ways to make people rich, the United States’ financial intermediaries - notably Wall Street and the banks - came up with ways to make them poor.
“The financial instability hypothesis,” Minsky explains, “is a theory of the impact of debt on system behavior and also incorporates the manner in which debt is validated. In contrast to the orthodox ‘Quantity Theory’ of money, the financial instability hypothesis takes banking seriously as a profit-seeking activity. Banks seek profits by financing activity and bankers, like all entrepreneurs in a capitalist economy, are aware that innovation assures profits. Thus, bankers whether they be brokers or dealers, are merchants of debt who strive to innovate in the assets they acquire and the liabilities they market.”
So it goes,"
P.S. “In Minsky’s mind,” we wrote in 2003 referring to his theory put forth in the 1950s while he was studying the Great Depression, “capitalism is naturally unstable and needs the government to stabilize it. Roughly, this is also the view of the Democratic Party.” It’s hard to believe we wrote that two decades ago, until you look at how much more the Democratic Party… and Republicans, too… have come around to the same point of view. Both, more aggressively pursuing their aims without regard to individual or economic liberty. Alas, that too, is a story for another day."
