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One Huge “ Minsky Moment ” : Lessons from the Financial Crisis. By Lester Henry Department of Economics UWI St Augustine. Outline. The Current Financial Crises Origins of the Crisis What is a “ Minsky Moment ” : The Crisis Unfolds

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One Huge “ Minsky Moment ” : Lessons from the Financial Crisis

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One Huge “Minsky Moment”: Lessons from the Financial Crisis

By

Lester Henry

Department of Economics

UWI St Augustine


Outline

  • The Current Financial Crises

  • Origins of the Crisis

  • What is a “Minsky Moment”: The Crisis Unfolds

  • Attempts to Solve the Crisis and Why they have all failed

  • Consequences of the Crisis for:

    • The Global Economy

    • Neo-Liberal Ideology

    • The TnT Economy


The Financial Crisis

  • The largest financial Meltdown since the Great Depression

  • US$6 trillion lost on Stock Exchange

  • 4 to 6 Million US residents losing their homes

  • The Collapse of major financial firms: Merrill Lynch, Bear Stearns, Lehman Brothers etc.

  • International Contagion- Europe and Asia

  • Impact on Commodity prices

  • US Recession that is dragging down the rest of the world


What Caused this Mess?

  • The US Housing Bubble: Sub-Prime

    • Speculative activities in the FIRE economy

    • 5 to 6 years of fun!!

    • Greenspan’s easy low interest rate policy comment about “wealth creation”

  • Deregulation

    • Repeal of Glass-Steagal Act 1933 (Clinton/Rubin 1999)

    • Exemption of Investment Banks from holding reserves(2004)

    • Revolving Door (etc. Henry Paulson)

  • The Credit Rating Agencies

    • Irresponsible “AAA” ratings on all sort of junk

    • Helped to Internationalize the “pyramid” scheme


  • The “Minsky Moment”

    • Hyman Minsky: Post-Keynesian economist

    • Warned of the inherent instability of financial markets

    • He argued that during good times agents get careless and take on excessive risk eventually becoming “Ponzi borrowers” (aka, Pyramid Scheme)

    • Ponzi borrowers can repay neither the interest or the original debt, and rely entirely on rising asset prices to allow them continually to refinance their debt. The longer a period of economic stability lasts…., the more society moves towards being full of Ponzi borrowers, until the entire economy is a house of cards, built on excessively easy credit and speculation. (Wilson, 2007)


    The “Minsky Moment” 2

    • The “Minsky Moment” arrives when “over-indebted investors are forced to sell even their solid investments to make good on their loans, sparking sharp declines in financial markets” (Lahart, 2007)

    • This is triggered by a sudden or unexpected event

    • Many believe the initial “Minsky Moment” came since early in 2007

    • So what is happening now is one “huge Minsky Moment”


    Attempts to Solve the Crisis and Why they have all failed

    • Trying to Solve the Crisis

      • Adding Liquidity thru lower interest rates

      • Bailing out of troubled Investment banks

      • The US$700 billion bailout of “the system

  • Why they have all failed

    • Not aimed at the real problem of foreclosures

    • Aimed at re-inflating asset prices

    • Really been “Welfare for Wall Street”

    • In fact it has been Class warfare with a vengeance


  • Consequences of the Crisis : Global

    • Contagion and “neighborhood” effects

    • Global recession (BIS warned of this in 2007)

    • Fall in commodity prices

    • May force China and other emerging markets to decease their dependency on the US market

    • Potential US$ decline (reduced role as a reserve currency)

    • At what point will the US lose its “AAA” rating?


    Consequences of the Crisis :TnT Economy

    • Potential fall in Oil and Gas prices due to the worldwide recession

    • Panic selling on local stock market

    • Pension funds at risk (e.g. UWI)

    • Intra-CARICOM exports may also suffer

    • Impact on H&S fund

    • Rising Interest rates could lead to mortgage foreclosures locally

      • Houses can become “upside down”

      • Banks may receive “jingle mail”


    Summary: Lessons

    • Unregulated financial markets are a disaster waiting to happen (Leads to Sophisticated Pyramid schemes)

    • Must guard against the “revolving door”

    • we should perhaps not be to too hasty to get highly sophisticated in out financial system

    • Must also take decisive action against excessive debt accumulation and speculative increases in asset prices

    • We must avoid our own local “Minsky Moment”


    Selected References

    • Grabel, Ilene (2003) “Predicting Financial Crisis in Developing Countries: Astronomy or Astrology”, Eastern Economic Journal, Vol. 29, No.2, Spring, pp. 243-258.

    • Lahart, Justin (2007) “In Time of Tumult, Obscure Economist Gains Currency Mr. Minsky Long Argued Markets Were Crisis Prone; His 'Moment' Has Arrived”, Wall Street Journal, August 18th.

    • Minsky, Hyman (1992)”The Financial Instability Hypothesis”, The Jerome Levy Institute, Bard College, May.

    • Wilson, Simon (2007) “Hyman Minsky: Why Is The Economist Suddenly Popular?”, The Daily Reckoning (UK Edition), April 13.

    • Wolfson, Martin (2002) Minsky’s Theory of Financial Crises in a Global Context”, Journal of Economic Ideas, Vol. XXXVI, No. 2, June, pp.394-400.

    • Wolfson, Martin (2000) “Neoliberalism and International Financial Instability”, Review of Radical Political Economics, Vol. 32, No, 3, pp. 369-378.


    Thank You!!!!!


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