BBC: Did Hyman Minsky find the secret behind financial crash

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Not sure why this is a surprise or a secret

#1  Postby Macdoc » Mar 24, 2014 9:57 am

Did Hyman Minsky find the secret behind financial crashes?
Hyman Minsky

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American economist Hyman Minsky, who died in 1996, grew up during the Great Depression, an event which shaped his views and set him on a crusade to explain how it happened and how a repeat could be prevented, writes Duncan Weldon.

Minsky spent his life on the margins of economics but his ideas suddenly gained currency with the 2007-08 financial crisis. To many, it seemed to offer one of the most plausible accounts of why it had happened.

His long out-of-print books were suddenly in high demand with copies changing hands for hundreds of dollars - not bad for densely written tomes with titles like Stabilizing an Unstable Economy.

Senior central bankers including current US Federal Reserve chair Janet Yellen and the Bank of England's Mervyn King began quoting his insights. Nobel Prize-winning economist Paul Krugman named a high profile talk about the financial crisis The Night They Re-read Minsky.

Here are five of his ideas.

Stability is destabilising
Minsky's main idea is so simple that it could fit on a T-shirt, with just three words: "Stability is destabilising."

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Analysis: Why Minsky Matters is broadcast on BBC Radio 4 at 20:30 GMT, 24 March 2014

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Most macroeconomists work with what they call "equilibrium models" - the idea is that a modern market economy is fundamentally stable. That is not to say nothing ever changes but it grows in a steady way.

To generate an economic crisis or a sudden boom some sort of external shock has to occur - whether that be a rise in oil prices, a war or the invention of the internet.

Minsky disagreed. He thought that the system itself could generate shocks through its own internal dynamics. He believed that during periods of economic stability, banks, firms and other economic agents become complacent.

They assume that the good times will keep on going and begin to take ever greater risks in pursuit of profit. So the seeds of the next crisis are sown in the good time.

Three stages of debt
Minsky had a theory, the "financial instability hypothesis", arguing that lending goes through three distinct stages. He dubbed these the Hedge, the Speculative and the Ponzi stages, after financial fraudster Charles Ponzi.

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Ponzi schemes
Charles Ponzi
Similar to a pyramid scheme, an enterprise where - instead of genuine profits - funds from new investors are used to pay high returns to current investors.

Named after fraudster Charles Ponzi (1882-1949), such schemes are destined to collapse as soon as new investment tails off or significant numbers of investors simultaneously wish to withdraw funds.

In the first stage, soon after a crisis, banks and borrowers are cautious. Loans are made in modest amounts and the borrower can afford to repay both the initial principal and the interest.

As confidence rises banks begin to make loans in which the borrower can only afford to pay the interest. Usually this loan is against an asset which is rising in value. Finally, when the previous crisis is a distant memory, we reach the final stage - Ponzi finance. At this point banks make loans to firms and households that can afford to pay neither the interest nor the principal. Again this is underpinned by a belief that asset prices will rise.

The easiest way to understand is to think of a typical mortgage. Hedge finance means a normal capital repayment loan, speculative finance is more akin to an interest-only loan and then Ponzi finance is something beyond even this. It is like getting a mortgage, making no payments at all for a few years and then hoping the value of the house has gone up enough that its sale can cover the initial loan and all the missed payments. You can see that the model is a pretty good description of the kind of lending that led to the financial crisis.

Minsky moments
The "Minsky moment", a term coined by later economists, is the moment when the whole house of cards falls down. Ponzi finance is underpinned by rising asset prices and when asset prices eventually start to fall then borrowers and banks realise there is debt in the system that can never be paid off. People rush to sell assets causing an even larger fall in prices.

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Wiley Coyote in "Chariots of Fur", 1994
The Minsky moment: Like the moment when the cartoon character realises they're running on thin air
It is like the moment that a cartoon character runs off a cliff. They keep on running for a while, still believing they're on solid ground. But then there's a moment of sudden realisation - the Minsky moment - when they look down and see nothing but thin air. Then they plummet to the ground, and that's the crisis and crash of 2008.


more

http://www.bbc.com/news/magazine-26680993

And it's happening all over again in various economies notably Britain and Canada where over priced home values have created a bubble.....

The dismantling of the barriers between finance, insurance, mortgages and banks have led to too much concentration no consideration for the public weal.

Yet banks are only able to pull the shite they do because they are chartered by the public ( aka gov't ) to be able to undertake fractional lending and leverage their capital and other people''s money 30+ times.

Like owning one house and renting it out 30 times....at the same time legally and by government charter. :scratch: :what:

Nice deal they cut.

Meanwhile small and medium business that are actual wealth and job creators struggle for financing and are forced into the costly credit card realm where once more the banks rake it in.

Borrowing at insanely low rates, paying interest at insanely low rates, but nary a blush at collecting 17-21% interest on credit card debt. :nono:

Fucked system....gonna break again and again until these Ponzi scheme builders are sent to jail and the banks are taken out of speculation.

Just as other concentrations got busted up early in the last century - time to reign in the predators in the financial world
Fines handed out are just the cost of doing business....they could care less. :coffee:
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Re: Not sure why this is a surprise or a secret

#2  Postby igorfrankensteen » Mar 24, 2014 11:57 am

Actually, I don't think it's the legality of fractional practices that is the problem, or causes the problem. What is at the core of what this Minky guy apparently said, AND what I saw happen in the event, is that lenders went into a frenzy of IRRESPONSIBLE fractional lending. Note that the whole mess was referred to as SUB-prime lending. What that SUB -PRIME refers to, is that the loans themselves were known AT THE TIME THEY WERE MADE, to be crappy, and not correctly supported by real value, or by trustworthy and capable borrowers.

If anything needs to be attacked, it is the practice of handing out huge paychecks to people who MAKE huge loans, without connecting their rate of pay with the QUALITY of the loans they make. Since lenders were paid based only on the SIZE of the loans, they were incentivized to loan as much money as they possibly could, and not allow the ability (or obvious IN-ability) of the borrowers to repay them, to get in the way of writing them up and processing them.

Add to that, the ability of lenders to hide their crap inside of Derivatives, and to pretend that they were selling high quality loans, when they were actually selling bad debts at premium prices, and the disaster was set into concrete.

Republicans over here want to blame the Democrats for having SUGGESTED that more people with lower incomes to be allowed to buy housing, but they carefully avoid admitting that the details of HOW that was to be done, was left up to the lenders...and the lenders chose flat out, greed driven, Ponzi-like idiocy.
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Re: Not sure why this is a surprise or a secret

#3  Postby Panderos » Mar 24, 2014 12:27 pm

:popcorn:
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BBC: Did Hyman Minsky find the secret behind financial crash

#4  Postby kennyc » Mar 24, 2014 1:19 pm

Did Hyman Minsky find the secret behind financial crashes?


American economist Hyman Minsky, who died in 1996, grew up during the Great Depression, an event which shaped his views and set him on a crusade to explain how it happened and how a repeat could be prevented, writes Duncan Weldon.

Minsky spent his life on the margins of economics but his ideas suddenly gained currency with the 2007-08 financial crisis. To many, it seemed to offer one of the most plausible accounts of why it had happened.

His long out-of-print books were suddenly in high demand with copies changing hands for hundreds of dollars - not bad for densely written tomes with titles like Stabilizing an Unstable Economy.

Senior central bankers including current US Federal Reserve chair Janet Yellen and the Bank of England's Mervyn King began quoting his insights. Nobel Prize-winning economist Paul Krugman named a high profile talk about the financial crisis The Night They Re-read Minsky.

Here are five of his ideas.

Stability is destabilising
Minsky's main idea is so simple that it could fit on a T-shirt, with just three words: "Stability is destabilising."

Most macroeconomists work with what they call "equilibrium models" - the idea is that a modern market economy is fundamentally stable. That is not to say nothing ever changes but it grows in a steady way.
....


http://www.bbc.com/news/magazine-26680993
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Re: BBC: Did Hyman Minsky find the secret behind financial crash

#6  Postby kennyc » Mar 24, 2014 1:56 pm

oops....maybe mods can combine the threads or delete this one....
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Re: Not sure why this is a surprise or a secret

#7  Postby Ihavenofingerprints » Mar 24, 2014 4:27 pm

The same basic mistakes were made in Minsky's time and will continue to be made into the future. Plenty of banking systems were barely impacted (relatively) during the financial crisis. These simple issues can be fixed with proper regulation, and it's in the banks interest to work with the government in this regard so they can ensure long term survival of the industry.

I'd be surprised if the US ever learn though and for as long as they are central to the world economic system we will all be impacted by the "shocks".
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Re: BBC: Did Hyman Minsky find the secret behind financial crash

#8  Postby johnbrandt » Mar 25, 2014 9:20 am

Shareholders didn't seem to notice it even happened. We've seen companies privatised here in Australia (which luckily didn't suffer much at all) since the crunch, but this still results in the changes to a business which mean the only thing that matters in the business anymore isn't efficiency, isn't providing a service to the public, isn't providing people with stable jobs, but doing whatever it takes at whatever cost so that the shareholders can see their share prices rise and rise. That's all that matters...the share price, nothing more, and even then it only matters while the price is going up...if the business fails, they'll dump it quicker than a hot potato and move to something else where they can demand ever-increasing profits at the cost of everything else. Nothing matters but that. Not how the business is actually performing for the long term (as we see under-performing managers and CEO's still getting bonuses even when they fail), not stability and service to communities by creating local jobs (if it can be done cheaper by contractors or in some foreign country, then sack all the local workers to save a few bucks), etc.

My old boss looked...briefly...at listing the soft drink company I worked for, but he realised one important fact: "Once you have shareholders, nothing else matters except the shareholders".


I sometimes think it might have been a little sad that Australia didn't get a sharp wake up call from the GFC and just appeared to cruise through it easily. Maybe a little jolt might have been good for the system.

Be interesting to see what happens in years to come if people learn from what happened...
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