One Huge “Minsky Moment”:
Lessons from the Financial Crisis
By
Lester Henry
Department of Economics
UWI St Augustine
1
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
2
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
3
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
4
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)
5
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”
6
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$700 billion bailout of “the system
• Why they have all failed
•
•
•
•
Not aimed at the real problem of foreclosures
Aimed at re-inflating asset prices
Really been “Welfare for Wall Street”
In fact it has been Class warfare with a vengeance
7
Consequences of the Crisis : Global
•
•
•
•
Contagion and “neighborhood” effects
Global recession (BIS warned of this in 2007)
Fall in commodity prices
May force China and other emerging markets to decease
their dependency on the US market
• Potential US$ decline (reduced role as a reserve currency)
• At what point will the US lose its “AAA” rating?
8
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”
9
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”
10
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. 369378.
11
Thank You!!!!!
12