Thursday, August 16, 2007

Is This the Minsky Moment?

I was reading an article by my father's colleague, Harry Schultz, over at Marketwatch, and I saw his mention of the "Minsky Moment." What is this, I asked myself.

So I Yahooed it and came up with this nice blog about the phenomenon.

This is the crunch moment, the time when push comes to shove, when puts and calls have to put up or shut up, the crucial pay-up-time bottom line when all those speculators using other people's money and/or credit have to prove their worth or get out of the business.

I agree with Harry (gee, I was just in Monaco--I should have looked him up), although he goes a bit overboard in his description of the future (as usual--Harry doesn't like to talk in mundane terms).
Schultz_Harry_cartoon
[Thanks to BFI-consulting.com for the image.]

Harry says this is 1929-1933 all over again and that we should head for the hills. At AlamedaLearning.com, however, we get a more measured and cautious statement of the situation. There are some nice graphs that explain why and perhaps even how much of today's ominous rumblings may be a sign of earthquakes to come. I would tend to agree that the future is unknown, but I've reserved a front-row seat to watch the denouement. Hopefully, I won't get thrown onto my tail end as it unfolds.

(Newcomers: Please check out some of my past posts to see what I'm talking about. I've been predicting a wild ride for many months now, so I'm anxious to see how this all plays out.)

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3 Comments:

Blogger Freddie Sirmans said...

Just browsing the internet, your blog is very, very interesting.

8:31 PM  
Anonymous Anonymous said...

Katy, Minsky deserved to remain obscure as is much of what Keynes contributed is worth forgetting on the matter of business cycles.

Both Minsky and Keynes start with the presumption that markets are inherently unstable. However, history and an extensive body of theory suggests otherwise. While “bubbles” and severe panics are quite dramatic events, they are remarkably rare.

The best evidence that markets are generally and inherently stable is that every day trillions of transactions occur within millions of markets by billions of people. And this is occurring more widely with each passing day. If markets ere fundamentally or inherently unstable, they would have been abandoned long ago.

Whenever market outcomes are out of balance, the disequilibrium between bid and offer prices will set into motion forces to stabilize outcomes. The only way for disequilibrium to persist is for an outside force (like a government agency) to block entry or competition.

This insight applies to financial markets. And so it is that that large swings in markets or persistent imbalances are caused by external factors. In particular, central bank actions to artificially suppress interest rates that lead to credit expansion that is not supported by economic fundamentals.

This provides the fuel that pumps air into asset bubbles. Without that fuel, prices in other sectors would be depressed by an offsetting amount.

As such, central bankers create “false” signals of artificially-lower interest rates that induces investors and entrepreneurs to enrage in investments that will later be discovered to have been rash. But they behaved rationally in light of the distorted signals that they received in the form of a lower cost of credit.

Whether you look at the South Sea bubble or tulip-mania or dot.com burnouts, you will find the fingerprints of loose monetary policy behind them.

As it is, other economists offer a clearer, more consistent explanation for booms and busts. These include Ludwig von Mises and F.A. Hayek whose work is promoted by a new generation of “Austrian” economists.

As it is, the ideas of Minsky and Keynes provide cover for the sins committed by central bankers that are the fundamental source of instability. Meanwhile, markets are blamed even though they are merely a mechanism distorted by an inflated money supply.

Following the logic of Minsky and Keynes, the Fed is being praised for pumping in more liquidity to markets plagued by bubbles. Bit this is like thanking the person that smeared you with cow dung for shooing away the flies!

Bestest...Cris

11:41 PM  
Blogger Katy said...

Hey, Cris, I'm flattered to see you reading me.

Of course, I agree with every word you have written here, as I'm sure you realize. Sometimes when I mention Keynes, as in this instance, I say to myself, "Well, he couldn't have been 100% wrong on everything he wrote, so I'll let him have this trifle." And anyway, it's not even sure he actually said it. As for Minky, ditto.

I enjoy your travel updates, and I'd love some pictures.

Bestest to you, too.

8:50 AM  

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