Ponzi finance and the Minsky Moment
▶ Hyman Minsky was an American economist who passed away almost three decades ago. He made much sense of the idea of credit cycle by posing hedge, speculative and Ponzi borrowers, three different risk-aversion categories.
▶ Where speculative borrowers can at least pay their interest, Ponzi borrowers are those who can neither finance their interest nor principal payments out of their cash flows alone, but count on asset prices ever trending up.
▶ The model of capitalism he depicts is one of asset bubbles driven by credit cycles. As financial stability and economic growth go through prolonged booms, investors and borrowers forget the risks associated with their endeavours and tend to push asset prices far too high through excessive re-leveraging.
▶ On the other side of the coin, lenders, banks and regulatory bodies often find it opportune to pass by prudential regulations and loosen credit standards.
During the last two decades, that is after the tech bubble burst back in 2000, many such cycles developed slowly, but surely.
▶ The most severe cycle deepened after the Fed began to raise its policy rate in the summer of 2004, and especially in 2005 and 2006. It was mostly mortgage, but not only mortgage.
▶ Sub-primes, near-primes, interest rate only loans, negative amortization mortgages and all that points to a myriad of Minsky-like speculative and Ponzi borrowers at work.
▶ Consumption rose, over-borrowing amplified, the savings propensity of the American household has been falling throughout, even negative. That was the picture before 2008, between 2004 and 2007 anyway.
▶ There has recently been talk about yet another Ponzi scheme that exploded in Turkey. Whether the incident is Ponzi is unclear but even if it is, according to Minsky, capitalism itself is Ponzi-like so there is nothing surprising about it.
▶ I don’t know whether such Keynes and Kalecki-inspired ideas are adequate to grasp the functioning of financial markets, but they surely make more sense than assuming markets are fully efficient.