The tumultuous markets over the past three weeks have caused a good deal of agony and somewhat less ecstasy for investors around the globe. But as the ructions have divided banks, funds and punters into winners and losers, one previously obscure economist is enjoying all-round acclaim.
By popular accord, analysts have rallied round the theories of Hyman Minsky in explaining this upset.
Such is the resurgent popularity of the economist, who died more than a decade ago, banks and analysts are now squabbling to establish who was first to apply Minsky’s ideas to the markets in 2007. Rather like Simon Cowell and Louis Walsh’s carping about who was the first to recognise the talents of the latest big-lunged teen singing sensation.
The WSJ this weekend caught up with Minsky’s new-found fame – reporting that with his thesis that financial systems are inherently susceptible to bouts of speculation, the economist was out of step with his peers in stressing the tendency towards excess and upheaval. The Aleph blog also this weekend also took up the Minsky refrain.
CLSA’s Christopher Wood and Nouriel Roubini are among those to have expounded Minsky’s ideas during the past month. Roubini, in arguing that our current situation is more dire than that in 1998, contended that this time round “we also have a insolvency/debt crisis among a variety of borrowers that overborrowed excessively during the boom phase of the latest Minsky credit bubble.”
But who really did get there first?
UBS is laying claim. The Swiss bank pointed out last week that its senior economic adviser George Magnus back in March began to examine the possibility of the credit cycle approaching a ‘Minsky moment.’
On March 6, Magnus wrote:
The essential characteristic of economic stability from Minsky’s point of view is that debt becomes increasingly easy to validate. In other words, it encourages leverage and, sooner or later, new and more ambitious debt structures.
Minsky called these financial structures hedge, speculative and Ponzi (so-called after Carlo Ponzi who created and was ruined by a pyramid finance scheme in Boston in 1920). The more the economy moves from hedge finance towards Ponzi finance, the greater the susceptibility to instability.
He followed this in July with another piece of research in which he reviewed the evidence that a “Minsky moment” was getting closer. The FT’s Martin Wolf last week trumpeted the arrival of a Minsky moment, crediting Magnus: “The moment when credit dried up even to sound borrowers. Panic had arrived”. The discussion is ongoing at FT.com’s Economists’ Forum on the subject.
But FT Alphaville has found another contender for the Minsky crown.
On March 5, coincidentally (or suspiciously) one day before Magnus’ first research note, Richard Bernstein the chief investment strategist for Merrill Lynch, mentioned Minsky’s name in response to a question on FT.com:
Top economists forecast generally favourable economic growth well into the future. Similarly, no end in sight to investable capital is maintaining today’s asset prices. When, if ever, do the various imbalances, mispriced risk, etc. start to affect this rosy outlook?
Mike Croft, Los Angeles
Richard Bernstein: There was an economist named Hyman Minsky who argued that stability breeds instability. Stable markets, he argued, lead people to take on excessive risks, which then cause instability. I think his work characterises the current environment quite well.
Any other strategists out there wish to stake their claim?