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One Huge “ Minsky Moment ” : Lessons from the Financial Crisis

One Huge “ Minsky Moment ” : Lessons from the Financial Crisis. By Lester Henry Department of Economics UWI St Augustine. Outline. The Current Financial Crises Origins of the Crisis What is a “ Minsky Moment ” : The Crisis Unfolds

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One Huge “ Minsky Moment ” : Lessons from the Financial Crisis

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  1. One Huge “Minsky Moment”: Lessons from the Financial Crisis By Lester Henry Department of Economics UWI St Augustine

  2. 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

  3. 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

  4. 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

  5. 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)

  6. 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”

  7. 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

  8. 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?

  9. 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”

  10. 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”

  11. 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. 369-378.

  12. Thank You!!!!!

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