Presentation on theme: "1 One Huge “ Minsky Moment ” : Lessons from the Financial Crisis By Lester Henry Department of Economics UWI St Augustine."— Presentation transcript:
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 18 th. 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.