On Minsky Moments

What are they - and do they apply beyond economics and markets, in areas like politics and security?

Spoiler alert: My sense is that “Minsky Moments,” the risks of which are so often overlooked in the rarefied world of economics, can also be seen in modern politics—and in our responses to the growing risks of global conflict and climate disruptions.

But first, at least for some readers, I may need to say a few words about what the basic idea is—and where it came from.

Although I developed powerful antibodies to much of what passed for economics back in the late Sixties, among economists whose thinking have spurred my own has been Hyman Minsky. What follows are simply working notes on my evolving efforts to wrap my brain around his ideas—and their implications both for today and tomorrow.

And just as Nikolai Kondratiev (another longstanding influence of mine) had “Kondratiev waves” (or K-waves) named after him, so economists and decision-makers talk—and should talk a lot more—about the risk of Minsky Moments.

Introducing Minsky Moments

So, what was Minsky thinking? In headlines, I discovered early on, a Minsky Moment involves “a sudden and catastrophic collapse of asset prices after a period of growth and stability.”

And one fascinating element in the equation is that Minsky concluded that the very conditions of growth and stability—or at least the expectation that such conditions will continue—can create the enabling conditions for the ensuing collapses that explode such expectations and certainties.

Although he is now seen as—and considered himself to be—a Keynesian (indeed, I learned that John Maynard Keynes served as his dissertation advisor), Minsky seems to have been uneasy with the ways in which many mainstream economists interpreted the great man.

In particular, he rejected a set of economic ideas that have since gained growing traction, among them the “efficient market hypothesis”—in favor of what he called the “financial instability hypothesis.” In essence, he embraced uncertainty, not certainty.

In the process, he identified “three classes of borrowing which cause an accumulation of debt that may lead to the insolvency of the whole economic system: hedge borrowing, speculative borrowing, and Ponzi borrowing.” Minsky saw this trio “as stages of an evolutionary process,” as follows:

• “In the hedge phase at the end of a previous crash and the beginning of a new boom, lenders are cautious and borrowers can make both principal and interest payments out of current cash flow.

• “In the speculative phase, lenders begin to be less cautious, seeking greater profits through loans to borrowers who can still service their loans, but who cannot repay principal and must ask for their loans to be rolled over.

• “Finally, in the Ponzi phase, lenders throw caution to the wind and make loans on the basis of assets whose value is insufficient to generate the cash flow necessary for repayment unless the asset’s price continuously rises. If such Ponzi borrowing based on a particular, overvalued asset class is widespread enough, then an asset bubble may occur, which sooner or later must burst.’”

When this happens, bankruptcies can ripple from primary borrowers to their lenders, then on to their lender’s lenders—and, ultimately, through the entire financial system. This is a process that we experienced most recently in 2008, just as we were launching our own fledgling business, Volans. The global economy wobbled on its axis.

Extending the idea

Even if most efficient mark hypothesis (or EMH) enthusiasts may still find Minsky’s approach heretical, most sustainability champions will easily understand that what have been called “domains of dynamic stability” can be found even in systems characterised by instability, indeed by what may look like chaos to untutored eyes.

Many of the ecosystems we earnestly work to protect share the same characteristics, which is what makes the likelihood of “thresholds” and “tipping points” so central to the work of system thinkers in the field. Among their number, I am particularly attracted to the thinking of Professor Tim Lenton, with his work on “positive tipping points.”

If, as I have long suspected to be the case, we are now entering a period of extreme disruption and volatility, the question is what we can do to mitigate the malign impacts on our businesses, economies and societies? And, at the same time, to enable and power the positive tipping points needed to evolve economic models that genuinely work for all life, both human and non-human.

In parallel, I have often wondered whether the Minsky logic mightn’t also apply to other aspects of human thinking and behavior? So, for example, a political party or regime that has long prevailed may come to think that it “owns” the political system, taking ever-greater risks that risk upsetting a growing proportion of citizens and, at least in effective democracies, the electorate.

I have also pondered whether generations raised in conditions of peace might not come to undervalue the investments needed to maintain the conditions of the peace they have increasingly come to take for granted?

It’s not simply a matter of forgetting what war is like, as earlier generations of combatants fade into memory, but also of forgetting how wars begin in the first place. How, in the “powder keg” theory of conflict, the system is primed for war—and the overlooked powder train can be ignited by a single spark.

Minsky died in 1996, but his influence lives on—and, I hope, the impact of his thinking will continue to evolve. Certainly I intend to carry one small torch in his memory as I try to spotlight and navigate between the growing number of powder kegs and powder trains that characterize these unsettled times.

Hyman P. Minsky, by Pontificadot, via Wikipedia