Wall Street Journal recognizes Minsky

Minsky may have been to a certain degree influenced by Marx. He was probably obscure because he did not say too many things the establishment wanted to hear!

Wall Street Journal - August 18, 2007

In Time of Tumult,
Obscure Economist
Gains Currency

Mr. Minsky Long Argued
Markets Were Crisis Prone;
His 'Moment' Has Arrived

By JUSTIN LAHART

The recent market turmoil is rocking investors around the globe. But
it is raising the stock of one person: a little-known economist whose
views have suddenly become very popular.

Hyman Minsky, who died more than a decade ago, spent much of his
career advancing the idea that financial systems are inherently
susceptible to bouts of speculation that, if they last long enough,
end in crises. At a time when many economists were coming to believe
in the efficiency of markets, Mr. Minsky was considered somewhat of a
radical for his stress on their tendency toward excess and upheaval.

Christopher Wood, a widely read Hong Kong-based analyst for CLSA
Group, told his clients that recent cash injections by central banks
designed "to prevent, or at least delay, a 'Minsky moment,' is
evidence of market failure."

Indeed, the Minsky moment has become a fashionable catch phrase on
Wall Street. It refers to the time when over-indebted investors are
forced to sell even their solid investments to make good on their
loans, sparking sharp declines in financial markets and demand for
cash that can force central bankers to lend a hand.

Mr. Minsky, who died in 1996 at the age of 77, was a tall man with
unruly hair who wore unpressed suits. He approached the world as "one
big research tank," says Diana Minsky, his daughter, an art history
professor at Bard. "Economics was an integrated part of his life. It
wasn't isolated. There wasn't a sense that work was something he did
at the office."

She recalls how, on a trip to a village in Italy to meet friends, Mr.
Minsky ended up interviewing workers at a glove maker to understand
how small-scale capitalism worked in the local economy.

Although he was born in Chicago, Mr. Minsky didn't have many fans in
the "Chicago School" of economists, who believed that markets were
efficient. A follower of the economist John Maynard Keynes, he died
just before a decade of financial crises in Asia, Russia, tech
stocks, corporate credit and now mortgage debt, began to lend
credence to his ideas.

Following those periods of tumult, more investors turned to the
investment classic "Manias, Panics, and Crashes: A History of
Financial Crises," by Charles Kindleberger, a professor at the
Massachusetts Institute of Technology who leaned heavily on Mr.
Minsky's work.

Mr. Kindleberger showed that financial crises unfolded the way that
Mr. Minsky said they would. Though a loyal follower, Mr. Kindleberger
described Mr. Minsky as "a man with a reputation among monetary
theorists for being particularly pessimistic, even lugubrious, in his
emphasis on the fragility of the monetary system and its propensity
to disaster."

At its core, the Minsky view was straightforward: When times are
good, investors take on risk; the longer times stay good, the more
risk they take on, until they've taken on too much. Eventually, they
reach a point where the cash generated by their assets no longer is
sufficient to pay off the mountains of debt they took on to acquire
them. Losses on such speculative assets prompt lenders to call in
their loans. "This is likely to lead to a collapse of asset values,"
Mr. Minsky wrote.

When investors are forced to sell even their less-speculative
positions to make good on their loans, markets spiral lower and
create a severe demand for cash. At that point, the Minsky moment has
arrived.

"We are in the midst of a Minsky moment, bordering on a Minsky
meltdown," says Paul McCulley, an economist and fund manager at
Pacific Investment Management Co., the world's largest bond-fund
manager, in an email exchange.

The housing market is a case in point, says Investment Technology
Group Inc. economist Robert Barbera, who first met Mr. Minsky in the
late 1980s. When home buyers were expected to have a down payment of
10% or 20% to qualify for a mortgage, and to provide income
documentation that showed they'd be able to make payments, there was
minimal risk. But as home prices rose, and speculators entered the
market, lenders relaxed their guard and began offering loans with no
money down and little or no documentation.

Once home prices stalled and, in many of the more-speculative
markets, fell, there was a big problem.

"If you're lending to home buyers with 20% down and house prices fall
by 2%, so what?" Mr. Barbera says. If most of a lender's portfolio is
tied up in loans to buyers who "don't put anything down and house
prices fall by 2%, you're bankrupt," he says.

Several money managers are laying claim to spotting the Minsky moment
first. "I featured him about 18 months ago," says Jeremy Grantham,
chairman of GMO LLC, which manages $150 billion in assets. He pointed
to a note in early 2006 when he wrote that investors had become too
comfortable that financial markets were safe, and consequently were
taking on too much risk, just as Mr. Minsky predicted. "Guinea pigs
of the world unite. We have nothing to lose but our shirts," he
concluded.

It was Mr. McCulley at Pacific Investment, though, who coined the
phrase "Minsky moment" during the Russian debt crisis in 1998.

Laurence Meyer, who served on the faculty with Mr. Minsky at
Washington University in St. Louis, was a Federal Reserve Governor
during those turbulent times. Mr. Meyer says that when he was an
academic, Mr. Minsky's work didn't interest him very much, but that
changed when he went into the real world. He says he grew to
appreciate it even more when he was at the Fed watching financial
crises unfold.

"Had Minsky been there, he probably would have been calling me and
alerting me along the ride. And that would have been a good thing,"
Mr. Meyer says. "Every year that goes by, I appreciate him more. I
hear myself sometimes and I think, oh my gosh, I sound like Hy Minsky."

Steven Fazzari, an economics professor at Washington University, says
that Mr. Minsky would have supported the Federal Reserve's recent
move to provide cash and cut the rate it charges banks on loans from
its discount window to try to avert a financial crisis that could
spill over to the economy. But he would probably be worried, too,
that the moves might be bailing out investors who would all too soon
be speculating again.

Having seen recent events unfold in the way his friend and former
colleague predicted, Mr. Fazzari says, "I hope he's someplace saying,
'Aha, I told you so!'"