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You are so right! Well, what I said in December 2008, was that December 2007
had marked only the beginning of the US recession. In that sense, I said,
Riccardo was correct. But in fact the slowdown inevitably triggerred a
Minsky moment anyway, so I wrote "a sort of "Minsky moment" does seem to
have arrived, though maybe not a "moment", but an "episode"." An avalanche
of "deleveraging" subsequently occurred as investors frantically tried to
reduce their liabilities and reschedule their debts.

A "Minsky moment" occurs when investors, who borrowed capital at lower rates
to obtain earnings at higher rates upon reinvestment, face a cashflow
problem when yields drop, thus turn out to have overextended their
liabilities, and therefore are forced to sell off even good-yield assets to
repay their loans; that is what happened when the collapse of Lehman
Brothers
in 2008 fueled the panic). In Minsky's own presentation, the
moment occurred at the end of a boom fueling excess debt and speculation, it
was a cyclical (recurrent) phenomenon.

I did not find Riccardo's analysis convincing at the time, because he failed
to make much sense of the meaning and severity of the credit crunch, i.e.
the overextension of debt. He seemed to miss the wood for the trees. He said
plainly at the time that the current situation did not correspond to
Minsky's idea. This, plus Fred Moseley's complete neglect of the working
class in his analysis of the subprime crisis, disappointed me at the time,
it seemed more like scholastic niceties.

In a subsequent paper, however, a year later, Riccardo clarified his view
that there was no structural (endogenous) reason for the leverage ratio to
increase in the course of the boom (US non-financials were awash with cash);
that, in the post-2003 recovery, investment activity in the productive
sector had remained flat (not really true for US and EU); that Central bank
policy had supported the growing debt bubble; and that there had not been a
wage-price inflation spiral (
http://www.laurentian.ca/NR/rdonlyres/D97CF7C5-06AA-4887-A8D2-0CB4216C6225/0/WP200904BellofioreHalevi.pdf )
.
The term "Minsky moment" was originally invented by the Pacific Investment
Management Company (PIMCO) in 1998 for the Russian ruble crisis, when
falling commodity prices sent the exchange rate of the ruble into a
tailspin, in due course causing a collapse of the stocks, bond and money
markets, and prompting a major restructuring of Russian debt (Paul McCulley
said already bluntly in 2001 that "The objective of monetary policy must be
to ease until capitalists regain their animal-spirited urge to act like
capitalists, fleeing liquidity for the hope of capital gains... Debt
deflation is a beast of burden that capitalism cannot bear alone."
http://www.pimco.com/Pages/FF_01_2001.aspx ). Point was, that the Russian
markets fairly quickly bounced back afterwards (world oil prices rose, and
the Russian economy functioned to a large extent on the basis of
counter-trade, not reliant on banks).

J.

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Received on Sat Dec 11 09:07:27 2010