Tuesday, 25 March 2014

Lessons from the past

My attention was recently drawn to an article about the late Hyman Minsky: not a comedian, but an economist, although the line between these two occupations might well be a dotted one.

Minsky died n 1996, and his contribution to this blog, which I am sure he did not predict, is that he appears to have hit upon an accurate description of the cycle of financial instability which, by reason of being a cycle, is currently cycling away.

Minsky's arguments are actually very straightforward, and may well have been influenced by Galbraith's analysis of the Great Crash of 1929, which anyone who is remotely involved in the property market should read, and which is available at the bargain price of nothing from this link

Galbraith laid the 1929 crash out in all its astonishing absurdity.  The driver for collapse was the availability of lending on the security of stocks and shares.  As the ownership of shares became more popular, and their price rose with demand, banks "got in on the act", and lent increasing percentages of share prices secured on those stocks, which had the effect of increasing demand yet further until one day; one Tuesday to be precise, the realisation that just because something was used as security for a loan did not mean it was worth anything became all too evident.

So why has this pattern been repeated over and over again? Minsky's explanation was again simplicity itself.  At the start of the cycle, perhaps remembering the last crash, funders and borrowers are cautious, but then they pass into a second phase, where owners of gradually appreciating assets start to use them as security to acquire further such assets; with the gearing of the asset holder increasing throughout this phase, pushing up prices for those assets, and leading to a hysterical and insane expectation that the increases in prices will continue indefinitely.

Minsky referred to this last stage as a Ponzi stage, comparing the movement of funds within this overheated market to Ponzi schemes.

And then... Then the market collapses.  The degree of collapse depends on the inherent, rather than the inflated value, of the underlying asset, which as it is land, which is in genuinely short supply in the UK, does to an extent act as a moderating influence. 

Minsky was not warning, he was describing. And I would suggest we are in the Ponzi stages of a property boom. All the evidence suggests so.  



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