Monday, September 17, 2018

The Minsky Moment Ten Years After

These days are the tenth anniversary of the biggest Minsky Moment since the Great Depression.  While when it happened most commentators mentioned Minsky and many even called it a "Minsky Moment," most of the commentary now does not use that term and much does not even mention Minsky, much less Charles Kindleberger or Keynes.  Rather much of the discussion has focused now on the failure of Lehman Brothers on September 15, 2017.  A new book by Lawrence Ball has argued that the Fed could have bailed LB out as they did with Bear Stearns in February of that year, with Ball at least, and some others, suggesting that would have resolved everything, no big crash, no Great Recession, no angry populist movement more recently, heck, all hunky dory if only the Fed had been more responsible, although Ball especially points his finger at Bush's Treasury Secretary, Hank Paulson, for especially pressuring Bernanke and Geithner at the Fed not to repeat Bear Stearns.  And indeed when they decided not to support Lehman, the Fed received widespread praise in much of the media initially, before its fall blew out AIG and brought down most of the pyramid of highly leveraged derivatives of derivatives coming out of the US mortgage market ,which had been declining for over two years.

Indeed, I agree with Dean Baker as I have on so many times regarding all this that while Lehman may have been the straw that broke the camel's back, it was the camel's back breaking that was the problem, and it was almost certainly going to blow big time reasonably soon then.  It it was not Lehman, it was going to be something else.  Indeed, on July 12, 2008, I posted here on Econospeak a forecast of this, declaring "It looks like we might be finally reaching the big crash in the US mortgage market after a period of distress that started last August (if not earlier)."

I drew on Minsky's argument (backed by Kindleberger in his Manias, Panics, and Crashes) that the vast majority of major speculative bubbles experience periods of gradual decline after their peaks prior to really seriously crashing during what Minsky labeled the "period of financial distress," a term he adopted from the corporate finance literature.  The US housing market had been falling since July, 2006.  The bond markets had been declining since August, 2007, the stock market had been declining since October, 2007, and about the time I posted that, the oil market reached an all-time nominal peak of $147 per barrel and began a straight plunge that reached about $30 per barrel in November, 2008.  This was a massively accelerating period of distress with the real economy also dropping, led by falling residential investment.  In mid-September the Minsky Moment arrived, and the floor dropped out of not just these US markets, but pretty much all markets around the world, with the world economy then falling into the Great Recession.

Let me note something I have seen nobody commenting on in all this outpouring on this anniversary.  This is how the immediate Minsky Moment ended.  Many might say it was the TARP or the stress tests or the fiscal stimulus,  All of these helped to turn around the broader slide that followed by the Minsky Moment.  But there was a more immediate crisis that went on for several days following the Lehman collapse, peaking on Sept. 17 and 18, but with obscure reporting about what went down then.  This was when nobody at the Board of Governors went home; cots made an appearance.  This was the point when those at the Fed scrambled to keep the whole thing from turning into 1931 and largely succeeded.  The immediate problem was that the collapse of AIG following the collapse of Lehman was putting massive pressure on top European banks, especially Deutsches Bank and BNP Paribas.  Supposedly the European Central Bank (ECB) should have been able to handle this  But along with all this the ECB was facing a massive run on the euro as money fled to the "safe haven" of the US dollar, so ironic given that the US markets generated this mess.

Anyway, as Neil Irwini The Alchemists (especially Chap. 11) documented, the crucial move that halted the collapse of the euro and the threat of a fullout global collapse was a set of swaps the Fed pulled off that led to it taking about $600 billion of Eurojunk from the distressed European banks through the ECB onto the Fed balance sheet.  These troubled assets were gradually and very quietly rolled off the Fed balance sheet over the next six months to be replaced by mortgage backed securities.  This was the save the Fed pulled off at the worst moment of the Minsky Moment.  The Fed policymakers can be criticized for not seeing what was coming (although several people there had spotted it earlier and issued warnings, including Janet Yellen in 2005 and Geithner in a prescient speech in Hong Kong in September, 2006, in which he recognized that the housing related financial markets were highly opaque and fragile). But this particular move was an absolute save, even though it remains today very little known, even to well-informed observers.

Barkley Rosser


7 comments:

media said...

I heard Bernanke, Guenther and Paulson on CSPAN , and S Pearlstein of GMU also on CSPAN promoting his new book , and Richard Wollf (i think of U Mass/New school, etc.) on Sputnik radio (part of russia today) all discussing this.

The first 3 (or 'holy trinity') said they basically saved the world, and were demonized for saving the 'bank(s)ters', and QE (putting all that money into banks, except for Lehman Bro's) was paid back fairly quickly so noone lost.

Pearlstein basically said the same thing, and said in response to a caller who said 'maybe the governemnt got paid back, but i lost my savings' , that 'the government's money is your money', so basically you got paid back--didn't lose anything.
I guess that means if you lost your saving then govt will give you some food stamps---though they may cut the amount down from like 7$/day to 5, to keep the obesity down, so no problem.

I couldn't really figure out what Wolff said, but it sounded like what Dean Baker said in the past---rather than bail out the banks (and i guess investment firms--i dont even remember or know what they are---AIG, maybe Goldman-Sachs, and some others) -- the government should have bailed all the people who bought alot of houses and other things---cars, shopping, clothes, dining, etc.--and ran up alot of credit card debt . (Some of my friends friends apparently had this thing of running up alot of credit card debt and then declairng bankruptcy and doing it again.)

(I can understand the 'american dream' of wanting a nice house on a big lot, new cars, and new roads with HOV lanes, but that has turned alot of what even 5 years ago was farmland in suburbs of DC into vast housing developments, polluted the streams, creates heat islands. I guess they contribute to global warming---give to charity the C02 ).

I wonder which view is correct. Government did seem to get paid back all the QE cash they printed. But was that caller correct? Some people lost their savings, house, etc.

I will say all of these economists didnt sound like the brightest bulbs on the block.
I know someone whose son has a PhD in math from U Penn---and with that modest intellectual background is now serving in US Army in Afghanistan . It shows you can go far if you get a little education. (Trump has his Wharton MBA, and managed to eke out a respectable living
from that. Bernanke i think was at Yale; his intervewer was also a prof at Yale---it shows with a little education at yale you can go far--get a job at the FED and a talk show on CSPAN. As Bryan Caplan and Andrew Hacker have argued, a 'degree in education' is basically a 'badge' similar to a valid ID. Once you have the badge you don't have to jump any more hoops, go through hazing rituals, or do any arithmatic much less calculus. (I remember i got a job at a very elite private school , which i quit in about 1 month---stupid decision---just by showing a paper i co-wrote on a topic in mathematical biology using statistical mechanics methods--they hired me on the spot. The principal of the school who hired me was also somewhat drunk at the time. (I could smell it.) Going to that school probably costs 40G/yr. Thats one reason i didnt stay long.)


(For accuracy Pearlstein is not an economist---he has a BA degree in a very technical field---'american studies' --he's more like Samuelson of the WaPo who is also not an economist, tho people confuse him with Paul Samuelson who was a real economist (although his famous book is as outdated as Adam Smith, as are his discussions of 'ergodicity'--straying into that territory is walking into a minefield, but his later papers i read (i think i read maybe 5 ) were more on track but in many respects just math. His EMH paper is amongst his best; along with his discussion of the 'Goodwin model' of 'class struggle').

So was there ever a 'crisis' and did anybody lose any money?


Peter T said...

I believe the close link between US and EU markets, and the crucial move to extend US cover to EU banks, is a major theme of Adam Tooze' just published book, Crashed.

rosserjb@jmu.edu said...

media,

A bit of both. After the initial save I wrote of, the really crucial one, they probably could have and should have come down on some of the worst players in the US system. Also, more aid should have been given to those who got shafted by fraudulent mortgage deals, but every time there was a move to do that there was a lot of political pushback from mortgage holders not in trouble who basically said, "why should we pay for those who foolishly took ourt bad mortgages?" So nothing was done.

Do keep in mind the initial save involved foreign banks, which is why it was so hushed up and even now not much is sais loudly about it. I think this is also for politicaal reasons. Supporting foreign banks? What? But it was crucial. The later stuff was less importsant.

Peter T.

Could be. I suspect some other books have covered this also I have not read, but it remains the case that the vasrt majority of people, even quite well informed people, really known next to nothing or just plaoin nothing about those important swap deals that happened ever so quietely ten years ago. Shhhh is the word even now.

Peter T said...

I have not gotten to Tooze yet (btw, his history of the economy of the 3rd Reich is brilliant), but from his blog, his key point is that the trans-Atlantic nexus is absolutely the key foundation of the world's financial system, and that any break in that link would have massive negative repercussions. Trump anyone?

media said...

JBR--thanks for informative reply. i dont really follow what i call 'macroeconomics' like banking tho i do have a relative who works for BoA ---last time i saw her was a few months ago at MIT for a college graduation. she had rented a cottage on the beach, so after visitng mit , i managed to get picked up by the cops for drinking beer while swimming in atlantic ocean so they took me back. my relative was very unhappy about that--thats BoA abd MBA U chicago style. I got a ride home in a police car.

i guess or am sure foreign banks own lots of stuff in usa--including real estate. china is also buying alot of africa.

one could use the duncan foley/solper-samuelson/chemical kinetics appproach to study trade, currency, and immigration or population flows using principle of detailed balance or its nonequilibrium version--just equalize the temperatures.

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