Stability, fragility, then, suddenly, crisis. This is the fate that Hyman Minsky, a former professor of economics at Washington University in St. Louis, warned in 1986 that economies that take on too much risk of debt and allow speculative bubbles to form in the markets could be the cause of this fate. Decades later, as global debts hit a record $300 trillion and stocks rise in the face of lingering inflation and banking instability, Allianz chief economist Ludovic Subran fears that Minsky’s prediction does not come true.
“We have all the ingredients for a so-called Minsky moment,” he said. Bloomberg Monday.
Minsky, who died in 1996 at age 77, is known for his seminal book, Stabilizing an Unstable Economy (1986)who argued that there are five common stages in a business cycle: displacement, boom, euphoria, profit taking, and panic.
Shift occurs after a new technology or paradigm, such as low interest rates or the Internet, excites investors. Media attention and word of mouth then create a boom lending and asset prices linked to this new phenomenon, which in turn attracts even more investors who fear being left behind, creating a period of euphoria and risk taking. But eventually, the euphoria fades as asset prices detach from reality, debtors struggle to repay their loans, and some investors start to take profit. This leads to a Minsky moment, with profit taking turning to panic and asset prices fall.
Minsky argued that economies cannot avoid these cycles of boom and bust, when financiers and investors turn into economic annihilations as their frenzy of greed turns into fear. And since then, we’ve seen his theory come true twice, first during the rapid sell-off in tech stocks after the dotcom bubble, and then again when house prices crashed during the global financial crisis of 2008.
Allianz’s Subran noted on Monday that a sign that another Minsky moment may be coming is declining liquidity in the economy as banks tighten their lending standards. “You see this everywhere,” he warned, pointing to commercial real estate, which is struggling with rising vacancy rates, collapsing prices and fears of defaults, as an area of particular concern. The sector has been affected by the shift to hybrid working, as well as rising interest rates and problems with regional banks that have made it almost impossible to obtain new loans or refinance old ones.
Subran is particularly concerned that continued high interest rates could lead to more “financial crashes” in the banking sector or from non-bank lenders, such as hedge funds and pension funds, which focus on the struggling commercial real estate sector.
“Everyone’s problem now is the very brutal tightening, but then there is an added layer of poor risk management,” he said, referring to potential problems with commercial real estate loans from non-bank lenders. which are not subject to the same regulations as banks’.
Subran expects loan terms and access to credit to continue to decline this year as well, which he believes will eventually help trigger a recession in the United States. It won’t be a “remake of the global financial crisis” of 2008, he said, but the market sell-offs will become more frequent in the coming months.
Subran isn’t the only one worried about a Minsky moment, either. JPMorgan Chase’s chief market strategist and co-head of global research Marko Kolanovic explained in a March note that high inflation and rising interest rates raised the odds of a sudden crash. asset and loan prices.
“The possibility of a Minsky moment in markets and geopolitics has increased,” he wrote. “Even if central bankers succeed in containing the contagion, credit conditions are expected to tighten more quickly due to pressure from markets and regulators.”