Do you have a licence for your Minsky ?

Wikipedia defines a Minsky moment as the point in the credit cycle when investors start to incur cash flow problems due to the growing debt load they have acquired in order to finance speculative investments. At this point in the cycle, a major sell-off begins as counterparties start to withdraw from the market, leading to a sudden and precipitous collapse in asset prices, accompanied by a sharp drop in liquidity. Economist Hyman Minsky argued during his lifetime that markets were inherently unstable and that prolonged stability (a bull market, if you will) always culminated in a larger collapse. This has something in common with Mandelbrot’s view of market instability, namely that the idea that market prices and volatility are normally distributed – essentially, held within the classic, orderly ‘bell curve’ of standard distribution – is a dangerous myth. A nice metaphor for market instability in this context is a sand pile slowly growing on a table. As each individual grain of sand is dropped onto the pile, the sand pile grows in a more or less orderly fashion. But at some point, just one extra grain of sand will cause the pile to collapse upon itself. But judging in advance precisely which individual sand grain will cause the tipping point may be impossible. The natural order of markets, in short, may actually be closer to chaos than we think.

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Comments

[Mark Jackson]

Thsi post shows that the banks were not heading the advice of the past. Was the subprime mortgage market the grain of sand that caused the banking collapse? maybe but banks have evolved into mere gamblers in my opinion, cahsing bull markets, devising ever more elaborate financial instruments that they dont fully understand. They have built a house of cards with a differenec. When it all comes crashing down who picks up the peices? Not them but us poor suckers through governments bailing them out with our tax payers money. I didnt see many bankers going into personal bankruptcy due to their greed and ineptitude.