Ég er kannski fullseinn að bætast í hóp þeirra sem hafa skrifað „fyrir fimm árum…“ pistla. Ég ætla samt að gera það, sérstaklega vegna þess að Stefán Ólafsson minnist örstutt á þann hagfræðing sem ég hef lært mest af. Fyrir fimm árum síðan, nýbúinn með BSc nám í hagfræði, hafði ég hins vegar ekki hugmynd um hver þessi hagfræðingur var. Umræddur hagfræðingur hét Hyman Minsky.

Enski textinn sem fylgir í lok þessa pistils er 6 blaðsíðna (já, ég veit, fáið ykkur kaffi ef þið hafið tíma til að lesa þetta allt saman!) hluti úr doktorsritgerðinni sem ég er að vinna í (ég biðst fyrirfram afsökunar á öllum hugsanlegum og óhugsanlegum villum, þetta er óyfirlesinn texti). Textinn lýsir kenningu Minsky um fjármálalegan óstöðugleika, nokkuð sem ég hafði ekki hugmynd um hvað var fyrr en veturinn 2008-2009.

Ég átta mig á að þessu texti er þungur í lestri fyrir hinn almenna Íslending, það þarf talsverða þekkingu á efnahagslegum hugtökum (á ensku) til að skilja hann til hlítar. En ef þið hafið þolinmæði til að lesa þetta allt saman munið þið sjá hvað kenningin lýsir ferlinu að baki „íslenska efnahagsundrinu“ og hruninu vel. Ég vona til dæmis að einhver hag- eða viðskiptafræðineminn renni augunum yfir þetta og hugsi með sér að þetta sé a.m.k. áhugavert – og jafnvel þess vert að spyrja um í tíma.

Ég veit annars ekki hvort minnst sé á Minsky í BSc eða öðru námi í hagfræði og viðskiptafræði heima á Íslandi í dag. Ég vona það samt innilega því eftirfarandi er það sem við hefðum átt að vita.

Vonandi vitum við það í dag…

Fáið ykkur nú kaffi og dragið djúpt andann!

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3.3.1 Minsky’s Financial Instability Hypothesis

Narrating Minsky’s Financial Instability Hypothesis (FIH) and how it describes the development of financial instability is in order before continuing.[1]

The FIH is depicted in a (dynamic) capitalistic economy with developed financial institutions. The story begins at a point in time when financial structures of economic units within the economy are conservative, i.e. the use of leverage is limited and the ratio of equity in financing economic activity is high.[2] The reason for this is that the economy has recently been through a slump, or even an economic disaster, and people have a recent and strong memory of the recent hardship. They therefore want to be careful in their financial decisions. Both bankers and investors have a high-equity preference. However, although the general sentiment leans towards the limited use of leverage in financing economic activity, the financing structure of economic units is not homogeneous. Some are more leveraged than others, although they may have more conservative financial structures than they would like to or used to have.

Due to the limited leverage the general operations of economic units are resilient to any unforeseen shocks: even though some lions may appear in the way as investment and other general economic activity is carried out the ample use of equity provides resilience to the financial structures of economic units. Bankruptcy rates are therefore low and profits, although they can be small if shocks are experienced, are generally realised. The general realisation of profits makes both investors and bankers think that the ample use of equity is non-warranted: had they used a higher leverage, their return on equity had been higher. Those economic units that had used most leverage profited most (measured by return on equity) and by the word of mouth and via the news, this becomes public knowledge.

Investors and bankers alike therefore realise that “it paid to lever… As a result, over a period in which the economy does well, views about the acceptable debt structure change” (Minsky, 1984, p. 65). The preferences for leverage will be revised upwards. Time has also passed and at least a part of the industrial leaders that had experiences from past economic cycles has retired and a younger generation, which possesses lesser real-life familiarity of leadership through booms and busts, has entered the stage. Especially amongst those newcomers the attractive profitability of using high leverage is rediscovered. Since it is assumed that both investors and bankers live in the same economic landscape and are under the influences of the same news flow of profit realisations, they both share the opinion that leverage could be increased without any serious risks. Consequently, since investors’ appetite for leverage increases they demand more credit from the banking system. The banks will be happy to provide that credit and “’[t]his increase in the weight of debt financing raises the market price of capital assets and increases investment. As this continues the economy is transformed into a boom economy” (Minsky, 1984, p. 66). Furthermore, credit expansion takes place via increasingly more “adventuresome” ways (Minsky, 2008a, p. 125):[3]

[S]uccess breeds daring, and over time the memory of the past disaster is eroded. Stability – even of an expansion – is destabilizing in that more adventuresome financing of investment pays off to the leaders, and others follow. Thus an expansion will, at an accelerating rate, feed into the boom.

The increased application of leverage increases the general amount of purchasing power in the economy since bank credit (money, i.e. purchasing power) is created alongside the increase in leverage. This newly created purchasing power is used to finance investment and speculation activities in all sorts of assets, both financial and real capital: “Increased availability of finance bids up the prices of assets relative to the prices of current output, and this leads to increases in investment” (Minsky, 1984, p. 66). The increased investment in real capital calls for increased labour. Economic growth and economic activities increase. As this happens, profits will be realised yet again according to expectations and the use of leverage will be rewarded further. This pushes for more debt-financing of units’ investment and speculation activities as “success breeds daring”.  The boom feeds on itself.

By now, the previously rather credit-conservative tone amongst economic units has turned into a “euphoric atmosphere” where “optimistic views of the future prevail” (Minsky, 2008a, p. 86). The macroeconomic level of leverage increases still further as “others follow” the leaders.

However, people always had, have and will only have an uncertain knowledge about the future (Keynes, 1937, pp. 213-214):

[B]y “uncertain” knowledge… [we mean that] there is no scientific basis on which to form any calculable probability whatsoever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of series of prospective advantages and disadvantages, each multiplied by its appropriate probability, waiting to be summed.

This uncertainty about the future, in good times and bad, is individually dealt with by convention in our decision processes (Keynes, 1937, p. 214):

We assume that the present is a much more serviceable guide to the future than a candid examination of past experience would show it to have been hitherto… We assume that the existing state of opinion as expressed in prices and the character of existing output is based on a correct summing up of future prospects… [or] we endeavour to fall back on the judgment of the rest of the world which is perhaps better informed.

The euphoric mood, the optimistic views of the future, the over-confidence in investment opportunities, and the recent profits, now generally firmly believed to be a mere taste of the future riches, weigh heavier in the decision process of investors than the distant less prosperous past.

This leads people to adjust their liquidity preferences downwards. Short term debt has become popular as it carries a lower rate of interest and debtors believe they can always get a refinance at the future maturity date. Economic units will prefer to put less emphasis on holding liquid cash-assets and near-cash assets (such as highly liquid short term notes and government bonds) and they will consequently readjust their asset portfolios towards more illiquid assets (both financial and non-financial ones). This has the effects that “liquid-asset interest rates rise relative to other rates” (Minsky, 2008a, p. 86) or, in other words, the yield curve flattens.[4]

This relative rise of short term interest rates spells trouble for those investors that have used short-term debt to finance their positions in long-term assets. Past credit contracts were made to finance positions and investments in longer-term assets which now pay a lower relative yield to (short term) interest rate cost than before. As the contractual repayment date of their debts draws nearer, their need, if they do not have the adequate cash income from their asset holdings, to find refinancing possibilities increases. But even if they find refinancing it will be at a higher rate of interest, relative to the yield they derive from their longer-term assets, than before because time has passed since their last liability contract was made and in the meanwhile the decrease in general liquidity preference amongst economic units has had the effects that “liquid-asset interest rates rise relative to other rates”. The lenders of those now-squeezed borrowers will, due to increased risk coming from a fall in profits and net-income-cover of debt, either demand a) a boost in the borrower’s equity position or b) that the borrower pays higher rate of interest still on their borrowed funds. The lenders can even demand both. Kalecki’s Principle of Increasing Risk[5] adds to the problems stemming from the relative increase in short term rates.

The requirement of higher interest charges will put further pressure on the profits of those leveraged units and the borrower may even simply reject such stipulates and decide, or desire, rather to liquidate his positions and pay up his debts. The requirement of higher equity pushes the borrower to find it. One way of doing that is to issue new shares and some of those highly indebted units will seek to do so. However, another choice is the same choice as in the case of rejection or inability to pay higher rate of interest: decrease the balance sheet by liquidating the positions, i.e. to “run off” or “sell out” of the positions previously entered. The leveraged unit is therefore likely to sell an asset on its balance sheet, either simply because he rejects the new loan stipulates or because he is forced to do so to increase his equity position. The asset in question can be of a financial or a real nature. But when the unit sells the asset, it means that its offered supply on the market will go up and, given unchanged demand, we can expect that this will lead to a fall in the market price of the asset, especially as the seller may have to liquidate the asset within a specific time frame, i.e. before his debt matures.

This price decrement will have the effect that other aggressively leveraged units will meet the same requirement from their lenders as the first one: as the equity on their balance sheet has decreased due to the fall in the nominal value of the asset, the lender will demand, on the principle of increasing risk and higher market rate of interest, higher rate of interest on the borrowed funds than before and/or a boost in the equity position in the units’ portfolio holdings. This will cause those units to run into the same problem as the first unit had before: they must issue new equity or “sell out” of their asset positions. Their activity on the market will have the same effects as the activity of the one who liquidated his position ahead of them: the price will fall further. This then hits the nearest leveraged investor behind them and the self-enforcing chain reaction gathers pace. Leveraged units that do not manage to sell out of their positions in time before the market price of their assets falls start going bust.

The price decreases and the news of highly leverage economic units going bust will cause other investors not only to be forced to sell their positions but they, and their financiers, will reconsider the use of leverage, which now works against them: the young will learn the lessons the old had before. Liquidity and non-leveraged positions will be increasingly favoured again and the price of long-term, illiquid assets will fall as balance sheets will be readjusted back towards more liquidity and less leverage.

This aggravates the price decreases of long-term assets and their price falls further. Investment in those asset classes will consequently decrease for two reasons. First, the reconsidered preference for leverage makes investors and their bankers wary of investing with borrowed funds. This decreases credit and money supply in the economy, pushing the price of capital assets downwards. Second, nobody will like to create a real capital asset, via real capital investment, whose price is not only falling but its bottomed-out price is still enshrined in uncertainty. Investment in illiquid real capital assets will therefore contract. A fall in labour demand will shortly follow and unemployment goes up. By now the euphoric environment has turned into that of pessimism about the future. Investment behaviour based on convention is now based on the recent past of bankruptcies but not increasing profits as was the case earlier in the cycle.

The primary consideration of economic units is now to reconstruct their balance sheets. This they will attempt by selling assets and by using wage and capital-asset income to pay down debts. If what Minsky called Big Government (fiscal expenditures) and Big Bank (Lender of Last Resort) step in and support this phase with cash flows activities (public investment projects, unemployment benefits, etc.) and price-supporting activities (e.g. Quantitative Easing) the asset price decreases will be slowed down and the reconstruction of balance sheets sped up compared to if no such support had been in place. Economic activity will be subdued until balance sheets have been adequately reformed and enough profits return for investors to gain their confidence in the future again. That will lead us back to stage one of the story where leverage is limited and profits are realised due to now conservative financial structures.

The whole process can then start anew.