George Soros, Hy Minsky and Matt Millen
Kurt Brouwer August 20th, 2007
What do George Soros, Hy Minsky and Matt Millen have in common?
Read on. But first, a little background. The late Hyman Minsky was a rather obscure economist whose work is discovered anew whenever we have a financial crisis. The last time people widely discussed Mr. Minsky’s views was in the aftermath of the 1998 financial crisis. Justin Lahart at the Wall Street Journal reports:
‘The recent market turmoil is rocking investors around the globe. But it is raising the stock of one person: a little-known economist whose views have suddenly become very popular.
Hyman Minsky, who died more than a decade ago, spent much of his career advancing the idea that financial systems are inherently susceptible to bouts of speculation that, if they last long enough, end in crises. At a time when many economists were coming to believe in the efficiency of markets, Mr. Minsky was considered somewhat of a radical for his stress on their tendency toward excess and upheaval…
Mr. Minsky did much to point out that bubbles are an almost inevitable result of market activity. That is, buyers with a successful strategy spawn more buyers using that strategy until it stops working.
This is similar in some respects to the philosophy of hedge fund manager, George Soros, who wrote in his book, The Alchemy of Finance (Wiley), that markets are inherently reflexive. That is, buying begets more buying until a peak is reached and then selling begets more selling until a bottom is reached. Lahart continues:
…At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they’ve taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. “This is likely to lead to a collapse of asset values,” Mr. Minsky wrote.
When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived…’
In terms of the last point, a Minsky moment definitely arrived over the past few weeks. We witnessed hedge funds and financial companies being forced to sell solid assets because the securities they held that were tied to subprime loans suddenly became toxic. One wave of selling spawned another.
However, on this topic, my vote for the most useful and pithy philosophy goes, not to Mr. Soros or even Mr. Minsky, but rather to Matt Millen.
Millen, when he was a linebacker for the San Francisco 49′ers, said, “It’s never as good as it seems when you’re winning, but never as bad as it seems when you’re losing.”
Hat tip: Steve Janachowski
- Investing , Personal Finance
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