Larry the cat sits outside Number 10 Downing Street following British Prime Minister Liz Truss resignation speech, in London, on Oct. 20.TOBY MELVILLE/Reuters
I wonder if Liz Truss knows much about Hyman Minsky. One day, their names might become closely associated.
Mary Elizabeth Truss is the rookie British Prime Minister whose deeply problematic economic plan set off a massive sell-off of the country’s bonds and a near-collapse of pension funds, forcing the Bank of England to intervene in the market – and her to resign.
Hyman Philip Minsky was an American economist who described what has come to be known as the “Minsky moment”: the point at which overheated financial markets, bloated and destabilized by excessive debt and increasingly risky, speculative investment, finally crack.
The concept became popular in the global financial crisis of 2007-2009, when the failure of U.S. investment bank Lehman Brothers sent an international house of cards tumbling to the earth, looking an awful lot like what Dr. Minsky had talked about for decades. Over the past few weeks, it appeared that Ms. Truss might become this decade’s “Lehman” – shorthand for the trigger event of a Minskyesque collapse.
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She still might. It’s early yet. One of the things about Minsky moments is that they are much easier to pinpoint in retrospect. With British government bond trading still considerably roiled and sending ripples through global markets, and massive political uncertainty gripping the country after Ms. Truss’s resignation last Thursday, we don’t yet know whether this crisis will fizzle out or spread like a smouldering brush fire.
Regardless, the British debacle is convincing evidence of just how fragile financial markets have become. It’s a powerful reminder of the kinds of risks that Dr. Minsky described decades ago – ideas that were relatively obscure in his own time. (He died in 1996.) Since the global financial crisis, his name has been synonymous with omens of financial doom.
“Minsky is the guy everyone rediscovers whenever something really bad happens,” economist Stephanie Kelton wrote in a recent blog post.
At the heart of Dr. Minsky’s theories is that markets are inherently prone to instability – to swings from overexuberance to mass sell-offs. In times when the markets appear to be stable – when things are going well, when risks appear to be relatively low and predictable – that false sense of security is particularly dangerous.
Participants inevitably take on too much cheap debt, risky investments become more popular and widely held, and asset classes become unsustainably overpriced. The kindling is stacked, just waiting for the right spark to set it off.
As Dr. Minsky summed it up: “Stability is destabilizing.”
If stability (or the illusion thereof) is the basis for a Minsky moment, the present situation might not seem to qualify; conditions haven’t been particularly stable for the better part of three years. It seems hard to imagine that we all got too comfortable with normalcy, because we haven’t really had any.
However, one could argue that the conditions for kinds of market-centred instability that Dr. Minsky was talking about have, more or less, been manufactured by fiscal and monetary policy during the COVID-19 pandemic. Those efforts were intended to compensate for the extremely abnormal situation into which economies and financial markets were plunged – to, in effect, simulate normalcy. And they did so by hyper-stimulating public and private debt.
If we are about to have a Minsky moment, the root trigger has, fittingly, been provided by a dramatic reversal of that policy direction. Rapid central-bank interest rate hikes have put an ever-tightening grip on economic and market conditions over the past several months. Still, we may look to some other more immediate event that pushes us past the tipping point.
Is a Minsky moment imminent, inevitable or even predictable? Probably not. In 2017, the International Monetary Fund warned of the risk of global markets slipping into one, citing credit excesses and bloated central bank balance sheets. Certainly nothing came of those fears over the next three years – until the COVID-19 pandemic created a new and urgent set of worries.
The policy actions in that crisis, while critical to staving off economic and financial disaster at the time, have only deepened the conditions that the IMF was worried about before the pandemic. Still, trying to predict what will make all that hit the proverbial fan is near impossible.
Perhaps the Truss events won’t be that trigger, but there are certainly other candidates lined up as contenders over the next year. Maybe it will be a collapse of the wobbly Chinese property market. Or a crippling winter energy crisis in Europe. Or a crumbling of emerging-market debt under the weight of fast-rising interest rates, high inflation and a soaring U.S. currency. All of these are entirely within the realm of possibility.
Or, we might look back on Ms. Truss’s six disastrous weeks in office as knocking over the first of a line of dominoes in the world’s financial markets that ends in a pile of rubble. That would pretty much cement the global recession that economists and policy makers fear, and make the recovery from a downturn a much longer and harder climb.
In that case, Liz Truss will certainly become very familiar with the name Hyman Minsky.