An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Pages
▼
Pages
▼
Wednesday, November 24, 2021
The Real Reason Why OPEC+ Won’t Open The Taps — Tsvetana Paraskova
By that argument, Matt, Steve Keen, as an Engineer, Economist and informatics professional is an "Art Degree idiot"? And Minsky too?
“A period of tranquil growth thus leads to rising expectations, and a tendency to increase leverage: as Minsky put it in his most famous sentence, 'Stability – or tranquility – in a world with a cyclical past and capitalist financial institutions is destabilizing' (1978, p. 10).”
“ Keen was born in Sydney in 1953. His father was a bank manager. Keen graduated with a Bachelor of Arts in 1974 and a Bachelor of Laws in 1976, both from the University of Sydney. He then completed a Diploma of Education at the Sydney Teachers College in 1977.
In 1990, he completed a Master of Commerce in economics and economic history at the University of New South Wales. He completed his PhD in economics at the University of New South Wales in 1997.[4]”
Keen has always been a card carrying member of the debt doomsday club
Minsky had a theory, the "financial instability hypothesis", arguing that lending goes through three distinct stages. He dubbed these the Hedge, the Speculative and the Ponzi stages, after financial fraudster Charles Ponzi.
In the first stage, soon after a crisis, banks and borrowers are cautious. Loans are made in modest amounts and the borrower can afford to repay both the initial principal and the interest.
As confidence rises banks begin to make loans in which the borrower can only afford to pay the interest. Usually this loan is against an asset which is rising in value. Finally, when the previous crisis is a distant memory, we reach the final stage - Ponzi finance. At this point banks make loans to firms and households that can afford to pay neither the interest nor the principal. Again this is underpinned by a belief that asset prices will rise.
The easiest way to understand is to think of a typical mortgage. Hedge finance means a normal capital repayment loan, speculative finance is more akin to an interest-only loan and then Ponzi finance is something beyond even this. It is like getting a mortgage, making no payments at all for a few years and then hoping the value of the house has gone up enough that its sale can cover the initial loan and all the missed payments. You can see that the model is a pretty good description of the kind of lending that led to the financial crisis.
Minsky moments
The "Minsky moment", a term coined by later economists, is the moment when the whole house of cards falls down. Ponzi finance is underpinned by rising asset prices and when asset prices eventually start to fall then borrowers and banks realise there is debt in the system that can never be paid off. People rush to sell assets causing an even larger fall in prices.
It is like the moment that a cartoon character runs off a cliff. They keep on running for a while, still believing they're on solid ground. But then there's a moment of sudden realisation - the Minsky moment - when they look down and see nothing but thin air. Then they plummet to the ground, and that's the crisis and crash of 2008.
Figures of speech, metaphors, similes, etc. are useful in gaining an understanding of things. I admit that last paragraph was lame. Here is one of my favorite ones, however, which I trust is relevant to this discussion. I read this years ago, and it has stuck with me.
In the first chapter of his book, A Zebra in Lion Country, famed investor, talented writer, and well-known Acorn Fund manager Ralph Wanger likens the experience of a portfolio manager to a zebra:
A Zebra In Lion Country
Zebras have the same problem as institutional portfolio managers like myself.
First, both have quite specific, often difficult-to-obtain goals. For portfolio managers, above-average performance; for zebras, fresh grass.
Second, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions.
Third, both move in herds. They look alike, think alike and stick close together. If you are a zebra and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best, for there the grass is fresh, while those in the middle see only grass that is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better.
On the other hand – or hoof – there comes a time when lions approach. The outside zebras end up as lion lunch. The skinny zebras in the middle of the pack may eat less well but they are alive.
A portfolio manager for an institution such as a bank trust department, insurance company or mutual fund cannot afford to be an Outside Zebra. For him, the optimal strategy is simple: stay in the centre of the herd at all times. As long as he continues to buy the popular stocks, he cannot be faulted. On the other hand, he cannot afford to try for large gains on unfamiliar stocks, which would leave him open to criticism if the idea failed.
Needless to say, this Inside Zebra philosophy doesn’t appeal to us as long-term investors. We have all tried to be Outside Zebras most of the time, and there are plenty of claw marks on us.
Further to my comment, another quote from the same book by Ralph Wanger:
This time, the zebras are in a canyon, with the lions asleep at the far wall. Every zebra is going to munch grass right up to the lion's nose, then bolt down the trail just before the lion pounces. Unfortunately, it is a narrow trail, and in fact, the zebras will pile up into a helpless clot at the first narrow point and become instant steak tartar. Many large institutions claim that they can do a "market timing" quick switch from stocks to cash, or cash to stocks, for billon-dollar portfolios in a very illiquid market. No way. Any such strategy can only generate a highly volatile market, featuring lots of short but sizable swings as the chartists whipsaw themselves with bad guesses and high transaction costs.
But I though Peak Oil was just 'Leftist fear mongering'.
ReplyDeleteOil used to be $150 now it’s $75… only Art Degree economorons would say “oil prices are up!”…
ReplyDeleteIt’s paradox from these Art Degree idiot people “down is up!”… “stability creates instability!” , etc…
By that argument, Matt, Steve Keen, as an Engineer, Economist and informatics professional is an "Art Degree idiot"? And Minsky too?
ReplyDelete“A period of tranquil growth thus leads to rising expectations, and a tendency to increase leverage: as Minsky put it in his most famous sentence, 'Stability – or tranquility – in a world with a cyclical past and capitalist financial institutions is destabilizing' (1978, p. 10).”
Steve Keen Quotes (Author of Debunking Economics)
@Marian Ruccius...Franko is Trump supporter. [prob an Incel too] As such, he is impervious to rational arguments.
ReplyDelete“ Keen was born in Sydney in 1953. His father was a bank manager. Keen graduated with a Bachelor of Arts in 1974 and a Bachelor of Laws in 1976, both from the University of Sydney. He then completed a Diploma of Education at the Sydney Teachers College in 1977.
ReplyDeleteIn 1990, he completed a Master of Commerce in economics and economic history at the University of New South Wales. He completed his PhD in economics at the University of New South Wales in 1997.[4]”
Keen has always been a card carrying member of the debt doomsday club
Minsky: “stability creates instability!”
ReplyDeleteArt degree unqualified paradox spewing moron…
re: Minsky
ReplyDeleteThree stages of debt
Minsky had a theory, the "financial instability hypothesis", arguing that lending goes through three distinct stages. He dubbed these the Hedge, the Speculative and the Ponzi stages, after financial fraudster Charles Ponzi.
In the first stage, soon after a crisis, banks and borrowers are cautious. Loans are made in modest amounts and the borrower can afford to repay both the initial principal and the interest.
As confidence rises banks begin to make loans in which the borrower can only afford to pay the interest. Usually this loan is against an asset which is rising in value. Finally, when the previous crisis is a distant memory, we reach the final stage - Ponzi finance. At this point banks make loans to firms and households that can afford to pay neither the interest nor the principal. Again this is underpinned by a belief that asset prices will rise.
The easiest way to understand is to think of a typical mortgage. Hedge finance means a normal capital repayment loan, speculative finance is more akin to an interest-only loan and then Ponzi finance is something beyond even this. It is like getting a mortgage, making no payments at all for a few years and then hoping the value of the house has gone up enough that its sale can cover the initial loan and all the missed payments. You can see that the model is a pretty good description of the kind of lending that led to the financial crisis.
Minsky moments
The "Minsky moment", a term coined by later economists, is the moment when the whole house of cards falls down. Ponzi finance is underpinned by rising asset prices and when asset prices eventually start to fall then borrowers and banks realise there is debt in the system that can never be paid off. People rush to sell assets causing an even larger fall in prices.
It is like the moment that a cartoon character runs off a cliff. They keep on running for a while, still believing they're on solid ground. But then there's a moment of sudden realisation - the Minsky moment - when they look down and see nothing but thin air. Then they plummet to the ground, and that's the crisis and crash of 2008.
Can you try it again but leave out the figures of speech Ahmed?
ReplyDeleteMinsky = Schiff
ReplyDeleteFigures of speech, metaphors, similes, etc. are useful in gaining an understanding of things. I admit that last paragraph was lame. Here is one of my favorite ones, however, which I trust is relevant to this discussion. I read this years ago, and it has stuck with me.
ReplyDeleteIn the first chapter of his book, A Zebra in Lion Country, famed investor, talented writer, and well-known Acorn Fund manager Ralph Wanger likens the experience of a portfolio manager to a zebra:
A Zebra In Lion Country
Zebras have the same problem as institutional portfolio managers like myself.
First, both have quite specific, often difficult-to-obtain goals. For portfolio managers, above-average performance; for zebras, fresh grass.
Second, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions.
Third, both move in herds. They look alike, think alike and stick close together. If you are a zebra and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best, for there the grass is fresh, while those in the middle see only grass that is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better.
On the other hand – or hoof – there comes a time when lions approach. The outside zebras end up as lion lunch. The skinny zebras in the middle of the pack may eat less well but they are alive.
A portfolio manager for an institution such as a bank trust department, insurance company or mutual fund cannot afford to be an Outside Zebra. For him, the optimal strategy is simple: stay in the centre of the herd at all times. As long as he continues to buy the popular stocks, he cannot be faulted. On the other hand, he cannot afford to try for large gains on unfamiliar stocks, which would leave him open to criticism if the idea failed.
Needless to say, this Inside Zebra philosophy doesn’t appeal to us as long-term investors. We have all tried to be Outside Zebras most of the time, and there are plenty of claw marks on us.
Further to my comment, another quote from the same book by Ralph Wanger:
ReplyDeleteThis time, the zebras are in a canyon, with the lions asleep at the far wall. Every zebra is going to munch grass right up to the lion's nose, then bolt down the trail just before the lion pounces. Unfortunately, it is a narrow trail, and in fact, the zebras will pile up into a helpless clot at the first narrow point and become instant steak tartar. Many large institutions claim that they can do a "market timing" quick switch from stocks to cash, or cash to stocks, for billon-dollar portfolios in a very illiquid market. No way. Any such strategy can only generate a highly volatile market, featuring lots of short but sizable swings as the chartists whipsaw themselves with bad guesses and high transaction costs.