Authers’ Notes: The Magic of Minsky Moments

Authers’ Notes: The Magic of Minsky Moments

(Bloomberg) -- Welcome to Authers’ Notes, our Bloomberg book club, where senior markets editor John Authers leads conversations about old books that shed light on new developments in the market and economy. This month’s book is Hyman P. Minsky’s classic, John Maynard Keynes.

Authers’ Notes: The Magic of Minsky Moments

Our next book will be Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms by Russell Napier. It’s a great work of stock market history which endeavors to find out whether there’s a way to spot a truly historic buying opportunity in real time. Pick it up, and join us for a discussion next month on the terminal.

Below is a complete transcript of blog entries in the order they were originally posted.

01/23 11:02 ET

Joining us today is Robert J. Barbera, director of the Johns Hopkins University Center for Financial Economics. Here’s a bit from his bio:

Barbera has spent the past half dozen years teaching and doing research at Johns Hopkins. His research focuses on the nexus between finance and macroeconomics. Starting in 1982, he spent some 30 years as a Wall Street economist, including roles as chief economist at Mount Lucas, Investment Technology Group, Lehman Brothers, and E.F. Hutton. Early in his career, he served as an economist for U.S. Senator Paul Tsongas and for the Congressional Budget Office.

He holds a B.A. and Ph.D. from Johns Hopkins, and is the author of The Cost of Capitalism: Understanding Market Mayhem and Stabilizing Our Economic Future.

Authers’ Notes: The Magic of Minsky Moments

Andrew Dunn TOPLive Editor

01/23 11:04 ET

Also joining us today are my Bloomberg Opinion colleague Justin Fox, and our macro strategist Laura Cooper, who recently came to us from RBC. Both are in our London office today.

Justin has been a very distinguished financial journalist for many years, and his magnum opus is The Myth of the Rational Market.

Authers’ Notes: The Magic of Minsky Moments

Meanwhile, you can read Laura’s latest Macro View column on the Fed here. She warns that the risk of a snapback is only increasing.

John Authers Senior Editor

01/23 11:06 ET

A reminder on procedure: Please follow the discussion. If you have comments or questions, please email them to the book club email address:

John Authers Senior Editor

01/23 11:07 ET

TO BEGIN: Bob Prince, who helps oversee the world’s biggest hedge fund at Bridgewater Associates, says the boom-bust economic cycle is over.

The tightening of central banks all around the world “wasn’t intended to cause the downturn, wasn’t intended to cause what it did,” Prince, the co-chief investment officer of Bridgewater, said in an interview with Bloomberg TV in Davos. “But I think lessons were learned from that and I think it was really a marker that we’ve probably seen the end of the boom-bust cycle.”

Authers’ Notes: The Magic of Minsky Moments

Andrew Dunn TOPLive Editor

01/23 11:08 ET

Bob Prince’s comments were treated almost universally with horror among my contacts, as they sound like the classic words we hear at the top of a Minsky cycle before the crash comes. Also bear in mind that Ray Dalio, Bridgewater’s founder, is famous for using Minsky’s framework as part of his approach to investing.

So, should we be alarmed by this? What exactly did Minsky mean by his own version of a boom-bust cycle, and how does it differ from the boom-bust cycles that have traditionally preoccupied central banks?

John Authers Senior Editor

01/23 11:10 ET

For starters Dalio and I are the same in that we both are Minsky fans. We are different in two ways. He, unlike me, has a keen sense of market timing and he, unlike me, has $billions.

On the key issue for all of us, however, I stand firm. We have not ended the Minsky cycle. Indeed, the basic dynamic, as the expansion endures building confidence in the continuation of expansion leads to increases in risk taking. Look at junk bond yields: 16% in the bust; 8% in 2011; 6% late in 2018 amid Fed tightening. Now less than 5%.

So we went from lending to risky companies under no circumstances to lending to them at remarkably low interest rates. The result? A boom in corporate borrowing, a stepwise rise in corporate leverage. And a financial system that is becoming riskier -- and therefore more susceptible to a small disappointment.

That is vintage Minsky.

Robert J. Barbera ‘The Cost of Capitalism’ Author

01/23 11:11 ET

So I’ve watched the (Bob) Prince video, and I think all he was saying that is that the central-bank driven ups and downs of recent years are over because central banks have no maneuvering room left, not that we have come to the end of boom-bust cycles for all time.

But I guess it is an indication of a certain amount of complacency, what is what Minsky was all about.

Justin Fox Bloomberg Opinion Columnist

01/23 11:11 ET

Bob Prince has a point. The Fed finds itself in a precarious position. Its signal of an asymmetric inflation response has fueled an expectation that it will step in to support equity markets -- classic moral hazard. Any hints of retreat could spark sharp market volatility. Yet balance sheet expansion at an unsustainable pace risks spurring increasingly risk-seeking behavior. They can’t tighten, they can’t ease.

The Fed will need to reset expectations, no easy feat. So the boom-bust cycle is on pause.

Laura Cooper Macro Strategist, London

01/23 11:13 ET

Laura, I guess the question that arises from that is how the Fed moves away from moral hazard and resets expectations without causing a Minsky moment in the process.

The classic moment when the U.S. authorities attempted to puncture moral hazard came when they allowed Lehman Brothers to fail. That led to the Minsky moment to end all Minsky moments, and perversely increased moral hazard by making it obvious to everyone that they could not possibly let another institution fail.

I guess one way to do this would be by proceeding in gentle steps -- but then that was what Bernanke was trying to achieve when he talked about “tapering” QE in 2013, and that led to a famous market tantrum.

John Authers Senior Editor

01/23 11:14 ET

Next Question: Giles Chance, of Dartmouth’s Tuck School of Business, invokes Ben Bernanke’s legacy. His question seems particularly relevant given yesterday’s comments that central banks have quashed the boom-bust cycle:

“A monetary event that has completely changed the landscape since the early 2000s is the ‘Bernanke Put,’ combined after 2008 with QE -- originally conceived of course by ‘Helicopter’ Ben.

“Economists would have argued, once, that enlarging the Fed’s balance sheet to this extent and issuing this amount of new money would have undermined the dollar by increasing inflation. It hasn’t happened. But will it? Deflationary forces still seem to be hard at work.”

He asks: “Did Bernanke banish Minsky? Logic says no, but experience seems to go the other way.”

John Authers Senior Editor

01/23 11:16 ET

“Did Bernanke banish Minsky?” Again it feels like it’s a matter of time-frame. Forever, no. For a long time, no. For the next few years, maybe.

I’m sort of more interested in the longer-term question, but I realize that’s no help to people trying to make investment decisions.

Justin Fox Bloomberg Opinion Columnist

01/23 11:17 ET

Replying to Justin, I suspect that the timing problem is a key reason exactly why the Minsky cycle tends to repeat itself. If there’s a crash at some indeterminate point in the future, but for the time being animal spirits and momentum are pushing markets up, so you want to keep piling into markets.

Being early, as many a Wall Streeter will tell you, is just another way of being wrong.

John Authers Senior Editor

01/23 11:20 ET

I agree, John. It’s hard to fight market momentum that’s speculative in nature, and it would take a serious departure for the Fed to not run to the rescue if data deteriorates or stocks look wobbly.

From the Bernanke-put to the Powell-put, it’s hard to not keep piling into markets without a catalyst in sight.

Laura Cooper Macro Strategist, London

01/23 11:21 ET

Let’s move on to the issue of exactly what central banks (or others for that matter) should do to stop the terrifying Minsky cycle working its way through to its conclusion.

Dec Mullarkey of SLC Management boils down Minsky’s thesis like so:

  • Stable growth encourages increased risk-taking;
  • When investors crowd into risky bets, small disruptions can quickly trigger a rush for the exits

Barbera, he says, “makes it clear that policy makers have been ignoring Minsky’s thesis for decades.” He continues: “You advocate that government oversight of markets can help control downturns but also contain excesses.”

Mullarkey asks: “What tools could policy makers use to temper asset bubbles? For instance, some governments use macro prudential polices to arrest housing froth. Is there anything comparable for mitigating financial asset bubbles?”

John Authers Senior Editor

01/23 11:24 ET

I am afraid that this insight is based on something that Bloomberg’s Joe Weisenthal tweeted a while ago, possibly as a troll (I looked for it on Twitter but couldn’t find it), about Trump’s constant back-and-forth on trade actually being good for the economy because it keeps market participants from thinking that they know what’s going to happen next.

Mullarkey asks what tools policy makers can use to restrain asset bubbles. Maybe it’s frequent small mistakes and U-turns.

Or something like that. It seems like kind of a silly suggestion, but the widespread sense that Alan Greenspan was a “Maestro” somehow immune from mistakes was really unhealthy, so least it’s different from that.

Justin Fox Bloomberg Opinion Columnist

01/23 11:25 ET

Looking into policy makers’ toolkits to temper asset bubbles, ex-post policies have come at a great fiscal cost (post-GFC case in point) but it is hard to implement ex-ante policies -- prevention is better than a cure! Capital and liquidity standards -- have these been effective in increasing the resilience of the financial system to shocks?

The question is difficult as it leaves policy makers with having to call out a bubble. Easy in theory -- harder for investors and central banks until it has burst.

Laura Cooper Macro Strategist, London

01/23 11:26 ET

Would contra-cyclical buffers be at least a partial answer? At times like this a mechanism would force banks to have a larger capital buffer, whether they wanted it or not?

Then there is the issue of whether there’s a way to intervene directly in corporate decisions in a way that still just about passes muster with modern free marketeers. In the final chapter of John Maynard Keynes, Minsky asserts:

To do better it is first necessary to constrain the liability structure of business firms. Debt-financing of investment and of positions in the stock of capital will have to be regulated, especially for large-scale organizations.

Is there a form of “regulation” (as opposed to “authoritarian order” or “socialist plan”) that could stop companies from getting over-levered or investors lending to them? Maybe contra-cyclical balance sheet requirements for normal businesses and not just banks (which were plainly Minsky’s greatest concern)?

John Authers Senior Editor

01/23 11:30 ET

A very insightful question for Bob from our masterful colleague Peter Coy of Bloomberg Businessweek:

“You argue that it’s easy to separate Minsky’s prescription from his diagnosis. In other words, that someone can believe that stability creates its own stability without concluding that socialized investment is the solution. But isn’t that a bit facile? Minsky, and Keynes himself, believed that socialized investment (not full-blown socialism) was more than a dispensable political preference.

“By blowing off the Minsky/Keynes prescription, aren’t you guilty of the same sin as the neo-Keynesians, who picked just the bits of Keynes they liked? To put it differently, aren’t you a Schumpeterian on the way up in the boom/bust cycle and a Minskyite on the way down?”

John Authers Senior Editor

01/23 11:31 ET

That is a great question. First off, Minsky was quite explicit about the fact that he felt cocksure of his diagnosis and very tentative about his prescriptions.

But I respectfully disagree that I am Schumpeter when up and Minsky when down. Indeed that is precisely how I characterize Greenspan.

Greenspan, on the way up, insisted that he had no ability to “outguess the markets given their enormous ability to process information.” And yet that is precisely what he did when the market swooned -- hence the Greenspan put.

I argue for a symmetric approach. When markets are in disarray you are super-easy. As markets get frothy, you lean against the froth.

I published an academic paper(ugh) that modified the Taylor Rule. Put in a term for the risky/risk-free bond spread. That spread has fallen by 50 bps over the past 12 months and it is below 200bps -- it was 350 bps in 2012. Its current level is a clear indication of very easy money.

The Fed is supposed to lean against that easy money. But instead they are mesmerized by the fact that the core PCE deflator is 1.65% instead of 2%.

In addition, look at Anat Admati’s work. Banks should have much more capital -- don’t text this to Jamie Dimon.

A world wherein the Fed leans against such excesses and banks have much more capital will still have entrepreneurial gusto and it will still have boom/bust dynamics, but it almost certainly will be less so that the current state of affairs.

In short, I don’t think it’s A or B, it is a continuum. And we have tilted way toward no attention to these issues despite their self-evident effects.

Robert J. Barbera ‘The Cost of Capitalism’ Author

01/23 11:35 ET

Bob, I love your response to Peter Coy, but it does raise the question of why Greenspan and other policy-makers didn’t lean against the wind more in the 1990s and early 2000s.

One obvious answer is that it probably would have been politically unpopular. As Sebastian Mallaby’s great biography made clear, Greenspan was extremely attuned to what would fly politically. But any central banker is going to find it hard to be tough when times are good.

Justin Fox Bloomberg Opinion Columnist

01/23 11:36 ET

The redoubtable Peter Coy circles back to the question posed by Mullarkey:

Central banks could and should make more use of countercyclical capital buffers. The problem with the Fed’s is that you have to tighten in boom times, which is politically difficult. Far better to set the buffers very high and then loosen them in downturns. That’s politically more appealing.

Will that work? Or will the bank lobbyists inevitably get the buffers loosened while times are still good?

John Authers Senior Editor

01/23 11:41 ET

What to do, in a regulatory sense, is to me a secondary question. The first event that needs to occur, is the mainstream macroeconomics model has to embrace the self-evident fact that finance drives the boom-bust cycle.

The Fed has told us that the absence of any inflation pressures is sufficient to keep rates flat to down going forward.

Reflect upon that. All of the major cyclical events of the past 30 years have been the result of financial market excesses. And yet the Fed is focused on the prices of cars and the performance for wages.

Am I exaggerating? The 1990 recession was the junk bond S&L debacle. The 1990 collapse in Japan was an asset collapse. The 1990s Asian contagion was finance. The 2000 recession was the tech bubble bust. Oh, and then there was 2008-2009.

Nonetheless, the mainstream macro model says inflation drives the cycle, and many Keynesian pundits have lambasted the Fed for tightening, given low core price inflation.

In my estimation mainstream macro is to blame. How can you ask Fed Chair Jerome Powell to reject the mainstream model and keep one eye on asset prices, when the academic community wilfully denies the dynamic?

Robert J. Barbera ‘The Cost of Capitalism’ Author

01/23 11:44 ET

Let’s move the discussion to China, which is critical because (a) it’s very big, (b) it has a lot of debt and (c) it’s explicitly worried about the possibility of a Minsky moment.

I wrote about this here. In particular, Zhou Xiaochuan, when he was standing down as governor of the People’s Bank of China in 2017, said:

“If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky moment.’ That’s what we should particularly defend against.”

Even William Rhodes, once the spearhead of many Citibank attempts to ease countries through debt crises, speculates openly that China could face a Minsky moment. This is terrifying, but China does not have an orthodox capitalist system of the kind Minsky was talking about. Can it avoid a Minsky moment?

John Authers Senior Editor

01/23 11:52 ET

China certainly has crazy debt levels. It is hard to use the standard Minsky model. The Minsky moment comes when investors decide excesses are too high and they begin to sell debt.

Others have to follow suit, and soon the financial system itself looks suspect. We then get a generalized sell-off of good and bad assets, until the authorities, despite their philosophical desire to stand aside, come to the rescue.

In China, there is no philosophical love affair with Adam Smith. Chinese authorities have been bailing out financial institutions every step of the way over the past half-decade at least. Moreover, lenders are compelled to lend to state owned enterprises, to meet GDP targets, even if the construction they are financing makes no sense.

That means two things to me: As long as the Chinese government will make good on the assets, the game continues. And the game, when it ends, will be all the more ugly.

On the issue of suspect China GDP growth and how that relates, Yingyao Hu and I did a paper, using satellite data, to estimate that China is 30% lower in national income than official data suggest. Notice I said national income not GDP. We conjecture that the buildings have kept going up, but increasingly they are empty and the lights don’t go on. So we have a climbing depreciation schedule.

Yes, GDP rose by 6%. but after an instantaneous writedown of the half-empty asset, income rose only by 4%.

Robert J. Barbera ‘The Cost of Capitalism’ Author

01/23 11:53 ET

I agree with Bob, there is little reason for Chinese authorities to step away from the game. It may try, but faces a tricky balancing act: Can it contain a debt binge that has spurred around half of global growth post-crisis while also continuing to achieve its growth targets?

I would guess that deleveraging will take a backseat while the U.S.-China trade dispute remains unresolved and growth is vulnerable.

The rising importance of China’s economy in the global sphere -- ~16% in 2018 -- suggests that if/when a Minsky moment inevitably arrives, the pain would be severe. But that’s beyond the realm of the players of the game for now.

Laura Cooper Macro Strategist, London

01/23 11:59 ET

Bruno Momont of Black River Asset Management raises the issue that demographic factors can cross-cut the Minsky cycle, and lead to long, drawn-out “moments.”

The Minsky framework based on human psychology doesn’t provide insights into the pressure on public sector debt sustainability as a result of demographics if the age-dependency ratio were to increase while the working age population declines in absolute size. This type of “moment” (if it isn’t averted through immigration and other policies) is likely to be drawn out over many years, decades even. It would play out as tectonic shifts in politics driven by the political economy of generational changes in electoral power.

Any thoughts?

John Authers Senior Editor

01/23 12:00 ET

It seems like Minsky cycles and demographic trends are different things with different causes and different remedies, and if we try to consider them together it will quickly get too complicated to make any sense of.

But yes, there will probably be some interesting things happening with public-sector debt in the coming decades!

Justin Fox Bloomberg Opinion Columnist

01/23 12:06 ET

Wow, that’s an issue-filled question, one wherein I would look for answers outside of the finance cyclical boom/bust dynamics.
Let me try and unpack the issues.

First, on public debt sustainability, I think we are miles and miles away from that as an issue. Italy has little economic growth. They are once again in a political crisis. Their debt-to-GDP is something like 135%. And their 10-year borrowing rate? 1.25% Japan has 225% debt and borrows at 0%. Hard to see the U.S. as near an inflection point.

That said, I reject the MMT notion that we can borrow with impunity in a non-Trump next administration. The issue is not debt levels but utilization levels. Suppose we pass the Green New Deal and Medicare for All, and we commit to having an electric recharger in every gas station by 2024.

All, perhaps, great ideas. But the unemployment rate is 3.5% that would require employment growth at four times the current rate. Even if we build bridges across the Rio Grande, it is hard to imagine we could do it.

Regarding the aging of the population, you can look to traditionally conservative types, (Bret Stephens of the New York Times): Bring us your poor...Net immigration would lift your ability to grow.

Robert J. Barbera ‘The Cost of Capitalism’ Author

01/23 12:07 ET

I think demographic factors can aggravate the challenges in mitigating a Minsky moment. Just look at the U.S. Fed Chair Powell warned last year that the U.S. budget is on an “unsustainable path” with debt growth outpacing the economy. But debt warnings are being taken in stride, largely out of the purview of market watchers.

Only one-third of the U.S. federal budget goes to discretionary spending, with the bulk of funds directed to mandatory social security and health care costs. That’s an element set to surge under aging demographics -- this would limit the capacity to direct stimulus spending when a downturn hits.

Laura Cooper Macro Strategist, London

01/23 12:11 ET

Former law professor Jay Weiser raises the issue that the Minsky cycle is driven as much by political institutions as by banks, central banks or investors. Insurance commissioners and housing regulators, for example, also yielded to overwhelming pressure from the financial industry. So did credit rating agencies. As he puts it:

“The real challenge is how to rein in rent-seeking elites so that realistic capital requirements can be imposed.”

John Authers Senior Editor

01/23 12:15 ET

Some of my good friends are rent-seeking elites.

And, much more seriously, this is all of a piece. Without sounding like a Johnny One-Note, we need to refashion the mainstream macro model, with finance at center stage. That sets the stage for rethinking the rules of the game, at the Fed, among regulators and for corporate managers.

Rudi Dornbusch of MIT said it takes much longer than imaginable for an errant trend to end. But when it does happen faster than you could have imagined.

That looks like a great description of climate-change issues.

It is something to keep in mind when thinking of finance.

and let me be clear. I am a big proponent of Minsky’s diagnosis, but I don’t want a revolution.

Ne pas jette le bebe avec l’eau de bain.

Robert J. Barbera ‘The Cost of Capitalism’ Author

01/23 12:16 ET

Weiser is right that it’s hard to rein in rent-seeking elites. But it seems important to remember that the 1980s/1990s solution of defaulting to financial markets via deregulation owed a lot to writings by public-choice scholars about the capture of regulators by rent-seeking elites.

They implied that regulation almost invariably makes things worse, and yet deregulation seems to have made things worse, too.

Justin Fox Bloomberg Opinion Columnist

01/23 12:19 ET

Long before there was Minsky, and Keynes, there was James Mills, a Manchester banker who presented a paper to the Manchester Statistical Society in 1867 “On Credit Cycles and the Origin of Commercial Panics.” He had a taxonomy similar to, if not as well-defined, as Minsky’s hedge, speculative and Ponzi finance (“The Post-Panic Period,” “The Middle or Revival Period” and “The Speculative Period”). Here he is on the latter:

In the speculative period under review, the healthy confidence which marked the middle period has degenerated into the disease of a too facile faith. The one fact of an apparent profit is for the moment held as full warrant for ever new commitments....And, as demand always stimulates supply, there is at such times no lack of channels for the inflow of this confidence; every one of them, of course, a Pactolus....The commercial and investing classes thus come under an enormous amount of obligation, dependent for its success upon the one precarious condition of a continuance of the existing scale of prices.

In other words, the basic analysis of the problem has been with us for more than 150 years. There’s definitely been some evolution in proposed remedies.

Mills wrote that “it may be fairly hoped that the cycles of Credit can be indefinitely lengthened,” and that’s pretty much what’s happened. But are there diminishing returns here? How much better can we really get at controlling cycles that seem to derive from basic aspects of human psychology?

Justin Fox Bloomberg Opinion Columnist

01/23 12:21 ET

Justin, I am in awe of you for finding the work by Mills, which I will confess to knowing nothing about.

One tentative point I might make in response is that it’s possible that the asset-market cycle has grown steadily more detached from the economic cycle over time. So it’s now possible to spur a massive boom in asset markets without a corresponding boom in the market for labor and a rise in consumer price inflation. Might that make any sense?

John Authers Senior Editor

01/23 12:29 ET

Justin wonderfully reminds us of the long history of recognition about financial market dynamics. How can we keep ignoring these frameworks?

A few months back, Nobelist George Akerlof wrote a paper titled “What They Were Thinking Then: The Consequences for Macroeconomics During the Past 60 Years.”

He shares two stories about major flaws that the creators of the neoclassical synthesis sensed were risky propositions.

One was the permanent unemployment-inflation trade-off. The second was ignoring Keynes on the centrality of financial market excesses to the boom-and-bust cycle.

He points out that the Great Inflation killed the permanent I/U trade-off notion, and the model was recast. But the Great Recession, following 30 years of asset-market boom-bust cycles, so far has only spurred tweaks in the mainstream model. Why???

It’s easy to blame the rent seekers. But I think a second group that is very important. When you insist that people are rational about accelerating inflation risks, you make modeling in a highfalutin fashion easier.

When you admit that people buy fewer cars when their price goes up but more stocks when stock prices rise, you blow the model up. It gets ad hoc and weird.

Whether my conjecture is right or not, I do find it amazing that mainstream macro has denied this self-evident truth for too long to imagine -- even Dornbusch would be flummoxed.

Robert J. Barbera ‘The Cost of Capitalism’ Author

01/23 12:31 ET

I agree with John that it is increasingly clear that equity markets are detaching from the economic cycle. The S&P 500 is at the most expensive it has been in nearly two decades on a forward-looking P/E basis.

Sure, the labor market has held firm but the trajectory for U.S. economic growth is slowing. The Fed has implicitly shifted its mandate away from full employment and price stability -- the Fed is the market’s friend and the liquidity is flowing.

Laura Cooper Macro Strategist, London

01/23 12:32 ET

Finally, Matthew Brooker, a Bloomberg Opinion editor in Hong Kong, says it came as a surprise to him that Minsky doesn’t claim his view of the inherent instability of capitalism as original, but merely a correct reading of Keynes.

“In Minsky’s telling, Keynes’s work has been simplified and bastardized by being reconciled with the work of classical economics, with which it rightly marked a revolutionary break,” he notes. “Was Minsky just being modest? Or is all in fact contained within Keynes, who saw crises as being an inevitable feature of capitalism rather than anomalies within a system that tended toward equilibrium?”

John Authers Senior Editor

01/23 12:39 ET

Did Minsky highlight or add? My favorite question of this effort.

I would say he certainly highlighted in a big way. In particular he quoted extensively from post-General Theory publications wherein Keynes categorically rejected the Keynesian assertions about what the General Theory meant.

Minsky, however, took a giant step further than Keynes.

Keynes asserted that the world is pervasively uncertain, but we all must make decisions. And so we embrace a convention: “tomorrow will be yesterday.”

Minsky’s brilliant additional insight? The longer the string of similar yesterdays, the bigger the bets that yesterday will persist, and the riskier the financial backdrop. That means finance, all by itself, generated-boom-bust cycles.

In macro jargon, we have a model that generates busts endogenously. The notion of out-of-this-world shock is all wrong. Listen to Greenspan in late 2008:

“Those of us who looked to the self-interest of lending institutions to protect shareholder’s equity (myself included) are in a state of shocked disbelief.”

Any Minsky fan who read that quote belly laughed.

Robert J. Barbera ‘The Cost of Capitalism’ Author

01/23 12:40 ET

Obviously, Minsky’s view of the inherent instability of capitalism isn’t original, given that Mills voiced the same view in 1867. :-)

But Chapter 12 of Keynes’s General Theory -- on “The State of Long-Term Expectation” -- really is all about the inherent instability of financial markets.

It’s also the only chapter in the “General Theory” that I’ve read from beginning to end, but I’ve been told that the rest of the book does not integrate its lessons particularly well into the greater whole.

So maybe Minsky was being a little generous, but Chapter 12 really does contain multitudes -- including, Richard Thaler once told me, most of behavioral finance.

Justin Fox Bloomberg Opinion Columnist

01/23 12:42 ET

As always seems to be the case, we’ve been typing non-stop for 90 minutes and still do not seem to have done much more than scratch the surface of a profoundly fascinating topic. Thank you everyone for taking part.

Our next book will be Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms by Russell Napier. It’s a great work of stock market history which endeavors to find out whether there’s a way to spot a truly historic buying opportunity in real time.

This version of the book’s cover, from 2009, features a blurb from me describing it as a “cult classic in the investment community” and I stand by that description. I have seen it on the desks of so many fund managers over the years that it obviously has a great and unacknowledged influence.

Authers’ Notes: The Magic of Minsky Moments

It was updated with a new introduction in 2016, and it is well worth returning to it now. The view from the bottom of bear markets can also tell us a lot about what the top might look like. We will aim to hold another discussion like this one, this time on the grand secular stock market trends and how to spot them, about a month from now.

Enjoy your reading and thank you for taking part.

John Authers Senior Editor

To contact the reporter on this story: John Authers in New York at

To contact the editors responsible for this story: Tal Barak Harif at, Andrew Dunn, Anny Kuo

©2020 Bloomberg L.P.