According to Minsky theory there are three basic modus vivendi of a financial unit: hedge, speculative and Ponzi. For hedge units cash receipts exceed cash payment commitments, for speculative units they are equal and for Ponzi units cash receipts are insufficient to match obligations and require taking additional debt on a regular basis.
The main and major problem of our economy is that millions of families and thousands of businesses were able to run Ponzi scheme of operation for substantial amount of time, some of them for over a decade. That was possible thanks to the Autumn period of the Kondratieff wave, where interest rates are constantly falling thus providing the incentives to increase the debt levels substantially above the levels possible in previous periods. The last time U.S. economy was in Kondratieff Autumn in 1920s and it ended badly.
Every Ponzi unit eventually either bankrupts on its own personal pace or participates in a wider Minsky moment, i.e. widespread risk aversion of creditors away from Ponzi units.
The only two scenarios that can potentially prevent the bankruptcy of a Ponzi unit are:
- Substantially increase the cash receipts on a permanent, not temporary basis
- Substantially reduce the outstanding debt that will convert (upgrade) the Ponzi unit to at least the speculative unit
As far as I can see none of the proposed measures is addressing the problem even in a slightest manner. It was just used as an excuse for Bush and his GOPniks to push their personal agenda of cutting taxes for riches.
I outlined my own proposals in one of the previous posts
At this moment the way #1 is pretty much impossible for most, especially in a declining economic environment. The $800 will not help unless it is sent every month.
And the way #2 for most corporations and families means bankruptcy or foreclosure. Mish recently observed a trend of intentional foreclosures, i.e. a person decides to foreclose on “his” house not because he can’t keep up with the payments but because he observes that foreclosure is a sound financial decision in his case. So, instead of wasting budget money to prevent foreclosures they must work to make the foreclosure less painful. It’s not good to waste your time – it’s better to foreclose when you are young and still keep your savings than foreclose when you are old and maxed out on your credit cards
January 28, 2008 at 7:56 pm
As far as I can see none of the proposed measures is addressing the problem even in a slightest manner.
I would agree with that. Rate cuts also will not be effective. Nor will a recapitalization of the bond insurers. All that rotting debt will still be out there. But you never really hear this said in the main financial media, and stocks rally well on news flow about all of the above.
Still not a bear market yet. Not really.
January 28, 2008 at 9:08 pm
there are three basic modus vivendi of a financial unit: hedge, speculative and Ponzi.
Add; float, vig and cut. the float from processing so much that there is a gap twixt when your order is initiated and sealed. Vig is when the bookies are nice and cover your bet while you are scraping together and uncredited for the cash. And finally cut. Servicing fees are obscene in the modern context. An order of magnitude at least too high.
January 30, 2008 at 11:14 pm
Options: “1) Substantially increase the cash receipts on a permanent, 2) Substantially reduce the outstanding debt ”
I don’t see option 1 occurring with the $1/day Chinese worker competing against American labor. I think that we have a winner behind option 2 when the American consumer simply stops spending. This will bring about some very unpleasant outcomes for the US with the most likely scenario being a complete deflationary crash in all but the absolute necessities (food, electricity, oil which will be in an inflationary spiral due to the end of cheap worldwide energy).
People are just now starting to turn away from Ponzi greed and are entering a self preservation mood. I have tried to look at some scenarios to attempt to understand where this will all pan out at. We are not just looking at a monetary problem. Looking at a strict economic model base, where natural resources are used to support expansion of higher economic functions. 2% of the American population in agriculture supports 98% of the remaining population working in higher economic functions. This agro number is heavily skewed by the use of petrol and advanced machinery in this industry. Should energy usage in this system of agriculture falter, then a significant portion of the population will be required to be re-employed in agriculture. I cannot see any way that current levels of US population be supported w/o a massive drop in caloric intake. Before the age of farm machinery the amount of arable land in farm use was massive, far beyond what is available today and was used to feed a much smaller population. I cannot see a pleasant outcome for this condition.
P.S. Theroxylandr, Once again Great Post!
February 1, 2008 at 3:15 pm
[...] 2007 is quickly went into fast destruction mode just in few months. I’ve posted few days ago about Minsky theory and I just want to add few [...]
March 5, 2008 at 10:58 am
[...] But now is not the normal times. We are in Kondratieff Winter and the orthodox wave theory says that the Winter is a time of massive deleveraging, i.e. the outstanding debt must decline sharply. All asset prices are bound to fall and all Ponzi units are bound to fail. Read more about Ponzi units here. [...]
October 14, 2008 at 12:47 pm
these are not normal times so haow about this as a compromise. we (the taxpayer) buy down the principal to be compatible with new market realities, then we the taxpayers get half of the equity when the homes are sold in the future. getting half of the future equity as a home owner would be an inducement to stay in the home for the current home owner and a disincentive for those that are on the buble to dump out of their currently “current” mortgages.
P.S. these new mortgages cannot be refinanced. nor could the homes be sold (without declaring bankruptsy) for say 5 years