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Minsky Moment at Hand?

By on August 4, 2007

Next week should be interesting. The wheels seem to be ready to come off. I’m looking forward to the fireworks show.

Below is excerpted from Marketwatch, by Rex Nutting & Nick Godt,

“Global credit markets are overleveraged, says economist Nouriel Roubini of Roubini Global Economics. That’s how the hedge funds and private-equity firms were able to reap such fantastic returns. But with underlying assets leveraged 10 or 20 or 50 times, even a small decline in asset values can wipe out the entire investment, or trigger a demand for immediate payment, causing a cascading default among all the parties to a deal that’s gone bad.
Minsky theorized that an asset bubble has three stages. In the first, so-called “hedge” investors can pay off the interest and principal from their cash flow. Healthy returns push up prices, attracting the “speculative” investors of the second stage, who can meet their interest payments from cash flow with the help of liquid capital markets, but would have to sell off assets to pay off the principal. In the third stage, “Ponzi” investors rush in, relying on the continual appreciation of the value of the asset to pay the interest or the principal.
If the asset loses value, Ponzi investors lose everything and speculative investors get squeezed. That’s the Minsky moment.”

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