Strength, weakness, and then, suddenly, a crisis. That’s the fate that Hyman Minsky, a former professor of economics at Washington University in St. Louis, in 1986 that could come for economies that took on too much risky debt and allowed market bubbles to form. Decades later, with world debts touching a record $300 trillion and rising stocks in the face of stubborn inflation and banking instability, Allianz Chief economist Ludovic Subran worries that Minsky’s prediction is about to come true.
“We have all the ingredients of a so-called Minsky moment,” he SPOKE Bloomberg monday
Minsky, who died in 1996 at the age of 77, is best known for his seminal book, Stabilizing an Unstable Economy (1986)which argues that there are five common stages in an economic cycle: displacement, boom, euphoria, profit taking, and panic.
moving On happens after a new technology or paradigm, such as low interest rates or the internet, excites investors. Media attention and word of mouth then creates a boom of loans and asset prices related to this new phenomenon, which in turn led to more investors fearing to be left behind, creating a period of euphoria and risk taking. But eventually, the euphoria fades as asset prices drift away from reality, debtors struggle to pay their debts, and some investors start defaulting. profit taking. That leads to a Minsky moment, with the profit taking to panic and asset price declines.
Minsky argues that economies cannot avoid these boom-bust cycles, when financiers and investors turn into economic annihilators as their frenzy of greed turns to fear. And since then, we’ve seen his theory come true twice, first with the rapid selloff in tech stocks after the dot-com bubble and then again when real estate prices collapsed during the global financial crisis in 2008.
Allianz’s Subran noted on Monday that a sign that another Minsky moment may be coming is the disappearance of liquidity throughout the economy as banks tighten their lending standards. “You see that everywhere,” he warned, pointing commercial real estate, struggling with rising vacancy rates, collapsing prices, and fears of defaults, as a particular area of concern. The sector is affected by the transfer of hybrid work, as well as the increase in interest and issues in regional banks that make obtaining new loans or refinancing old ones almost impossible.
Subran is particularly concerned that persistently high interest rates could lead to more “financial accidents” in the banking sector or from non-bank lenders, such as hedge and pension funds, pointing to ailing commercial real estate sector.
“Everyone’s problem now is the sudden tightening, but there is an additional layer of mismanagement of risk,” he said, referring to potential problems with commercial real estate loans to non-banks that are not subject to in the same regulations as. banks’.
Subran expects lending conditions and access to credit to continue to fall this year as well, which he says will ultimately help the US recession. This is not a “remake of the global financial crisis” of 2008, he said, but the market sell-off will become more frequent in the coming months.
Subran wasn’t the only one worried about a Minsky moment. JPMorgan Chase’s chief market strategist and co-head of global research, Marko Kolanovic, explained in a March note that high inflation and rising interest rates have increased the likelihood of a sudden collapse in asset prices and lending.
“The possibility of a Minsky moment in markets and geopolitics has increased,” he wrote. “Even if central bankers are successful with contagion, credit conditions look set to tighten faster due to pressure from markets and regulators.”