For all of you avid blog readers out there, this topic was covered about Hyman Minsky, and the developing push towards a “Minsky Moment” last year, but oddly, I am going to say that last year’s events did not constitute a real “Moment” but this weeks’s events are in fact the long awaited Minsky Moment!
According to this summary article in newsweek, major banks are selling long held investments to raise capital rather than turn to outside sources to raise additional capital.
If you’ll recall from last year’s blog post, the main reference document contained this paragraph:
Recall that a Minsky Moment is basically about the highest stage of leverage
and its relationship with and to the price of money and asset prices. It’s less of a
moment, as such, and more about a sequence of events in credit markets,
triggered by anything that causes asset prices to falter and risk premiums to rise
sharply. First, credit supply begins to dry up as lenders tighten lending
standards; the terms and the cost of credit and, nowadays credit insurance,
increases. Subsequently, this can result in a more serious withdrawal of liquidity
as lenders reduce or shut down lines of credit and call in loans, and borrowers
may have to sell liquid assets in order to raise cash or comply. The final
‘moment’ is where the prospect (or fact) of a deflationary credit contraction
forces the monetary authorities to relax monetary conditions and lower interest
rates in order to ensure the integrity and functioning of ‘good’ lenders and
borrowers and avert, if possible, the likelihood of contagion into income,
spending and hiring and firing decisions in the real economy.
What is more understood now, and less then, is the Staggering amount of leverage that was injected into our financial system during the years 2004-2007 and who the real borrowers of all of this cash were . . . The major investment banks have hit the wall with their new backstop, The Fed, and commercial banks are near losing their ability to operate freely with core capital being challenged by writeoffs.
Just I guess people forgot that these massive institutions were the real borrowers in the real estate market . . .
Note that at the same time, monetary policy was relaxed last year, but now the mortgage lending policies are being relaxed for FHA and money being pumped into the mortgage lending arms of the government via GSEs and HUD.