NOTES ON COVID:
ETFs earnt more than everyone then Active management (which for a while has not been earning
this much and certainly not more than Quant firms) Quant firms lost instead because they did not
take into account the possibility of a pandemic because they did not have data to take into account
about such an event.
Economic degrowth + recession but this not due to financial crisis not a Minsky moment.
VIDEOS 1 ON MINSKY
Unit has assets and liabilities (=cash flows over each year)
assets generate profits allocated in different ways according to the liability’s structure
Liability structure = a prior commitment of expected future incomes
- If unit can cover both interest + principal debt payments (= can fully validate its debts out of
current income with a margin of safety) = “hedge unit”
When economy dominated by hedge financing you get an interest rate pattern: where short term
interest rates = substantially lower than long term interest rates
Keynes pointed out there was a constitutional bias = lenders prefer to lend short while buyers
prefer to borrow long.
payments includes both payment of interest + of principal
It is possible to roll over (=borrow again) the debts to keep financing the project you want to
invest in
Secrets for a well ordered financial system: if your profit flows are good + they are expected to
remain good you have no trouble rolling over debt (sometimes its formalized)
Rolling over finance = speculative
- In a long term hedge contract = you know the interest payments and you know the
refinancing problem
- In a speculative one = interest payments may go up or down on you as the market changes
+ you may find that liquidity preferences of the lender has affected how they are willing to
deal with you from time to time
- Ponzi finance = when you borrow to pay interest (Mexico, Brazil) = debt growing in a very
inefficient way you are not getting investment nor consumer goods = you are just getting
closer to the next crisis
Ponzi financing = will occur when a debt burden (=short term debt mainly) is confronted with a drop
in profits or huge rise in interest rate
Ponzi finance = leads to cutting off areas from being externally financed + weakens the financing
ability of institutions because: it decreases the institutions’ profits and available funds
US economy consists of: (1) a system of borrowing and lending + (2) a basis of margins of safety.
2 margins of safety:
, - One is = cash flow margin
- Other = equity margin
When stock market collapses equity margin of organizations can disappear, even though the cash
flow margin remains the class or quality of borrowers disappears.
The market valuation of a company is important because it is = the excess of their total value of
assets over their debts (as the market values it)
so: a booming stock market is = increasing perceived margins of safety
a collapsing stock market = diminishes it
Financial Instability Hypothesis = in normal functioning of an economy when: economy is doing well
+ liability’s structure predominantly hedge the interest rate structure = is such that it is cheaper
to finance short-term than long-term + those who can make the arrangements for financing + re-
financing will shift their liability structure and this continues until the margins is eaten up = means
higher short rates relative to long rates (long-rate being the market determined rate really).
and then if you have rising interest rates + short term finance you form good expectation
about the economy + develop financial structures where any drop in income or rise in interest rates
will transform some firms to Ponzi financing.
when there are: firms become Ponzi bankruptcy will occur affecting the liquidity preferences
of lenders + borrowers leading to collapse
SO: = endogenous process based upon how financial markets behave + how profit seeking portfolio
managers + bankers + businesses behave.
There are agents operating for profits + agents who manage portfolios that need risk + uncertainty
valuation which are unfortunately miopic with regards to the past + imperfect with regards to the
future therefore a capitalist economy = is subject to booms +busts.
VIDEO 2 ON MINSKY
Minsky moment = when a market fails or falls into crisis after an extended period of market
speculation r unsustainable growth.
A Minsky moment = is based on the idea that periods of speculation if they last long enough will
eventually lead to crises; the longer speculation occurs the worse the crisis will be.
In order to have a Minsky moment = there needs to be excessive speculation = fueled by over
borrowing + over-spending prices are (bid up like this) so high because people are able to borrow
money.
Graph of credit market debt (as percentage of GDP) has expanded over the course huge growth in
credit both in Great Depression + in financial crisis in 2008 in both cases = investors + speculators
= realize that prices cannot keep rising indefinitely so they begin to sell
Everyone was so over leveraged when they began to sell prices began to decline (asset prices
deflation) = people started to go bankrupt
Everyone was using credit + speculating pushing prices up BUT the amount of debt was getting
bigger and bigger until people realized that this amount of debt + levels of prices = was not
ETFs earnt more than everyone then Active management (which for a while has not been earning
this much and certainly not more than Quant firms) Quant firms lost instead because they did not
take into account the possibility of a pandemic because they did not have data to take into account
about such an event.
Economic degrowth + recession but this not due to financial crisis not a Minsky moment.
VIDEOS 1 ON MINSKY
Unit has assets and liabilities (=cash flows over each year)
assets generate profits allocated in different ways according to the liability’s structure
Liability structure = a prior commitment of expected future incomes
- If unit can cover both interest + principal debt payments (= can fully validate its debts out of
current income with a margin of safety) = “hedge unit”
When economy dominated by hedge financing you get an interest rate pattern: where short term
interest rates = substantially lower than long term interest rates
Keynes pointed out there was a constitutional bias = lenders prefer to lend short while buyers
prefer to borrow long.
payments includes both payment of interest + of principal
It is possible to roll over (=borrow again) the debts to keep financing the project you want to
invest in
Secrets for a well ordered financial system: if your profit flows are good + they are expected to
remain good you have no trouble rolling over debt (sometimes its formalized)
Rolling over finance = speculative
- In a long term hedge contract = you know the interest payments and you know the
refinancing problem
- In a speculative one = interest payments may go up or down on you as the market changes
+ you may find that liquidity preferences of the lender has affected how they are willing to
deal with you from time to time
- Ponzi finance = when you borrow to pay interest (Mexico, Brazil) = debt growing in a very
inefficient way you are not getting investment nor consumer goods = you are just getting
closer to the next crisis
Ponzi financing = will occur when a debt burden (=short term debt mainly) is confronted with a drop
in profits or huge rise in interest rate
Ponzi finance = leads to cutting off areas from being externally financed + weakens the financing
ability of institutions because: it decreases the institutions’ profits and available funds
US economy consists of: (1) a system of borrowing and lending + (2) a basis of margins of safety.
2 margins of safety:
, - One is = cash flow margin
- Other = equity margin
When stock market collapses equity margin of organizations can disappear, even though the cash
flow margin remains the class or quality of borrowers disappears.
The market valuation of a company is important because it is = the excess of their total value of
assets over their debts (as the market values it)
so: a booming stock market is = increasing perceived margins of safety
a collapsing stock market = diminishes it
Financial Instability Hypothesis = in normal functioning of an economy when: economy is doing well
+ liability’s structure predominantly hedge the interest rate structure = is such that it is cheaper
to finance short-term than long-term + those who can make the arrangements for financing + re-
financing will shift their liability structure and this continues until the margins is eaten up = means
higher short rates relative to long rates (long-rate being the market determined rate really).
and then if you have rising interest rates + short term finance you form good expectation
about the economy + develop financial structures where any drop in income or rise in interest rates
will transform some firms to Ponzi financing.
when there are: firms become Ponzi bankruptcy will occur affecting the liquidity preferences
of lenders + borrowers leading to collapse
SO: = endogenous process based upon how financial markets behave + how profit seeking portfolio
managers + bankers + businesses behave.
There are agents operating for profits + agents who manage portfolios that need risk + uncertainty
valuation which are unfortunately miopic with regards to the past + imperfect with regards to the
future therefore a capitalist economy = is subject to booms +busts.
VIDEO 2 ON MINSKY
Minsky moment = when a market fails or falls into crisis after an extended period of market
speculation r unsustainable growth.
A Minsky moment = is based on the idea that periods of speculation if they last long enough will
eventually lead to crises; the longer speculation occurs the worse the crisis will be.
In order to have a Minsky moment = there needs to be excessive speculation = fueled by over
borrowing + over-spending prices are (bid up like this) so high because people are able to borrow
money.
Graph of credit market debt (as percentage of GDP) has expanded over the course huge growth in
credit both in Great Depression + in financial crisis in 2008 in both cases = investors + speculators
= realize that prices cannot keep rising indefinitely so they begin to sell
Everyone was so over leveraged when they began to sell prices began to decline (asset prices
deflation) = people started to go bankrupt
Everyone was using credit + speculating pushing prices up BUT the amount of debt was getting
bigger and bigger until people realized that this amount of debt + levels of prices = was not
