Opinion
The Minsky moment
By Vivid writer: Andrew Taylor
'The Minsky moment', also known as the point of capitulation, is the point at which participants in a market dump their assets at any price in order to flee the market.
Posted: 24/11/2008
'The Minsky moment' is the point at which participants in a market dump their assets at any price in order to flee the market.
The day before the British government announced its multi-billion pound rescue plan, Robert Peston - who as the BBC's business editor has shot to fame by explaining events to a bemused public - warned of scenes approaching capitulation. By Friday of the same week it was not only banking stocks that were in free fall, but stocks in general, as fears spread of a wider global recession spread. Peston described the scenes of panic selling in New York as close to the Minsky Moment - the tipping point. He indicated that the failure of governments to reverse the downward spiral would lead to even more panic and chaos, and since then Iceland, Ukraine and, most frighteningly, Hungary, have all gone cap in hand to the IMF. Confidence is, rather like religion, an act of faith that once lost is not easily recovered.
The domino-like collapse of household name financial institutions such as AIG, Morgan Stanley, RBS, Lehman Brothers and HBOS seemed unthinkable just months ago. Now nothing seems impossible and you and I find ourselves nervously reading the news on our computer screens every morning to see whether we will need to move our money. The trouble is that without confidence in the banking system our ability to conduct day-to-day business will simply break down.
Despite all the doom and gloom in major financial centres there is a widely held belief that this will somehow not affect Romania. Such thinking is both dangerous and absurd. First, new finance for sectors like real estate development has virtually dried up, as banks seek to reduce risk. This will severely impact the property market. Developers are rushing projects that are already under construction toward completion, whilst future plans are being shelved as they simply cannot get hold of financing. Second, banks have tightened the terms upon which consumer finance is offered. Third, and perhaps most importantly, the money offered in credits is largely being purchased from banks head offices. However, these same head offices are doing everything possible to hold liquidity right now. Furthermore because the banks are unwilling to loan to each other this creates a still greater need for short-term liquidity, compounding the unwillingness to lend. As the supply of cash from the centre dries up borrowers will find themselves paying ever more for the dwindling resource of finance. Indeed the Economist recently argued that whilst public debt in Romania and Bulgaria is far more manageable than in Hungary, the dependence upon foreign banks for financial liquidity is of serious concern. In the event that either Romania, or Bulgaria should require assistance from their wealthier EU neighbours, failure to come good on corruption, judicial improvements, and organised crime has left little goodwill in Brussels. Fourth, those unfortunate enough to have swallowed the private pension plan idea are looking at significant losses.
Some of the largest banks in Romania are being touched far more directly than we realise. Unicredit is rumoured to be in trouble, following a profits warning. Whilst the newly broken up ABN AMRO has made way for Royal Bank of Scotland (RBS) in Romania, whose share value has crashed by more than 90 per cent over the last few months. Indeed had the Brown government not acted as boldly as it did it seems certain that the markets would have taken this institution down. A similar fate befell ABN AMRO in the Netherlands, when the bank that bought it, Fortis, was rescued by the Dutch government, which is now ABN AMRO's largest shareholder by default.
Let us be in no doubt that whilst this may be the tipping point into a very deep worldwide recession, it is also a tipping point in global power relations. America will need to spend a great deal more than it has so far if it is buy its way out of the crisis. This is the moment where you can almost feel the rise of China, India and the Gulf's petrodollars, each of whom have through their companies or sovereign investment funds purchased large chunks of the world's financial assets. Just as Britain discovered in the post-war era, America will discover that it simply lacks the ability to both pay for the financial mess its got itself into and its limitless foreign adventures. Its deficit will lead to a scenario described by Margaret Thatcher as like that of a housewife who has pawned all the jewellery and is still spending more than she earns - cuts are inevitable. Meanwhile China has just conducted its first space walk, and India just sent its first spaceship to the moon.
So where does that leave us? In the near term we have a future based upon financial uncertainty as we await the full effect of economic ripples to lap over to this corner of Europe. The medium term looks likely to be a multi-polar world, similar to either the interwar era, or the nineteenth century. Both of which led to significant warfare. At least the environment will benefit from the pause in economic expansion heralded by a global recession.
Andrew Taylor runs Connect-CEE, an outdoor management training company.
Comments:
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Tuesday 25th November 2008 at 17:11 Bill Krouwel said: "As ever, Andy Taylor is both insightful and incisive in his comments on a world turned upside down... This all seems remote until it's YOUR house that's being repossessed by the near-bankrupt bank which urged you to borrow...as thousands of Icelanders are currently discovering... Just be grateful it's not "dubbleyuh" who's going to be leadinmg the U.S. through this one..." | |