Thursday, August 02, 2007

Market States, Minsky Cycles and Fools

In Phillip Bobbit's excellent work, Shield of Achilles, he traces concepts of the state in a historical context ending in the current nation-state alignment where the state's legitimacy is believed to rest on the ability of the state to provide a nation with a good level of material success. He then argues that the nation state is undergoing a crisis of legitimacy and the successor state system of the market-state is slowly taking hold. The market state's badge of legitimacy will be the state's ability to offer its stakeholders as many opportunities as possible with minimal to no concern over the eventual distribution of the end results.

Earlier this week Nouriel Roubini asked a pretty good question concerning the credit and liquidity circumstances that we are in.

it increasingly looks like we are at the peak of a credit/debt cycle, in the US and globally.

Specifically, the crucial macro question that we should ask ourselves today is whether we are at the peak of a Minsky Credit Cycle. Or as the UBS economist George Magnus – an expert of financial instability - put it: “Have we reached a Minsky moment?”

Hyman Minsky was an American economist who died in 1996. His main contribution to economics was a model of asset bubbles driven by credit cycles. In his view periods of economic and financial stability lead to a lowering of investors’ risk aversion and a process of releveraging. Investors start to borrow excessively and push up asset prices excessively high........

Minsky’s ideas and model fit nicely the last two US credit booms and asset bubbles that ended up in a recession: the S&L-based real estate boom and bust in the late 1980s; and the tech bubble and bust in the late 1990s. But the experiences of the last few years suggest another Minsky Credit Cycle that has probably now reached its peak. First, it was the US households (and households in some other countries) that releveraged excessively: rising consumption, falling and negative savings, increased in debt burdens and overborrowing, especially in housing but also in other categories of consumer credit....

The 'ownership society' rhetoric of the Republican Party is aligned with the rhetoric and intellectual framework behind the transition to a market-state. George W. Bush's argument for Social Security privatization was there was the potential for individuals to have greater gains with private accounts than in Social Security. It was an opportunty argument that he lost every time he opened up his mouth. But I digress a bit.

Over the past twenty five years, it appears that we have gone through three significant financial bubbles in this country. Early testers and insiders who could get in at the ground floor got rich, early adapters who were not too greedy got out ahead of the game, mass adapters came in just as prices were nearing their peak and got kicked in the 'nads on the downside risk, and significant social costs were generated and spread through out the society in a manner that was not proportional to the bubble's winners and losers.

Right now, increasing opportunity space means for most people the opportunity to either take on greater risk and volatility with minimal concurrent rewards or the opportunity to find even greater fools. Given that the population of the world is a finite number, the number of greater fools for any individual is also finite.

Most of the opportunities to get ahead in my lifetime has been predicated on getting in on a bubble before it has been recognized as such and then getting out at or near the top. If this is what opportunity means --- a chance to lose your pension, your 401(K) and your house --- the market state will not be popularily adapted in the United States.

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