Mid-Life MBA: The Art of Business

The Wall Street Journal noted today how the current market volatility is raising the stock of a little-known economist whose views have suddenly become very popular–Hyman Minsky.

The WSJ says that, “Minsky, who died more than a decade ago, spent much of his career advancing the idea that financial systems are inherently susceptible to bouts of speculation that, if they last long enough, end in crises. At a time when many economists were coming to believe in the efficiency of markets, Mr. Minsky was considered somewhat of a radical for his stress on their tendency toward excess and upheaval.”

“Today, his views are reverberating from New York to Hong Kong as economists and traders try to understand what’s happening in the markets. The Levy Economics Institute of Bard College, where Mr. Minsky worked for the last six years of his life, is planning to reprint two books by the economist — one on John Maynard Keynes, the other on unstable economies. The latter book was being offered on the Internet for thousands of dollars.  Christopher Wood, a widely read Hong Kong-based analyst for CLSA Group, told his clients that recent cash injections by central banks designed “to prevent, or at least delay, a ‘Minsky moment,’ is evidence of market failure.”"

The “Minsky moment” has become a fashionable catch phrase on Wall Street. It refers to the time when over-indebted investors are forced to sell even their solid investments to make good on their loans, sparking sharp declines in financial markets and demand for cash that can force central bankers to lend a hand.

Wikipedia says:

“Hyman Minsky has proposed a simplified explanation that is most applicable to a closed economy. He theorized that financial fragility is a typical feature of any capitalist economy. High fragility leads to a higher risk of a financial crisis. To facilitate his analysis Minsky defines three types of financing firms choose according to their tolerance of risk. They are hedge finance, speculative finance and Ponzi finance. Ponzi finance leads to the most fragility.

Financial fragility levels move together with the business cycle. After a recession firms have lost much financing and choose only hedge, the safest. As the economy grows, and expected profits rise, firms tend to believe that they can allow themselves to take on speculative financing. In this case they know that profits will not cover all the interest all the time. Firms, however, believe that profits will rise and the loans will eventually be repaid without much trouble. More loans lead to more investment and the economy grows further. Then lenders also start believing that they will get back all the money they lend. Therefore they are ready to lend to firms without full guarantees of success. Lenders know that such firms will have problems repaying. Still, they believe these firms will refinance from elsewhere as their expected profits rise. This is Ponzi financing. In this way the economy has taken on much risky credit. Now it is only a question of time before some big firm actually defaults. Lenders understand the actual risks in the economy and stop giving credit so easily. Refinancing becomes impossible for many and more firms default. If no new money comes into the economy to allow the refinancing process, a real economic crisis begins. During the recession firms start to hedge again and the cycle is closed.”

Major Works of Hyman P. Minsky

• “Central Banking and Money Market Changes”, 1957,
• “Can “It” Happen Again?”, 1963, in Carson, editor, Banking and Monetary Studies.
• “Longer Waves in Financial Relations: Financial factors in more severe depressions”, 1964, AER.
• “The Modeling of Financial Instability: An introduction”, 1974, Modelling and Simulation.
• John Maynard Keynes, 1975.
• “The Financial Instability Hypothesis: A restatement”, 1978, Thames Papers on Political Economy.
• Can “It” Happen Again? Essays on instability and finance, 1982.
• “The Financial-Instability Hypothesis: Capitalist processes and the behavior of the economy”, 1982, in Kindleberger and Laffargue, editors, Financial Crises.
• “Beginnings”, 1985, BNLQR.
• Stabilizing an Unstable Economy, 1986.
• “The Global Consequences of Financial Deregulation”, 1986, Marcus Wallenberg Papers on International Finance.
• “Sraffa and Keynes: Effective demand in the long-run”, 1988
• “The Macroeconomic Safety Net: Does it need to be improved?”, 1989, in H.P. Gray, editor, Modern International Environment.
• “Schumpeter: Finance and evolution”, 1990, in Heertje et al, editors, Evolving Technology and Market Structure.
• “Financial Crises: Systemic or Idiosyncratic?”, 1991
• “Market Processes and Thwarting Systems” with Piero Ferri, 1991 
• “The Transition to a Market Economy: Financial Options”, 1991
• “Reconstituting the United States’ Financial Structure: Some Fundamental Issues”, 1991
• “The Capitalist Development of the Economy and the Structure of Financial Institutions”
• “The Financial Instability Hypothesis: A clarification”, 1991, in Feldstein, editor, Risk of Financial Crisis.
• “Financial Instability Hypothesis”, 1993, in Arestis and Sawyer, Handbook of Radical Political Economy
• “Finance and Stability: The Limits of Capitalism”, 1993
• “Business Cycles in Capitalist Economies”, 1994, MIJCF.

I was surfing through Churchbusiness.com when I noticed a recent “culture of accountability,” webinar and felt palpably startled.  The site said the webinar would be about “accountability,defined as “ the acknowledgement and assumption of responsibility for actions, products, decisions and policies, including the administration, governance and implementation within the scope of one’s job.” Accountability also encompasses the obligation to report, explain and be answerable for results and consequences.  (Godevenos)“For some strange reason, it doesn’t come easy to theology students or church leaders in general; yet, accountability has been around since the beginning of man, from the early chapters of Genesis to the Jesus’ parable of the talents,” Godevenos continues. “It’s still going strong today in our public and private systems of governance. It involves either the expectation or assumption of account-giving behavior.”

In its simplest form, accountability has also come to mean “the willingness to stand up and be counted,” he says – but how do we get our staff (and possibly our congregants) to do just that?

Awareness of this concept in the church is critical but it is also critical that the concept have a context for without grace, accountability will turn an institution that is to be a ministry of grace into just another form of the law. This is not to say however, that the concept has no place–it does.  A pastor, for example, may not be able to guarantee a 20% increase in giving or in membership of a particular church, but it should guarantee that the pastor is indeed preparing well for his preaching, visiting well to support his congregation, and finding creative ways to reach his surrounding community. Accountability is an important concept for annual evaluations in the church but the challenge will be to properly place it in the broader context of church life.

Here is a WSJ video, on the fine art of tying a necktie. A video demonstration illustrates the “four in hand,” “the half-Windsor,” and, the mother of all knots, “the full-Windsor.”

Most of us learned the “Four in Hand,” but alas big knots are now “in.”  What to do?  Turnbull & Asser and the WSJ to the rescue.
link.brightcove.com/services/link/bcpid452319854/bctid627954944

Amaranth hedge fund participants lost half of their money as the fund suffered the losses from several bad bets, $5 billion in the last week alone.  Analysts suggest that Amaranth was overly dependent on bets on natural gas and on one trader in particular, 32 year old Brian Hunter of Calgary, Alberta.  Analysts further suggest that Hunter illustrates the problem of over dependence on debt by hedge funds, estimating that Hunter had to borrow $8.00 for every $1.00 of funds in order to cover his positions.

Broader diversification within the fund would have mitigated losses, though at the expense of the better than 20% returns that the fund had been enjoying.  Still, the staggering losses of the past month underscore the value of the diversity principle, that the standard deviation of a portfolio is less than the weighted average of the individual components.

Again, another almost 100 point drop in the Dow.  What’s up?

Jim Jubak says it well on MSN, “Don’t Bet the Ranch on a Rebound.”  While he doesn’t believe the stock market rally is dead, he suggests that there are too many uncertainties afoot to risk much in the short term.  He does go so far as to admit that the rally that began in 2003 is getting a little “long in the tooth.”

Bearmarketcentral.com goes a little further: it’s bad and only going to get worse.  A great book with a similarly pessimistic outlook is “The Bear Book,” by John Rothchild.  Give it a read if the notion resonates with you.

Bear market musings on PBS.org features several brief articles and comments on bear markets by a variety experts including Peter Lynch.  Read it for some sobering perspective before you reinvest in those Latin American or Emerging Market stocks and funds.

Where the market is going tomorrow is anyone’s guess but I’m doubtful that there should be much rush to buy back in before the fall at the earliest.

The center for retirement research at Boston College reported in a new study released this week that 43% of Americans will not have enough money for retirement.  Assumptions included a requirement for 73% of pre-retirement income.

CRR said that those most at risk included Low-income Gen Xers (60%); Low-income late boomers (54%); Middle-income GenXers (46%); Two-earner GenX couples (53%); Single GenX women (52%).

The average 401-k savings of those approaching retirement is currently near $60,000 and constitutes the sole provision for additional income beyond Social Security payments.

If you can’t afford to devote one to two full time years to graduate business study, can you get the equivalent by reading the books?  The central thesis of the PMBA concept is that you can come close.

While you won’t derive the equivalent by reading alone, and while you won’t actually read all of the books that you might encounter in a traditional MBA, and while you won’t benefit from the lecture and team-based project components, you will absorb a lot of the content.  The reading program has the potential to extend your leadership potential and familiarize you with core concepts.

One of the books, “How to Read a Financial Report” by John Tracy provides a startlingly clear “dummies” guide to wading through financial reports.  This is useful.  It is less than comprehensive however, the natural shortcoming of a primer.

Josh Kaufmann lists several PMBA resources on his site with extensive discussion.  There is also a PMBA site for participants to gather and discuss individual books.  Well worth a serious look if you are interested in business concepts and in acquiring new skills and insights.

Josh Kaufmann

The Personal MBA