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.

The Los Angeles Times reported this week that Wal-Mart Stores Inc. must face a class action by South Carolina employees claiming that the company forced them to work through breaks and off the clock, a judge ruled.

They said that, “current and former hourly workers from July 31, 1999, forward can sue in a single case, Judge Perry M. Buckner III in Walterboro, S.C., said. The group of about 100,000 workers is large enough and their claims similar enough to allow a class action, Buckner said in an Aug. 1 ruling.”

Wal Mart faces more than 70 U.S. wage-and-hour suits by employees claiming it failed to pay for all hours worked.  In other Wal Mart news, Julie Roehm, Wal-Mart’s former marketing chief alleged in a recent court filing that Lee Scott, Wal-Mart’s CEO, bought yachts and jewellery for his wife at preferential prices as a result of his relationship with Irwin Jacobs, whose company buys unsold Wal-Mart stock.  Roehm, the accuser, was previously fired for an alleged affair with another employee and for accepting gifts from vendors.  Both sides contend the respective accusations and, like the wage-and-hour suits, will have their day in court.  The internal investigation and subsequent firing of Julie Roehm is a story in itself, one that is as deeply troubling as it is interesting.

Considering Wal-Mart’s ongoing business, human resources, labor, and ethical issues, one might be justified in considering these as signs of a company that has become bloated and unmanageable, that is perhaps nearing the end of its useful business life. Could we be viewing WM’s segue into senescence?

Reported in Barron’s, Joel Kurtzman, a senior fellow at the Milken Institute and publisher of the Santa Monica, Calif., think-tank’s The Milken Institute Review, says, “We’ve gone back as far as 1995 to look at the long-term trend in demand. It has increased by 1.5% per year. Consumers have used 300 billion barrels of oil and 330 billion barrels have been found. So in terms of supply, we’re in good shape,” he says.

The day the Iraq war began, oil was around $33 per barrel. Since then, demand hasn’t jumped and Iraq is again producing some crude, but prices have more than doubled. Says Kurtzman: “We’ve had three or four years of steady demand and increases in supplies, yet prices — it doesn’t add up. I think we’re going to see a drop that could be fairly precipitous.”

In addition to fear and uncertainty, the current price of oil also reflects compensation for a 30% decline in the value of the dollar, says Kurtzman. “It’s the ’70s all over again.”

What do you think?