Читать книгу Secret Life of Money - Everyday Economics Explained - Daniel Davies - Страница 8
ОглавлениеIf you’re ever asked to provide forecasts for the overall economic environment – well, in fact, should this ever happen, then what we’d truly advise is to find some way of sliding out of the responsibility as it’s a thankless task even for people who are paid to do it – the best thing to do is to find the website of a central bank or similar, take their forecasts as a bill of goods, and then trust that nobody will ever either check up on how well the macro bit of the projections turned out, or really blame you all that much if the answer is ‘terrible’.
On the other hand, if you find yourself in the position of actually needing, for your own purposes, to have a general idea of how the economy might turn out, or to be able to say something sensible about the risk of an otherwise decent idea being blindsided by a global calamity, then … nothing’s certain, but we’ve had reasonable results in the past in making crash predictions based on a back-of-the-envelope assessment about how ‘fragile’ the typical financial structure has got to be, in order to suggest that we’re all going to hell in a handcart.
FINANCIAL INSTABILITY
If you read the financial papers, you’ll occasionally see the phrase ‘Minsky moment’ used to describe, usually with extensive benefit of hindsight, the tipping point at which some economic structure or other took its first steps on the road that led to hell. If you read the excellent book Manias, Panics and Crashes by Charles Kindleberger, you’ll come across a summary of the ideas of the 1950s economist Hyman Minsky. If you’ve read Financial Instability by Minsky or any of his academic papers, then, to be honest, we’re a bit scared of you – they’re hard to find, pretty technical and not always very clearly written. It is fair to say that Minsky is a lot more admired than read and a lot more cited than understood, and that in general a very high percentage of the people who ever use the phrase ‘Minsky moment’ have only heard of Minsky via Kindleberger, if that.
What we’re saying here is that you shouldn’t feel bad for chucking his name about based only on the summary we’re about to give. That’s not to say you shouldn’t bother with the Kindleberger book – it’s a classic of the financial literature and a great aeroplane read too. But our summary is much shorter.
THE CYCLE
So, here goes. Minsky’s financial instability hypothesis, in a nutshell: good times cause people to take on debt – to use the jargon, they ‘increase their leverage’, but this just means that they do more things financed with borrowed money, and less with their own individual or corporate savings. Leverage leads to risk. Risk leads to bad times. As a theory of the business cycle, there are a lot of technical criticisms to be made, but it’s got a good intuitive feel to it and it matches up to the really big disasters pretty well.
LEVERAGE
The amount of debt that a company (or some other project) has. The analogy is to mechanical leverage because it increases the profits if things go right (you only have to pay back the debt, you don’t have to share the upside), but increases the losses if they don’t (you still have to pay back the debt if you don’t make any profits at all).
WHICH PART OF THE CYCLE ARE YOU IN?
But in this form it’s hardly a guide to action. Luckily, Minsky gave some pointers about how to identify what phase of the cycle you’re in. What you need to do is look for the typical financial structure around you, and decide which category it fits into. Minsky gives you a choice of three.
Hedge: ‘Hedged’ financial structures are cash flow positive. The money that’s coming in is enough to cover the interest payments on the debt, and to pay back the principal of the debt in a reasonable amount of time. By definition, these hedged financial structures are cautious, non-risk-taking structures. Think of a twenty-five-year mortgage to a civil servant, for three times their salary. Or a loan to finance a retailer’s purchase of goods overseas, where the sale of the goods will generate enough cash to repay the loan.
Speculative: Speculative financial structures are still cash flow positive, but are only paying down the debt very slowly. If something is dependent on being able to ‘roll over’ its debt (i.e. to take out a new loan when the old one falls due), then it’s speculative. Think of a manufacturing company that is taking out a five-year bank loan to install machine tools that will last twenty years. At the end of the five years, the bank gets to make the decision whether to roll over the loan (which it will do if the company is servicing its debt well and making a profit), or to foreclose (which it will do if the company is not making money and it needs to sell the assets to get the loan paid back).
Ponzi: A ‘Ponzi’ investment is named after Charles Ponzi, a famous conman who promised vast returns to investors, which he delivered for a while, by paying out returns not from profits of the investments, but purely from new capital brought in by new investors. Such schemes are a staple of con artists, as seen, for example, with the recent scandal of Bernie Madoff who made off with people’s money in exactly the same way. In Minsky’s terminology, a Ponzi investment is one that isn’t even covering its interest payments – not only does the debt have to be rolled over, but also each successive rollover is bigger than the one before (because it needs to refinance the rolled-up interest payments). Think of a dot com start-up, which is going to need several rounds of financing before it even starts turning a profit.
You can tell from the names of the categories that some of them are somewhat more pejorative than others – being in a Ponzi category certainly doesn’t sound ideal.
In actual fact, the last two categories shouldn’t be regarded as intrinsically or invariably bad. Nearly all property development, for example, has (at best) a speculative structure, because it has a long time horizon before it turns profitable, significantly longer than the maximum term that anyone is prepared to lend to property developers. Banks prefer to keep the term of their lending short, because it increases their control – at every loan rollover, they can either keep the project going, or shut it down and sell the assets half-made.
What we’re saying here is don’t get hung up on the terminology – ‘Ponzi’ and ‘speculative’ don’t necessarily mean ‘bad’. An awful lot of the most important things in the modern world started off – or were at some point in their lives – financed on a Ponzi basis. After all, if you went to university and took out student loans, the chances are that your university education had a Ponzi financial structure – for all the time you were at college, you were increasing your debt rather than servicing it, in the assumption that at some point in the future you’d start generating cash flows to pay it back.
SPOTTING THE BUBBLE
While individual speculative or Ponzi schemes aren’t necessarily bad, the problems start when these more fragile structures start to become dominant in the economy, or when economic units that don’t realistically have the kind of explosive growth prospects that might justify something other than a hedge structure start getting into speculative (let alone Ponzi) territory. So, if you see big leveraged buyouts of very mature companies, you should start getting nervous. Or property companies with a portfolio of third-tier shopping centres in provincial towns being financed as if they were building office blocks in Mayfair.
Or (and this is how one of the authors spotted, in writing and six months ahead of the event, the bursting of the Irish property bubble), you can sometimes see structures that were towards the more adventurous end of hedge financing getting pushed, en masse, into speculative or Ponzi territory by either a structural rise in their interest bill, or a structural fall in their earnings. It’s usually not hard to get a back-of-the-envelope calculation of the average cash flow of a business, and it’s usually not too hard to get a back-of-the-envelope estimate of the fixed costs (debt service and rent) that this cash flow has got to cover. When you see a big shift in the ratio between the two, then you know you’re looking at a fragile situation.
If you’re looking to go crisis-spotting, that’s the best way to go about it, in our opinion. Some readers might feel a bit short-changed here – all we’ve done is give a few pointers and aphorisms about things to watch out for, not a step–by-step guide to making macroeconomic predictions. But really – did you think there was an easy way to do this stuff?
