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To: pater tenebrarum who wrote (57150)	1/11/2001 3:50:29 PM
From: chic_hearne	Read Replies (1) \| Respond to of 436258

heinz, speaking of Ponzi you might find this interesting.... Rather, his huge contribution to macroeconomics comes under the label of the “Financial Instability Hypothesis.” Minsky openly declared that his Hypothesis was “an interpretation of Keynes’ General Theory.” Minsky’s key addendum to Keynes’ work was really quite simple: providing a framework for distinguishing between stabilizing and destabilizing capitalist debt structures. Here’s a concise summary of Minsky’s work, written by his own hand in 1992: "Three distinct income-debt relations for economic units, which are labeled as hedge, speculative, and Ponzi finance, can be identified. Hedge financing units are those which can fulfill all of their contractual payment obligations by their cash flows: the greater the weight of equity financing in the liability structure, the greater the likelihood that the unit is a hedge financing unit. Speculative finance units are units that can meet their payment commitments on ‘income account’ on their liabilities, even as they cannot repay the principle out of income cash flows. Such units need to ‘roll over’ their liabilities – issue new debt to meet commitments on maturing debt. For Ponzi units, the cash flows from operations are not sufficient to fill either the repayment of principle or the interest on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stocks lowers the equity of a unit, even as it increase liabilities and the prior commitment of future incomes. I t can be shown that if hedge financing dominates, then the economy my well be an equilibrium-seeking and containing system. In contrast, the greater the weight of speculative and Ponzi finance, the greater the likelihood that the economy is a deviation-amplifying system. The first theorem of the financial instability hypothesis is that the economy has financing regimes under which it is stable, and financing regimes in which it is unstable. The second theorem of the financial instability hypothesis is that the over periods of prolonged prosperity, the economy transits from financial relations that make for a stable system to financial relations that make for an unstable system. In particular, over a protracted period of good times, capitalist economies tend to move to a financial structure in which there is a large weight to units engaged in speculative and Ponzi finance. Furthermore, if an economy is in an inflationary state, and the authorities attempt to exorcise infla-tion by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make positions by selling out position. This is likely to lead to a collapse of asset values.” Smart man, that Minsky. And also exceedingly prescient. He passed away in 1996, as financing patterns of the New Economy were following precisely his script, moving progressively toward Ponzi units. Beyond that, the Federal Reserve did indeed declare the economy to be in an inflationary state (even if it wasn’t!), and attempted to exorcise the (nonexistent!) inflation with monetary constraint. And, lo and behold, the Ponzi finance units have evaporated over the last year, and speculative finance units have morphed into Ponzi units. Risk asset prices have collapsed and, now, the economy faces the risk of a more generalized collapse of asset values.