The Short View By John Authers - Credit and Markets

The Short View By John Authers - Credit and Markets
Copyright The Financial Times Limited 2007
Published: July 13 2007 03:00 | Last updated: July 13 2007 03:00
A Minsky Moment has been averted for now. Can it be postponed indefinitely?

Yesterday saw credit markets recover slightly from their precipitous falls of the past week, while stock markets rallied. By mid-session in New York, the Dow Jones Industrial Average was on course to close at an all-time record as, more significantly, were the MSCI emerging markets index, Brazil's Bovespa and Korea's Kospi.

So the sharp increase in the cost of credit has not yet brought down the stock market with it. Why not?

Enter Hyman Minsky. The late US economist offered a theory of the behaviour of lenders, which many have re-examined in recent weeks.

He said credit conditions became increasingly lax in times of good economic health. Then the credit supply would dry up (through such measures as the tightening of lending standards). Then liquidity dried up as lenders called in loans and borrowers sold liquid assets to comply. The final "moment" came when central banks cut rates to avert economic collapse.

The theory was drawn to fit a world where, as in 1929, the decision whether to extend credit rested with bankers. Now it rests with the markets. But its potential relevance to current circumstances is clear.

George Magnus of UBS suggests reasons to believe a Minsky Moment can be deferred. First, housing problems take a while to unfold. Second, companies have cleaned their balance sheets and are not heavily leveraged. Third, there is still much liquidity in the world system. High energy and commodity prices suggest petro-dollars will not go away.

Finally, there is still no clear evidence of economic weakness, as the most recent data underscore, or of a significant return by inflationary pressures.

All these factors could change quickly. But even with credit valuations back to earth, markets believe Minsky's Moment of reckoning can be deferred further.