Thursday, April 24, 2008

More Minsky interpretation from Pimco guy.

Read the full text here:

My commentaries and excerpt from it:

Along the way, policy makers have slowly recognized the Minsky Moment followed by the unfolding Reverse Minsky Journey. But I want to emphasize “slowly,” as policy makers, collectively, still suffer from more than a thermos full of denial. Part of the reason is human nature: to acknowledge a Reverse Minsky Journey, it is first necessary to acknowledge a preceding Forward Minsky Journey – a bubble in asset and debt prices – as the marginal unit of debt creation morphed from Hedge to Speculative to Ponzi.

Funny to note that Greenspan is now in Pimco's payroll and his work-mate McCulley has a free-hand to slap him in the face, and there's nothing Greenspan can say about it.

And it was all quite dandy while asset prices, notably property prices, were soaring. Which, of course, propelled the Forward Minsky Journey. There were no regulatory cops on the beat, only regulatory czars in corner offices, actively accommodating growth in the shadow banking system.


Accordingly, regulatory arrangements need to be brought into sync with reality. I don’t profess to have a detailed regulatory reform plan ready to present you. I don’t. What I’m laying out is simply a bedrock principle: if you have access to the Fed’s discount window, the Fed should – and will, I strongly believe – have the power to supervise and regulate your business – core capital requirements, risk management, liquidity management, et al.

To be sure, there is the pesky little problem of investment bank holding companies that don’t own a bank and don’t have deposits against which they must hold reserves at the Fed. But to me, that’s not an insurmountable problem: The Fed could simply impose reserve requirements on some bucket of short-term, non-deposit funding instruments used by both investment and commercial banks (so as to keep the playing field level).

Who? GS, MS, LEH, C, JPM. What? Leverage reduction. When? Soon.

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