Newsletter: Financial Instability-A Question of Leverage
How do we distinguish between good and bad leverage? Previously unpublished research.
An important component of the Market Climatology model is the Financial Instability Hypothesis (FI) of Hyman Minsky. I devote a chapter of the hypertext book to this topic but I give few details on how to measure it. Minsky himself offered no way to measure the FI regime either, which is why he was generally criticized for the hypothesis. But he did give a qualitative description and when those conditions fit the Russian Financial Crisis of 1998 and the Global Financial Crisis of 2008, the concept of a Minsky Moment became ingrained in economic and market analysis.
In this newsletter I will discuss how I measure financial instability. I use data and work of others for this but I also use this data in a specific way. I should add that we can only measure when the conditions exist for a Minsky Moment. What actually triggers the crisis varies from regime to regime. But I still find it best to take the Murphy's Law approach. If something can go wrong, it probably will. So best to prepare.