Discussion Questions

Group Number: Group Member Name:

I. Selected article or media source?

a. Author: Not Available
b. Title: Minsky’s Moment
c. Publisher: The Economist
d. Date of Publication: 7/30/2016
e. Internet Address or Link http://www.economist.com/news/economics-
brief/21702740-second-article-our-series-seminal-economic-ideas-looks-hyman-
minskys

II. Instructor Questions

1. What topic(s) in this article are relevant to the economic subjects we are covering in this

unit?

This article discusses the beginning of a collapse of the market triggered by the reckless

trading activity that defines an unsustainable bullish period. Minsky Moment is named after

the economist Hyman Minsky and describes the point in time when the sudden decline in

market sentiment inevitably results in a market crash.

2. Is this article mostly positive (factual) or mostly normative (opinion)? Why?

The article is mainly positive because it addresses the theory that bursts of bullish optimism

will eventually lead to a crisis if they last long enough, and the longer the speculation takes

place, the more serious the crisis will be.

3. What about this article potentially makes it a reliable source of information?

This is primarily a reliable source because the article's content is very news-like. Similarly,

the facts presented in this article all focus heavily on what we are researching and provide
 straightforward, succinct details on the claim to the fame of economic theory based around

the concept of inherent market volatility, particularly bull markets.

4. What about this article potentially makes it an unreliable source of information?

The article itself is not unreliable to me; however, the U.S. has undergone a prolonged period

of economic growth, debt levels are rising, and financial activity is intense, even though it

does not seem to have reached the extreme levels that presage a Minsky Moment that renders

it an unreliable source of information for the U.S. economists.

III.Discussion Questions

1. What is the financial instability hypothesis?

Economist Hyman Minsky established the Financial Instability Hypothesis. He explained

that capitalism's financial crisis is structural because cycles of financial richness enabled

borrowers as well as lenders to be increasingly irresponsible. The surplus optimism causes

economic bubbles along with ultimate surge. Capitalism is thus susceptible to moving from

intervals of financial stability to uncertainty (instability). This is a kind of market failure and

requires regulation by the government. Financial instability can be summed up as: Success

produces chaos that leads to recession or economic stability breads instability itself.

2. In your own words, how did Minsky explain investment?

Minsky explained investment today as an interchange of money for money tomorrow. A

company is currently paying for building a factory; income from operating the service will turn

to money for it in the future years, all going well. The money today can come from one of two
sources: the corporation's own money or that of others (for instance, if the company borrows

from a bank). Balancing the two is a major issue for the economic approach.

3. In your own words, how did Minsky explain financing?

Minsky explained that when corporate cash flow increases beyond what is needed to pay

off debt, a credit euphoria arises and shortly afterward loans surpass what lenders can pay off

from their incoming profits, which in effect causes a financial crisis. Besides that, Minsky made

a distinction among three forms of financing. The 1 st, which he called "hedge financing", is the

securest (safest). The 2nd, "speculative financing", is a little dangerous (riskier) and the 3 rd, the

most dangerous, is "Ponzi financing". Cashflow does not cover either principal or interest;

companies simply bet that the fundamental property will be adequately valued to offset their

liabilities. They'll be left vulnerable if it fails to happen.

4. What is efficient-market theory?

The Efficient Market Theory (EMT) is a hypothesis that share prices represent all

knowledge and that it is difficult to reliably produce alpha. According to the EMT, commodities

are continuously exchanged (traded) on markets at their reasonable amount, making it

unreasonable for investors to purchase undervalued stocks or sell inventories for inflated prices.

Furthermore, people are often ignorant about what they want, far from being reasonable actors

who optimize their gains as well as make the wrong decisions. But Minsky had criticized earlier:

he argued that deep-seated powers in financial systems are propelling them into trouble, with

stability only ever being a temporary illusion.

5. “The further we move on from the last crisis, the less we want to hear from those who see

another one coming.” Do you agree or disagree? Why?

 I agree with that statement because Minsky Moment crises typically arise since investors

take on supplementary position (credit) risk during bull markets, engaging in overly aggressive

speculations. The longer the length of a bull market, the more investors borrow to try to take

advantage of market movements. He said that when a financial operation reaches an

unsustainable extreme, which leads to rapid price deflation and unpreventable failure of the

economy. What follows, as Hyman Minsky hypothesizes, is a lengthy period of instability.