Is Australia heading towards a “Minsky moment”? - Peter Bain

In Dickens’ most famous morality tale, the ghost of Christmas future is used to warn Scrooge of the ultimate consequences of not learning from his twisted and broken past.  Those of Dickens’ tales set in Victorian London (including Oliver Twist and Great Expectations) are so powerful in part, because they juxtapose the liberties enjoyed by an affluent, ordered society with the apparent hopelessness of generational poverty in the nineteenth century’s greatest city.  His writings were powerful statements on social commentary.  Were he alive today, he would have much to say about the dangers and causes of rising inequality, which were core to his ideological passions.

Many of the innovations in financial markets throughout history have been sponsored if not created by governments.  Government bonds were invented by the Dutch Republic in 1517.  The United East India Company, again created at the direction of the Dutch state, was created in 1602 and was the first to raise equity capital from its citizens.  Following this example, modern states learned to attract investment capital from their citizens in addition to taxation revenue.

Later politically motivated creations included government sponsored mortgage markets to drive up home ownership.  The most prominent example was Fannie Mae as part of Roosevelt’s new deal in 1938.  As with most government interventions, the intent and many of the outcomes were very good.  Freddie Mac followed in 1970 to further develop a secondary mortgage market and GW Bush responded to the 2000’s tech wreck by throwing the weight of the US government behind a housing led recovery.

But eventually, when power is distributed to imperfectly regulated free markets, the cycle of greed and fear inevitably present.  In the case of the mortgage markets, the alchemy of collatoralised debt obligations is what gave rise to the Global Financial Crisis in 2008.  A decade earlier, it was the mathematical wizardry of Nobel prize winners Scholes and Merton in the creation and destruction of hedge fund Long Term Capital Management that required a $3.6bn bailout by the Federal Reserve to prevent contagion in the global banking system. In fact, the appearance of these economic “black swans” is a regular occurrence through the millenia, at least back to the time of Christ.

Financial inventions and interventions are often created reactively in response to a pressing need or to generate profit for entrepreneurs, but in their development they all too often fail to learn the harsh lessons of the past.  Short sightedness causes massive social fallout again and again.  In the case of LTCM, algorithms based on only very recent financial history fell apart when the Asian financial crisis hit.  In the housing and equity markets, herd behaviour repeatedly drive asset prices to multiples of revenue that have proved dangerous in the past.    And that is tragic, because in a very real sense, financial history shapes all of history.   The collapse of large asset bubbles can take decades to recover from, the great depression being the most prominent example in the last century.

And in 2021, some fear the next economic black swan lurks.  In recent weeks, the vague world of the family office has hit the headlines with the $8bn collapse of Archegos fund.  Driven up by enormous stimulus of various kinds since the GFC, asset prices across the developed world are at historical extremes, arguably completely unhinged from economic reality.  In Australia, how resilient will our economy be as we withdraw record breaking stimulus in the midst of record private and public indebtedness?

And yet our governments, rather than responding with long term approaches to bring markets back to some sort of sustainable equilibrium, choose instead the politically easier path of the status quo regardless of the cost to future generations.  How long will it be before Australia is pulled up by the IMF or some other external force and told to balance its budget?  This would have been unthinkable only fifteen years ago. 

All the while China, not beholden to the short-term thinking of our democratic cycles, plans decades ahead and remains successfully on track for global dominance.  Once again this is history repeating itself.  China, the manufacturing powerhouse and creditor giant of the world appears ultimately hellbent on war with the US lead free world.  The parallels between Germany and the British empire in the first half of the twentieth century are striking.  It was the pain caused by the treaty of Versailles and secondly the Great Depression which presaged the horrors of World War Two. In its capacity as a wealthy creditor, China is mistrusted and even loathed like previous empires in a similar position.   

The mercurial Scrooge ultimately learned from his past and was redeemed.  Can we in Australia and the world more broadly get better at learning from history, smooth the evolutionary process of our economic behaviour and avoid a return to the brutal poverty experienced by some in Victorian Britain?  To do so would seemingly fly in the face of economic history since the creation of money, but we must try, for the long term security of our children.

Peter Bain is a Melbourne based businessman.  He holds an economics degree from Monash University.

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