Viewpoint

Ryan Day

All of the political bloggers are buzzing on about the housing crisis, and most all of them are pondering one thing, or, more accurately, one man. Who is this man who is rising to fame while the housing market crashes? Hyman Minsky — an obscure and dead economist whose major theories were all proposed in the 1960s and 70s.Why is this man of such interest to the blogosphere? Well, to many people (or many people who publish over the internet, anyway) it seems that Minsky’s theories on financial crises are coming true with the seemingly inevitable housing market crash.

Minsky theorized that financial markets run in a cycle. The cycle begins in prosperous times, when there is money to be had. This prosperous environment leads to what Minsky called a “speculative euphoria” — investors go into large amounts of debt in order to buy into the soaring market.

Eventually the amount of debt that they are in exceeds the amount of profit to be made, which causes banks to call in the loans issued to investors. This, in turn, causes investors to sell in order to pay off their loans, and this massive sell-off of investments leads to a crash in the market. At this point, the cycle can start all over again.

Many people have written that the housing market has reached that fated “Minsky moment.” Here, the homeowner serves as the investor, making a large, expensive purchase in the form a house and then paying for it with a mortgage loan.

Before house prices rose greatly, mortgages were low risk for lending institutions, as there were many safeguards in place, such as a down payment. As the prices of houses rose, more people were buying into the housing market, and banks began to make mortgages easier to attain.

Now housing prices are dropping sharply, and the market has seemingly crashed. I’m sure you can see that there is a major problem here-now that investors in the housing market can’t pay their mortgage debts, where will banks get their money?

I’m no economist, but to me this is a large problem, and as a non-economist, the theories of Hyman Minsky make sense to me, but if this cycle is only going to continue, then what is the solution?

There needs to be a strong effort against large-scale speculation as seen in the housing market. Perhaps there even needs to be more government regulation on all markets that could run into such speculation.

I’m not educated enough to be the one making the judgment calls in this area, but it’s just something to think about.

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