Wikipedia defines a Minsky moment as the point in the credit cycle when investors start to incur cash flow problems due to the growing debt load they have acquired in order to finance speculative investments. At this point in the cycle, a major sell-off begins as counterparties start to withdraw from the market, leading to a sudden and precipitous collapse in asset prices, accompanied by a sharp drop in liquidity. Economist Hyman Minsky argued during his lifetime that markets were inherently unstable and that prolonged stability (a bull market, if you will) always culminated in a larger collapse. This has something in common with Mandelbrot's view of market instability, namely that the idea that market prices and volatility are normally distributed – essentially, held within the classic, orderly 'bell curve' of standard distribution – is a dangerous myth. A nice metaphor for market instability in this context is a sand pile slowly growing on a table. As each individual grain of sand is dropped onto the pile, the sand pile grows in a more or less orderly fashion. But at some point, just one extra grain of sand will cause the pile to collapse upon itself. But judging in advance precisely which individual sand grain will cause the tipping point may be impossible. The natural order of markets, in short, may actually be closer to chaos than we think.

Chaos has this eerie ability to pop up seemingly from nowhere. The drilling rig seems to be functioning properly, and then it suddenly explodes. It is probably too early to state with certainty exactly why US markets dropped by 10% on Thursday, albeit they were quick to recover most of their losses. (Indeed the quest for certainty itself may be wholly illusory.) Early potential culprits were identified as fat-fingered dealers or high-frequency algorithmic trading systems, or both. It seems a justifiable question to ask why banks – if they were involved – should continue to have the privilege to distort financial markets to this degree, or why high-frequency trading systems should be allowed to squat upon the infrastructure of the equity market like some kind of hugely manipulative but frankly irrelevant parasite. It is as if financial markets were administered and regulated (nice one !) by the state solely for the purpose of institutional speculation. Other than the pursuit of the profit motive, where is the social utility…

Unlock the rest of this article with a 14 day trial

Unlock with Email
Unlock with Google

Already have an account?
Login here