A couple of years back, contributing writer Edward Chancellor suggested a story about the excesses of the market. We were eating lunch amid the fading stained-glass splendor of the National Arts Club on Gramercy Park with Rob Cox, the U.S. editor of Breakingviews.com, for which Eddy wrote a column and edited. He suggested the story be focused on the analysis of a fellow by the name of Hyman Minsky.
“Who?” I asked.
Mea culpa. Today the name of economist Minsky is a little better known thanks in no small part to the efforts of devotees like Eddy — and to the extraordinary meltdown over the past year of our global financial markets. Minsky, who died in 1996, often noted that “stability is unstable.” His “Financial Instability Hypothesis” put forth the view that the reduction of risk leads inevitably to the creation of new risks; market players begin to feel overconfident and take on more debt, while making increasingly speculative bets. Just when things appear safest, as during the so-called Great Moderation of the early part of this decade, trouble is brewing. It’s an economic phenomenon that ought to be familiar to parents, who know that when their young children are quiet and in another room, all hell is about to break loose.
Eventually, Eddy contributed a shrewd analysis of the markets, which appeared in these pages in February 2007 and was titled, echoing Minsky again, “Ponzi Nation.” At the time, the financial world still seemed a sunny, comprehensible place to most of its denizens, who were blissfully unaware of the kids in the back rooms brewing up their SIVs, CDOs, PIKs and whatnot. Profits poured in at record levels, the housing bubble continued to inflate, and, to paraphrase a market sage of that time, everyone was dancing.
Eddy, the author of Devil Take the Hindmost, a history of financial speculation, was rather more chary. As he noted, “Minsky’s credit cycle heads inexorably toward a bust.”
At the risk of saying he told you so, I think it’s only fair to note — hundreds of billions of dollars in written-off debt later — that he did. For that prescience Eddy was honored last month with two major journalism awards. On April 17, at a luncheon in New York, he was given the George Polk Award for financial reporting.
In their citation the judges noted that “Chancellor sounded the alarm months before the financial markets began their roller-coaster ride south, warning that excessive risk-taking and interconnected investments . . . could cause calamity for world economies.” A little more than a week later, in London, Eddy was named the Business Journalist of the Year for economics. The honors are richly deserved.
Eddy’s column, Inefficient Markets, can be found each month in this magazine’s Investing section. In this issue he turns his weather eye to the sober outlook for stocks at the end of an era of financial liberalization and ever-greater leverage.
