The Financial Instability Hypothesis is one of the crowning achievements of Hyman Minsky. It blames debt accumulation for financial crises, emphasizing the macroeconomic impact of three classes of borrowers.
1. Hedge Borrowers - Hedge borrowers are the safest type of debt, as they have the ability to pay back principal and interest regardless of whether or not they are offered additional credit.
2. Speculative Borrowers - Speculative borrowers take out debt less responsibly, they are capable of paying back principle, but must borrow again to make interest payments.
3. Ponzi Borrowers - Ponzi borrowers are incapable of making principal/interest loan payments without additional sources of credit. Ponzi borrowers only remain solvent if they're investing in consistently/indefinitely appreciating assets.
The issue with ponzi borrowers is that no investment appreciates indefinitely. If you could invest for guaranteed return, then it wouldn't have been an investment in the first place.
A combination of asset prices declining and too many ponzi borrowers existing causes macroeconomic issues. Specifically: ponzi borrowers start defaulting across the board, asset prices decline more sharply, causing speculative borrowers to start to default on their loans too. If the lending situation is bad enough, ponzi defaults can even cause some of the hedge borrowers to start to fail.
On Thursday (9/8) the Federal Reserve released their plan for a financial crisis. They will institute a "countercyclical-capital-buffer"; simply put, they plan to increase reserve requirements.
Increased reserves are likely to reduce the number of bank insolvencies, but they also reduce the amount of money banks can lend. This policy decision could hurt consumers/business owners who have become reliant on debt to function.
The United States is more reliant on debt than at any point in history.
LINK TO SOURCE ARTICLE
Asset Price Bubble
Federal Reserve Bubble
Treasury Bonds and LIBOR
Rucker, Patrick. "Federal Reserve Says It May Ask Banks for Extra Capital in a Crisis." Reuters. Ed. Leslie Adler. Thomson Reuters, 08 Sept. 2016. Web. 09 Sept. 2016.
Source: Moskowitz, Dan. "Overview of VelocityShares TVIX | Investopedia."Investopedia. Investopedia, 13 Apr. 2015. Web. 11 July 2016.
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