Institutional investor presents Edward Chancellor article about Hyman Minsky, who coined a Ponzi finance phrase, named after Carlo Ponzi who built financial pyramids in 1920s in Boston, promising people to double their money in 90 days, and the scheme lasted as long as new money kept pouring in. These schemes were present in the last two decades in other countries as well, including Poland and Albania.
Article argues that we are in a period of low volatility and high stability, and that every stability period eventually ends, as people in such periods tend to take ever larger risk exposures. And it is probably true in many marktes, such as housing, or derivative markets bets by hedge funds.
The other view is that globalization and securitization helped to repackage and distrubute risks such that world is much better prepared to weather the storm. It may be the case, but sharp growth of asset prices, sharp growth of monetary aggregates, including in many emerging markets, which are less liquid and have less developed market institutions, does raise important questions, for example whether it is structural adjustment or a process that could threaten financial stability in the medium term.
On July 26, 1920, when Boston Post published a headline story questioning the legitimacy and stability of the Ponzi scheme, people panicked, but Ponzi had enough cash to pay those who arrived at the door, and the scheme lasted for another month. People should learn from history, and from past mistakes. Especially in calm times, when things are smooth and easy and risks seem smaller than they used to be, people should be reminded from time to time about Minsky warning.