Are we reaching another Minsky moment.

Minsky was an American economist, an outcast in his time (he died about 20 years ago), who is best known for his Financial Instability Hypothesis.
Basically it says that stability in the free market system begets instability.
The development of a housing bubble is the classic example. After a crisis, like the one we just had, the financial system acts cautiously and borrowers have to satisfy lenders that they have the capacity to repay principal and interest. As time goes on, lenders become more optimistic (it will never happen again) and they relax their criteria, assuming asset prices will go on rising. Finally, caution is thrown to the winds, and they go on lending on a more risky basis even when asset prices are falling.
It's a bit like the cartoon character who is being chased and doesn't realise, till he looks down, that he has run out of road is running in mid-air.

What is required to counteract this inbuilt instability is regulatory systems that recognise what is happening before it happens, ie more control over the financial system. This can be difficult politically where it means people are shut out from borrowing when they want to but it sure beats shutting the world down.

So have we reached a Minsky moment?

"Australian household debt has hit a record 177 per cent of annual disposable income while housing valuations are "flashing red", according to Barclay's chief economist, Kieran Davies.

"House prices now equate to 4.3 times annual income and 28 times annual rent, both within a fraction of their historic highs," Mr Davies said.

Read more: http://www.smh.com.au/business/the-economy/australias-house-prices-flashing-red-debt-to-income-ratio-at-record-levels-20140404-362bz.html#ixzz2xyCPIF1q

If you look Hyman Minsky up you will find some funny stories about him. He was never afraid to say what he thought.
He was working at a university where the economics school had just been moved into this newly built concrete bunker-like accommodation.
A reception was held to celebrate its opening, with the architect being feted by the university heads. Finally guests were asked if they had any questions for the architect. Minsky was the only one to put his hand up .. ."Why us" is what he asked.

This is very apropos. Stricter rules on bank capitalisation fit nicely in with Minsky's hypothesis, especially if they could be on a variable cyclical basis.
I can't understand why they would give them another 4 years to meet these targets though.
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GFC prevention: US banks must raise $72.7 billion in cash

DateApril 9, 2014 - 7:29AM




The eight biggest US banks must raise a total of about $US68 billion ($72.7 billion) in capital by 2018 to comply with a new rule designed to prevent another financial crisis, prompting industry complaints that international standards are less restrictive and give their global competitors an advantage.

US regulators on Tuesday (US time) finalised the rule to limit banks' reliance on debt. Banks will have to fund part of their business through less risky sources such as shareholder equity, rather than by borrowing money.

"In my view, this final rule may be the most significant step we have taken to reduce the systemic risk posed by these large, complex banking organizations," said Martin Gruenberg, chairman of the Federal Deposit Insurance Corp, which approved the rule on Tuesday. The Federal Reserve was scheduled to vote on it in the afternoon.

The rule would apply to JPMorgan Chase, Citigroup , Bank of America, Wells Fargo, Goldman Sachs, Morgan Stanley, Bank of New York Mellon and State Street.



The Financial Services Roundtable, a trade group for large banks, issued a statement blasting the limits that are more stringent than the international Basel III agreement.

"This rule puts American financial institutions at a clear disadvantage against overseas competitors," said Tim Pawlenty, the group's chief executive.

The FDIC's vote on Tuesday implements a portion of the Basel III agreement known as the leverage ratio, which is calculated as a percentage of a bank's total assets.

The Federal Reserve's board plans to vote on the rules later on Tuesday. Comptroller of the Currency Thomas Curry, who sits on the FDIC's board, approved the rules on behalf of his agency.

The final rules would require the eight biggest US banks to hold capital equal to 6 percent of their total assets. Their bank holding companies would have to meet a 5 percent ratio.

That's higher than the 3 per cent ratio included in the Basel agreement. Smaller US banks would be held to the 3 per cent ratio, regulators said.

US officials said the biggest banks appear likely to meet the higher requirements in time.

Leverage limits

The Basel III accord included both a leverage ratio and risk-based capital requirements, which take into account the riskiness of banks' assets.

Critics of leverage rules, including many banks, say risk-based capital requirements are more tailored to banks' businesses and that leverage rules are unfairly draconian.

"While the ostensible effect may be stronger individual banks and bank holding companies, the potential for adverse effects on market liquidity and the strength of the system going forward could be real," Oliver Ireland, an attorney at Morrison & Foerster in Washington, said in an email.

US regulators, including FDIC Vice Chairman Thomas Hoenig, argued leverage ratios are harder for banks to game. Hoenig said the 3 percent Basel leverage ratio would not have been high enough to sustain many banks through the financial crisis.

"Banks with stronger capital positions are in a better position to lend, to compete favorably in any market, and to achieve satisfactory results for investors," Hoenig said.

The agencies proposed adjusting the way banks tally up their assets under the leverage rules. They tweaked those calculations to bring them more in line with the Basel rules.

Regulatory officials said the proposed changes, which would apply to banks meeting the 3 per cent Basel ratio as well as the eight biggest firms, would require more capital for credit derivatives and less for traditional loans.

They said the changes would result in a "modest" increase in the amount of capital banks would need to hold.

Banks have until June to comment on the proposed changes.

Reuters

You should change your name to pessimist_now mate.
Not saying you're wrong of course.

Exactly why so many people have switched from long to short, with a wide spread.
There are still however some sectors where growth is inevitable together with income return, as long as you pick the right stayers.
The other thing is that major corrections are a buying opportunity for good stocks.
But good luck to you as well.