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Tuesday, October 09, 2007

A "Minsky Moment"

Why stability is destabilizing.
Three types of borrowers:
Hedge Financing: Can pay both principal and interest out of cash flows.
Speculative Financing: Can pay interest but must cover principal by new financing.
Ponzi Financing: Cash flow covers neither interest nor principal. Must sell assets or borrow more to cover interest payments.

When the crash comes

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