Paul Davidson asserts:
Henry is correct on
this Clff.
Minsky's writings (which you quote) require that the agent
engaging in
"> "Hedge financing units are those which can
fulfill all of their current
> contractual payment obligations by
their cash flows: the greater the weight
> of equity financing in the
liability structure, the greater the likelihood
> that the unit is a
hedge financing unit. Speculative finance units are units
> that can
meet their payment committments on "income account" on their
>
liabilities, even as they cannot repay the principle out of income cash
> flows"
requires that the financing unit "knows" its future
cash flows --and in a nonergodic world this can be done only if one has
engaged in forward contracting to cover all future cash inflows and outflows
(assuming no one defaults on a cash inflow contract). As long as some
inflows depend on future sales that are not already contracted for, any
hedge or speculative finance can become Ponzi
finance.
Paul
[Clifford
Poirot]
It is because of uncertainty about future cash
flows that current hedge units can become Ponzi units (as Minsky himself
noted). As Minsky noted, the ability to project these cash flows is
dependent on the maintence of aggregate demand (and I would add of other
factors as well such as consumer preferences, technological change, etc.)
which are unpredictable.
To argue that a current hedge position can become a
Ponzi position does not mean you cannot make intelligent decisions
today about whether a proposal is a hedge, speculative or
Ponzi proposal. That we cannot form reliable probability distributions
into the future is why loan officers must resort to rules of
thumb.
Here is a simple example. A loan officer faces
three prospects for a small business loan:
Prospect 1: An applicant requests a loan
to buy a business, that is fully backed by the existing assets of the
business. The income generated by the business for the last five years will
cover the principal and interest payments. The applicant is also willing to
pledge his home equity. This is clearly hedge finance. Anyone can tell, that
this business is not guaranteed success, but it generates a current cash
flow sufficient to meet all obligations.
Prospect 2: An applicant requests a loan to start a
new business. In order to meet the principal and interest payments, the
business will have to generate a steady increase in sales volumes beyond
first year projections. It will require balloon financing. this is
speculative financing.
Prosect 3: Prospect 3: the applicant requests a
loan for a business in order to pay off existing debt that the business is
unable to pay out of current sales. In order to meet future interest and
liability payments, the business will have to sell existing
assets.
Of course, 1
can become 3. But at the present time, they are in different situations and
they can be evaluated differently. Now, let's suppose the loan officer
decides that he can securitize and sell all three loans and thus makes all
three, the level of instability in the system will increase. That is why the
increase in endogenous money creation and increasingly liquid
characteristics have led to increasing levels of financial
fragility.