In the middle of the desert, a somewhat stupid coyote runs after a very clever bird. The two animals go at high speed.

Suddenly, the bird stops in front of a precipice. The coyote, on the other hand, continues to run without looking until it realizes it is running in the air.

This scene is a classic of Bee Beep and the coyote.

Questa immagine ha l'attributo alt vuoto; il nome del file è Plymouth_%286787874235%29.jpg

But it is also the perfect illustration of a very serious economic theory: the hypothesis of financial instability.

According to Hyman Minsky, all periods of economic prosperity contain the elements of a future crisis. Like what? It is simple. When all goes well, economic agents (households, businesses, the State) are trustful and borrow money to carry out projects, invest, and develop activities.

In this good environment, investors risk more; banks lend money more easily, without paying too much attention to the danger of not being repaid. Minsky calls this the “paradox of tranquillity”.

However, at some point, the whole economy lives on credit. It then happens that other, more worrying phenomena arise: unemployment, slowdown in activities, lower income, and difficulty in repaying. Despite this, economic agents continue to behave as if nothing had happened. Just like when the poor coyote runs in the air!

Some bad news are enough to trigger the “Minsky moment“: everyone wakes up suddenly and gets scared. We realize that risks can no longer be taken, loans cannot be repaid, and banks stop lending money.

It is the general crisis: the coyote is too busy to realize it is about to fall on deaf ears. And it is too late to avoid to fall. The same happens in the real world.

And what about you, has it ever happen to you to live a Minsky moment?

Di شہاب – Opera propria, CC BY-SA 4.0, https://commons.wikimedia.org/w/index.php?curid=44752971