Edward Quince's Wisdom Bites: Minsky

 

Hyman Minsky’s insight is unsettling because it doesn’t blame shocks. It blames comfort.

Periods of stability change behavior. Risk-taking increases not despite calm conditions, but because of them.

The Three Phases of Forgetting

Minsky outlined the progression:

1. Hedge finance: cash flows cover principal and interest
   
   

2. Speculative finance: cash flows cover interest only
   
   

3. Ponzi finance: cash flows don’t cover either; refinancing is required
   
   

Each step feels rational at the time. Nothing bad has happened yet.

Why the Calm Is the Shock

Credit quality deteriorates quietly. Covenants loosen. Underwriting relaxes. Yield-starved capital stretches.

Then something small breaks. Liquidity vanishes. Refinancing fails. And suddenly, what looked stable reveals itself as fragile.

This is not an accident. It is endogenous to capitalism.

The Lesson

Watch how returns are generated, not just how large they are. When you see borrowing used merely to sustain appearances—especially in opaque markets like private credit—you are closer to the cliff than the yield suggests.

XTOD

“The best way to think about the credit cycle is that it's the process of people forgetting, and then remembering, that bad things happen.”