A Minsky moment is a sudden, major collapse of asset values which marks the end of the growth phase of a cycle in credit markets or business activity.

Description

According to the hypothesis, the rapid instability occurs because long periods of steady prosperity and investment gains encourage a diminished perception of overall

market risk Market risk is the risk of losses in positions arising from movements in market variables like prices and volatility. There is no unique classification as each classification may refer to different aspects of market risk. Nevertheless, the most ...

, which promotes the

leverage Leverage or leveraged may refer to: *Leverage (mechanics), mechanical advantage achieved by using a lever * ''Leverage'' (album), a 2012 album by Lyriel *Leverage (dance), a type of dance connection *Leverage (finance), using given resources to ...

d risk of investing borrowed money instead of cash. The debt-leveraged financing of speculative investments exposes investors to a potential cash flow crisis, which may begin with a short period of modestly declining asset prices. In the event of a decline, the cash generated by assets is no longer sufficient to pay off the debt used to acquire the assets. Losses on such speculative assets prompt lenders to call in their loans. This rapidly amplifies a small decline into a collapse of asset values, related to the degree of leverage in the market. Leveraged investors are also forced to sell less-speculative positions to cover their loans. In severe situations, no buyers bid at prices recently quoted, fearing further declines. This starts a major sell-off, leading to a sudden and precipitous collapse in market-clearing asset prices, a sharp drop in market liquidity, and a severe demand for cash. The more general concept of a "Minsky cycle" consists of a repetitive chain of Minsky moments: a period of stability encourages risk taking, which leads to a period of instability when risks are realized as losses, which quickly exhausts participants into risk-averse trading (de-leveraging), restoring stability and setting up the next cycle. In this more general view, the Minsky cycle may apply to a wide range of human activities, beyond investment economics.

Context

The term was coined by

Paul McCulley Paul Allen McCulley (born March 13, 1957) is an American economist and former managing director at PIMCO. He coined the terms " Minsky moment" and "shadow banking system", which became famous during the Financial crisis of 2007–2009. He is curr ...

of PIMCO in 1998, to describe the 1998 Russian financial crisis, and was named after economist

Hyman Minsky Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist, a professor of economics at Washington University in St. Louis, and a distinguished scholar at the Levy Economics Institute of Bard College. His research at ...

, who noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Minsky opposed the deregulation that characterized the 1980s. Some, such as McCulley, have dated the start of the

financial crisis of 2007–2010 Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fi ...

to a Minsky moment, and called the following crisis a "reverse Minsky journey"; McCulley dates the moment to August 2007,Global Central Bank Focus
, by

while others date the start to some months earlier or later, such as the June 2007 failure of two

Bear Stearns The Bear Stearns Companies, Inc. was a New York-based global investment bank, securities trading and brokerage firm that failed in 2008 as part of the global financial crisis and recession, and was subsequently sold to JPMorgan Chase. The comp ...

funds.

Description

Context

See also

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Further reading