![Stylized Minsky Cycle](https://upload.wikimedia.org/wikipedia/commons/c/cf/Stylized_Minsky_Cycle.PNG)
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
Credit (from Latin verb ''credit'', meaning "one believes") is the trust which allows one party to provide money or resources to another party wherein the second party does not reimburse the first party immediately (thereby generating a debt), ...
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
PIMCO (Pacific Investment Management Company, LLC) is an American investment management firm focusing on active fixed income management worldwide. PIMCO manages investments in many asset classes such as fixed income, equities, commodities, asset ...
in 1998, to describe the 1998 Russian financial crisis
The Russian financial crisis (also called the ruble crisis or the Russian flu) began in Russia on 17 August 1998. It resulted in the Russian government and the Russian Central Bank devaluing the ruble and defaulting on its debt. The crisis had s ...
, 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 att ...
, 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 fina ...
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 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 ...
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 compa ...
funds.
See also
*
Austrian business cycle theory, which faults excessive credit expansion as the cause of collapse events
*
Debt deflation
Debt deflation is a theory that recessions and depressions are due to the overall level of debt rising in real value because of deflation, causing people to default on their consumer loans and mortgages. Bank assets fall because of the defaults an ...
, the ensuing collapse of asset prices and falling overall private indebtedness.
*
Economic bubble
An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be c ...
*
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 fina ...
, historical example
*
Financial economics #Departures from rationality, overview of various theoretical approaches to market crises
*
Hedge (finance)
A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insu ...
, underlying concept (preventative)
*
Margin (finance)
In finance, margin is the collateral that a holder of a financial instrument has to deposit with a counterparty (most often their broker or an exchange) to cover some or all of the credit risk the holder poses for the counterparty. This risk c ...
*
Ponzi scheme
A Ponzi scheme (, ) is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. Named after Italian businessman Charles Ponzi, the scheme leads victims to believe that profits are comin ...
, underlying concept (causative)
*
Sub-prime mortgage crisis
The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. It was triggered by a large decline in US home prices after the coll ...
, somewhat generalized example
Notes
Further reading
What's a Minsky moment?– ''Seattle Post-Intelligencer''
– ''Doctor Housing Bubble''
The Minsky Moment by
John Cassidy – ''
The New Yorker
''The New Yorker'' is an American weekly magazine featuring journalism, commentary, criticism, essays, fiction, satire, cartoons, and poetry. Founded as a weekly in 1925, the magazine is published 47 times annually, with five of these issues ...
'' (2008)
{{Financial crises
Financial crises
Market risk
Business cycle theories