Minsky moment
Encyclopedia
A Minsky moment is when over-indebted investors are forced to sell good assets to pay back their loans, causing sharp declines in financial markets and jumps in demand for cash. In any credit cycle
or business cycle
it is the point when investors begin having cash flow problems due to the spiraling debt incurred in financing speculative investments. At this point, a major sell off begins because no counterparty
can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in market clearing
asset prices and a sharp drop in market liquidity
.
The term was coined by Paul McCulley
of PIMCO in 1998, to describe the 1998 Russian financial crisis, and was named after economist Hyman Minsky
. The Minsky moment comes after a long period of prosperity and increasing values of investments, which has encouraged increasing amounts of speculation using borrowed money.
Some, such as McCulley, have dated the start of the financial crisis of 2007–2010 to a Minsky moment, and called the following crisis a "reverse Minsky journey"; McCulley dates the moment to August 2007, while others date the start to some months earlier or later, such as the June 2007 failure of two Bear Stearns
funds.
The concept has some parallels with Austrian business cycle theory although Minsky himself was known as a Keynesian and is identified as a post-Keynesian.
Credit cycle
The credit cycle is the expansion and contraction of access to credit over the course of the business cycle. Some economists, including Barry Eichengreen, Hyman Minsky, and other Post-Keynesian economists, and some members of the Austrian school, regard credit cycles as the fundamental process...
or business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...
it is the point when investors begin having cash flow problems due to the spiraling debt incurred in financing speculative investments. At this point, a major sell off begins because no counterparty
Counterparty
A counterparty is a legal and financial term. It means a party to a contract. A counterparty is usually the entity with whom one negotiates on a given agreement, and the term can refer to either party or both, depending on context....
can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in market clearing
Market clearing
In economics, market clearing refers to either# a simplifying assumption made by the new classical school that markets always go to where the quantity supplied equals the quantity demanded; or# the process of getting there via price adjustment....
asset prices and a sharp drop in market liquidity
Market liquidity
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
.
The term was coined by Paul McCulley
Paul McCulley
Paul Allen McCulley is a 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....
of PIMCO in 1998, to describe the 1998 Russian financial crisis, and was named after economist Hyman Minsky
Hyman Minsky
Hyman Philip Minsky was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises...
. The Minsky moment comes after a long period of prosperity and increasing values of investments, which has encouraged increasing amounts of speculation using borrowed money.
Some, such as McCulley, have dated the start of the financial crisis of 2007–2010 to a Minsky moment, and called the following crisis a "reverse Minsky journey"; McCulley dates the moment to August 2007, while others date the start to some months earlier or later, such as the June 2007 failure of two Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...
funds.
The concept has some parallels with Austrian business cycle theory although Minsky himself was known as a Keynesian and is identified as a post-Keynesian.
Further reading
- What's a Minsky moment? – Seattle Post-Intelligencer
- Minsky has his moment – Financial Reality
- Housing Minsky moment – Doctor Housing Bubble
- Have we reached a Minsky moment? – MoneyWeekMoneyWeekMoneyWeek is a weekly investment magazine that covers financial and economic news and provides commentary and analysis across UK and global markets...
- The Minsky Moment, by John CassidyJohn Cassidy (journalist)John Cassidy is a British-American journalist and author. He is a staff writer at The New Yorker and a contributor to The New York Review of Books, having previously been an editor at The Sunday Times of London and a deputy editor at the New York Post...
– The New YorkerThe New YorkerThe New Yorker is an American magazine of reportage, commentary, criticism, essays, fiction, satire, cartoons and poetry published by Condé Nast...