Minsky moment

Minsky moment

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.[1][2] 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.[1]

The term was coined by Paul McCulley of PIMCO in 1998, to describe the 1998 Russian financial crisis,[2] 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,[3] 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[4] although Minsky himself was known as a Keynesian and is identified as a post-Keynesian.[5]

Notes

  1. ^ a b In praise of ... Hyman Minsky, The Guardian, August 22, 2007, http://www.guardian.co.uk/commentisfree/2007/aug/22/comment.business 
  2. ^ a b Lahart, Justin (2007-08-18), "In Time of Tumult, Obscure Economist Gains Currency", The Wall Street Journal, http://online.wsj.com/public/article/SB118736585456901047.html 
  3. ^ Global Central Bank Focus, by Paul McCulley
  4. ^ Prychitko, David L. (2009), "Competing explanations of the Minsky moment: The financial instability hypothesis in light of Austrian theory", The Review of Austrian Economics 32 (3): 199, doi:10.1007/s11138-009-0097-1, http://www.springerlink.com/content/g131473281177713/. ,
  5. ^ King, J.E. "Post Keynesian economics." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 06 October 2011 <http://www.dictionaryofeconomics.com/article?id=pde2008_P000135> doi:10.1057/9780230226203.1314

Further reading


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