Minsky moment

A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. The spiraling debt incurred in financing speculative investments leads to cash flow problems for investors. The cash generated by their assets no longer is sufficient to pay off the debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. This is likely to lead to a collapse of asset values. Meanwhile, the over-indebted investors are forced to sell even their less-speculative positions to make good on their loans. However, at this point no counterparty can be found to bid at the high asking prices previously quoted. 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.[1][2]

A more general meaning is to say that a "Minsky Cycle" features a series of Minsky Moments... in which a period of stability encourages risk taking, which leads to a period of instability, which causes more conservative and risk-averse (de-leveraging) behavior, until stability is restored, continuing the cycle. In this more general view, the Minsky Cycle may apply to a wide range of human activities, beyond investment economics.

The term was coined by Paul McCulley of PIMCO in 1998, to describe the 1998 Russian financial crisis,[2] and was named after economist Dr. Hyman Minsky, who noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze.[3] Minsky opposed the deregulation that characterized the 1980s.

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,[4] 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[5] although Minsky himself was known as a Keynesian and is identified as a post-Keynesian -- as is McCulley.[6]

Economic cycles were an accepted norm at ancient times in many cultures, none more so than in biblical Jubilee-based systems where two cycles run simultaneously. One being a seven year cycle and the other being a fifty year cycle in which all debts get defaulted and written off. Any contract made involving debt takes into account a priori that the debt will be written off during the Jubilee year thereby overcoming any destabilizing effects of eventual economic cycles and collapse of asset values.

See also

Notes

  1. ↑ In praise of ... Hyman Minsky, The Guardian, 22 August 2007
  2. ↑ 2.0 2.1 Lahart, Justin (2007-08-18), "In Time of Tumult, Obscure Economist Gains Currency—Mr. Minsky Long Argued Markets Were Crisis Prone; His 'Moment' Has Arrived", The Wall Street Journal
  3. ↑ Subprime mortgage crisis and possible recession BY JOHN CASSIDY
  4. ↑ Global Central Bank Focus, by Paul McCulley
  5. ↑ 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.,
  6. ↑ 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. 6 October 2011 <http://www.dictionaryofeconomics.com/article?id=pde2008_P000135> doi:10.1057/9780230226203.1314

Further reading