Minsky Moment - Explained
What is a Minsky Moment?
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Table of ContentsWhat is a Minsky Moment?How Does a Minsky Moment Work?Minsky Moment Catalysts and Effects2017 Considerations
What is a Minsky Moment?
Minsky Moment is named after Hyman Minsky, an economist who argues that markets (particularly bull markets) have innate characteristics of being unstable. The bull market refers to a period of time in which the market experiences a sudden increase. Minsky moment refers to a period of time when there is a sudden rise or major collapse of asset values as a result of increased debt. A Minsky Moment is based on the idea that during periods of bullish speculation. If this period extends, it will eventually result in a crisis and the longer this speculation, the worse the crisis will be.
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How Does a Minsky Moment Work?
Minsky Moment was developed by Paul McCulley in 1998 to describe the Asian Debt Crisis of 1997. This crisis was caused as a result of the pressure on dollar-pegged Asian currencies by speculators which eventually cause the currencies to fall. After an existing increase in the market, retail and institutional investors may decide to take more credit during this promising market period which a sudden change in the market value can cause the market to fall. Hence, this is called a Minsky moment. A leading example of this Minsky moment is the 2008 financial crisis. At the peak of this crisis, quite a substantial number of markets assumed their all-time lows which led to a selloff in assets to cover debts and higher default rates. This is referred to as margin calls.
Minsky Moment Catalysts and Effects
Minsky moment mostly occurs at a point where the market is in its flourishing period and investors take on credits. This flourishing time is referred to as the bull market. When this flourishing period extends over a long period of time, investors take more credit. This then affects prices by decreasing from over speculation which results in margin calls and higher levels of credit unpaid which also affects average borrowing rates across the market. A Minsky Moment is the very short moment the market experiences' an extreme decrease which extends over a long time frame of instability in the market. For example, an investor who borrows funds to invest while the market is in its prosperous time, at a point in time, If the market comes down a bit, leveraged assets might not be able to account for the debts taken to acquire them. And when the lenders start requesting for the repayment of the debts, Speculative assets owned by the investors are difficult to sell, eventually, investors start selling less speculative ones to repay the loans. The sale of these investments results in the general fall of the market. In this scenario, the market is in a Minsky moment, hence the demand for cash flow is high and there is a need for the country's central bank to assist in cash flow problems.
The international monetary fund in 2017 issued a global warning about an impending Minsky Moment. This is a result of an increased level of debts globally which may cause this moment to occur. Also in China, financial experts warned over an impending Minsky moment which may be caused by an increased level in debts. They warned that if debts continue to increase and equity market valuations continue their bullish trend, Minsky moment is inevitable. While a decline in the market activities has not occurred, the debt level has been very high following the recovery from the 2008 Minsky moment.