Minsky Moment

AAA

DEFINITION of 'Minsky Moment'

When a market fails or falls into crisis after an extended period of market speculation or unsustainable growth. A Minsky moment is based on the idea that periods of speculation, if they last long enough, will eventually lead to crises; the longer speculation occurs the worse the crisis will be. This crisis is named after Hyman Minsky, an economist and professor famous for arguing the inherent instability of markets, especially bull markets. He felt that long bull markets only ended in large collapses.

INVESTOPEDIA EXPLAINS 'Minsky Moment'

The phrase "Minsky moment" was coined by Paul McCulley in 1998 while referring to the Asian Debt Crisis of 1997, in which speculators put increasing pressure on dollar-pegged Asian currencies until they eventually collapsed. These types of crises occur because investors take on additional risk during prosperous times or bull markets. The longer a bull market lasts, the more risk is taken in the market. Eventually, so much risk is taken that instability ensues.

For example an investor might borrow funds to invest while the market is in an upswing. If the market drops slightly, leveraged assets might not cover the debts taken to acquire them. Soon after, lenders start calling in their loans. Speculative assets are hard to sell, so investors start selling less speculative ones to take care of the loans being called in. The sale of these investments causes an overall decline in the market. At this point, the market is in a Minsky moment. The demand for liquidity might even force the country's central bank to intervene.

RELATED TERMS
  1. Subprime Meltdown

    The sharp increase in high-risk mortgages that went into default ...
  2. Bull Trap

    A false signal indicating that a declining trend in a stock or ...
  3. Liquidity Squeeze

    When concern about the short-term availability of money causes ...
  4. Asian Financial Crisis

    Also called the "Asian Contagion", this was a series of currency ...
  5. Leverage

    1. The use of various financial instruments or borrowed capital, ...
  6. Liquidity

    1. The degree to which an asset or security can be bought or ...
Related Articles
  1. What are the components of the risk ...
    Investing

    What are the components of the risk ...

  2. What is a liquidity squeeze?
    Investing

    What is a liquidity squeeze?

  3. Subprime Lending: Helping Hand Or Underhanded?
    Investing Basics

    Subprime Lending: Helping Hand Or Underhanded?

  4. Who Is To Blame For The Subprime Crisis?
    Mutual Funds & ETFs

    Who Is To Blame For The Subprime Crisis?

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center