Minsky Moment

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.

BREAKING DOWN '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. Speculative Stock

    A stock with a high degree of risk. A speculative stock often ...
  2. Speculation

    The act of trading in an asset, or conducting a financial transaction, ...
  3. Speculative Flow

    The movement of speculative capital between different assets ...
  4. Speculative Risk

    A category of risk that, when undertaken, results in an uncertain ...
  5. Contagion

    The spread of market changes or disturbances from one region ...
  6. Speculative Company

    A company with a significant percentage of its assets tied up ...
Related Articles
  1. Economics

    What is a Financial Crisis?

    A financial crisis is a situation in which the values of assets drop rapidly.
  2. Insurance

    Riding The Market Bubble: Don't Try This At Home

    Riding the bubble takes timing, a clear understanding of the market and, most of all, a lot of luck.
  3. Active Trading Fundamentals

    Speculation

    It may sometimes be difficult to distinguish between speculation and investment - learn more about how the speculation differs from investment in terms of risk taken and gains achieved.
  4. Options & Futures

    Market Speculators: More Help Than Harm

    Speculators often get a bad rap, but it's important to remember that they only observe trends, not manipulate them.
  5. Economics

    3 Financial Crises in the 21st Century

    Take a look at several of the most prominent financial crises of the 21st century, and understand why the Great Recession was a truly remarkable contraction.
  6. Forex Fundamentals

    What Causes A Currency Crisis?

    Find out what can cause a currency to collapse, and what central banks can do to help.
  7. Investing

    Investing In Crisis, A High Risk-High Reward Strategy

    The financial crisis of 2008 and the great recession that followed is still fresh in the memories of many investors.
  8. Entrepreneurship

    Crisis Management Strategies For Business Owners

    When a PR problem arises, your company will be judged on how you handle it. Are you ready?
  9. Active Trading Fundamentals

    Digging Deeper Into Bull And Bear Markets

    Discover why it's important to know the characteristics of the two types of market conditions.
  10. Fundamental Analysis

    The 3 Best Investments When Bull Markets Slow Down

    Find out why no bull market lasts forever, and why investors should shift their assets away from growth and toward dividends when stocks slow down.
RELATED FAQS
  1. Do speculators have a destabilizing effect on the financial system?

    A speculator is anyone who trades derivatives, commodities, bonds, equities or currencies with higher-than-average risk in ... Read Answer >>
  2. What is the difference between speculation and hedging?

    Learn about speculation and hedging, the difference between them, and how traders and investors speculate and hedge. Read Answer >>
  3. What are the typical day-to-day responsibilities of a Chief Operating Officer (COO)?

    Learn how a country's debt crisis affects the world, including how currency values, inflation and output are affected on ... Read Answer >>
  4. What is the difference between investing and speculating?

    The main difference between speculating and investing is the amount of of risk undertaken in the trade. Typically, high-risk ... Read Answer >>
  5. How can derivatives be used for speculation?

    Find out more about derivative securities, speculation and how derivatives could be used to speculate on the price of the ... Read Answer >>
  6. What is the difference between speculation and gambling?

    Learn about speculation and gambling, examples of speculation and gambling, and the main difference between a speculator ... Read Answer >>
Hot Definitions
  1. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  2. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  3. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  4. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  5. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  6. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
Trading Center