What is a Minsky Moment
Minsky Moment refers to a period of time when a market fails or falls into crisis after an extended bullish period with highly inflated market speculation and unsustainable growth. A Minsky Moment is based on the idea that periods of bullish speculation, if they last long enough, will eventually lead to crisis and 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
A Minsky Moment crisis follows a prolonged period of bullish speculation which is also associated with high amounts of debt taken on by both retail and institutional investors. "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.
The 2008 financial crisis is also cited as a leading Minsky Moment example. During the height of this crisis a wide range of markets reached all-time lows which caused margin calls, a selloff in assets to cover debts and higher default rates.
Minsky Moment Catalysts and Effects
Minsky Moment crises generally occur because investors take on additional credit risk during prosperous times or bull markets. The longer a bull market lasts, the more credit risk is taken in the market. Eventually, prices deflate from over speculation which results in margin calls and higher levels of credit defaults also affecting average borrowing rates across the market. A Minsky Moment marks the short time period in which markets experience severe deflation which is followed by a prolonged period of instability.
For a hypothetical example consider an investor who borrows 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.
In 2017 several experts issued warnings of an approaching Minsky Moment in China as debt levels increased while equity market valuations also continued their bullish trend. The Chinese government itself has also warned investors of an impending Minsky Moment if debt levels continue to rise. Meanwhile, the International Monetary Fund also issued global warnings of high debt levels in 2017 that had the potential to result in Minsky Moment crisis results around the world. While imploding of markets toward that result has not yet occurred, debt level increases accumulating from a strengthened recovery following the height of the 2008 crisis still continue to be a widespread concern.