Monday, May 21, 2012

Minsky Moment

Time to revisit this topic.

Minsky moment is the economic phenomenon that occurs when over-indebted investors are forced to sell good assets to pay back their loans, causing sharp declines in financial markets and jumps in demand for cash.[1][2] In any credit cycle or business cycle it is the point when investors begin having cash flow problems due to the spiraling debt incurred in financing speculative investments. At this point nocounterparty can be found to bid at the high asking prices previously quoted; consequently, a major sell-off begins leading to a sudden and precipitous collapse in market-clearing asset prices and a sharp drop in market liquidity.[1] 
The term was coined by Paul McCulley of PIMCO in 1998, to describe the 1998 Russian financial crisis,[2] and was named after economistHyman Minsky. The Minsky moment comes after a long period of prosperity and increasing values of investments, which has encouraged increasing amounts of speculation using borrowed money.
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,[3] 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[4] although Minsky himself was known as a Keynesian and is identified as a post-Keynesian.[5]

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