Minsky moment
Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
A Minsky moment is the sudden collapse of asset prices after a long boom built on borrowed money. It comes from Hyman Minsky's financial instability hypothesis, which says that stability breeds instability. In calm times, borrowers take on more risk, and finance moves through three stages:
- hedge finance: income pays both interest and principal;
- speculative finance: income pays only the interest;
- Ponzi finance: the debt can be repaid only if asset prices keep rising.
When prices stop rising, Ponzi borrowers are forced to sell. Prices crash and the crisis spreads. Paul McCulley coined the term in 1998.
Example
The 2008 global crash is the classic case. For years, US home buyers borrowed on the belief that house prices would keep rising. When prices fell, borrowers defaulted, banks failed and a worldwide crisis followed.
Don't confuse with
- Herd behaviour: people following the crowd, which helps inflate bubbles. A Minsky moment is the point where a debt-fuelled bubble bursts.