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Minsky Moment

Candlefocus Editor

The term “Minsky Moment” was coined by Yale University’s Hyman Minsky, an economist who wrote extensively on the tendency of markets to become exponentially overvalued after a significant period of sustained growth. Minsky noted that the “flip side of successful investments is the urge to speculate.” He argued that after a period of economic expansion, investors exhibit a tendency to become blinded by their own greed, taking on ever-increasing levels of risk to chase returns.

This relentless drive for quick ROI ultimately brings about a Minsky Moment, a point in time when the risk associated with a particular asset class or market segment becomes untenable. This can manifest in the sudden and debilitative bursting of a price bubble, an event that usually has dramatic ramifications at both the micro and macro level.

For example, prior to the Great Recession of 2008, investors in the US housing market became extremely complacent, over-extending themselves based on a setup of unsustainable levels of growth. As prices reached a peak and demand waned, investors trying to leave the market at the same time caused prices to plummet into a state of rapid deflation, an event now viewed in hindsight as the tipping point of a global financial crisis.

Minsky’s Moment and its associated financial collapse have become hallmarks of every major bear market, often leading to a loss of faith in traditional capitalist models, and motivating new forms of alternative finance. Despite the potential for disastrous outcomes, most analysts agree that Minsky Moment events are inevitable in a financially mature and globally integrated economy. Investors and governments should thus be aware of the potential for Minsky Moment events and strive to identify impending crises before they become unmanageable.

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