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Entry from February 09, 2011
Minsky Moment (Minsky Crisis)

The terms “Minsky moment” and “Minsky crisis” refer to the economist Hyman Philip Minsky (1919-1996), who studied financial crises. Minsky argued against large amounts of accumulated debt during long periods of prosperity.

“A Minsky Crisis” is the title of a paper by Lance Taylor and Stephen A. O’Connell in The Quarterly Journal of Economics (1985). An article summary explains, “A model is developed to illustrate Hyman Minsky’s financial crisis theories. A key assumption is that the level of wealth in the economy is determined macroeconomically, with the value of firms’ assets responding to the state of confidence as reflected by discounted quasi rents on capital.”

The term “Minsky moment” is credited to Paul McCulley of PIMCO, who is said to have used the term in 1998 to describe 1998’s Russian financial crisis. McCulley joined PIMCO in 1999; the term “Minsky Moment’ appears in the January 2001 issue of the PIMCO publication “Global Bank Central Focus.” McCulley wrote, “Yesterday’s 50 basis-point Fed funds rate cut was a very positive signal that Fed policy makers grasp that we’re facing a debt-deflation Minsky Moment.”

“Minsky crisis,” though the older term for the same economic situation, has been less popular than the alliterative “Minsky moment.”

Wikipedia: Minsky moment
A Minsky moment is when investors who have borrowed too much are forced to sell good assets to pay back their loans. In any credit cycle or business cycle it is the point investors begin having cash flow problems due to the spiraling debt incurred financing speculative investments. At this point, a major sell off begins because no counterparty can be found to bid at the high asking prices previously quoted, leading to a sudden and precipitous collapse in market clearing asset prices and a sharp drop in market liquidity.

The term was coined by Paul McCulley of PIMCO in 1998, to describe the 1998 Russian financial crisis, and was named after economist Hyman 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, 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 although Minsky himself was known as a Keynesian and is identified as a post-Keynesian.

Wikipedia: Hyman Minsky
Hyman Philip Minsky (September 23, 1919 – October 24, 1996) was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises. Minsky was sometimes described as a post-Keynesian economist because, in the Keynesian tradition, he supported some government intervention in financial markets and opposed some of the popular deregulation policies in the 1980s, and argued against the accumulation of debt. His research was noticed by Wall Street.

Wikipedia: Paul McCulley
Paul Allen McCulley is a managing director at PIMCO. He coined the term Minsky moment and Shadow banking system which became famous during the Financial crisis of 2007-2009.

He is also a generalist portfolio manager and member of the investment committee in the Pimco Newport Beach office. In addition, he heads PIMCO’s short-term bond desk, leads PIMCO’s cyclical economic forums and is author of the monthly research publication, Global Central Bank Focus. Prior to joining PIMCO in 1999, he was chief economist for the Americas at UBS Warburg. During 1996-98, he was named to six seats on the Institutional Investor All-America fixed-income research team. He has 25 years of investment experience and holds an M.B.A. from Columbia Business School. He received his undergraduate degree from Grinnell College.

McCulley adheres to Keynesian economics, and was particularly influenced by Hyman Minsky.

He is a regular guest of CNBC and Bloomberg Television providing investment commentary.

“Macroeconomic life after bubbles is not a self-correcting process of renewal, but a self-feeding process of debt deflation — to wit, it’s a Minsky Moment.”

What Does Minsky Moment Mean?
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. 

OCLC WorldCat record
A Minsky Crisis
Author: Lance Taylor; Stephen A O’Connell
Edition/Format:  Article : English
Publication: The Quarterly Journal of Economics, 1985, vol. 100, p. 871-885
Database: JSTOR
Summary: A model is developed to illustrate Hyman Minsky’s financial crisis theories. A key assumption is that the level of wealth in the economy is determined macroeconomically, with the value of firms’ assets responding to the state of confidence as reflected by discounted quasi rents on capital. The second assumption is that there is high substitutability between liabilities of firms and money in the public’s portfolio. A downward shift in anticipated profits leads wealth to contract and the public to shift portfolio preferences toward money. Interest rates rise, leading to further dampening of expected profits, and a debt-deflation crisis can occur.

OCLC WorldCat record
Minsky crïsis revisited : a model of capital asset pricing and income distribution
Author: Domenico Delli Gatti; Mauro Gallegati
Publisher: [Rome, Italy] : Temi di Ricerca, 1988.
Series: Luidi einaudi, 8 1988. 
Edition/Format:  Book : English

OCLC WorldCat record
Yes, “it” did happen again : a Minsky crisis happened in Asia
Author: J A Kregel; Jerome Levy Economics Institute.
Publisher: Annandale-On-Hudson, N.Y. : Jerome Levy Economics Institute, Bard College, [1998]
Series: Working paper (Jerome Levy Economics Institute), no. 234. 
Edition/Format:  Book : English

PIMCO—Global Central Bank Focus
Paul A. McCulley | January 2001
Capitalism’s Beast of Burden
Yesterday’s 50 basis-point Fed funds rate cut was a very positive signal that Fed policy makers grasp that we’re facing a debt-deflation Minsky Moment.
And if the Fed delays, or refuses, to explicitly pursue monetary reflation, fiscal policy authorities will have very sound macroeconomic grounds for taking up the charge. Indeed, in the midst of a Minsky Moment, the restorative power of monetary reflation is by definition truncated, so some degree of fiscal stimulus is presently warranted, even if the Fed does vigorously pump the monetary keg. And make no mistake, if fiscal stimulus can be “justified,” it will be pursued.

PIMCO—Global Central Bank Focus
Paul A. McCulley | March 2001
Look, Honey, I Caught A Liverwurst!
What a long strange trip, starting with musings about irrational exuberance in stocks and ending with rates hikes non-targeted at a non-bubble in NASDAQ. 1 If the only matter at hand was Mr. Greenspan’s legacy, his duplicity would be of no great importance. But if Mr. Greenspan is unwilling to accept that we are living in a post-bubble world, it is a matter of grave importance. Macroeconomic life after bubbles is not a self-correcting process of renewal, but a self-feeding process of debt deflation — to wit, it’s a Minsky Moment.

Google Groups: miscrosoft.public.investor.discussions
Newsgroups: microsoft.public.investor.discussions
From: “jim sturtz”
Date: Thu, 11 Jul 2002 04:52:41 -0400
Local: Thurs, Jul 11 2002 2:52 am
Subject: us debt problems

The direct method, of course, is to open the discount window to the corporate sector, not just the banking sector. That is indeed a last resort action by the lender of last resort, and should never be used, except perhaps in times of war. Let me state for the record that I’m not recommending it now! The indirect way for the Fed to stop a Minsky Moment from becoming a Minsky Meltdown is for the Fed to order the banking system to quit withdrawing from “liquidity lending.” http://www.pimco.com/

Wall Street Journal
AUGUST 18, 2007
In Time of Tumult, Obscure Economist Gains Currency
Mr. Minsky Long Argued Markets Were Crisis Prone; His ‘Moment’ Has Arrived.

The recent market turmoil is rocking investors around the globe. But it is raising the stock of one person: a little-known economist whose views have suddenly become very popular.

Hyman Minsky, who died more than a decade ago, spent much of his career advancing the idea that financial systems are inherently susceptible to bouts of speculation that, if they last long enough, end in crises. At a time when many economists were coming to believe in the efficiency of markets, Mr. Minsky was considered somewhat of a radical for his stress on their tendency toward excess and upheaval.
Indeed, the Minsky moment has become a fashionable catch phrase on Wall Street. It refers to the time when over-indebted investors are forced to sell even their solid investments to make good on their loans, sparking sharp declines in financial markets and demand for cash that can force central bankers to lend a hand.
“We are in the midst of a Minsky moment, bordering on a Minsky meltdown,” says Paul McCulley, an economist and fund manager at Pacific Investment Management Co., the world’s largest bond-fund manager, in an email exchange.
It was Mr. McCulley at Pacific Investment, though, who coined the phrase “Minsky moment” during the Russian debt crisis in 1998.

The New Yorker
The Minsky Moment
by John Cassidy
February 4, 2008
Twenty-five years ago, when most economists were extolling the virtues of financial deregulation and innovation, a maverick named Hyman P. Minsky maintained a more negative view of Wall Street; in fact, he noted that bankers, traders, and other financiers periodically played the role of arsonists, setting the entire economy ablaze. Wall Street encouraged businesses and individuals to take on too much risk, he believed, generating ruinous boom-and-bust cycles. The only way to break this pattern was for the government to step in and regulate the moneymen.

Many of Minsky’s colleagues regarded his “financial-instability hypothesis,” which he first developed in the nineteen-sixties, as radical, if not crackpot. Today, with the subprime crisis seemingly on the verge of metamorphosing into a recession, references to it have become commonplace on financial Web sites and in the reports of Wall Street analysts. Minsky’s hypothesis is well worth revisiting. In trying to revive the economy, President Bush and the House have already agreed on the outlines of a “stimulus package,” but the first stage in curing any malady is making a correct diagnosis.

OCLC WorldCat record
Editor’s corner: Is the current financial distress caused by the subprime mortgage crisis a Minsky moment? or is it the result of attempting to securitize illiquid noncommercial mortgage loans?
Author: P Davidson
Edition/Format:  Article : English
Publication: JOURNAL OF POST KEYNESIAN ECONOMICS, 30, no. 4, (2008): 669-676
Database: British Library Serials

OCLC WorldCat record
A Minsky Moment: Reflections on Hyman P. Minsky (1919-1996)
Author: Charles J Whalen
Publisher: Sacramento, Calif. [etc.] Dept. of Economics, California State University [etc.]
Edition/Format:  Article : English
Publication: Journal of economic issues. 42, no. 1, (2008): 249
Database: ArticleFirst
Other Databases: British Library Serials

OCLC WorldCat record
Liquidity traps or Minsky crises: a critical review of the recent U.S. recession and Japan’s Heisei recession in the 1990s
Author: Peter C Y Chow; Kevin R Foster
Publisher: M.E. Sharpe, Inc.
Edition/Format:  Article : English
Publication: Journal of Post Keynesian Economics, 32, no. 4 (2010): 571-590
Database: ArticleFirst
Other Databases: WorldCat; British Library Serials

OCLC WorldCat record
A Perspective on Minsky Moments: Revisiting the Core of the Financial Instability Hypothesis
Author: Alessandro Vercelli
Publisher: Taylor & Francis
Edition/Format:  Article : EN
Publication: Review of Political Economy, 23, no. 1 (2011): 49-67
Database: ArticleFirst

Posted by Barry Popik
New York CityBanking/Finance/Insurance • (1) Comments • Wednesday, February 09, 2011 • Permalink