What’s a Minsky Moment, and Why the Worries About One

(Bloomberg) -- The mere mention of a “Minsky moment” -- a sudden crash of markets and economies that are hooked on debt -- is enough to send shudders through policy makers. The theory stems from the work of Hyman Minsky, a U.S. economist who specialized in how excessive borrowing fuels financial instability. Record debt levels around the world, coupled with sky-high financial market valuations, have kept Minsky’s theory prominent, drawing warnings from the International Monetary Fund and others. U.S. Treasury Secretary Janet Yellen once described his work as “required reading.”

1. What makes a Minsky moment?

The term refers to the end stage of a prolonged period of economic prosperity that has encouraged investors to take on excessive risk, to the point where lending exceeds what borrowers can pay off. At that point, Minsky wrote, there’s an increase in “speculative and Ponzi finance.” When a destabilizing event as simple as an increase in interest rates occurs, investors can be forced to sell assets to raise money to repay loans. That in turn sends markets into a spiral amid a demand for cash. There have been attempts to distinguish between a Minsky moment and a Minsky process that leads up to it.

2. Have there been Minsky moments?

Yes. In 1998, following the bursting of asset bubbles in Asia, Russia defaulted on its domestic debt and devalued the ruble. (It was during that crisis that Paul McCulley, then an economist at Pacific Investment Management Co., coined the term “Minsky moment.”) The global financial crisis of 2007-2008 is considered another Minsky moment, since it was caused by the implosion of the U.S. subprime mortgage market.

3. How do things look now?

Massive borrowing around the world since the financial crisis has prompted warnings of another Minsky moment to come. The IMF, in 2016, reported that the debt of governments, households and nonfinancial firms was “at an all-time high,” at 225% of global gross domestic product. The flood of government borrowing and ultra-easy central bank monetary policy in response to the coronavirus pandemic had driven that figure up to 256% by 2020, or a record $226 trillion. Meanwhile, the Bank of England in late 2021 became the first major central bank to raise interest rates since the pandemic started. The U.S. Federal Reserve announced its first rate increases in March 2022.  

4. Who was Minsky?

Minsky studied at the University of Chicago and at Harvard University, where he was a teaching assistant to Alvin Hansen, who coined the term secular stagnation. From 1957 to 1965, Minsky was an associate professor of economics at the University of California, Berkeley, where he developed his major theories. He died in 1996, before his ideas gained wide prominence.

The Reference Shelf

• Minsky’s biography at the Levy Economics Institute of Bard College.
• A QuickTake explainer on secular stagnation.
• QuickTake on financial risks in China, and why China is scrutinizing its biggest dealmakers.
• Bloomberg Opinion’s John Authers examined whether distressed property developer Evergrande could become China’s Minsky moment.

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