in finance and investing a sudden and catastrophic collapse of asset prices after a period of growth and stability is known as a minsky moment named after economist hyman minsky 1911 to 1996 this label has been applied to some of the most devastating economic crises in history minsky mostly wrote during a period when he thought economists were lulled into complacency by the relative stability of the mid 20th century his work was meant to wake them from their slumber as such there is an irony that an economist who dedicated his life s work to developing policy solutions to avoid financial crises has his name applied to the very moments he sought to prevent several decades after his death after so many crises we might not now be in a minsky moment but we seem to be in a minsky era 
below we show you how analysts diagnose a minsky moment also minsky s suggestions for preventing or recovering from it understanding the minsky momentthe phrase minsky moment was coined in 1998 by paul mcculley of pimco fame while referring to the asian debt crisis of 1997 the concept derives from the view that periods of bullish speculation if they last long enough will eventually lead to a crisis and the longer the period of speculation lasts the more severe the eventual crisis will be hyman minsky worked for much of his career in relative obscurity but that would change when his work on economic crises became unfortunately relevant minsky thought these events were the result of a new form of capitalism which he called money manager capitalism what others would later call financialization in the last decades before he died in 1996 here minsky gives a succinct summary of his views in short minksy was a keynesian or neo keynesian arguing that markets tend to produce crises that good institutions and policies can prevent minsky believed that financial markets move through cycles of boom and bust emphasizing that once there s a transition from stable investment to speculative finance the chance for a crash heightens when the time comes that investors can no longer afford their spiraling debt two crucial points are worth emphasizing minsky s work describes how periods of economic stability can paradoxically lead to greater instability in the long run according to minsky more investment generates higher profits at the aggregate level all else being equal while this is a positive sign for most investors and the public it can make the financial system more unstable when profits continually exceed expectations servicing debt becomes easier encouraging firms to borrow ever more sums after all in a booming economy profits from speculation outpace the interest to be paid as janet yellen put in 2009 when optimism is high and ample funds are available for investment investors tend to migrate from the safe hedge end of the minsky spectrum to the risky speculative and ponzi end this leads us to minsky s famous categories of credit hedge speculative and ponzi let s define these once an economy reaches the third stage if prices don t go up and lenders stop lending then the minsky moment arrives drawing on the work of other economists minsky s theory also describes a debt deflation process that s not the result of overleveraged firms purposely going way over their skis the events that trigger the start of a debt deflation are normal results of the financing relations that lead into and take place during an investment boom minsky wrote the bankruptcy of one major borrower can bring down its creditors who then default on their own debts creating a cascade of defaults as uncertainty and pessimism spread investment declines and through a multiplier effect income and demand drop as a recession or worse arrives the crisis that made the notion of minsky moment more widely known at least among analysts and regulators was the 2008 financial crisis also called the great recession during this period a wide range of markets reached all time lows triggering a wave of margin calls a massive sell off in assets to cover debts and high default rates the minsky moment and the financial instability hypothesisgiven the massive changes in finance and the economy there s something of a parlor game among analysts theorists and practitioners to name the current period neoliberalism financialization post keynesian postmodern finance and so on and to mark its beginnings whether 1945 1980 2007 8 or the pandemic minsky used the phrase money manager capitalism for the postwar period to describe changes in the american financial system he argued that the rise of institutional investors such as pension and mutual funds had fundamentally changed the nature of capitalism he thought such a system was inherently volatile which was his financial instability hypothesis to understand the changes in capitalism which to many of us is simply the natural state of capitalist markets we need to look at the prewar period as minsky saw it before the era of money manager capitalism there was for minsky commercial capitalism we can think broadly of the period from when the depression era regulations took effect through the 1950s and beyond under this system banks were the dominant financial institutions and their primary role was to provide financing to businesses and households for productive investments they had long term relationships with their customers and were more focused on the soundness of their loans than on maximizing short term profits the government played a more active role in regulating the financial system and promoting economic stability through deposit insurance and bank supervision policies this was a period of stability that economists he later argued took for granted under money manager capitalism on the other hand the primary goal of financial institutions is to maximize returns for their clients rather than to support the broader economy this leads to a focus on short term profits a tendency toward speculation and ever more financial innovation producing new speculative investment products here are some primary features of this kind of capitalism according to minsky putting this all together minsky s concept of money manager capitalism highlights how the evolution of the financial system has transformed capitalism itself creating minsky thought new risks and challenges for policymakers and society 