Read - What Does Minsky Moment Mean?
By Daniel at 19 March, 2009, 2:21 pm
A situation in which 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 long enough, will eventually lead to crises and the longer that 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 end in large collapses.
Investopedia explains Minsky Moment
The phrase “Minsky Moment” was coined by Paul McCulley in 1998, when referring to the Asian Debt Crisis of 1997, in which speculators put increasing pressure on dollar-pegged Asian currencies until the eventual collapse. These types of crises will occur because investors take on additional risk during prosperous times or bull markets. The longer a bull market lasts, the more risk is taken in the market. Eventually, so much risk is taken that instability ensues.
For example an investor might borrow funds to invest while the market is in an upswing. If the market slightly drops, leveraged assets might not cover the debts taken to acquire them. Soon after, lenders start calling in their loans. Speculative assets are hard to sell, so investors start selling less speculative ones to take care of the loans being called in. The selling of these investments means the market as a whole begins to decline. At this point the market is in a Minsky moment. The demand for liquidity might even force the country’s central bank to intervene.
http://www.marketwatch.com/news/story/economic-katrina-about-overtake-financial/story.aspx?guid={2C57B7C4-AAEC-490A-AE79-B65E9F5FBCBC}
From Page 2 of an article dated Aug.3, 2007…..By Rex Nutting & Nick Godt, MarketWatch Last update: 5:49 p.m. EDT Aug. 3, 2007Comments: 1…(guess who?)
Ian Shepherdson, chief economist of High Frequency Economics, says mortgage payment delinquencies, defaults and home foreclosures are likely accelerate.
And the peak rate of ARM resets won’t be reached until the end of this year. By then, the monthly value of mortgages resetting will be 50% higher than the current level, while the pace of resets will not wane until the fourth quarter of 2008, according to Shepherdson.
“Moreover,” he wrote in a report this past week, we are increasingly convinced that the unemployment rate will be rising before too long, generating a further increase in mortgage delinquencies even among people who are able to take the hit of ARM resets, provided they have a job.”
Global credit markets are overleveraged, says economist Nouriel Roubini of Roubini Global Economics. That’s how the hedge funds and private-equity firms were able to reap such fantastic returns. But with underlying assets leveraged 10 or 20 or 50 times, even a small decline in asset values can wipe out the entire investment, or trigger a demand for immediate payment, causing a cascading default among all the parties to a deal that’s gone bad.
Minsky theorized that an asset bubble has three stages. In the first, so-called “hedge” investors can pay off the interest and principal from their cash flow. Healthy returns push up prices, attracting the “speculative” investors of the second stage, who can meet their interest payments from cash flow with the help of liquid capital markets, but would have to sell off assets to pay off the principal. In the third stage, “Ponzi” investors rush in, relying on the continual appreciation of the value of the asset to pay the interest or the principal.
If the asset loses value, Ponzi investors lose everything and speculative investors get squeezed. That’s the Minsky moment.
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