I read something interesting about the present turmoil in financial markets.It is titled as “Minsky Moment”.Exactly what is it ? Read on……
1. What’s a Minsky moment?
The phrase “Minsky moment” has been popping up a lot in financial news reports about the turmoil roiling financial markets worldwide. It’s named after Hyman Minsky (1919-1996), an economist known as a rather pessimistic contrarian during his lifetime for arguing that markets are inherently unstable and long stretches of good times just end in bigger collapses.If you’re not sure exactly what a Minsky moment is, the Wall Street Journal’s Justin Lahart offered a wonderfully clear explanation:
At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they’ve taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. “This is likely to lead to a collapse of asset values,” Mr. Minsky wrote.
When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash [that can force central bankers to lend a hand]. At that point, the Minsky moment has arrived.
2. A Minsky moment is the point in a credit cycle or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments. At this point, a major selloff begins due to the fact that 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.The concept has some parallels with Austrian Business Cycle Theory, although Hyman Minsky himself was known as a “radical” Keynesian.
Let’s hope that Indian stock market does not face such anxious moments again.Or is it wishful thinking ??.