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

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 US economist who specialized in how excessive borrowing fuels financial instability. Sky-high debt levels around the world, coupled with towering financial market valuations, have kept Minsky’s theory prominent, drawing warnings from the International Monetary Fund and others. US Treasury Secretary Janet Yellen once described his work as “required reading.”

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.