Marketplace Dimensions

Hyman Minsky was an academic who did not view his life separate from economics. He had been a long time proponent of the theory that financial markets will experience bouts of speculation that may end up in crises based on how long the speculation lasts. His proposition was contrary to the belief in the efficiency of the financial markets.

The Wall Street has coined a term called the "Minsky Moment" to refer to the market condition when over-leveraged buyers have to sell their strong revenue-generating assets to honor the loan terms. The sell-off results in a declining financial market, which pushes the asset values further down.

Minsky presented that when times are good, investors take on additional risks to build up positions in the market. However, the risks may reach a point when the income from the good assets may not be enough to pay off the debt used to acquire the assets. The lenders may demand the loans, if the speculative assets start falling in value. The result will be a drastic decline in the asset values.

Currently, the global financial markets might be going through a Minsky moment as per Paul McCulley, an economist and fund manager at Pacific Investment Management Company (PIMCO), the world's largest bond-fund manager. The availability of cheap credit, the spectacular performance of the emerging economies, and the increased appetite of investors for higher returns and higher risks, have contributed to the speculative tendencies in the asset markets.