# Understanding Minsky Moments: Causes, History, and Real-World Examples

![Minsky Moment: A sudden collapse of asset prices following a prolonged period of economic prosperity that led investors to lose sight of risk.](https://www.investopedia.com/thmb/wVzPrum-RJ5qe4us4Yo5WfhSur0=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/minskymoment.asp-final-dd166d923bfe46f1974994d1863771fc.png)

*— Investopedia / Julie Bang*

> **Definition**
>
> A Minsky moment refers to a sudden collapse of asset prices after a long period of growth sparked by debt or currency pressures. It's at the explosive juncture of an economy about to fall.

## What Is a Minsky Moment?

A Minsky moment marks the abrupt collapse of market speculation following prolonged bullish growth. Coined in 1998, it encompasses crises like the 2008 Financial Crisis, emphasizing that speculative periods eventually lead to financial instability. Economist Hyman Minsky emphasized these cycles, outlining hedge, speculative, and Ponzi stages that predict the markets’ trajectory toward such crises.

Below, we show you how analysts diagnose a Minsky moment. Also, Minsky's suggestions for preventing or recovering from it.

### Key Takeaways

*   A Minsky moment refers to a sudden market collapse after a period of speculative growth, as credit risk escalates with excessive borrowing.  
    
*   Hyman Minsky identified three stages of credit evolution leading to financial crises: hedge, speculative, and Ponzi finance.  
    
*   The 2008 financial crisis is a prime example of a Minsky moment, highlighting the dangers of unchecked speculative finance.  
    
*   Minsky's theories emphasize the need for regulatory interventions and policy measures to stabilize economies and prevent financial crashes.  
    

## Decoding the Dynamics of a Minsky Moment

The phrase "Minsky moment" was coined in 1998 by Paul McCulley of [PIMCO](https://www.investopedia.com/terms/p/pimco.asp) 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.

Minsky worked in relative obscurity until his work on economic crises became, unfortunately, relevant. Minsky believed these events arose from a new form of capitalism he called "money manager capitalism" or "[financialization](https://www.investopedia.com/terms/f/financialization.asp)." Here, Minsky gives a succinct summary of his views:

> "The major flaw of our type of economy is that it is unstable. This instability is not due to external shocks or to the incompetence or ignorance of policymakers. … The dynamics of a capitalist economy which has complex, sophisticated, and evolving financial structures leads to the development of conditions conducive to incoherence—to runaway inflations or deep depressions. But incoherence need not be fully realized because institutions and policy can contain the thrust to instability. We can, so to speak, stabilize instability."

In short, Minksy was a Keynesian (or [neo-Keynesian](https://www.investopedia.com/ask/answers/012615/what-difference-between-keynesian-and-neokeynesian-economics.asp)), arguing that [markets tend to produce crises](https://www.investopedia.com/terms/p/pain-trade.asp) 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:

1.  Minksy wasn't calling out specific individuals for moral approbation. He identified that a crisis is not the fault of certain irresponsible borrowers as much as a systemic problem arising from within the new phase of capitalism. You could swap one group out for any other, and the results would be similar.
2.  He wasn't a fatalist: these cycles don't need to lead to the worst calamities, not least since he called for interventions that might prevent them.

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:

*   **The hedge finance stage**: In this economic period, borrowers can repay their debts with revenues or cash on hand. They have enough cash flow to cover both the principal and interest on their loans.
*   **The speculative finance stage**: Borrowers can still pay interest on their loans but must continually roll over the principal. They have no choice at this point but to rely on the assumption (or hope) that they can refinance or borrow new funds to cover their principal.
*   **The Ponzi finance stage**: Borrowers can only repay their debts by increasing their debt or selling borrowed assets at fire sale prices since many are in the same position and the market knows you must sell, giving you no bargaining position. Borrowers don't have enough cash coming in to cover either the principal or interest payments on their loans. They can now only rely on the appreciation of their assets or the willingness of lenders to provide additional funding.

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](https://www.investopedia.com/terms/g/great-recession.asp). 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.  

## Minsky Moments and the Financial Instability Hypothesis Explained

Given 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](https://www.investopedia.com/terms/n/neoliberalism.asp), 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 money manager capitalism, Minsky identified an era of "commercial capitalism."

We can think broadly of the period from when the Depression-era regulations took effect through the 1950s and beyond. In this system, banks dominated, focusing on financing businesses and households for productive investments. They prioritized sound loans over short-term profits and built long-term customer relationships. 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:

*   **Dominance of institutional investors**: Money manager capitalism is characterized by the growing power of institutional investors, such as pension funds, mutual funds, and hedge funds. These investors pool large amounts of capital and invest on behalf of their clients.
*   **Emphasis on financial innovation**: There is constant pressure to create new financial products and instruments to generate higher returns. This leads to the development of complex and opaque financial structures that are difficult to understand and regulate, even by those who produced them.
*   **Short-term focus**: Money managers and corporate CEOs are often evaluated based on their short-term performance, which can lead to a focus on speculative investments rather than long-term growth and stability.
*   **Increased financial fragility**: The focus on short-term profits and financial innovation can lead to outsized aggregate leverage and risk-taking, which makes the financial system more fragile and vulnerable to shocks.
*   **A disconnect from the real economy**: Financial institutions, Minsky suggests, often prioritize their profits over the needs of businesses and households, leading to a misallocation of resources.

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.

## Assessing the Potential for a Current Minsky Moment

A search of academic journal and newspaper databases shows that prognosticators are seemingly always working on articles about how the present is perhaps ripe for a Minsky moment. That doesn't make these analysts wrong—after all, Minsky thought this was to be a period of instability. Here, we review some major recent events that brought Minsky to mind for some:

### The Collapse of China's Real Estate Market

Starting in about 2017, experts issued warnings of an approaching Minsky moment in China as debt levels increased while equity values kept up their bullish [trend](https://www.investopedia.com/terms/t/trend.asp). The Chinese government warned investors of an impending crisis or Minsky moment if debt levels continued to rise.

When COVID-19 arrived in 2020, it exacerbated Chinese companies' already high debt levels as it lowered macroeconomic growth. With overleveraged balance sheets, many Chinese companies struggled to service debts, which had fueled speculative investing. While China tried to manage the crisis, in 2024, the bankruptcy of Evergrande Group, the Chinese real estate, looked to some as if it was finally setting off the Minsky moment. Meanwhile, the pandemic aftermath in China unfolded largely as Minsky’s framework would predict: more inefficient construction projects, lower interest rates, financial firm bailouts, and the squeezing of private corporations.

For readers of Minksy, revelations about [Evergrande's and other developers' apparent Ponzi financing schemes](https://www.investopedia.com/evergrande-files-for-bankruptcy-in-new-york-7692801) were perhaps a bit on the nose, given the name of his third credit cycle. With real estate demand declining, the system has unraveled. Some analysts predict the scale of the crisis, resembling Japan’s 1990s lost decade, could impede China’s growth and competitiveness for years.

### The Case of Silicon Valley Bank

In early 2023, experts quickly reached for Minksy's terms, worried about the hit the U.S. financial sector took as several regional banks collapsed and faced bank runs. The events surrounding the collapse of [Silicon Valley Bank](https://www.investopedia.com/what-happened-to-silicon-valley-bank-7368676), among other troubled financial institutions, caused some to diagnose a Minsky moment as these banks were taking ever-riskier bets with their lending and financing. Fortunately, though painful for those involved, the episode turned out largely self-contained.  

### World Debt Levels in 2024

More recently, the [International Monetary Fund](https://www.investopedia.com/terms/i/imf.asp) has joined a chorus of those issuing warnings of high global debt levels and the potential for a financial crisis. While this has not yet come about, there are warning signs. The U.S. has had an extended period of economic prosperity, rising debt levels, and speculative market activity as the S&P 500 and Dow Jones Industrial Average have broken all-time records. Nevertheless, speculation does not yet seem to be at the extreme levels that presage a Minsky moment, though time will tell.

## Strategies to Mitigate a Minsky Moment

Minsky argued for policy interventions during a Minsky moment to stabilize the economy and prevent a financial crisis. Here are some of his recommendations:

*   **Financial regulation**: Stricter oversight of financial institutions and markets is necessary to prevent too much risk and leverage.  
    
*   **Fiscal stimulus**: The government should increase spending and cut taxes during a recession to stimulate aggregate demand.
*   **Job creation**: Public works projects and other measures should be implemented to create employment and boost aggregate demand.
*   **Lender of last resort**: The central bank should provide liquidity to financial institutions and markets to prevent a collapse in credit.
*   **Restructure debt**: Debt should be restructured to prevent defaults and bankruptcies, such as reducing interest rates or extending loan maturities.

In the midst of a crisis, responsive measures include swift central bank interventions to provide liquidity, government bailouts to stabilize key financial institutions, and international cooperation to manage cross-border financial crises. These actions, he thought, might cushion the economic blow.  

## What Are Real-World Examples of Minsky Moments?

The market crash and [Great Depression](https://www.investopedia.com/terms/g/great_depression.asp) of the 1930s and the 2008 Global Financial Crisis/Great Recession are the most-cited examples. The 2008 crisis was triggered by the bursting of the U.S. housing bubble and subsequent failure of financial institutions overexposed to mortgage-backed securities. Another instance is the 1997 [Asian Financial Crisis](https://www.investopedia.com/terms/a/asian-financial-crisis.asp), starting with the collapse of the Thai baht and spreading to other East Asian economies, exacerbated by high levels of private debt.

## Can a Minsky Moment Be Predicted?

Predicting a Minsky moment is inherently difficult because of the complexity of market forces, investor psychology, and external economic factors or shocks. While economists and analysts can try to identify [speculative bubbles](https://www.investopedia.com/terms/s/speculativebubble.asp) and overleveraging as warning signs, the precise timing and trigger of a Minsky moment are often unpredictable.

## What Are Common Critiques of the Minsky Moment?

Critics argue that Minsky's theories are too focused on financial markets and neglect the role of real economic factors. Some also argue that his model is too deterministic, suggesting that [financial crises](https://www.investopedia.com/terms/f/financial-crisis.asp) are inevitable, which is not always the case. Others criticize the lack of empirical evidence supporting his hypotheses.  

## The Bottom Line

A Minsky moment represents the sudden collapse of markets following unsustainable speculative activity, as theorized by economist Hyman Minsky. Identified by phases of stable growth, speculative risk-taking, and eventual crisis, these moments underscore the inherent instability in modern financial systems.

Minsky’s work suggests that during periods of economic stability, high confidence leads investors to take excessive risks, particularly using borrowed funds, creating financial bubbles. When these bubbles burst, they expose the fragility of these systems. To mitigate the impact, it is crucial for governments and regulators to implement measures that promote financial stability and oversight, potentially averting severe economic downturns.  

> **Article Sources**
>
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>     
> 2.  L. Randall Wray. "Minksy Crisis." In Steven N. Durlauf and Lawrence E. Blume, eds. "[The New Palgrave Dictionary of Economics](https://link.springer.com/referenceworkentry/10.1057/978-1-349-95121-5_2974-1)." Palgrave Publishing, 2018. Pages 8792-8798.
>     
> 3.  Hyman Minsky. "[Uncertainty and the Institutional Structure of Capitalist Economics](https://www.jstor.org/stable/4452235)." _Journal of Economic Issues_. 30.2 (1996). Pages 357-368.
>     
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>     
> 6.  Janet L. Yellen. "[A Minsky Meltdown: Lessons for Central Bankers?](https://www.frbsf.org/wp-content/uploads/04161.pdf)" In "Conference Proceedings, 18th Annual Hyman P. Minsky Conference on the State of the U.S. and World Economies: Meeting the Challenges of Financial Crisis." Levy Economics Institute of Bard College. Pages 39-46.
>     
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