INVESTING EXPLAINED: What you need to know about the Minsky moment

In this series, we break down the jargon and explain a popular investment term or topic. Here is the Minsky moment.

What the hell is that?

The late US economist Hyman Minsky argued that stability in financial markets ultimately breeds extreme instability.

Individual and institutional investors become complacent and take on more debt until they can no longer service those loans with their income and have to sell even their least speculative holdings. This demand for cash drives stock prices down and causes the bubble to burst.

Minsky laid out his thesis in The Financial Instability Hypothesis in 1993, but the term “Minsky moment” was coined during the 1998 Russian debt crisis by Paul McCulley, chief economist at fund management group Pimco.

When was the term commonly used?

In 2007, the US subprime mortgage scandal triggered the global financial crisis. Bankers, brokers, and columnists frequently began using the “Minsky moment” to explain market turbulence.

Instability: Individual and institutional investors become complacent and take on more debt until they can no longer service those loans

Minsky, who died in 1996, was an unknown figure in his lifetime. But the global financial crisis made him famous posthumously. The Economist magazine even argues that the Minsky moment has become synonymous with financial crisis.

Why are we hearing it now?

People are wondering if China may be on the verge of a Minsky moment following the rapid increase in debt, particularly in the real estate sector.

Growth is slowing in all sectors and there is a “temperature difference” between the official figures and the real situation.

Inflation may be a problem in the UK, US and elsewhere, but there are signs of deflationary pressures in China.

What went wrong in the real estate industry?

Homebuilders are suffering from restricted lending, lower house prices and sluggish demand. Evergrande is struggling with more than $300 billion in debt on which it has failed to make interest payments.

Country Garden has also missed interest payments. These issues are one of the reasons giant wealth manager Zhongrong has been unable to pay its clients either interest or maturity proceeds. Zhongrong is part of China’s shadow banking sector and provides finance to property developers. It’s a strategy that has yielded record returns as property values ​​soared.

Is China worried?

In 2019, former Bank of China Governor Zhou Xiaochuan warned that the debt mountain was looming for a Minsky moment. However, it is not known whether this term was heard from the decadent West when planning the Beijing regime’s actions last week.

These include a rate cut and a cut in the stock market tax to stimulate the market. But investors want more, starting with a massive government spending program.

What would Minsky have said?

Minsky’s thesis related to the course of events in capitalist economies with mature financial systems. It is not clear whether his thinking applies to socialist states on the way to market economies.

But he probably would have thought that China’s troubles posed a global threat given it’s world’s second largest economy.