This week I learned about the Minsky Moment.
- This week I learned about the Minsky Moment.
- Hyman Minsky's Financial Instability Hypothesis.
- The idea that stability breeds instability through increasing leverage and risk-taking.
- Three stages of finance:
- Hedge finance (stable): Cash flow covers both interest and principal
- Speculative finance (risky): Cash flow only covers interest, must roll over principal
- Ponzi finance (unsustainable): Can't even cover interest, must borrow more to service debt
- In the last stage, it's in a critical state; radically over-levered, needs just a single grain of sand in the gears to blow the whole thing up.
- The Minsky Moment is the sudden realization that debt levels are unsustainable, triggering rapid deleveraging and crisis.
- The 2008 housing crisis was a classic example.