Sunday, August 7, 2011

"Economists and financiers have a useful term of art: a Minsky moment. A Minsky moment, named after the late economist Hyman Minsky, occurs when investors, encouraged by easy credit and rising asset prices, borrow money in order to reap even greater profits. So long as prices continue to rise, these leveraged investors can make interest payments on their debt and still come out ahead—way ahead. If, or when, the bubble bursts, however, and prices fall, their creditors come calling. In order to answer these margin calls, investors must sell off assets. But since it takes many investors to make a bubble, many of whom will also have taken on considerable debt, when the market pops, many other suddenly overleveraged investors must also answer margin calls and sell off assets. Cruelly, this rush to sell drives down prices, meaning investors have to sell still more assets, which further drives down prices, which leads to more margin calls, which, in the context of a bursting bubble, leads to more fire sales, even lower prices, even more margin calls, and so on. A Minsky moment. Or, in common parlance, when the shit hits the fan." — John Marsh, The New Inquiry

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