The world of modern men.

I ran into this simple explanation today that I wanted to share with you which I though was pretty interesting. The reason I looked this up is because I like to follow the financial and economy news from around the world. I studied among others business economy in my young(er) days. And now especially since I follow the news all the time now that I’m a Problogger and I’m at home “24/7”.

We all know that the financial crisis in the US is dominating the world economy. My guess is that this will continue in the next 1 – 1.5 year. On a side note; this effect has already struck several big countries like Spain who are now encountering the same problems. Since this is a global problem and the end isn’t in sight many economists and analysts are looking at this and are looking for a solution. Well, maybe not a solution but they want to give the cause a name.  

The expression “the Minsky moment” is repeatedly mentioned in this. Minsky did rang a bell but very vague and I didn’t had a clue what or who it was so I look it up. Now that I’ve read Wall Street Journalist Justin Lahart’s explanation it all came back to me (still vaguely, all I remember vaguely is that Hyman Minsky was one of the most negative economists of the last century).

At its core, the Minsky view was straightforward: When times are good, investors take on risk; the longer times stay good, the more risk they take on, until they’ve taken on too much. Eventually, they reach a point where the cash generated by their assets no longer is sufficient to pay off the mountains of debt they took on to acquire them. Losses on such speculative assets prompt lenders to call in their loans. "This is likely to lead to a collapse of asset values," Mr. Minsky wrote.

When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash [that can force central bankers to lend a hand]. At that point, the Minsky moment has arrived.

Thanks Brian Chin, for this short but vivid explanation.