Stability, fragility, and then, suddenly, a crisis. That’s the fate that Hyman Minsky, a former economics professor at Washington University in St. Louis, warned in 1986 could be coming for economies that take on too much risky debt and allow speculative market bubbles to form. Decades later, with global debts touching a record $300 trillion and stocks rising in the face of stubborn inflation and banking instability, Allianz chief economist Ludovic Subran is worried Minsky’s prediction is about to come true.
“We have all the ingredients of a so-called Minsky moment,” he told Bloomberg Monday.
Minsky, who passed away in 1996 at 77, is known for his seminal book, Stabilizing an Unstable Economy (1986), which argued that there are five common stages of an economic cycle: displacement, boom, euphoria, profit-taking, and panic.
Displacement happens after a new technology or paradigm, like low interest rates or the internet, excites investors. Media attention and word of mouth then creates a boom in loans and asset prices related to this new phenomenon, which in turn draws in even more investors who fear being left behind, creating a period of euphoria and risk-taking. But eventually, the euphoria fades as asset prices untether from reality, debtors struggle to pay back their loans, and some investors begin to take profits. That leads to a Minsky moment, with profit-taking turning to panic and asset prices plummeting.
Minsky argued that economies can’t avoid these boom-bust cycles, when financiers and investors transform into economic annihilators as their frenzy of greed shifts to fear. And since then, we’ve seen his theory come true twice, first in the rapid sell-off of tech stocks after the dot-com bubble and then again when real estate prices collapsed during the global financial crisis of 2008.
Allianz’s Subran noted Monday that one sign that another Minsky moment could be coming is the fading liquidity across the economy as banks tighten their lending standards. “You see that everywhere,” he warned, pointing to commercial real estate, which is struggling with rising vacancy rates, collapsing prices, and fears of defaults, as a particular area of concern. The sector has been affected by the shift to hybrid work, as well as rising interest rates and regional banks’ issues that have made getting new loans or refinancing old ones nearly impossible.
Subran is particularly worried that continued high interest rates could lead to more “financial accidents” in the banking sector or from non-bank lenders, like hedge and pension funds, that focus on the ailing commercial real estate sector.
“Everybody’s problem now is the very abrupt tightening, but then there is an additional layer of wrong risk management,” he said, referring to potential problems with non-bank lenders’ commercial real estate loans that aren’t subjected to the same regulations as banks’.
Subran expects lending conditions and access to credit to continue falling this year as well, which he says will eventually help spark a U.S. Recession. This won’t be a “remake of the global financial crisis” of 2008, he said, but market sell-offs will become more frequent over the next few months.
Subran isn’t the only one worried about a Minsky moment either. JPMorgan Chase’s chief market strategist and global research co-head, Marko Kolanovic, explained in a March note that high inflation and rising interest rates have increased the odds of a sudden collapse in asset prices and lending.
“The possibility of a Minsky moment in markets and geopolitics has increased,” he wrote. “Even if central bankers successfully contain contagion, credit conditions look set to tighten more rapidly because of pressure from both markets and regulators.”