The Minsky Effect

Amar Pandit , CFA , CFP

According to Wikipedia, “A Minsky moment is sudden, major collapse of asset values which marks the end of the growth phase of a cycle in credit markets or business activity.”

The late American economist Hyman Minsky postulated that an abnormally long bullish economic growth cycle will see a phenomenal rise in market speculation that will eventually lead to its collapse.

Now that you know what a Minsky Effect is, the question is haven’t you seen this at play before. We all have.

The real questions then are:

1. Does the stock market remain down forever?
2. Do asset values never recover?
3. Are these declines temporary or permanent?

We know the answers. Whether Minsky or some other effect, real money is only made by being invested in the stock market (by letting compounding work for us and by behaving well) and not by being scared out of a temporary decline or even a collapse in stock prices.