Covid-19 and the Minsky Moment: Where market stability is in itself a destabilising factor

Major governments to continue to provide helicopter money to thwart the severity of the Covid-19 Minsky Moment


By Colls Ndlovu

Prior to the global financial markets crisis of 2008, little was known of the now ubiquitous phenomenon known as the Minsky Moment.

It refers to the onset of a market implosion caused by the reckless speculative activity in the markets just before the said implosion.

Consequently, first there is irrational bullishness then followed immediately by the bursting of the bubble. Keynesian economist, Hyman Minsky is the one who lends his name to this phenomenon and it defines the momentary point where a sudden decline in markets confidence invariably leads to a market crash.

Speculative investors aggressively take undue risk positions during bull markets. Minsky Moment becomes the “tipping point when speculative activity reaches an extreme that is unsustainable, leading to rapid price deflation and unpreventable market collapse”.

Periods of bull markets characterized by speculation will inevitably lead to a crisis. The longer the bullish speculation, the more severe the crisis would be.

Bull markets

Bull markets are deemed to be unstable as speculation invariably creeps in, and that has a cumulative destabilizing effect to the system as a whole.

Unusually long bull markets always end in dramatic implosion. Minsky’s main hypothesis was that an abnormally long bullish economic growth cycle will tend to be accompanied by a massive speculation that will destabilize the financial system causing it to collapse.

The Minsky Moment also tends to be associated with high indebtedness by companies and institutional investors.
Paul McCulley, of Pimco, is the one who coined the term Minsky Moment in 1998 during the Asian financial markets crisis.

There was a curious similarity between what happened to the Asian economies in the run up to their 1998 crisis and what Hyman Minsky had predicted in his hitherto forgotten work in economics.

Currency speculators exploiting the Asian pegged currencies managed to cause the system to eventually collapse causing severe financial markets dislocation and disequilibrium.

The 2008 financial markets crisis brought the Minsky Moment to the fore. The crisis had been building up slowly during the years of market deregulation and debt fueled risk-taking that eventually reached a financial crescendo in September 2008 with the dramatic fall of Lehman Brothers.

Defaults, sovereign debts fallouts, a dramatic near-Greek exit from the European Union and a huge increase in credit default swap spreads were all the resultant features of the 2008 financial markets crisis.

Some characteristics of the Minsky Moment are the sight of investors excessively taking on additional credit risk during prosperous times.

The longer the bull-run, the more investors borrow taking maximum advantage of an uptrending market.

The Covid-19 is already seen as a Minsky Moment. The dramatic collapse of certain sectors of the economy especially the airline entities is widely watched.

The massive central bank quantitative easing and the determination by major governments to continue to provide helicopter money are programs that have helped to thwart the severity of the Covid-19 Minsky Moment.

It is worth mentioning that prior to the Covid-19, the U.S. had been undergoing a sustained period of economic prosperity.

Heterodox post Keynesian economist

A heterodox post-Keynesian economist, one of Minsky’s key contributions was his Financial Instability Hypothesis which was proven correct with by the 2008 crisis.

As they say conventional wisdom is almost always incorrect. Minsky challenged the conventional view about markets stability and the fact that only an external exogenous factor could cause the disturbance resulting in a crisis.

Minsky’s argument is that the market stability is itself a destabilising factor. He argues that stability can cause the organic destabilization of a financial system resulting in its failure. Identifying three stages of lending, Minsky postulates that these are the hedge, speculative and Ponzi stages.

To be sure, Minsky’s main thrust is that periods of prolonged prosperity, cause financial institutions to invest in riskier assets.

Riskier assets lead to the vulnerability leading to defaults.

Relaxed lending conditions result in increased leverage within the banking system. Minsky’s hypothesis has indeed been backed by the 2008 financial crisis. Consequently, its prestige as a hypothesis has been enhanced and immortalized.



Colls Ndlovu, a currency expert, is an award-winning economist and central banker, and is the inventor of the NCX Currency Index. He can be contacted on




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