Question

Was the 2007-2008 recession the result of a Minsky moment?

Explain in detail

Answer 1

A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money.(Subprime mortgage crisis and possible recession)

Minsky believed, “Economies evolve, and so, too, must economic policy."

Banks created too much money by giving loans in ease of creating new money and used that money to speculate financial markets.but eventually debts became a unpayable and this caused the financial crisis.But after the crisis banks refused to lend and economy shrinked and caused serious recession.

"The financial crisis of 2007 to 2008 occurred because we failed to constrain the financial system’s creation of private credit and money." Statement by financial services authority".