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The Market's Unrelenting Cheer Makes Some Nervous

The Market's Unrelenting Cheer Makes Some Nervous
Photograph by Scott Eells/Bloomberg

The late economist Hyman Minsky posited that a long stretch of calm on Wall Street and in the broader markets sows the seeds of its own demise. His 1960s-era “financial-instability hypothesis” didn’t get much love in the mostly deregulated half-century that followed—until so much financial laxity crashed and burned into 2008 and 2009. (Witness how blind the Federal Reserve was in the run-up to financial meltdown that would force it to take trillions of dollars worth of action.)

According to Minsky, investors take on more risk and debt in boom times, when complacency and easy money are the rage, until they hit a point when they realize they can’t service that debt. The ensuing rush to the exits is dominated by margin calls and forced selling; in an inflection known as a “Minsky moment,” markets fall, as does access to capital. The preliminaries to the ’08 financial crisis were marked by such instances, including subprime homeowner distress and the financial pyromania practiced by Bear Stearns, Lehman Brothers, and AIG.