“When there are too many pro-cyclical factors in an economy, cyclical fluctuations will be amplified,” Zhou Xiaochuan, governor of the People’s Bank of China, said at a meeting on the sidelines of the*Communist party gathering in Beijing. “If we are too optimistic when things go smoothly, tensions build up, which could lead to a sharp correction, what we call a ‘Minsky Moment’. That’s what we should particularly defend against.”*
A Minsky moment, named after the late US economist Hyman Minsky, occurs when hidden risks in an economy suddenly manifest themselves and asset prices slump, leading to defaults. Minsky believed that financial markets were*inherently unstable because periods of prosperity lead to excess optimism and irresponsible debt-funded investment.
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