Financial Instability Hypothesis

The Financial Instability Hypothesis, developed by economist Hyman Minsky, suggests that financial markets are naturally prone to cycles of boom and bust. During good times, investors become overly optimistic, leading to risky investments and rising debt. This creates a bubble. Eventually, when economic realities emerge, panic sets in, causing asset prices to crash and triggering a recession. Minsky’s theory highlights how this instability is a fundamental part of capitalist economies and suggests that periods of financial health can lay the groundwork for future crises, emphasizing the need for careful financial regulation and oversight.