Hyman Minsky (Minsky's Financial Instability Hypothesis)

Hyman Minsky's Financial Instability Hypothesis suggests that economies naturally go through cycles of stability and instability. During periods of prosperity, lenders and borrowers take on more risky loans, believing stability will continue. This leads to increased financial fragility. Eventually, risks accumulate, and a small shock can trigger a crisis, causing a rapid collapse in confidence and a financial downturn. Minsky's theory highlights that periods of economic stability can sow the seeds of instability, emphasizing the importance of cautious financial practices and regulation to prevent crises.