Minsky's financial instability framework

Minsky's financial instability hypothesis suggests that markets are inherently prone to fluctuations because investor confidence and borrowing behaviors change over time. During prosperity, optimism fuels increased lending and investment, which can lead to excessive debt. This buildup of debt eventually makes the system vulnerable, as borrowers struggle to meet obligations, causing confidence to decline and leading to a downturn. In essence, periods of economic stability can sow the seeds of their own instability, highlighting that financial crises are an intrinsic part of capitalism rather than anomalies.