Minsky's Financial Instability Hypothesis

Hyman Minsky's Financial Instability Hypothesis suggests that financial markets are inherently unstable. He argued that during stable economic periods, investors become overly confident, leading to excessive borrowing and risk-taking. This creates a "bubble." However, when the bubble bursts, it triggers a financial crisis, causing widespread panic and a downturn. Minsky identified three phases of borrowing behavior: "hedge" finance (manageable debt), "speculative" finance (borrowers depend on rising prices), and " Ponzi" finance (debt depends on continually rising asset values). His theory highlights the cyclical nature of economies, where periods of growth inevitably lead to crises.