Post-Keynesian Economics

Financial instability hypothesis

Financial panics and crashes aren’t random events, but are a part of a recurring cycle. After a crash, businesspeople and bankers are cautious and conservative. They only invest in projects they know will work, and they keep low levels of debt. After years of businesses being able to easily repay their loans, they slowly start to want to make riskier investments. Banks also want to start making riskier loans, and over time the level of debt and risk in the economy grows. At some point, someone gets spooked by all the debt and risk, and the entire house of cards falls down, leaving only the most conservative banks and businesses standing to start the cycle again.

Fra