The article explores one of the causes of the financial crisis of 2008 and of financial crises generally. The argument of the paper is that rather than tend toward equilibrium, financial and asset markets have a tendency to become unstable after prolonged periods of stability. The main driver of this process is the expansion of credit. Debt feeds its way into higher asset prices which in turn justify the accumulation of more debt to purchase further assets, and so on. The basis for the idea is Hyman Minsky's Financial Instability Hypothesis, itself a reinterpretation of The General Theory of Employment, Interest and Money by J.M. Keynes. The main proposal the article suggests is that monetary and regulatory policy should become more stringent as the boom proceeds, since even rational individuals cannot be expected to refrain from perpetuating the cycle.
Kim de Glossop,
The Inherent Instability of the Financial System,
4 J. Bus. Entrepreneurship & L.
Available at: http://digitalcommons.pepperdine.edu/jbel/vol4/iss2/8