Financial Risks

Almost all financial crises stem from excessive accumulation of debt. Although the specifics of crises may differ, they share common features that make it possible to describe the common underlying dynamics. Perhaps the central thinker on such dynamics was Hyman Minsky. His work, relatively unknown during his lifetime, has received a great deal of attention since the subprime crisis. The basic idea is that debt tends to amplify both booms and busts. During a boom, borrowing increases profits, encouraging the buildup of debt; during the bust, it exacerbates losses, leading to a rapid reversal in economic performance. The next section provides a more detailed explanation of how this happens and why it can be hard to manage.