Question

Explain Hyman Minsky’s Financial Instability Hypothesis, using a balance sheet approach. How can stability breed instability, according to Minsky?

Answer 1

Hyman Minsky’s Financial Instability Hypothesis says financial crisis are born in capitalism prosperity encouraged by borrowers and lenders to be careless.The excess optimism lead to financial break up then the capitalismis inclined to move from financial stability breed instability.Finally market failure and need  government regulation. The financial instability to be included economic stability itself breads instability.The reason for stability breed instability are,banks insist on small deposit and willing to lend multiples of income ,lending become more leveraged, assets bubble and sprculative lending cannot maintained and regulatory capture.