Dr. Hyman Minsky believed that prosperous markets will not remain healthy. Gradually but inexorably, participants engage in increasingly risky endeavors. Because they are successful, they risk more and more until ultimately, the risks are too widespread. One failure leads to another until the market contracts, and, if truly serious, crashes. The August 18th Wall Street Journal, P. A1, explains Dr. Minsky’s ideas and their current application.
The Wikipedia entry for Dr. Minsky summarized his ideas: “Basically, Minsky found that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, a speculative euphoria develops, and soon thereafter debts exceed what borrowers can pay off from their incoming revenues, which in turn produces a financial crisis. As a result of such speculative borrowing bubbles, banks and lenders tighten credit availability, even to companies that can afford loans,and the economy subsequently contracts.”