For economist Hyman Minsky, financial crises are not unpredictable accidents. They are the inherent result of the financial system's very operation. The longer markets remain stable, the more risks participants take. And the more risk they take, the more fragile the system becomes. To put it another way, crises do not emerge suddenly; they are built up gradually during periods of prosperity.
The Minsky Cycle
To understand this mechanism, one must look closely at the Minsky cycle, which is broken down into three financing phases. First is hedge financing: borrowers are able to repay both the interest and the principal of their debt through their income. If I earn 100 and owe 10, the system is robust.
Next, financing becomes speculative. Economic agents can still cover interest payments but must refinance their debt to repay the principal. If I earn 10 and owe 10 in interest, I rely on my banker to roll over the loan for the principal. The system then becomes dependent on market conditions and more sensitive to shocks.
Finally, financing shifts to the Ponzi type. Borrowers can no longer repay interest or principal with their income. They depend solely on the continuous rise in asset prices. If I earn 5 and owe 10 in interest, I pray that the value of my stock doubles tomorrow so I can sell and pay my debt. As long as prices rise, the balance holds. As soon as the momentum reverses, everything collapses.
This process follows an identical logic every time. A period of stability sets in, confidence grows, actors take on more risk, leverage intensifies, and the system gradually becomes vulnerable. When a trigger occurs—sometimes a minor one—it merely exposes a pre-existing fragility. It is not the shock that causes the crisis, but the accumulation of imbalances over time.
A crisis apart
The 2020 crisis, however, was unique. It was triggered by the COVID-19 health crisis rather than directly by a financial imbalance.
Nevertheless, this global health shock only revealed and accelerated fragilities already present in the system. Debt levels were high, valuations on certain assets were already stretched, and markets were heavily dependent on accommodative monetary policies. As early as 2019, the International Monetary Fund warned of rising financial vulnerabilities, particularly related to corporate debt and increased risk-taking in the markets. COVID-19 thus served as a catalyst in an already vulnerable environment.
Why do we have this impression?
If crises seem to return every ten years, it is not because of a mathematical rule. It is a regularity linked to several economic dynamics. The credit cycle, which generally spans eight to twelve years, plays a role. Periods of credit expansion encourage risk-taking before leading to a contraction phase. Investor memory is also a determining factor; over time, memories of past crises fade. Prudence gives way to optimism, then to overconfidence and complacency. Finally, monetary policy helps fuel these cycles. After each crisis, central banks lower interest rates to support the economy. This facilitates access to credit and encourages new investment, setting the stage for the next cycle.
The limits of this theory
Some economists criticize Minsky for a lack of predictive precision. His theory does not allow for forecasting exactly when crises will occur. It functions more as an analytical framework after the fact than as a forecasting tool. Others emphasize the role of external shocks. As explained previously, the 2020 crisis linked to the pandemic is a prime example. Crises are not solely the result of internal fragilities; they are also driven by unpredictable factors.
Where are we today in the cycle?
Several current signals suggest rising fragilities. Debt levels, whether for states or corporations, are high. Certain assets show significant valuations. Furthermore, the speed at which financial movements propagate has increased with the development of algorithms and ETFs. While the next crisis will likely not resemble previous ones, its mechanism will remain unchanged. Only its intensity might vary. Market interconnectedness, the weight of debt, and the extreme reactivity of investors risk brutally amplifying any correction.
The current context, however, has its own specificities. Central banks now play a much more active role in stabilizing markets. Their interventions are rapid and often coordinated.
For investors, the challenge is not to predict the next crisis but to monitor the signals that herald it. Credit trends, leverage levels, and the degree of market euphoria are all valuable indicators. But if we refer to the theoretical calendar, the major threat might not materialize for another four or five years.
