How calm markets can change the math of risk
When payments arrive on time and prices rise steadily, lenders and borrowers can start treating good conditions as the norm. A company may borrow on the assumption that future earnings will cover its interest; later, it may need to refinance the loan or sell an asset to repay the principal. The plan still works—until it depends on prices and credit continuing to cooperate.
That shift is the heart of economist Hyman Minsky’s account of financial instability. He described a progression from borrowing that can be repaid from income, to borrowing that requires refinancing, and finally to borrowing that works only if asset prices keep rising. Each step can look reasonable in isolation, especially after a long stretch without trouble.
Why trouble spreads quickly
Debt makes a small disappointment matter more. If an asset falls in value, a heavily indebted owner has less room to absorb the loss. Lenders may demand more collateral or refuse to renew loans. To raise cash, borrowers sell assets, and those sales can push prices down further—weakening other borrowers’ balance sheets in turn.
The result is a feedback loop: falling prices make credit harder to get, tighter credit prompts more selling, and more selling deepens the decline. A system that seemed sturdy because defaults were rare may therefore be fragile precisely because its plans rely on continued borrowing and rising prices. The warning is not that every calm period must end in a crash, but that calm can quietly encourage financial commitments that leave little room for a bad turn.
