2. The Anatomy of Financial Crises

This offers an overview of financial crises, contrasting the historian's view of unique events with the economist's search for systematic patterns. It introduces a model of financial crises, focusing on the boom and bust cycle, and highlights Hyman Minsky's theory that pro-cyclical changes in credit supply lead to financial fragility. The text illustrates how exogenous shocks, like technological innovation or financial liberalization, can trigger these cycles, fueled by expanding credit and leading to speculative manias often centered on real estate or stocks. It also discusses Minsky's taxonomy of finance (hedge, speculative, and Ponzi finance) and explores how crises propagate internationally through various channels, ultimately leading to a period of financial distress, revulsion, and potential panic as asset prices fall and investors rush for liquidity.

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