Will it Happen Again?
Chapter 8 asks whether the financial crisis will happen again. Economist Hyman Minsky observed a cyclical pattern. Stability in financial markets breeds instability as lenders and borrowers keep pushing the limits. The years 2005–2007 saw a remarkable expansion of risk-taking at major firms just before the market collapsed in 2008, providing a demonstration of the Minsky cycles at work in the financial crisis. Minsky saw in the financial system the dynamic of “normalization of deviance” that sociologist Diane Vaughan saw in the Challenger space shuttle disaster. If that seems to result in success, then they lower their standards yet further. Minsky saw the cycle emerge regularly in credit standards, when lenders would respond to the lure of profits by taking increasing risks, while Vaughan studied a production-driven government agency, NASA, whose leaders yielded to pressure from the political process to perform without interrupting a flight to take account of growing risks.
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