ABSTRACT
Business cycles engender financial instability as part of the recessionary adjustment to overproduction. This cyclical phenomenon must be distinguished from financial fragility, a gradual build-up of structural imbalances in the credit system which is part of the long-wave dynamic of the economy (see sections 3.1 and 3.2). During an expansion phase both borrowers and lenders will become more risk-prone and will accept higher debt levels when they see earlier investment decisions successfully validated. The usually short and shallow recessions during that phase are too weak to force much of a retrenchment in this debt-driven expansion. Gradually rising indebtedness is one major reason why the boom eventually ends (see Minsky, 1964).
