Instability in the financial system is a byproduct of speculative excess from "summary" of A Short History of Financial Euphoria by John Kenneth Galbraith
Speculative excess is the breeding ground for financial instability, a fact well known to those who have studied the history of financial euphoria. When individuals and institutions engage in excessive speculation, they create an environment that is ripe for instability. This is because speculation often leads to price distortions and unsustainable trends in the financial markets. During periods of speculative excess, investors tend to abandon rational decision-making and instead follow the herd. This herd mentality can result in the formation of asset bubbles, where prices are driven to unsustainable levels by the collective actions of speculators. These bubbles inevitably burst, leading to sharp corrections in asset prices and widespread financial instability. The aftermath of speculative excess is often characterized by panic and fear as investors rush to unwind their positions. This mass exodus exacerbates the instability in the financial system, as asset prices plummet and liquidity dries up. The resulting financial crisis can have far-reaching consequences, impacting not only investors but also the broader economy. In the end, it is clear that speculative excess is a key driver of instability in the financial system. As history has shown time and again, periods of euphoria fueled by excessive speculation inevitably lead to financial crises. Only by recognizing the dangers of speculative excess and taking steps to curb it can we hope to avoid the destructive cycle of boom and bust that has plagued financial markets throughout history.
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