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Yeah that's a reasonable model that links the debt and business cycles together, but it makes a key assumption: that investors only depend on lagging metrics of credit quality (business defaults), so fail to stop the bubble from inflating.

What is required is a good theoretical explanation for why investors fail to predict the point they are in the bubble and rein in speculation, since obviously this cycle has happened many times in the past.




> What is required is a good theoretical explanation for why investors fail to predict the point they are in the bubble and rein in speculation, since obviously this cycle has happened many times in the past.

I think the problem is human nature. People forget. Sure, this has happened many times before, but the most recent time was, say, eight years ago. That's a long time in peoples' memories.

And, while there may be this nagging memory of trouble, right now there's money to be made...


Lenders can't predict the future any better than creditors. There's nothing mysterious about that.

If you want a theory for _why_ the future is unpredictable, read up on chaos theory.




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