Recessions and financial crises — what they are

Recessions are not random natural disasters; they are the correction phases of systems that expanded beyond what the underlying economy could sustain. Financial crises tend to follow a pattern: leverage accumulates, asset prices inflate, the signal that initiated the expansion reverses, and the unwinding is faster and more painful than the buildup. Understanding this pattern does not allow you to predict the next crisis, but it does allow you to recognize the conditions that precede one.