Credit expansion

Credit expansion refers to the increase in the amount of credit available in an economy. Gene Epstein, an economist, explains on the EconTalk that credit expansion often precedes economic bubbles, such as the housing bubble and the internet bubble. It is essentially fueled by the extension of more money and credit, which can contribute to speculative manias. Drawing from both mainstream economists and the Austrian school of thought, Epstein suggests that checking rampant credit expansion is vital to prevent economic instabilities. The Austrian theory of the business cycle, which sees credit expansion as a key culprit in cyclical economic downturns, broadly supports this view 1.

For a practical example, during the 2001 downturn in the internet bubble, the expansion of credit was a significant factor, as noted by Epstein quoting Charles Kindleberger, who despite not being an Austrian economist, acknowledged that speculative manias increase in intensity through money and credit expansion 1.