Financial Crises, Expectations, and Institutions

This paper develops a unified theoretical framework to explain financial crises by integrating rational expectations with institutional analysis. It argues that systemic crises do not arise from irrational behavior or psychological fluctuations, but from rational revisions in expectations regarding the capacity of financial and monetary institutions to sustain economic order under stress. The paper introduces the concept of institutional belonging as the deep causal variable underlying financial stability. When agents perceive that institutions may fail to guarantee continuity, non-arbitrariness, and economic inclusion, coordination breaks down and crisis emerges. By reinterpreting major episodes—1929, 1997, 2000, 2008, and 2020—the paper shows that crisis severity depends on the credibility of institutional belonging at the moment of shock. It also advances a policy framework based on expanded monetary tools, including supply-oriented quantitative easing and the Monetary Credit Bazooka, as mechanisms to sustain productive continuity. This work contributes to the literature by shifting the analysis of crises from markets and psychology to institutions and belonging, providing a unified explanation of crisis emergence and policy response.