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Demystifying Global Financial Crises

Demystifying Global Financial Crises

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Published by patel.prashantn8897

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Categories:Types, Business/Law
Published by: patel.prashantn8897 on Oct 31, 2009
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05/01/2011

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DemystifyingGlobal Financial Crises
 
Prashant Patel
Smile Education2008
 
Anatomy of a Typical Financial Crises
Hyman Minsky Model
: identifies underlying economic model of a typical financialcrisesStarts with
Displacement
Displacement create
 profit opportunities
Opportunities draws firms and households…...boom is underway
Credit finances boom
Urge to Speculate
leads to “feedback loop”“Euphoria” leading to
“overtrading”
“Monkey see monkey do” – leading to
“mania”
Objects of speculation
could varySwindlers and catchpenny schemes flourishMania spread across borderSmart guys /
Insiders pull out
Speculators withdraw as
specific signal precipitates
Revulsion
– There is limited money to give limited exit at the top
Panic
 – feeds on itself just like speculation
 
Multiple Displacement backdrop
Asian crisesleads to lower prices in Asia. Lower prices led to lower inflation andlower yield in developed markets and soon globally.Shocked by Asian market collapse, Asian investors including central bankers kepttransferring savings to US. This help even lesser yields in US.Lower prices and lower credit rates led to unprecedented appetite to consume.Meanwhile Asian deflation spread over to other asset classes like crude on back of Russia bust and debt challenges of Saudi ArabiaThis was followed byLTCM collapsein Oct 1998 leading to further easing of liquidity.Lower credit, lower yields and“innovation shock”led unprecedented capitalspending on technology. Tech boom of 1998 to 2000 took off…but eventuallycollapsed under its own weight and scandals. Investors confidence hit lows.Investors confidence was shattered further on back of historic terrorist attackonUS – 9/11.Low investor confidence prompted further rate cuts in US and quickly across theglobe.

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