Professional Documents
Culture Documents
Prashant Patel
Smile Education
2008
Anatomy of a Typical Financial Crises
• Hyman Minsky Model: identifies underlying economic model of a typical financial
crises
• Starts 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 vary
• Swindlers and catchpenny schemes flourish
• Mania spread across border
• Smart 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 crises leads to lower prices in Asia. Lower prices led to lower inflation and
lower yield in developed markets and soon globally.
• Shocked by Asian market collapse, Asian investors including central bankers kept
transferring 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 Arabia
• This was followed by LTCM collapse in Oct 1998 leading to further easing of
liquidity.
• Lower credit, lower yields and “innovation shock” led unprecedented capital
spending on technology. Tech boom of 1998 to 2000 took off…but eventually
collapsed under its own weight and scandals. Investors confidence hit lows.
• Investors confidence was shattered further on back of historic terrorist attack on
US – 9/11.
• Low investor confidence prompted further rate cuts in US and quickly across the
globe.
Massive Liquidity Injects Multiple Bubbles
Historic Profit Opportunities
• Driven by huge liquidity and productivity US became nation of consumer. High
consumption led to even higher income.
• Lower credit found its way into housing markets. Home prices started rising above
mean. Combination led to huge profit opportunities.
• High US consumption fueled demand for cheaper Asian goods and services. Profit
opportunities arose for firms and individuals in Asia.
-50%
Multiple Bubble Bust
Management of Crises