Başlıkta belirtildiği 2008 balon krizini üç kavram ile ele alan bir makaleden, yapmış olduğum 2 sayfalık bir özeti paylaşmak istiyorum. Yaklaşık 20 sayfalık bir makalenin özetini okurken keyif alacağını ümit ediyorum.
The US Subprime market has fallen down in 2007 and Credit crisis has followed it. These situations affected financial institutions. Many banks had cash shortage and increased fund by selling their equity and issue funds such as bond. Central banks in US and Western Europe bailed out markets in order to rescue from losses. Nevertheless, some banks haven’t rescue. For example, Northern Rock was nationalized and Sachsen Landesbank was sold to another bank.
As financial markets are highly globalized, crisis is quickly spread. And globalization in spreading crisis was a determinant factor for subprime crisis because there were global portfolios and securitization built access to foreign investors to subprime fallout in US. Also, banks were striving with profound competition so profitability of banks has dropped. In April 2008, feared situations started. Mortgage markets had troubles and house prices has cascade declined. Effects with globalizations, recession in mortgage markets has influenced many financial markets. And central banks have intervened markets to fund high amounts cash in order to increase liquidity.
Market analysts determine instability of mortgage markets as “Minsky Moment”. “This term describes the sustained, cumulative processes in which periods of stability induce an endogenous increase in potential financial fragility that could lead to a process in which periods of debt deflation”. Hyman Minsky think that business cycle has reciprocal influence over investment and finance process. That is, he means that endogenous factors encompass effects of credit crunch and housing busts in asset prices, production, employment and government debt. On the contrary, Kindleberger thinks that “speculative bubble arises from exogenous factor”. These include factors such as a new invention, a political outcome, and financial liberalizations.
Analyzing the global subprime mortgage meltdown: the Kindleberger-Minsky Paradigm
Speculation based on past experiences and events are popular and effective for forecasting future behavior of markets. Moreover, agents assume that stability and prosperity appears so they take more risky decision so as to profit the higher. However, “instability is a normal result of modern financial capitalism” according to Minsky who added this third additional theory to Keynesian Theory which based on excessive inequality and inability to achieve full employment in capitalist system. And Minsky has correctly predicted explosion of mortgage securitization bubble.
Capital liberalization, financial deregulation and having non-reserve currencies conclude in collapse. Higher fragilities are expected for countries which has any reserve such as euro zone countries as currency mismatch and maturity mismatch. For example, maturity mismatch become if short term foreign exchange loans finance long term projects.
European countries have struggled increasing debts, boom in asset prices, and mortgage credits. Firstly, increasing debts was related to increasing current account deficits. Secondly, boom in asset prices lead to some banking transactions. Banking sector was assisted by multinational banks and foreign banks share increased over banks of some countries in 2008. Finally, mortgage credits were granted to private households. For example, banks loaned credits more than value (110%) in Poland.
Prediction of Minsky became true in September/October 2008. Collapse of Lehman Brothers has caused to fall down stock, security and housing markets. This situation was diffused globally and global investors pulled their investment. In conclusion, Minsky means that “complex modern economy is prone to speculative booms”. That is, although financial innovations and new instruments bring expansion of liquidity, simultaneously these accelerate financial instability and fragility.
On the other hand, Fragility think that speculative attacks arise from exogenous factors, as mentioned. According to Kindleberger, “asset price bubbles are permanent features of economic environment that arise because of the nature of human behavior”. And he ensured “prima facie” evidence because broad environment is more reliable for cross-country experiences.
And finally, crisis can be determined with four ways by one person. These are; “assets appeared much less risky than they truly were”, “securitization led to complex and hard to value assets on the balance sheets of financial institutions”, “securitization and globalization led to increasing connectedness between financial institutions, both within and across countries, and “ increased leverage”.
Stochastic model of herd behavior to explain speculative bubbling dynamics
Herding is ended up by speculative behaviors. Markets experience changes which depend on speculation. Pace and mood of market participants manage and integrate markets. And generally, investment decisions depend on speculative decisions even if investors are exposed to speculative errors.
Conclusion
Minsky think that new economic institutions can be created in order to limit impact of uncertainty. Also, he argued that “aim of policy is to assure that the economic prerequisites for sustaining the civil and civilized standards of an open liberal society exist”. Moreover, economic system should adjust less responsible to fluctuations in order to prevent losses.
European Central Bank in current crisis made mistakes for managing crisis. They worked to manage speculative bubbles and didn’t make radical changes for monetary policy. Actually, European Central Bank must stabilize interest rates, control credit so as to obviate speculation, and supervise institutions.
In conclusion, there are some recommendations in order to decrease risks of crisis. These are “to discrete measures, include financial markets risks in the analytical approach and monetary policy of central bank, set up early warning systems to recognize signals of increasing financial fragility and advise institutions to employ all available tools to deflate emerging bubbles safely. Also, monetary policy should ensure those real interest rates are below real output growth in order to attract more investment”.
