Essay on text 10
Manias, Panics and Crashes by Charles P. Kindleberger, chapters 1 and 2 - “Financial Crisis: a Hardy Perennial” and “Anatomy of a Typical Crisis”.
Alexandra Sangreman Ferreira – 11712
Maria Moreira da Cruz – 11536
Miguel Duarte Ferreira – 11689
The following essay is an analysis of the book Manias, Panics andCrashes by Charles P. Kindleberger, chapters 1 and 2 - “Financial Crisis: a Hardy Perennial” and “Anatomy of a Typical Crisis, respectively.
The author analyses several crises over the last few decades and tries to find common aspects between them to try to understand better financial crises in general, regardless the particularities of each one.
To achieve his goal, Kindleberger focuses hisanalysis on periods of economic booms, followed by downturns and tries to explain those throughout Hyman Minsky’s model, considering this one as the better general model to explain a financial crisis in a market economy.
The author observed that most financial crises appear as a consequence of the existence of an exogenous shock that changes the scenario for potential investors bringing potentialprofit opportunities. Investors assume an irrational speculative behaviour leading to higher levels of consumption, investment and GDP. During a time in which “credit was plentiful” and “money seemed ‘free’”, investors were able to finance their investments given a low interest rate, so they kept on investing, expecting continuous escalating prices. It was a “consumption spree andinvestment spree”. This speculation caused a non-sustainable inflation by creating a speculative “bubble” - term used to describe the rapid increase in asset prices. Investors expected to obtain short-term capital gains and were interested to hold his assets for a relative short period of time. It’s speculative. Investors expected to obtain capital gains from the increases in prices rather than from theinvestment income based on the increase in productivity.
“The increase in the rate of economic growth induces investors and lenders to become more optimistic about the future and asset prices increase more rapidly- at least for a while.” - Investors were buying expecting an increase in prices and they were really increasing because investors were buying more, it was based on speculation and not onproductivity.
Eventually, after this euphoria, asset prices would fall immediately after they ceased to increase. This decrease in prices would cause a rush of investors to sell their assets before further declines. Panic among investors and the rush to sell would make prices fall even rapidly, so stock prices would begin to decline drastically and an overall crash would emerge. Anon-sustainable boom in real estate and stock prices, due to the financial liberalization, would be followed by a collapse in those prices and a failure of the banks.
Kindleberger states that the speculative bubbles of the financial crisis are systematically related and he gives as an example the 1980’s Japanese bubble , that increased the outflow of money from Japan to some other countries and as aconsequence increased the money inflow in those countries leading to an over appreciation of their national currencies.
The author relates the economic cycles to the changes in the credit supply. He states that “the cycle of manias an panics results from the pro-cyclical changes in the supply of credit”. The supply of credit is higher during economic peaks, and it has usually gone lower when the rate ofeconomic growth slows down. So, when the speculative bubble bursts, banks freeze the access to credit, which causes a decrease in the available money and a decrease of the levels of consumption and investment.
The author studies the legitimacy of the existence of a ‘lender of last resort’ who would end the panic and restore confidence in markets. This lender is an entity that is expected to...