Write 2 pages with APA style on Money & Banking.

Write 2 pages with APA style on Money & Banking. Kindleberger and the Minsky Model Back in 1977, Charles Kindleberger introduced the Minsky-inspired model in his analysis of the financial crises in Western Europe and North America. Hyman Minsky’s work argues that these crises are caused by disruptions that includes but are not limited to wars, natural disasters or bounties, and political turmoil. These events cause a displacement of the macroeconomic system and change the economic outlook of the stakeholders in the financial sector. This can result to the depletion of capital in some sector and overvaluation on some as investments are realigned. It is in these circumstances wherein the so-called boom emerges. This boom in the financial sector as most crises have demonstrated is typified by a fragility that made much worse by credit and speculation. According to Kindleberger, this leads to a series of events such as how price increases leads to a rush for investment as profit opportunities loom large. This is an event that feeds upon itself: the opportunities that promise profit would bring in a new wave of investors and that the positive feedback that is perceived in the process and the outpour of investment increases further profit, which then encourages further investments. He then explained how this leads to what Minsky called as euphoria and when the speculation variable is thrown in, it finally results in overtrading, which aggravate the fragility of the situation. As speculation and overtrading bring in more investors, the probability of crashes increases as speculation for profit drives the ‘manias’ or ‘bubbles’.” During the feverish economic activity driven by speculative boom, a point is identified to emerge wherein prices start to level and uncertainty start to creep in. This situation, in Kindleberger’s theory creates a period of financial distress, which finally launches a steady downward spiral: There is an inevitable burst as the market started the race to withdraw. In the event of a rush to liquidate, the bubble bursts and further panic ensues. The problem will reach crisis proportions as financial institutions fail, prices decline and the number of bankruptcies spike. This stage, according to Kindleberger, is called revulsion when panic finally seizes the economic system, which is aggravated by liquidity, which, though orderly at times, can actually degenerate and spin out of control, feeding the panic further in the process. The Kindleberger’s revulsion of concept is more popularly known in the nineteenth century as “discredit.”

There are other variables that contribute to financial crises. This is highlighted in the dynamics of the relationship between hedge, speculation and the ponzi scheme. These variables are crucial factors that indicate a series of events that finally ends in a financial crisis. According to the Minsky model, in fragile financial situation, hedge finance gradually transforms into speculative finance. This happens as receipts no longer balance the payments. The system would, finally, give way to ponzi finance as cycles of borrowings ensue. This chain of events increases the financial volatility and the probability of households defaulting on their loans. The historical approach by which Kindleberger explained the financial crises also highlighted the adverse effects of failing to heed the lessons of history. The financial reforms being undertaken today is a move towards the right direction as these are mostly based on previous experiences. This is also demonstrated in the importance given to saving institutions especially in times of crises. As Kindleberger believed that the fate of an economic system relies on the viability of its firms.

All in all, the origins of financial crises are diverse. This is the reason why it has many forms. A commonality, however, is the latency of the financial volatility and while the financial sector may not be entirely unstable, crises could escalate fast. In order to avoid them or address them, there is a need to turn to previous experiences. This is highlighted by how the Minsky model underscored the limitation of the supply and demand analysis of the financial cycle. It cannot account for numerous variables such as shocks and distress in explaining price movements, for instance.