Analysis Of The Argument And Evidence Of The Movie ' Crash '

1355 WordsApr 28, 20176 Pages
Summary of the argument and evidence Minsky argues that there is а fundamental and inherent instability in our economy that tends towards а speculative boom. а human being is fundamentally а momentum investor as argued rather than а value investor. Hence during times of speculative boom three types of market players are prominent namely hedgers , speculators and Ponzi investors. Ponzi investors are those which rely on the increase in asset price to refinance their existing debt. Hence а Ponzi investor is safe as long as the asset prices tend to rise. This period of mammoth rise in asset prices is triggered by the herd mentality and the fundamental nature of humans being momentum investors rather than value buyers. Unlike other works…show more content…
Furthermore , for coherence to reign in а market , substitution principle must apply which states that higher relative price of а commodity tends to discourage buyers from buying it whereas lower relative price has the exact opposite effect on the appetite of the buyer. If the substitution principle is strong enough , then decentralised markets are reliable for efficient allocation of output to households and factor inputs to businesses. This leads us somewhere to the idea of а Pareto optimal equilibrium. “Equilibrium” would not be the right term to use in Minsky’s context as instead of equilibrium , he proposed “periods of tranquility” which are characterised by robust financial systems and innovations much like what preceded the 2008 subprime mortgage crisis. But phases of tranquility are just calm before the storm as tranquility encourages more risk-taking that increases incomes even as it disrupts conditions necessary for “coherency” and “tranquility”. Therefore , according to this theory the market forces that operate in the time of tranquility are what push the system towards instability so that even if an equilibrium is achieved for some time, it’ll set of behavioural responses that will quickly displace the economy from equilibrium. While Minsky credits Keynes for pointing out that the aggregate quantity of investment was self enforcing on the economy through the multiplier effect , he went one step
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