Kindleberger's Crisis : Financial Crisis

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Kindleberger’s Crisis Financial crises seem foreign to our thinking, something faraway, irrelevant in the context of modern society. But in truth, it is a very real phenomenon that had impeded the progress of nations and, many times, driven their victims toward bankruptcy and financial dependence. For this, its significance calls for analysis, as a means to understanding and, more powerfully, prevention and alleviation. Hence, the subject of this paper is to (1) describe a model, particularly, Minsky’s model of financial crisis as delineated in the second chapter of Kindleberger’s Panic, Manias, and Crashes, (2) qualify it from the lenses of Reinhart-Rogoff’s criteria for financial crisis, as well as find causes as to why, in the bubble, economic actors should think that a bubble phenomenon should not lead to crisis, like past other bubble phenomenon in history had, and (3) apply the model to the most recent crisis of 2007-2008 and evaluate it from that viewpoint. First, we begin with the model. Minsky’s model seed of a hypothetical crisis is a growth-inducing shock, called displacement, to a sector of the economy, perhaps the invention of the internet, a financial derivative, or some technological advancements that lead people and firms to expect economic growth in that particular sector, anticipate profit opportunities, adjust their financial prospects, and finally, demand more credit in hopes that the return on their capital exceeds cost. Lending institutions, whose
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