In a prior post on Theories of Great Depressions, the major input variable to the Systems Model was a "Shock". The shock could just be non-random "innovations" or it could be the outputs of some other system. Shocks themselves are "explained" by the Minsky-Kindleberger Framework, diagramed above.
During periods of Economic Stability, lending institutions start to expand credit. Expanded credit leads to more Speculation. When some trigger (shock) comes along (e.g., a bank failure, war, etc.) sellers panic sets in which leads to an Economic Crash, implementation of tighter Regulation and a return to Stability.
The Crash can be prevented if a Lenders of Last Resort (Central Bank, Governments, or International Institutions such as the IMF) step in to provide liquidity and soak up non-performing assets. The model seems to fit the 1929 Great Depression, the 1997 Asian Financial Crisis, the 2000 Dot-com Bubble, the 2008 Global Financial Crisis and the Eurozone sovereign debt crisis (2009-2018).
Notes
Bog Roll
- Did the Smoot-Hawley Tariff Cause the Great Depression? No!
- War and Normalcy: 1914-29 Post-WWI Euphoria led the a Speculative Bubble that was popped by the Stock Market Crash of 1929.
- What I've Learned About Bubbles: 2011-2012.
- Will There Always be Bubbles? Bubbles are deviations from an Attractor Path and could be controlled if Stabilizing Institutions could identify the Bubble starting.
- Should the Fed Pop Bubbles? Yes, but...
- This Time is Not Different. Debt Bubbles.
Summary
References
- Minsky, Hyman (1986) Stabilizing and Unstable Economy
- Kindleberger, Charles (2015) Manias, Panics and Crashes: A History of Financial Crises What causes departures from the Attractor Path.
