Minsky developed a seven stage framework showing how this works:
Stage One - Displacement
Disturbances of various kinds change investor perceptions and disrupt markets. It may be a tightened economic policy from higher interest rates or investors and lenders retrenching in reaction to:
-- a housing bubble, credit squeeze, and growing subprime mortgage delinquencies and defaults with spreading contagion affecting:
-- other mortgages, and the toxic waste derivative alchemy of:
-- collateralized debt obligation (CDO) instruments (packages of mostly risky junk and other debt),
--commercial and residential mortgage-backed securities (CMBS and RBMS - asset backed by mortgage principle and interest payments), and even
-- commercial and AAA paper; plus
-- home equity loans harder to service after mortgage reset increases.
Stage Two - Prices start to rise
Following displacement, markets bottom and prices begin rising as fundamentals improve. Investors start noticing as it becomes evident and gains momentum.
Stage Three - Easy credit
Recovery needs help and plentiful easy credit provides it. As conditions improve, it fuels speculation enticing more investors to jump in for financial opportunities or to borrow for a new home or other consumer spending. The easier and more plentiful credit gets, the more willing lenders are to give it including to borrowers with questionable credit ratings. Yale Economist Robert Shiller shares the view that "booms....generate laxity in standards for loans because there a general sense of optimism (like) what we saw in the late 80s" preceding the 1987 crash that doesn't necessarily signal an imminent one now.
New type financial instruments and arrangements also arise as lenders find creative and risky ways to make more money. In recent years, sharply rising housing prices enticed more buyers, and lenders got sloppy and greedy by providing interest-only mortgages to marginal buyers unable to make a down payment.
Stage Four - Overtrading
The cheaper and easier credit is, the greater the incentive to overtrade to cash in. Trading volume rises and shortages emerge. Prices begin accelerating and easy profits are made creating more greed and foolish behavior.
I am a 72 year old, retired, progressive small businessman concerned about all the major national and world issues, committed to speak out and write about them.
Libertarians like Friedman have to believe people are angels for their market hokum to work. We know that is not true and, more important, the lack of any "factor" balance (labor v. capital) in societal and economy corrupts both market theory and reality.
See more on factor balance at TheCenterForBalance.org
Kent Welton,
OligarchyUSA.com
PublicCentralBank.com
& more
by
Kent Welton (49 articles, 0 quicklinks, 0 diaries, 37 comments)
on Friday, August 24, 2007 at 1:25:22 PM
Its great to see people contradict Friedman's free market ideology. This free market crap is just propaganda spit out by corporate interests to use as an excuse when the implement business practices that are unethical and heartless. Outsourcing and the elimination of labor and environment standards has been passed off as well Adam Smith says if you don't let business run wild the economy will just collapse.
Whats really sad is these outsourcing free trade preaching corporations often recieve huge sums in government subsidies. Basically they want free trade and government to stay out of the way, unless they need some of uncle sams tax money.
A good example of how American corporations are ran today is perfectly demonstrated by the current Bush administration. The Bush administration is completely controlled by corporate interests and believes in Friedman's theories. What you will find is gross incompetence, favoritism, dishonesty, complete lack of ethics, short sightedness, unrelenting greed, no conscious. and placing profit over national interests.
If libertarians got their wish in a few short years our economy would be devasted as large corporations would leverage their power and take control of market segments, destroy competition and price gouge. Kind of like the oil companies only much worse.
by
Gary Denson (2 articles, 0 quicklinks, 1 diaries, 193 comments)
on Friday, August 24, 2007 at 4:35:39 PM
