Post on 21-Dec-2015
transcript
Crash of 1987: U.S.
1970 1975 1980 1985 1990 1995500
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Year
Dow Level
The Big Ten Bubbles <2008
Tulips (Holland 1636) South Sea Bubble (UK, 1720) Mississippi Bubble1720 1920's stocks Developing country lending (1970's) Japan 1980's (stocks and real estate) Asia (Thailand, Malaysia, Indonesia others,
1990's) Mexico, early 1990's Internet (late 90's)
Minsky Model Overview
Not periodic (many early models are) Kuznets (housing), Kondratief (50 years)
Changes in credit (pro cyclical)Changes in beliefs (optimism, risk)Starts with displacement
(causes/optimism)
Displacement Examples
US 1920's: Electricity/mass productionJapan 1980's: Financial
liberalization/FX appreciationAsia 1980's: Implosion of Japan
bubble/growth miraclesU.S. 90's: InternetU.S. 2008: ???
Speculative Finance
Income pays off interest Income can't pay off old debtsFirms must refinanceMiddle stage of bubble
Ponzi Finance
Charles Ponzi : Boston, 1920'sOffers 30 percent interest/monthFinances with new depositors In month 4:
Cash < interest payments Ponzi goes to prison
Bubbles and GrowthDividend Discount Model
Pt =Dt
(r −g)D =1,r =7%,g=3%,P =25D =1,r =7%,g=4%,P =33D =1,r =7%,g=6%,P =100
Growth, Bubbles, Mania and Irrationality
Mania = IrrationalityBubble trickier definition
Run up in price Deviation from fundamental
P/D, P/rental, P/earnings, deviation from PPP 14 - 40 months
Beliefs and growth: When are they irrational?
Bubbles in Return and Risk
Return: Optimistic return and growth forecasts
Internet bubbles Risk still considered
Risk: Optimistic beliefs on risk Reasonable (not stellar) returns Low risk Securitized debt
Difference When Bursts
Return: Expectations proved wrong, but new
values might still fall in tail of belief distribution
Risk Events show entire belief system is
completely wrong Investors have no valid probabilities
Propagation
Not part of Minsky model Mechanisms
Arbitrage (example: gold) Trade demands Capital flows Psychological connections
Crash of 87 Asian crisis and Argentina
Bankruptcies and bank failures Counterparty risk
Lender of Last Resort
Final lender to stop propagation mechanisms
National level: Central banks International level: IMF??
No Longer Relevant
Regulation keeps "ruling out" bubblesSeems pretty false right now
"Great moderation" Central banking of the 90's
Periods of relative stasis
Markets are Efficient
Prices contain all informationBubbles only appear to be bubbles ex-
postNeed more information orMore complete models
Speculation Stages
First stage Investors buy into limited but reasonable asset Want to hold asset Drive price up
Second stage Speculators enter Interested only in quick resale
How to Differentiate?
Real estate: Owner occupancy
Stocks Difficult
Problematic policy question Stop "speculative buying"
Rationality
Difficult to define without theory of how the world works Rational relative to something
Rationality and Markets
Does "individual rationality" -> "group rationality"?
Not clear Buy into a bubble
Do markets "aggregate information"? Not clear Truth plus noise No price -> trader feedback
Speculation and Stability
Does speculation destabilize markets?How can we tell when we see it?"Eliminate destabilizing speculators"
Stability and Mechanisms
No general market stability theorems in Economics and Finance
Cobweb models Supply responds to last period demand Can generate price cycles Expectations can make things worse
National Differences?
Speculation patterns??? Sheep grazing -> gambling and
speculation ?? U.S. open society and wide open business
climate -> speculation??This evidence is sketchy at bestFew countries/regions safe from
bubbles