Reconciling Capital Mobility and Economic Stability Edited by Dipak Dasgupta, Marc Uzan and Dominic Wilson. 59 Developing Countries and the WTO's Doha Development Round Edited by Pitou van Dijck and Gerrit Faber.
Contents
Preface
Consequently, a full historical appreciation of the current relevance of existing regulations is crucial, as is the fullest possible understanding of the theory. The complexity and historical specificity of the approach clearly pose major shortcomings as testable representations.
Acknowledgements
He is much more than a wonderfully curious young man, full of life and often excellent as a reality check; he is part of the queue. However, his collaboration in this project extends beyond anything I can mention; rather, it is in the form of the work itself and the very fact that it exists in public form.
The socio-economic context
An introduction to the evolution of financial fragility
An early economic recovery in the first few months of 1931 was halted when the failure of the Creditanstalt bank. By 1995, returns on real estate fell and the debt default of the real estate firms.
Capitalism
The desire to broadcast one's worth stems from the individual's innate desire to belong in society. In the process of communicating individual achievement, material consumption becomes both a product of socialization and the necessity of the economic order.
The impact of uncertainty on (in)forming behaviour
Here, rationality refers to the ability to adapt successfully to new situations, determined by the efficiency of the decision-making and problem-solving processes. That is, we strive to follow the behavior of the majority or the average.
Conventional approaches
The ability to easily transfer property to these partial claims effectively improves the liquidity of the underlying capital asset. In this way, the door is opened to examine the importance of the assumption of true uncertainty both socially and economically. As such, the exercise illustrates the limitations of the traditional view of financial instability and highlights some of its critical elements that require further investigation.
Such definitions are justified by reference to the satisfaction gained from consumption (or profit as income to enable consumption) as the motivator of agents' behavior. To possess such information about market performance is, in conventional terms, to know the true representation or model of the market. To highlight some of the essential limitations of the conventional perspective on financial market instability, consider a scenario in which debt-financed investment in evolutionary innovation assets is used.
The introduction of the naive speculator with access to loanable funds creates a potentially more dangerous situation.
The progression of a mania–panic episode
Justifications and means
In the process of 'commodifying' intangible knowledge assets, we actually change and diminish the inherent nature of knowledge itself. The result is a greater impatience and displacement of capital of the type emphasized by Keynes (eg, 1973a [1936]). But the uniqueness of the nascent innovation precludes any inference about any likelihood of success.
Rising asset prices reinforce the belief in the propriety of speculation and reassure professionals and amateurs alike. The introduction of the joint stock company in England and France in the late 1600s and early 1700s. More recent examples include the introduction of the discount broker in the 1980s and access to the Internet made possible by evolving innovations in information and communications.
Indeed, apart from examining how individuals behave reasonably in the face of a growing optimistic uncertainty that parallels the diffusion of the innovation, little else changes.
The other side of the coin
The further we are from the last downturn, the more vulnerable the markets become and therefore the more severe the next episode will be. Minsky's credit cycle focuses on the nature of debt incurred to finance enterprises and its relationship to the income stream from the investments. Increasing demand for loanable short-term funds drives up the costs of these funds and, in the face of a growing maturity mismatch, increases the vulnerability of financial markets.
This notion of a stability corridor is similar to Leijonhufvud's notion, adapted to allow an endogenous determination of thresholds. Without the ability to estimate future profitability, we lack the means to assess the appropriateness of the level of debt incurred. Bankers share a stake in the success of the trading business, perhaps by holding a lien on collateral assets or simply in their concern for the bank's solvency.
At the level of the social, banks are conservative institutions with a reputation for and a history of safety and reliability.
Recoil in crisis
There is the physical investment in the assets of the innovation, the future income that these assets can reasonably be expected to generate (when they can be estimated) and the market price of the physical assets themselves. These and other related explanations of the end of a given episode of speculation remain debated. Compounding the downward spiral and motivating an exit from the speculative markets is the intrusion of pessimistic uncertainty and the gradual erosion of the attractions of fashion.
The panic occurs in a demoralized environment created by the combination of the prevailing distress and a specific trigger. Where speculation was once a norm for the collective – partly justified by the vague promise of innovation – the end of financial speculation is unexpected for many. In many documented historical cases of panic, the trigger was something that dramatically reduced the liquidity of the speculative assets.
The magnitude of the detected deviation of contemporaneous prices from asset fundamentals may or may not be large.
Variations in manias, panics and crises
Societies in transition
Two related features of the British economy that were not present in the 18th century may explain why. At the turn of the century, personal computers, along with the Internet, were quickly becoming a household necessity. The relative importance of intermediary transfers of funds has declined due to the availability of direct markets.
While portfolio investments increased, the vast majority of new funding came in the form of loans. In the first quarter of the twentieth century, the United States was in the later stages of growth and transition to a period of high mass. By the turn of the century, the American economy was struggling to adapt to revolutionary changes in information and communication technologies.
The financial structure, although functionally the same in these two periods, underwent profound changes in the last quarter of the twentieth century.
The bottom line
When the institutions of the financial system fail, the system itself fails to provide even the basic financial services. Financial networks determine and define the channels through which distress spreads from the financial sector to other non-financial spheres of the economy. In the case of the collapse of the South Sea bubble, the adverse effects on the associated economies were limited.
A set of measures of financial 'depth'. derived from measurements of money supply as part of national income. Together, the financial concentration ratio and the bank intermediation ratio provide an overview of the relative economic importance of a country's largest banks in financing overall economic activity. 15. The aggregated balance sheet data discussed earlier provide a first approximation of the financial structure map and its relationship to the underlying structure of the economy.
The systemic nature of the crises allegedly stemmed from the relative importance of deposit banks in financing a relatively high share of domestic economic activity.
Evolving financial crises
Social influences on the individual's assessment of potential progress, and the presence of institutions that define the specific ways in which the individual can speculate in the innovation, create the potential for a destabilizing speculation of the type that forewarns a crisis. Where the speculative activity itself substantially affects the innovation's potential, the material outcome becomes dependent on the collective assessment of the potential outcome. As is generally understood, the reverse applies and the greater the financial leverage, the greater the financial distress of a given decrease in the value of the asset.
Rather, the crisis is simply—but significantly—the inability of the capitalist system to withstand shocks from time to time. The characteristics of the crisis will be different depending on the level of economic and financial development. A financial market breakdown that affects an economy in the early stages of development will be less severe than one that affects financial institutions if the functional importance of the market to the economy is relatively small.
In this we have both the source of the crisis and the contradictions of finance capitalism as a cumulative causal, path-dependent process.
Notes
They were the main device for speculators, but not the main cause of the bubble itself. 9 Hughes (1956) in an analysis of the commercial crisis of 1857 points out, however, that there had not been. Thus, in the celebrated speculative year 1825…the prices of many of the principal articles of commerce rose greatly, without any diminution in the others….
The other side of the coin: the influence of credit creation and banks on speculation. Apparently, “the cost of equity was considered higher than the cost of debt for most firms throughout the eighteenth century” (Neal 1994: 155). This Bubble Act, together with the memories of the losses of 1720, prevented a recurrence of a major stock market boom in the eighteenth century.
7 For a primer on balance sheet concepts in the context of assessing financial instability of the kind experienced in recent episodes, see Allen et al.
Bibliography
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Index