An essay on “financial crisis: a hardy perennial” and “anatomy of a typical crisis”

[pic]

Faculdade de Economia da Universidade Nova de Lisboa

An Essay on

“Financial Crisis: a Hardy Perennial” and “Anatomy of a Typical Crisis”

From Manias, Panics and Crashes: A History of Financial Crises

By Charles P. Kindleberger

Gonçalo Ladeira Dias nº 9765

Inês Ramalho Silva nº 9316

Lisbon
2010

Introduction

In the first two chapters of his book Manias, Panics, and Crashes: A History of Financial Crisis, Charles P. Kindleberger tries to explain the financial crises that occurred all over the world since 1970.

In the first chapter – Financial Crisis: A Hardy Perennial – the author looks at how financial crises often accompany peaks in the economic cycle and in chapter two – Anatomy of a Typical Crisis – he looks at the patterns of typical crisis.

Kindleberger notes a recurring pattern is for increased investor optimism as economies expanded – as the economy expanded credit growth accelerated and increasing numbers of individuals start to invest or speculate for short term capital gain, mania, continuing until some trigger event results in bubble bursting, panic and a crash.

Development

Kindleberger starts by noting that since the early 1970s the world economies experienced an unprecedented volatility in prices of commodities, currencies, real estate and stocks, and frequency of severity of financial crises.

The author argues that most of financial crises since 1970 resulted from speculative bubbles. We can define a bubble as an unsustainable pattern of changes in prices or cash flows. This concept is based on the appearance of an obsession, as investors begin to purchase assets just because of their expectations of price increases, rather than assets productivity. When these expectations are unrealistic, it leads to a speculative process that ultimately results in the financial system crisis – the bubble bursting.

Before 1970, all countries that