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  • Print publication year: 2011
  • Online publication date: August 2011

1 - Financial crises and the macroeconomy


Success breeds disregard of the possibility of failures. The absence of serious financial difficulties over a substantial period leads … to a euphoric economy in which short-term financing of longterm positions becomes the normal way of life. As the previous financial crisis recedes in time, it is quite natural for central bankers, government officials, bankers, businessmen and even economists to believe that a new era has arrived.

(Hyman P. Minsky, ‘Can “It” Happen Again?’ Essays on Instability and Finance, 1982, p. 213).

As the above citation from Hyman Minsky shows, one may think of modern macroeconomic development as a sequence of boom-bust cycles. Boom-bust cycles occur not only for specific sectors, but also for the entire macroeconomy. Macroeconomic boom periods are usually characterised by overvaluation of assets, overconfidence, expectations of high returns and undervaluation of risk, and by overleveraging. Bust periods reverse confidence and expectations. The current macroeconomic developments in the USA as well as in other regions of the world have features of a typical bust period that is characteristic of boom-bust cycles. In the boom period not only do prices increase but there is often also an asset price boom and credit boom. High asset prices serve as collateral for new borrowing. When a downturn starts, often initiated by a sudden bust, and frequently entailing long-term protracted periods of low growth and low employment, prices may fall and periods of debt deflation are often experienced.

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Financial Assets, Debt and Liquidity Crises
  • Online ISBN: 9780511792540
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