Subprime Crisis and Instability of Global Financial Markets

In order to prescribe adequate remedies to treat the current financial crisis one has to understand what in the first place went wrong. An age ago, older generations wrote that disease could not be cured without an accurate diagnosis. In contrast to mainstream “efficient markets hypothesis” we argue that Minsky’s financial instability hypothesis gives numerous valuable insights into sources and possible consequences of current global financial crisis. Furthermore, two decades ago Hyman P. Minsky predicted possible developments and perils of ever growing process of securitization of illiquid assets.Speculation, Debt, Financial instability hypothesis, Ponzi unit, Securitization.

Subprime crisis and instability of global financial markets

In order to prescribe adequate remedies to treat the current financial crisis one has to understand what in the first place went wrong. An age ago, older generations wrote that disease could not be cured without an accurate diagnosis. In contrast to mainstream 'efficient markets hypothesis' we argue that Minsky's financial instability hypothesis gives numerous valuable insights into sources and possible consequences of current global financial crisis. Furthermore, two decades ago Hyman P. Minsky predicted possible developments and perils of ever growing process of securitization of illiquid assets

Keynes' theory of conventional decision-making in financial markets

Pitanje koje se postavlja u ovom radu je da li finansijska tržišta funkcionišu na način koji je opisan danas i dalje dominantnom modernom teorijom efikasnih finansijskih tržišta. Stojimo na stanovištu da moderna teorija efikasnih tržišta svoje zaključke bazira na nerealnim pretpostavkama da je budućnost predvidiva i ergodična. Pošto pretpostavke modela impliciraju njegove zaključke, nerealne pretpostavke impliciraju netačne i neprimenljive teorijske modele. Za razliku od neoklasične teorije, Keynes je insistirao na tome da je budućnost fundamentalno neizvesna i neergodična. U tim okolnostima, kada ne postoji osnova za kalkulaciju budućeg toka stvari, jedino što je racionalno za agente na finansijskim tržištima je da svoje odluke donose na bazi društveno prihvatljivih konvencija. Dosledno, pošto su tako formirana očekivanja nestabilna, i pošto očekivanja na bazi kojih se donose odluke kreiraju budućnost, moguće je dokazati da je finansijskim tržištima inherentna nestabilnost.The question addressed in this paper is whether financial markets actually function in the manner described by the today still dominant modern theory of efficient financial markets. We argue that the theory's conclusions are based on unreal assumptions that the future is predictable and ergodic. Since assumptions of a model determine its conclusions, unreal assumptions imply incorrect and inapplicable theoretical models. In contrast to neoclassical theory, Keynes insisted that future was fundamentally uncertain and nonergodic. Under such circumstances, when it is not possible to calculate the future, the only rational thing for agents in financial markets to do is to base their decisions on socially acceptable conventions. Consequently, since convention-based expectations are unstable and since expectations create future it is possible to prove that financial markets are inherently unstable

A fresh view twenty years on: The Asian financial debacle and the Minskyan lessons learnt by the international monetary fund

In this paper we shall sketch the anatomy of the Asian financial crisis which erupted twenty years ago. In order to answer the question of how and why this crisis developed and what went wrong in its aftermath we embrace the Financial Instability Hypothesis of the seminal post- Keynesian economist Hyman P. Minsky. The real causes of the Asian crisis were endogenously developed euphoric expectations that followed financial liberalisation and deregulation and propelled the creation of an inverted capital structure and financial fragility. After the initial crisis and subsequent abrupt reverse of investor's sentiments, the International Monetary Fund intervened and multiplied financial difficulties that strangled regional economies. Fortunately, gradually and in line with the Minskyan approach to financial crises, the International Monetary Fund learned from its Asian mistakes, and starting from the outbreak of the global financial crisis in 2008 and the succeeding financial crisis in Eastern Europe in 2009, dropped its opposition to capital controls and its support for austerity measures in crisis-hit emerging market economies

Global financial interests: The role of IMF in starting and fighting a Asian financial fire in 1997

U radu se ističe teza da se oštrina i dubina azijske krize mogla ublažiti putem umerenih prilagođavanja i primene adekvatnih ekonomskih mera za prevazilaženje krize. Preterane su tvrdnje zvaničnika MMF-a da se kriza isključivo može opravdati dubokim makroekonomskim distorzijama i veoma zastupljenom korupcijom. Neoboriva je činjenica da je zemlje regiona karakterisala makroekonomska neravnoteža, slabe, nedovoljno razvijene finansijske institucije i neadekvatna prudenciona kontrola poslovanja finansijskog sektora, široko zastupljena korupcija i neadekvatan pravni sistem sa slabom sprovodljivošću zakona. Ipak se, sa druge strane, razmera i oštrina finansijskog požara koji je devastirao ekonomije pet azijskih zemalja ne može objasniti i opravdati isključivo navedenim neravnotežama i nedostacima. Panika koja je zahvatila međunarodne investitore, greške u sprovođenju ekonomskih politika zemalja domaćina i neadekvatne ekonomske mere za prevazilaženje finansijskih nevolja preporučene od strane MMF-a su simultano isprovocirali paniku i produbili krizu u znatno većoj meri nego što je to bilo neophodno i neizbežno.In our opinion severeness and deepness of Asian crisis could have been largely avoided with relatively moderate adjustments and appropriate policy changes. Explanations of IMF that crisis was provoked by deep macroeconomic distortions and high level of corruption, is, in our opinion, overstated to a great extent. It's evident that there were macroeconomic imbalances, weak financial institutions and prudential regulation, widespread corruption and inadequate legal environment with poor law enforcement. However, magnitude and severeness of financial fire that devastated five Asian economies can't be explained and justified with those imbalances solely. A combination of international investor's panic, policy mistakes by the host governments and poorly designed international programs for overcoming financial troubles provoked panic and deepened the crisis much more that it was both, necessary and inevitable

Animal spirits: Keynes' theory of rational investment decision-making under conditions of fundamental uncertainty

Keynesov pojam životnih nagona se u neoklasičnoj i novoklasičnoj ekonomskoj misli pogrešno poistovećuje sa iracionalnim odlučivanjem. Međutim, kada se prihvati Keynesova pretpostavka da je budućnost fundamentalno neizvesna i neergodična, životni nagoni postaju ključni činilac koji omogućava kontinuirano donošenje investicionih odluka. Sa druge strane, ukoliko životni nagoni ustuknu, investiciona delatnost pada, čime se otvara put nastanku ekonomske krize.Keynes's term, animal spirits, has been mistakenly confused with irrational decision-making. However, if we accept Keynes' assumption that future is fundamentally uncertain and nonergodic, animal spirits become key factor that makes continual process of investment decision-making possible. On the other hand, if animal spirits blunt, investment activity dwindles and makes emergence of deep economic crisis likely

Redde rationem: Kejnz, Minski i kolaps Long-Term Capital Management-a dvadeset godina kasnije

Cilj rada je da na studiji slučaja kolapsa Long-Term Capital Management-a, velikog američkog hedž fonda, ukaže na zablude moderne finansijske teorije. Pretpostavke modela koje opredeljuju validnost teorije moraju biti realne. Odgovornost akademske zajednice u kreiranju ekonomske politike je značajna jer jedino validna teorija može imati za posledicu ekonomsku politiku koja će se uspešno nositi sa nestabilnošću globalne svetske ekonomije. S druge strane, ukoliko se ova činjenica zanemari, realno je očekivati nove finansijske potrese u vremenu koje dolazi.

Cultural conflict as an invalid premise for overcoming the eurozone debt crisis

U radu se razmatraju uzroci i načini za prevazilaženje tekuće dužničke krize u evrozoni. Iako se slažemo sa nemačkim stavom da je uzroke krize velikim delom moguće objasniti na osnovu kulturoloških razlika, smatramo da je sukob kultura pogrešna polazna premisa za propisivanje recepata za prevazilaženje krize. Jasno je da će u dugom roku deficitarne ekonomije evrozone morati da preduzmu bolne reforme. Ipak, u kratkom roku, smatramo da se kriza jedino može prevazići ukoliko suficitarne ekonomije evrozone odustanu od nametnutih restriktivnih mera štednje sa jedne i značajno povećaju svoju potrošnju sa druge strane. Kada se kriza sanira, deficitarne ekonomije bi trebalo da naprave oštar zaokret u svojoj strategiji privrednog razvoja - moraće da puno rade i štede i značajno smanje potrošnju. Ukoliko suficitarne ekonomije ne odustanu od mera štednje dok kriza traje, procvetaće ekstremistička osećanja i organizacije čime će budućnost evrozone postati izrazito neizvesna.This paper discusses the causes of and ways to overcome the current debt crisis in the eurozone. Although we agree with the German view that the causes of the crisis could be, to a great extent, explained on the basis of cultural differences, we also believe that using cultural conflict as a starting premise for the prescription of remedies for overcoming the crisis is erroneous. It is clear that in the long run the deficitary eurozone economies will have to undertake painful reforms if they intend to persevere. However, this paper argues that in the short run the only way to overcome the crisis is to abandon austerity measures imposed to deficitary countries on the one hand, and increase the consumption of eurozone surplus economies on the other hand. Only when stability is restored again will there emerge conditions for deficitary countries to make a sharp turn in their economic development strategy - they will have to work hard and significantly increase savings and decrease consumption. If the surplus economies do not forgo the imposed austerity measures in the midst of the cri­sis, extremist sentiments and organizations will flourish, thereby making the future of the eurozone highly uncertain

Limitations of modern microeconomic theory of consumer choice: Sociological perspective

Neoklasičnoj teoriji izbora potrošača je neophodna reforma. Pretpostavka da potrošačev izbor nije pod uticajem ponašanja drugih potrošača je u sukobu sa realnošću. Nova i bolja teorija izbora potrošača od neoklasične je nezamisliva bez inkorporiranja intersubjektivnih faktora u model izvođenja pojedinačnih, i na bazi njih, agregatne (tržišne) funkcije tražnje. Cilj ovog rada je da se istaknu naširoko zanemarivani sociološki faktori koji značajno utiču na motivaciju i ponašanje potrošača. Uključivanje ovih faktora u modernu mikroekonomsku teoriju je neophodan uslov da bi se došlo do teorijskog modela koji realnije opisuje realnost u kojoj svakodnevno egzistiramo.Neoclassical theory of consumer choice needs to be reformed. Assumption that consumer choice is not influenced by the choice of others is in collision with reality. New and better theory of consumer choice is unimaginable without incorporation of intersubjective factors into the model of derivation of individual and aggregate (market) demand functions. Goal of this study is to underline widely neglected sociological factors that have significant influence on motivation and behavior of consumers. Inclusion of these factors into modern microeconomic theory is of essential importance if we are about to construct theoretical model aimed to describe reality in which we daily exist better than its predecessor did