The mechanism of financial crisis, Financial fragility...

The Mechanism of the Financial Crisis

The economic theory is dominated by two traditions of a principled approach to economics and economic phenomena. One tradition follows the classical school, beginning with the works of Adam Smith. The other goes back to the views of J. Keynes. According to the first tradition, the economy is an excellent self-regulating mechanism that does not require state intervention. Once the state has established adequate rules for the game, its further activity will only be harmful, causing deviations and contradictions in economic life. The second direction considers that the market in itself can not reach an effective equilibrium. The desire of individuals for private gain and the private good (private well-being) leads to chaos in economic processes and can result in a general economic collapse. The state should help here. Intervention of the state is only possible, but necessary and necessary to maintain the economic order and return the economy to a common equilibrium.

These two methodological approaches take the form of two theories of the financial system: the theory of effective financial markets and the theory of financial brittleness.

Financial fragility of the world

The theory of effective financial markets believes that financial markets, by virtue of having a large number of participants and a virtually homogeneous product, are approaching the ideal of perfect competition. Perfect competition can itself bring the system to equilibrium, without state intervention. Thus, there is no need for special regulation of the activities of financial markets and financial agents, since the participants themselves are able to understand their conflicts. The prices of financial products reflect all the information available to individuals and are subject to the process of random walks: today's price has no past, does not focus on past experience, does not remember past events.

However, the events of the financial crisis of 2008-2009. showed that if the market forces are given the freedom to do whatever they think is necessary, this leads to destructive results, the markets themselves do not come to an optimal balance. Economists turned to another explanation of the nature of the global financial crisis - the theory of financial fragility X. Minsky.

According to this theory, stability (the first period) leads to the second period - instability, because in the first period, economic agents become more optimistic, and they are not able to assess the real risks of lending. In other words, during the stability period, the number of borrowers prone to risk increases. This phenomenon was called the "paradox of tranquility". Minsk. It should be noted that, despite the fact that X. Minsky's theory of financial fragility has gained considerable popularity in connection with the events of 2008, there are grounds for her criticism and recognition that she does not include a number of important indicators and factors. A detailed analysis of the views on the advantages and disadvantages of X. Minsky's theory is given in A. Nesvetailova's paper.

In his work, Minsky described the following sequence of the emergence of the "fragile" financial system. In periods of financial stability, the method of financing from the secured (hedge) to the speculative one begins to be transformed. Then speculative financing grows into the "Ponzi-financing", which is also known as the creation of financial pyramids. Such a transition is a logical consequence of the growth of interest rates. With Ponzi Financing current cash receipts can not ensure the payment of interest on debt, which leads to the need to constantly increase the amount of debt of the financial institution. It is the increasing number of high-risk loans that creates a "fragile" a financial system that can collapse if at least one firm or financial institution fails. In fact, this happened in the US in 2007, when "burst" a bubble in the mortgage market.

The theory of financial fragility rests on the fundamental laws of money circulation, proceeds from the fundamental nature of money.

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