Abstract
The standard model of the sequence of events that leads to a banking crisis is that a shock triggers an economic expansion that morphs into an economic boom and then euphoria develops; the prices of securities and real estate increase rapidly, much more rapidly than GDP. Then there is a pause in the pace of these increases in the price of securities. A few savvy or lucky investors sell some of their securities to park their speculative gains in a secure store of value. The slowing of the increases in the prices of securities and real estate may induce a more cautious approach by others. Distress is likely to follow as the prices of securities begin to decline. The pattern is biological in its regularity. A panic is likely and then a crash may follow. Lord Overstone, the leading British banker of the middle of the nineteenth century, saw a similar pattern and was quoted with approval by Walter Bagehot: ‘quiescence, improvement, confidence, prosperity, excitement, overtrading, CONVULSION [sic], pressure, stagnation, ending in aquiesence’.1 Overstone identified five stages of euphoria before the financial crisis, or, in his words, the convulsion.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.