Экономические науки/14.Экономическая теория

Панасюк М.А., к.пед.н., доц. Сикорская Л.О.

Винницкий торгово-экономический институт

Киевского национального торгово-экономического университета

THEORY OF FINANCIAL CRISIS

Financial crisis has put a mass hindering thin route on the actual economy, labour markets and the profound mental layers of society, even as some fraction of the world economic elites act as if nothing has occurred. The structural adjustment to the new world order being finally born in this crisis will need two decades at the very minimum implying that it takes fairly a very long time.

According to Kunt financial crisis is an event in which substantial losses at financial institutions and/or failure of these institutions cause, or threaten to cause, dislocations to the real economy, measured in terms of output foregone. Global capital markets pose the same kinds of problems that jet planes do. They are faster, more comfortable, and they get you where you are going well. But the crashes are much more spectacular. The dual crisis of information and capital that is now leaving an imprint on the first decade of this century is paving a new geopolitical space, although it is something we clearly do not yet know fully.

The possibility that the financial system might be a source of instability leading to crises was frequently discussed in pre-Keynesian business cycle literature. The financial instability hypothesis does not attempt to provide a complete theory of business cycles but concentrates instead on explaining speculative booms and subsequent crises.

In most versions the speculative boom and the financial crisis that terminates it are both triggered by shocks; consequently it is implied that we should not look for too much regularity in the periodicity and amplitude of cycles in which such crises occur and that crises may not occur in all cycles. They are essentially individual events with certain common features but the economy’s reaction to them may be cyclical and basically similar in the sense that the comovements of various macroeconomic time series will be similar. The main issue to be resolved is whether the banking system itself is a major source of instability, as postulated by the FIH, or whether its importance lies in its tendency to spread the effects of shocks hitting some sectors of the economy to others. Empirical investigations need to be undertaken that are more rigorous than the existing historical analyses (such as that of Kindleberger, 1978).

Keynes did not progress to a full theory of the cycle. Instead he attempted to identify and explain the behaviour of variables which he regarded as essential components of cyclical movements. It was never absolutely clear which sectors and which variables were the prime movers and how they interrelated in cycles. Consequently various interpretations are possible.

Nevertheless, Keynes did emphasise the role of uncertainty, as opposed to risk, in the sense of Knight. Areas in which Keynes stressed decision-making under uncertainty, such as financial and investment decisions, should therefore feature strongly in a truly Keynesian theory of the cycle. Uncertainty is, however, more difficult to model than risk and leads naturally to instability if shocks or extraneous events cause rapid and fundamental reappraisals of the expectations concerning future events held by economic agents. It is perhaps because of the difficulty of analysing economic decisions under uncertainty, that it was essentially ignored in the multiplier-accelerator modelling of the cycle.

Recent cycle literature concentrates mainly on risk rather than uncertainty, again probably because analysis of stochastic models is more tractable in this case and normally assumes that the distributions of real and monetary stocks are known to the economic agents.

Following the brief review of the pre-Keynesian cycle literature in which financial instability played a part, the FIH is discussed. The FIH does not fit well with modern analysis incorporating rational expectations (RE) but the latter has also been developed to provide models in which speculative bubbles can occur.

Hansen (1951) and Haberler (1958) provide excellent reviews of pre-Keynesian business cycle literature. Hansen takes a critical stance and largely dismisses pre-Keynesian theories in favour of a multiplier-accelerator approach, stressing in particular the role of investment. In so doing he plays down the roles of innovation, uncertainty and the financial system in cycle generation and propagation. He is particularly critical of Hayek’s work (Hayek 1931), which is regarded by many as perhaps the major pre-Keynesian theory and which attaches weight to both monetary and real factors.

Haberler makes the following observation, for example: money and credit occupy such a central position in our economic system that it is almost certain that they play an important role in bringing about the business cycle, either as an impelling force or as a conditioning factor.

The original source of the ‘overtrading’ idea appears to be Adam Smith (1776), who described it as a general error committed by large and small traders when the profits from trade happen to be greater than normal.

Carey (1816) observed that banks contributed to and significantly amplified commercial and financial crises because, rather than checking the spirit of overtrading, they fostered and extended it by discounting freely on demand. Then at the first sign of crisis they abruptly changed their practice and adopted a dramatically opposite stance and diminished their loans violently and rapidly.

Mill (1848) devoted three chapters to the causes and effects of commercial crises. He perceived of a crisis as a commercial phenomenon caused by speculation in commodities - often, but not always, backed by an irrational extension of bank credit.

Marshall and Marshall (1879) also regarded crises as being related to reckless inflation of credit, with the subsequent depressions attributed to a want of confidence which induced a state of commercial disorganisation.

Haberler’s review of the literature draws a useful distinction between purely monetary theories of the cycle, monetary over-investment theories and psychological theories, all of which attach importance to money and credit. In his view, Hawtrey’s work is the leading example of a purely monetary theory.

Hawtrey argues that changes in the flow of money are the sole and sufficient cause of changes in economic activity, including the alternation of prosperity and depression and good and bad trade. In his theory aggregate demand, or consumer outlay as he calls it, is related to the money supply via the Cambridge version of equation of exchange, in which income velocity replaces transactions velocity. Consequently changes in consumers’ outlay are principally due to changes in the quantity of money and the business cycle is a replica, on a small scale, of an outright money inflation and deflation. Depression results from a fall in consumers’ outlay in response to a reduction in the circulating medium of exchanges and is intensified by a fall in the velocity of circulation.

Hawtrey assumes that bank credit is the main means of payment and the money supply consists of bank credit and circulating legal tender. The banking system creates credit and regulates its quantity. The upswing of the trade cycle is caused by an expansion of credit brought about by banks through the easing of conditions attached to loans, including reductions in the discount rate.

Merchants are particularly sensitive to interest rate charges and play a strategic role in Hawtrey’s theory. In the upswing prices will tend to rise, improving profitability, and so too will the velocity, thus reinforcing the expansionary tendencies.

Prosperity is terminated when credit expansion is discontinued. In the expansionary phase the demand for transactions balances will increase, causing a drainage of cash from the banks and making them reliant on the central bank to alleviate the shortages. If the central bank declines to do so because of its exchange rate objective or out of concern over growing inflationary pressure, then the process of credit expansion will be terminated. During the depression, loans are liquidated, bank reserves accumulate, excess reserves build up, and interest rates fall to very low levels. Hawtrey argues that the abundance of cheap money, reinforced by central bank policy, will eventually spark a revival but acknowledges the possibility of a credit deadlock in which pessimism prevails. This he regards as a rare occurrence but one which can explain the drawn-out depression of the 1930s.

Normally, however, banking policy can be relied upon to generate another upswing fairly soon after bank reserves have become excessive, and another over-expansion of credit will occur.

A financial crisis is said to occur when an asset loses a large part of its face value. This can lead to a wide range of adverse consequences such as a fall in output or stagnancy, currency crashes and worse, sovereign defaults. Such notable crises have been occurring since 4th century BCE (Dionysus of Syracuse) and have continued on different scales and levels. They have far reaching effects into the very roots of the economy. The causes of the crises can be manifold, and they have evolved as man as discovered means to propel society to higher levels of development.

Our world is now very inter-connected through currency markets, trade relations and capital flows. The advent of multinational corporations has also added to these inter-linkages. Thus, crises that may occur in one country can often get transmitted to another like a bad case of financial influenza driven by fears and speculation. The most remarkable financial crises are: The Great Depression, Eurozone and the Ruble Crisis

The Great Depression was the longest and most severe depression in global economic history, lasting for virtually the entire period between 1929 and the outbreak of World War II. As a stark contrast to the roaring '20s, a period of prosperity and ostentatious wealth, the Depression created massive and virtually instantaneous poverty.

The beginning of this period was marked by the Wall Street Crash, which remains the single most devastating crash in U.S. stock market history. On October 29, 1929, $10 billion (around $95 billion today) turned to dust. For some, it took entire lifetimes just to break even from the losses made at this point.

In the years leading up to Black Tuesday, the Dow was turning countless men into millionaires. The market became a hobby for many ignorant investors, who readily poured all their money into the stocks of companies (many of which were fraudulent) that they didn’t understand.

When the government raised interest rates, panic ensued. Investors were desperate to liquidate their stocks, but the money simply wasn’t there. Unfortunately, banks also invested in stocks, and the panic led to a run on those banks that reduced many to insolvency and failure. The country was thrust into the Great Depression, and much of the world followed.

Corruption, an ineffective economic reform policy, the devaluation of the ruble, and political instability in 1998 sent Russia into a massive financial crisis as the millennium came to a close. Additionally, as the exporter of one-third of the world’s oil and natural gas reserves, Russia was extremely vulnerable to price fluctuations. When foreign investors pulled their money out of the country, the banks were crippled to such an extent that even an IMF loan was largely ineffective. Annual bond yields stood at a staggering 200%. The crisis also hit the Dow, which suffered one of its biggest point drops in history.

This is an ongoing crisis that began in 2009 in the European region. It occurred due to growing fears of defaults by sovereigns of the European Union, particularly Greece, Portugal,Ireland, Spain and Italy. It exposed the fiscal inefficiencies of many countries. Previously in 1992, the members of the EU had signed the Maastricht Treaty which designated the levels of necessary levels of fiscal performance. However, countries like Greece spent heavily on public sector wages and social payments. The means to achieve the funds was done by securing future payments. This meant that they borrowed today on the basis of revenue expected to be generated later. Unfortunately, the economic slowdown in 2008 had trimmed these future revenues. Practices had been undertaken to evade international agreements. They were now exposed. The banking crashes, bursting of property bubbles in the countries prompted bailout programs to generate liquidity for these cash-strapped nations. However, much remains to be seen before relatively bigger economies such as Spain and Italy can be helped entirely. The main problem that exists even today is the nature of the common euro currency that makes monetary policy inflexible while fiscal policy was greatly undermined already.

Financial systems can contribute to economic development by providing people with useful tools for risk management, but when they fail to manage the risks they retain, they can create severe financial crises with devastating social and economic effects. For example, the financial crisis that hit the world economy in 2008-2009 has transformed the lives of many individuals and families, even in advanced countries, where millions of people fell, or are at risk of falling, into poverty and exclusion. For most regions and income groups in developing countries, progress to meet the Millennium Development Goals by 2015 has slowed and income distribution has worsened for a number of countries. Countries hardest hit by the crisis lost more than a decade of economic time. As the efforts to strengthen the financial systems and improve the resilience of the global financial system continue around the world, the challenge for policy makers is to incorporate the lessons from the failures to take into consideration the complex linkages between financial, fiscal, real, and social risks and ensure effective risk management at all levels of society.

The recent experience underscores the importance of: systematic, proactive, and integrated risk management by individuals, societies, and governments to prepare for adverse consequences of financial shocks; mainstreaming proactive risk management into development agendas; establishing contingency planning mechanisms to avoid unintended economic and social consequences of crisis management policies and building a better capacity to analyze complex linkages and feedback loops between financial, sovereign, real and social risks; maintaining fiscal room; and creating well-designed social protection policies that target the vulnerable, while ensuring fiscal sustainability.

Литература:

1. Marshall, A. Economics of Industry / A. Marshall, M. Marshall. - London: Macmillan, 1879.

2. Sargent T. J. The observational equivalence of natural and unnatural rate theories of macroeconomics/ Sargent T. J. - London: Journal of Political Economy,1976.- p. 631.

3. Scheinkman J. A. General equilibrium models of economic fluctuations: a survey of theory/ Scheinkman J. A. - Chicago: University of Chicago Working Paper, 1984.- p.432.