Scarica Appunti Business Economics & Organization (Mechanical Engr. POLITO)-FINANCIAL CRISIS OF ’08 – ’09 e più Appunti in PDF di Business Planning solo su Docsity! LESSON 5 – 19/10/18 FINANCIAL CRISIS OF ’08 – ’09 During financial crises some phenomena are common through time and countries, so, let’s see the stages of a financial crisis. 1. Inflation of the bubble: some financial assets have an unsustainable rise that the market can’t bear. 2. Bubble burst. 3. Fear: after the already explained bank-run phenomenon before the bubble burst, people start to save money because of fear, so, market can’t rise again and it’s frozen. 4. Market stall: no demand due to scarce resources means no production, and less work brings the firms to cut back; it creates a downward spiral that can turn recession (Decrease of the GDP with respect to the previous year, in percentage) into depression. In the ’08 – ’09 crisis, USA allowed families to get huge loans in order to buy new houses; lots of people started to do it, values of houses increased, the bubble burst and prices began to fall precipitously. Two phenomena are in common with the great depression of the ‘29: • Hearding human tendency to follow the crowd: if I hear about someone who get advantage doing something, I’ll do it like him/her. • Leverage borrow in order to invest: debts increase. Overall, how this bubble has been formed? Principally because of the extrapolative expectation (It’s like hearding phenomenon) by which people have the perception that the positive trend will continue also in future. Then, to inflate a bubble is possible only by improving the demand in that field, so, thanks to the leverage phenomenon, which creates credits (Like money creation) and by these, money allows the extrapolative expectations that the prices are going to rise again and again. Then, we’ve the final burst of the bubble: it happened when people understood that a continuous growth in that field was unsustainable, was a lie; leverage and hearding work in opposite direction respect to the bubble creation: people stop to invest, the price of the assets rapidly decrease (Assets = houses in ’08 – ’09 or financial assets in ’29), so the owners of these assets will not be able to pay back the debt with the banks, and hearding starts again to act, due to the tendency of people to take they reserves of the banks due to the rumours that the bank will fail; At the end of all banks will fail. After the burst of the bubble we have: • Financial meltdown (If bubble affects the financial sector). • Leverage phenomena total disappears: people stop to ask for money to banks because of fear. • The economy is frozen due to the lost in the people confidence: investments are cut down by firms. HOW TO GET OUT OF A FINANCAL CRISIS We can see, from the experience, some methods adopted in past divided in different stages used to get out of a financial crisis, according to the one of ’08 – ‘09: • TRIAGE STAGE (FINANCIAL TRIAGE): 700 billion of dollars were involved for financial bailout of banks during ’08 – ’09 crisis, in order to prevent a further collapse in the economy. • TREATMENT STAGE: During this stage, were allowed expansionary monetary and fiscal policies, in order to stimulate the market to have a strong response, increasing the production. • REHABILITATION STAGE: Finally, in this phase, was involved the development of rules, which are able to prevent future bubbles of the same nature.
