(via Commodityonline) Here is an interesting observation by MIT Professor Charles Kindleberger + it's amazing to see the patterns repeat endlessly and yet we forget to learn the lessons.
Anatomy Of A Market Crisis
- Displacement
Displacement happens when the economic outlook is altered by changing profit opportunities. (currently: China and India’ emergence is propelling commodities markets)
- A boom ensues
Bank credit and personal credit expands significantly. This results in Adam Smith’s 'overtrading': pure speculation, overestimation of profits and excessive gearing step forward. (currently: sub prime lending, ETFs based on air). Bubbles occur. Economists define bubbles as 'deviations from fundamentals'. Back to my Economic Clock: the only big market that has such a deviation from fundamentals is clearly the USA and Japan. However, the current mania (Greenspan’s irrational exuberance) will keep feeding on itself. We are in this boom phase now and, excluding America, there is no bubble – markets are in line with fundamentals, with the Economic Time.
- Distress sets in
The smart money starts selling. One event is the tripwire. Currently, I thought that the sub prime mortgage matter might be such a tripwire to crisis, but I was wrong, alas! 'Revulsion' rears its ugly head: revulsion against commodities or securities leads banks to stop lending on the collateral of such assets.
- Panic sets in
Everyone bolts for the exits. Then, one of three things happens. Either prices fall so lowly that people load back up (currently: that is what February was about), market 'circuit breakers' are established, i.e. trading is stopped if certain price limits are reached, or a lender of last resort stabilizes confidence.
Useful links:
http://web.mit.edu/newsoffice/2003/kindleberger.html
http://en.wikipedia.org/wiki/Charles_P._Kindleberger
No comments:
Post a Comment