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How can one track a
financial bubble as a likely precursor to bank panics and subsequent
recessions? We model the Minsky-Keynes depiction of a financial market—by
extending the “equilibrium-price” model to a “disequilibrium-price” model,
through adding a third dimension of time. In this way, we use a topological graphic
approach to see how the mode...
Context in source publication
Context 1
... leveraged "present-debt" can increase "future- wealth"; but "excessive leverage" can lead to "bankrupt- cy". In Figure 3, we graph this impact of leverage on a price equilibrium model-by modifying the 2-dimen- tional "price-equilibrium chart"-with the addition of a 3rd-dimension of time. This graph shows a supply-de- mand curve at two different times, T 1 and later T 2 . ...
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Citations
... Thus in a financial system, three things are essential: 1) credit-debt transactions as a fundamental financial process, and 2) a capital-asset market for liquidity of the asset, and 3) money as a medium of value-exchange. Using Minsky's emphasis on a time dimension to model a financial market, the author diagramed such a temporal financial process, as in Figure 2 (Betz, 2014). ...
... 666 Theoretical Economics Letters leverage" can lead to "bankruptcy". As shown in Figure 3, one can graph this impact of leverage on a price equilibrium model-by modifying the 2-dimentional "price-equilibrium chart"-with the addition of a 3 rd -dimension of time (Betz, 2014). This graph shows a supply-demand curve at two different times, T 1 and later T 2 . ...
... In a financial market, financial products of capital assets are traded, and a capital asset has two economic values-current rent and future liquidity. Over time from T 1 to T 2 , trading in the market can move from a price-equilibrium point to price disequilibrium, when a market gets hot and traders borrow money to purchase the asset at higher and higher prices [3]. ...
... Profits can be increased through financial leverage; and this is the financial rational of "leverage" (more "present-debt" toward greater "future-wealth"). However, as shown in Figure 2, when present-debt is too large (too highly leveraged), it might not create future-wealth but, instead, bankruptcy [3] [4]. ...
... In Figure 3, one can graph this impact of leverage on a price equilibrium model -by modifying the 2-dimentional 'price-equilibrium chart' --with the addition of a 3 rd -dimension of time. (Betz, 2014) This graph shows a supply-demand curve at two different times, T 1 and later T 2 . In the time-dimension, one can see how a 'price-disequilibrium' situation can arise over time, as a 'financial bubble'. ...
... U.S. stock bubble from 1995 to 2000. Upon a price-disequilibrium curve, one can fit a chart of a stock-market index over time onto the 'Price-Time' plane of the three-dimensional price-disequilibrium graph, as in Figure 4. (Betz, 2014) Billions of dollars were lost by venture capitalist funds in this sudden collapse, due to their investments in new Internet companies --hence called the 'dot.com' stock bubble. ...
Computer-based algorithms & models have become important in trading in financial markets. We illustrate the significance of model analysis of financial systems by a case study of BlackRock’s analytical platform called ‘Aladdin’. The nature of the model used in a computer algorithm is central to its real performance. Unreal models in financial algorithms will yield inaccurate performances. We review five fundamental models of economic dynamics: (1) traditional price-equilibrium of a commodity market, (2) Keynes-Minsky financial transactions over time, (3) price-disequilibrium of a financial market, (4) investment bank market disequilibrium process, and (5) disequilibrium financial grid of international capital flows. Empirically-valid graphic models are necessary – in order to methodologically develop societal-useful normative economic theory -- based upon the real natural-experiments of societies in economic history.
... Thus in a financial subsystem, three things are essential: 1) credit-debt transactions as a fundamental financial process; and 2) a capital-asset market for liquidity of the asset; and 3) money as a medium of value-exchange. As shown in Figure 2, the author [4] used Minsky's emphasis on a time dimension to model a financial market. ...
... Thus real financial markets operate very differently from commodity markets, due to the 'leverage' involved in purchasing a capital asset. As shown in Figure 4, the author [4] had indicated the impact of leverage in a price disequilibrium model-by modifying the 2-dimensional price-equilibrium-chart, with the addition of a 3rd-dimension of time. ...
... Figure 8 shows a systems-analysis of the securitization scheme for Wall Street financial products of securitized-mortgage derivatives, then called CDO 'collateralized debt-objects'. [4] The Wall Street investment banks included Bear Sterns, Merrill Lynch, and Lehman Brothers, and all became insolvent (bankrupt) from issuing too many (1) securitized mortgage derivatives (CDOs). But (2) the banks did not purchase the mortgages making up the bonds, only borrowed short-term to fund long-term mortgages. ...
The topic of managing technology had traditionally focused upon the manufacturing industries; but the service industries grew to become a major sector of industry and commerce. We examine how to manage technology in the financial commercial sector. What is innovation in the financial sector? How does innovation occur in the financial sector? What are the criteria of technology safety in financial innovations? Why did financial innovation contribute to financial instabilities, such as the Global Financial Crisis of 2007–08? Why had governmental agencies failed to properly regulate the financial sector for safety? How did U.S. government financial agencies handle that financial crisis to result in a major recession rather than a second Great Depression? This paper is a cross-disciplinary study between MOT and economics.
... Thus the financial product value depends upon: (1) its initial value when sold and (2) its later value when traded in a market. The Keynes-Minsky price disequilibrium transaction in a financial market was first modeled in (Betz, 2014); and we show this in Figure 1. In a financial market, financial products of capital assets are traded, and a capital asset has two economic valuescurrent rent and future liquidity. ...
International cash flows are involved in the process of international banking; and the modern technologies of information and communications (IC) have increased the speed, volume, and complexity of international flows. But at the end of the twentieth century, the global world began to experience destabilizing international flows-particularly in the Asian financial crisis of 1997, Global financial crisis of 2007, and Euro crisis of 2010. In using the IC technologies, how has international banking increased the frequency and intensity of international financial crises? Did the IC technology somehow encourage the failure of international financial institutions in performing with basic financial 'integrity', 'honesty', and 'prudence'? To answer these issues, one must observe the financial system within an IC network, a kind of financial 'grid'. We use the concept of a 'financial grid' and model the grid as a network of institutional intermediaries, matching financial supply-to-demand. To construct this topological model, we review the recent history of investment banking and of the organization of offshore banking into an unregulated but centralized international financial grid.
... As shown in Figure 6, Minsky's emphasis on a time dimension can be included in a supplydemand graph by adding a third time dimension to the graph. [10] A financial capital-asset transaction occurs over time, beginning with a loan for an asset purchase, followed by rents (income stream) from the productivity of the capital asset, which are used for payments of the loan until the sale of the asset. Financial agents provide a purchase loan to the purchaser of the asset, receiving in turn, from the purchaser, loan payments on the debt over time from T1 through T2. ...
One of the intriguing puzzles from the Global Financial Crisis of 2007-08 was this one: To save the U.S. economy, why did the U.S. Federal Reserve System (under the chair, Ben Bernanke) open its central bank discount window to the unregulated money-market funds? The discount window of a central bank is usually only open to legitimate banks; and money-market funds are not banks. But the action proved correct, and the crisis slipped into an economic recession and not a depression. Yet how can one theoretically explain Bernanke's economic reasoning underlying this critical de-cision? For explanation of that event, we integrate several traditional economic models: 1) the growth models of Harrod-Domar and of Solow, 2) the production-consumption model of Leontief, and 3) Minsky's price-disequilibrium model. The integration of these models is methodologically possible through a system dynamics representation of the algebraic forms of the traditional economic models. In a system dynamics model, economic flows become explicit, as well as do the connections between institutions. In this explanation, we see evidence for the economic postulate that: it is financial crises which trigger depressions and not production business-cycles. Production business-cycles trigger recessions.
... Irvin Minsky proposed a "price disequilibrium theory" for describing the dynamics of financial bubbles [3]; and the author constructed a graphic depiction of financial transactions in capital-asset markets to depict Minsky's disequilibrium theory [1]. In beginning and first decade of the twenty-first century, financial markets in both private-credit and public-credit experienced disequilibrium instabilities. ...
In disequilibrium pricing of financial markets, excesses in either public debt or private debt can trigger a financial crisis, with attendant bank panics and recessions. For example, in the Euro crisis beginning in 2010, financial contagion in the sovereign bond market has spread among five nations: Greece, Ireland, Cyprus, Portugal, and Spain. But the reasons for the contagion was initially different for the countries, due to either disequilibrium pricing in public debt markets or disequi-librium pricing in private debt markets. In previous papers, we introduced a time-independent-supply-demand model (three-dimensional model) for disequilibrium pricing in financial markets [1] and a steady-state disequilibrium systems model for the run-up of a financial crisis in a public debt market [2]. In this paper we construct a time-dependent disequilibrium systems model for the run-up of financial crises in a private debt market. We analyze the empirical case of the 2010-12 Euro crisis in Spain (private debt crisis) and then compare this to the empirical case of the 2010-2015 Euro crisis in Greece (public debt crisis).
... However, in a financial market, capital assets have two values, an immediate value of rents and a future value of liquidity. This requires financial markets to be modeled with a time dimension; and the author constructed a price-disequilibrium model from the price-equilibrium model by adding the dimension of time [7]. Thus one can display the Greek bond "financial bubble" in the "rapid rise of interest rates" on a price-disequilibrium model, Figure 2. ...
... How is it possible to have a financial bubble in government fiscal processes? A stock market disequilibrium occurs due to excessive leverage in stock speculation [6] [7]. What is the excess in government policy which creates a fiscal disequilibrium? ...