The financial crisis. A crititcal analysis of its causes and consequences

Seminar paper from the year 2015 in the subject Economics - Finance, grade: 1,7, University of Applied Sciences Essen, language: English, abstract: In order to answer the first question of this term paper the financial crisis is analyzed regarding Minsky's theoretical framework. The focus lies on the question if an endogenous instability of the economic system can be proven. Furthermore, the second question if consequences as a reaction have been drawn is answered but it has to be said that an evaluation of the effect of the consequences goes beyond the scope of this work.§§In 2007 the biggest financial crisis after the 'Great Depression' of 1939 took place. One theoretical framework explaining financial crises of that kind was envisioned by Hyman P. Minsky (1919-1996) in the latter half of the 20th century and was not considered in this context for a long time. The most prominent part of the theoretical framework, the financial instability hypothesis (FIH), emphasises that the modern capitalist system is prone to bouts of relative instability and financial collapse. When the storm in 2007 broke it was discovered again and the world began to talk about a 'Minsky moment'. Prominent economics called the theory a required reading and championed it as visionary.§§Until the year 2007 the economic world followed another school of thought. The so-called neoclassic described a world in which financial crises would only occur if exogenous shocks would disturb the self-regulating power of the markets. In detail this is called the efficient market hypothesis (EMH). In addition means this that financial crises caused by systemically reason are not part of the theoretical model.§§On the contrary, Minsky described a cyclical model which tries to implement loan relationships, financial institutions, financial innovations and uncertainty in the analysis of the modern capitalism. An emphasis lays on the financing structure of different economic players and the role of financial institutions regarding their influence on the real economy. Minsky's theory is based on the whole economic cycle and really tries to explain how financial crises are actually caused. Although all these factors make the theory interesting for the recent crisis and different economics had called the financial crisis a Minsky moment a huge discussion if the theory is really applicable came up.