Subscribe to DSC Newsletter

Financial Bubbles, Real Estate bubbles, Derivative Bubbles, and the Financial and Economic Crisis

Didier SORNETTE (ETH Zurich and Swiss Finance Institute)
Ryan WOODARD (ETH Zurich)


The financial crisis of 2008, which started with an initially well-defined epicenter focused on mortgage backed securities (MBS), has been cascading into a global economic recession, whose increasing severity and uncertain duration has led and is continuing to lead to massive losses and damage for billions of people. Heavy central bank interventions and government spending programs have been launched worldwide and especially in the USA and Europe, with the hope to unfreeze credit and boltster consumption. Here, we present evidence and articulate a general framework that allows one to diagnose the fundamental cause of the unfolding financial and economic crisis: the accumulation of several bubbles and their interplay andmutual reinforcement has led to an illusion of a “perpetual money machine” allowing financial institutions to extract wealth from an unsustainable artificial process. Taking stock of this diagnostic, we conclude that many of the interventions to address the so-called liquidity crisis and to encourage more consumption are ill-advised and even dangerous, given that precautionary reserves were not accumulated in the “good times” but that huge liabilities were. The most “interesting” present times constitute unique opportunities but also great challenges, for which we offer a few recommendations.


http://www.er.ethz.ch/Fin_crisis_chapter

Views: 177

Tags: ETH, asymptotix

Comment

You need to be a member of AnalyticBridge to add comments!

Join AnalyticBridge

On Data Science Central

© 2019   AnalyticBridge.com is a subsidiary and dedicated channel of Data Science Central LLC   Powered by

Badges  |  Report an Issue  |  Privacy Policy  |  Terms of Service