Two part paper about the recent financial crisis and Hyman Minsky's Dissertation - 1

Two part paper about the recent financial crisis and Hyman Minsky's theories - Dissertation Example The stationary properties of all the variables are examined using Augmented Dickey Fuller (ADF) unit root tests. To test for stationarity, the unit roots for each of the series are examined using the Augmented Dickey Fuller (ADF) unit root tests developed by Dickey (1976); Fuller (1976); Dickey and Fuller (1979). Here the null hypothesis that the time series belongs to the difference stationary process against the alternative that it belongs to the trend stationary process has been tested using two models, one with constant and the other with constant and trend. The optimum number of lags is selected using Akaike Information Criteria. 45 3.4 Hypothesis Testing 47 3.5.4 Model Limitations 48 3.6. 5 Hyman Minsky’s Articulation 49 Chapter 4 – Statistical Result 55 4.1 Empirical Evidences for Greenspan’s Theories 55 H 63 R 63 D 63 B 63 FRM 63 Constant 63 -1.000 63 0.03(0.56) 63 0.07(0.04) 63 0.09(0.03) 63 -0.002(0.65) 63 -0.23(0.03) 63 0.002(0.15) 63 -1.000 63 0.04(0. 03) 63 0.43(0.04) 63 -0.004(0.21) 63 -0.65(0.76) 63 0.001(0.14) 63 0.002(0.013) 63 -1.000 63 0.32(0.14) 63 -0.001(0.11) 63 -0.43(0.16) 63 4.2 Empirical Evidences for Taylor’s Theory 67 Price Expectations and Housing 70 4.3 Empirical Evidences for Hyman Minsky’s Theory on Financial Crisis 72 Chapter 5 – Data Analysis and Interpretation 75 5.1 Discussion of Greenspan’s Theory 75 5.2 Discussion of Taylor’s Theory 83 5.3 Discussion of Minsky’s Theory 88 Chapter 6- Conclusion 94 References 100 Chapter 1- Introduction 1.1 Background In 2007, a number of leading European and U.S. banks were severely impacted by the collapse of mortgage-backed instruments that were mainly a by-product of their ‘packaging’. To the dismay of financial institutions, these toxic assets comprised a major portion of the bank’s asset base. The high demand in the housing market was triggered by historically low (many would argue below equilibrium) intere st rates. This ‘artificial’ demand led to a bubble in the housing sector that subsequently burst once the Fed raised interest rates, paving the way for a series of delinquencies. Buoyed by the booming housing market, banks granted loans to subprime borrowers who under ‘normal’ conditions, would have been rejected. With the rise in interest rates, these subprime borrowers failed to pay back on their house payments which resulted in a plethora of loan foreclosures. The rising defaults led to a credit crunch because financial institutions suddenly became very wary of lending to each other. For example, a steep rise in liquidity costs resulted in the â€Å"first bank run† in Britain in over 150 years. The enduing credit crisis was the result of a sustained period of global imbalances and bubbles in asset prices. The Federal Reserve continuously kept interest rates at unprecedented low levels for a significant part of the decade, setting the stage for che ap credit. Many business leaders and financiers across the world considered U.S. households