wolfson - financial crises; understanding the postwar u.s. experience (1986)

[...]... remainder of the study then sets about to resolve these issues and to develop a coherent theoretical understanding of the financial crises that have occurred in the postwar period in the United States Part 11 (Chapters 4-9 ) is an in-depth examination of these financial crises, including the events in the economy leading up to the crises The approach to the data is guided by the theoretical business-cycle,... state-insured thrifts in Maryland The image of depositors waiting in long lines to withdraw their money was one that had not been seen in the United States since the Depression Despite the reemergence of the phenomena of financial crises in the postwar period, and despite the threat they pose to the financial system, our theoretical understanding of the causes of financial crises has not proceeded... of the financial condition of the business sector, which set the stage for a financial crisis This point may be termed the general business-cycle perspective Second, the crisis is brought about because of developments in the demand and supply of credit The key to understanding why the crisis occurs is to be found in the way the supply of credit falls short of the demand Especially important here is the. .. compatible with the theories of six of the seven writers mentioned above (Milton Friedman's theory is the exception) It consists of two major points First, financial crises are the result of the normal functioning of the economic and financial systems over the course of the business cycle Endogenous processes take place near the peak of the expansion phase of the business cycle, in particular, the deterioriation... analysis, though, is still at the level of the possibility of crisis The actual cause of the crisis in the real sector, the reason for the unsaleability of the commodity, is to be found in the movement of the rate of profit: The rate of profit falls The fixed charges-interest, rent-which were based on the anticipation of a constant rate of profit and exploitation of labor, remain the same and in part cannot... both? With regard to the supply of credit, the main issue concerns the source of the limitation All the writers recognize a limitation on the supply of credit due to a conscious tightening of monetary policy by the Federal Reserve Board (for the modern period), or adjustments required by the gold standard (in the earlier period) The key question concerns the reaction of the banks Do they voluntarily limit... involved in the theory of investment are only briefly mentioned INTRODUCTION 9 Despite its emphasis on understanding rather than prediction, the model is capable of being evaluated, according to how accurately and consistently it generalizes the postwar history of financial crises This evaluation is carried out in Chapter 11 Chapter 12 compares the postwar experience to the theories of financial crises... in full, the alarm turns into panic 27 Mitchell concludes that "the ending of a crisis, whether accompanied by panic or not, is the cessation of intense demand for prompt liquidation " This comes about because "the members of the business community have withstood, on the whole successfully, the test of ability to meet their financial obligations " "The acute stage of liquidation -the crisis-is over,... because of the decreased creditworthiness of their business borrowers (Veblen, Mitchell, Minsky) or do they try to accommodate the increased business loan demand (Wojnilower)? If they try to accommodate the demand for credit, what is the source of the interruption in the supply of credit? The final set of questions concerns the nature and definition of the financial crisis itself What is a financial. .. short-term financing has become for many "a way of life "50 Therefore over a period of good years the weight of short-term debt in the business financial structure increases and the weight of cash in portfolios declines Thus there is a shift in the proportion of units with the different financial structures-and the weight of speculative and Ponzi finance increases during a period of good years SI Thus financial . expansion phase of the business cycle create the conditions that make financial crises likely. The model is devel- oped by addressing the theoretical issues discussed above. Some comments about. Ill. UNDERSTANDING THE POSTWAR EXPERIENCE 10. A Business-Cycle Model of Financial Crises 11. Evaluating the Business-Cycle Model 12. Evaluating the Theories of Financial Crises 13 Data Wolfson, Martin H. Financial crises. Bibliography: p. ',I. Depressions. :2. Business cycles. 3;' Business cycles-United States. I. Title. . 1 &apos ;- ; ISBN 0-8 733 2-3 7 6-9