Financial Bubbles, Real Estate Bubbles, Derivative Bubbles, and the Financial and Economic Crisis
54 Pages Posted: 12 Jun 2009
There are 2 versions of this paper
Financial Bubbles, Real Estate Bubbles, Derivative Bubbles, and the Financial and Economic Crisis
Financial Bubbles, Real Estate Bubbles, Derivative Bubbles, and the Financial and Economic Crisis
Date Written: May 20, 2009
Abstract
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 and mutual 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.
Keywords: Financial crisis, bubbles, real estate, derivatives, out-of-equilibrium, super-exponential, growth, crashes, complex systems
JEL Classification: G01, G17, O16
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Large Stock Market Price Drawdowns are Outliers
By Anders Johansen and Didier Sornette
-
Significance of Log-Periodic Precursors to Financial Crashes
By Anders Johansen and Didier Sornette
-
On Rational Bubbles and Fat Tails
By Thomas Lux and Didier Sornette
-
Endogenous Versus Exogenous Crashes in Financial Markets
By Anders Johansen and Didier Sornette
-
By Anders Johansen and Didier Sornette
-
2000-2003 Real Estate Bubble in the UK But Not in the USA
By Wei-xing Zhou and Didier Sornette
-
Financial Bubbles, Real Estate Bubbles, Derivative Bubbles, and the Financial and Economic Crisis
By Didier Sornette and Ryan Woodard
-
Empirical Distributions of Log-Returns: Between the Stretched Exponential and the Power Law?
By Yannick Malevergne, Vladilen Pisarenko, ...
-
By Didier Sornette and Wei-xing Zhou