US Financial Crisis:Where are the US Economists?



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Code : ECC0010

Year :
2008

Industry : Banking, Insurance and Financial Services

Region : US

Teaching Note: Available

Structured Assignment : Available

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Financial Crisis: Was it Foreseen by the Economists? J.K.Galbraith (Galbraith), the legendry economist had always warned about the dangers of financial excesses. Galbraith, in the early 1900s, professed that all stockmarket bubbles exhibit, "seemingly imaginative, currently lucrative, and eventually disastrous innovation in financial structures".2 To understand Galbraith's views, the innovation in the financial sector can be likened to the technology life cycle. Innovation, in its infancy, promises enormous wealth enthusing entrepreneurs. For all those who could get calculations correct, innovation does result in huge gains, however, those who let greed take over prudence, it proves a bane – the dotcom bubble at the turn of the 21st century serves as the latest example. Galbraith argued that the capitalist system, which is cyclical and unstable, requires a very strong regulation and an active government, to guard the executives of the financial houses from toying with the economy by betting disproportional sums in financial innovations.

Similarly, Hyman Minsky (moderately known US economist) gave his 'financial – instability hypothesis', which he first developed in the 1960s. He noted that the bankers, traders and other financiers periodically played the role of arsonists, setting the entire economy ablaze.3 He had further noted that in Wall Street, businesses and individuals took too many risks...

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Ignored due to Ignorance Ignorance was pivotal in precipitating the financial crisis. The financial experts were creating, buying, selling and trading securities. However, they themselves did not fully understand these complex and sophisticated financial instruments. Truly enough, in 2003, Warren Buffet had called the financial derivatives weapons of financial mass destruction.

Also, the time when the predictions were made, the scenario was not so bleak and everything seemed to be booming. No wonder, when Roubini made his predictions in 2006, it was not paid much attention. Unemployment and inflation were low; despite the rising oil prices and softening housing market. Moreover, Roubini was known to be a perennial pessimist and so were his predictions. Economist Anirvan Banerji (Banerji) felt that Roubini's predictions were not based on any mathematical models and therefore his predictions did not have much worth...






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