Manias, Panics And Crashes

A financial crisis usually involves a substantial disruption in the flow of funds from lenders to borrowers. Also, historically most financial crises in the United States have involved the commercial banking system. In the late nineteenth century U.S. economy spent as much time in recession as it did in expansion. However, after 1950, the U.S. economy experienced a phase of macroeconomic stability from 1950 to 2007. This stability ended with the financial crisis of 2007-2009. The financial crisis of 2007-2009 was the most severe the United States experienced since 1930s. In chapter two of Manias, Panics and Crashes - A History of Financial Crises, Kindleberger and Aliber presented an economic model of a general financial crisis developed by Hyman Minsky. Minsky’s model primarily succeeds in explaining the financial crisis in the United States, Britain and other market economies.
His model places more emphasis on the credit instability of the credit system. The model is in line with the classical economist’s notion as Kindleberger and Aliber mention, “his model is in the tradition of the classical economists, including John Stuart Mill, Alfred Marshall, Knut Wicksell and Irving Fisher, who focused on the variability in the supply of credit” (p. 27). According to Kindleberger and Aliber, Minsky ascribed great significance to the role of debt configurations in causing financial difficulties, which is similar to Fisher’s interpretation. Minsky’s model also signifies the role of highly leveraged borrowers in causing financial difficulties.

The Minsky’s model of a general financial crisis can be summarized in five distinctive, yet comparatively coinciding stages of displacement, boom, overtrading, revulsion, and