ECONOMIC CRISIS

Economic Crisis

Economic Crisis

Introduction

Alan Greenspan believed that the present economic crisis has exposed a flaw in his belief in the stability of the unregulated capitalism. There are many aspects to the financial crisis: the losses incurred by banks and investors in complex financial assets and securities institutions; default households that borrowed and the associated losses for retail banking liquidity crisis due to problems with financing from banks and companies; in the board decline in the prices of risky assets. It is difficult to ascertain that the cause of this crisis, especially at the microeconomic (lack of transparency and liquidity of funds, weaknesses in the regulations, poor assessment and risk-sharing, etc.) or macroeconomic (in excess global liquidity and its causes, monetary policy, which are either pro-cyclical or not the right papers, etc.). (Robert, 2000)

Discussion

Are they primarily microeconomic reasons (problems with regard to information, transparency, evaluation and distribution of risk rules, etc.) or primarily microeconomic reasons (errors in monetary and macroeconomic management, lack of international coordination) to consider : (Geoffrey, Jehle, & Reny, 2001)(1) poor information about the risk of financial assets and poor risk assessment undertaken; (2) lack of standardization of financial assets; (3) cycling of norms and standards; (4) the poor allocation of risk; (5) Methods used in lending to households; (6) Excessive liquidity (conversion) run the risk of banks. In the real level of risk assets, was not taken into account by banks and investors, for various reasons: (Robert, 2006)

the complexity and lack of transparency of assets;

Credit ratings are not associated with a real risk given the rating agencies, as reflected in the trends in ratings (see Table);

The use of debt leverage to achieve high returns without taking into account the induced risk;

Failure to take into account the correct correlations, which appear between the return on assets in times of crisis (eg, consequently, the inability to raise the ratings ABS tranches, which led to the crisis affecting mono-lines. (Chart)

Economics of Information and Game Theory

Game theory is important for the living room of games such as poker or bridge, most research in game theory focuses on how groups of people interact. Non-cooperative game theory deals with how smart people take interact with each other to achieve their own goals. In addition to game theory, economic theory has three main branches: the decision theory, the theory of general equilibrium and mechanism of development of the theory.

1970-84

1995-97

2006-98

2007-06

Tradable

5.1

5.4

-1.7

3.5

 Agriculture

3.7

2.9

-0.2

2.9

 Mining and quarrying

4.9

2.7

-0.3

0.6

 Manufacturing

11.4

10.3

-3.1

4.9

Non-tradable

9.5

7.4

-6.6

5.4

 Construction

13.0

9.7

-14.5

5.5

 Financial

11.1

8.1

-10.3

4.7

 Transport and communication

11.1

7.5

-4.1

9.6

 Electricity, gas and water supply

12.8

13.7

7.7

6.9

 Trade, hotel and restaurant

8.0

7.5

-6.2

4.9

 Services

8.0

4.6

-0.1

4.0

GDP

6.7

6.3

-4.2

4.4

Decision theory can be regarded as a theory of games, one person or one player game against nature. The emphasis is on the formation of preferences and beliefs. Decision theory is often used as a decision analysis. (Hugh, 2004)

General equilibrium theory can be regarded as a specialized branch of game theory, which deals with trade and production, and usually with a relatively large number of individual consumers and producers. Political economy became a combination of general equilibrium theory and game theory in which the private sector is modeled ...