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Minsky and Indonesia: Revisiting the Indonesian Crisis by Financial Instability Hypothesis

In: Minsky, Crisis and Development

Author

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  • Yasuyuki Matsumoto

Abstract

In 2007, the instability and fragility of financial markets due to the US subprime mortgage crisis became tangible. It awoke bankers’ and investors’ scepticism above underlying credit and liquidity risks and turned them to extreme conservatism in managing their portfolio. They scrambled to liquidate property-related, highly leveraged, complex and/or less transparent financial products. These unwinding activities worsened bankers’ and investors’ balance sheets through marking down the value of portfolio to the market and forced them to face a shortage of capital. It also broke down mutual credibility among financial institutions. Inter-bank market lost mutual-credibility and liquidity decreased. As a result, the credit default swap (CDS) market collapsed. CDS spreads skyrocketed crushing market values of collateralised debt obligations (CDOs).1 Central banks pumped huge liquidity into the inter-bank market to prevent commercial banks from rushing into asset sales and withdrawing liquidity. Central bankers were forced to use emergency methods such as accepting securitised products as collaterals for lending and purchasing low-grade corporate papers, in order to sustain the financial system.

Suggested Citation

  • Yasuyuki Matsumoto, 2010. "Minsky and Indonesia: Revisiting the Indonesian Crisis by Financial Instability Hypothesis," Palgrave Macmillan Books, in: Daniela Tavasci & Jan Toporowski (ed.), Minsky, Crisis and Development, chapter 18, pages 318-335, Palgrave Macmillan.
    • Handle: RePEc:pal:palchp:978-0-230-29232-1_19
    DOI: 10.1057/9780230292321_19
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