Using Theory to Analyze the Crisis

In Chapter 2, the financial crisis theories of Minsky, Kindleberger, Garrison, and Mishkin were explained. In Chapter 3, the nuances of each of these theories were analyzed relative to one another. In the process, a framework was created that allows us to see how the theories overlap, how they are unique, and how they have common elements but with different degrees of importance within the theory. This chapter essentially returns to the framework from Chapter 3 to determine whether these theories adequately explain the most recent financial crisis. First, the points that are common to all four theories are analyzed relative to recent experience. This will establish whether the commonalities in existing theory remain relevant. Second, those elements in which the theories are in disagreement are empirically evaluated. For example, two theorists, Minsky and Mishkin, argue that the crisis is triggered by endogenous developments, while Kindleberger and Garrison contend that it is exogenous developments which set the stage for a financial crisis. The objective here is the check the empirical data to determine if one perspective is more relevant today than another.