‘Graduate Research’ Category Archives

23
Jan

1st Draft of Chapter Two

by Riaan Nel in Graduate Research

I have not yet posted my first draft of Chapter 2 of my thesis.  Here it is.  Please feel free to comment.  It is a theoretical discussion on how to explain the 2008 Global Financial Crisis.  (Some of my friends recently complained about insomnia –  this might be the remedy :) ).  

 Chapter 2:  The Financial Instability Theory – The Theoretical Discussion 

 “A sophisticated, complex, and dynamic financial system such as ours endogenously generates serious destabilizing forces so that serious depressions are natural consequences of noninterventionist capitalism:  finance cannot be left to free markets”  (Minsky, 1986:292)

 

          Hyman Minsky’s research has become a prominent source of reference by commentators, policy makers, and academics in their efforts to explain the 2008 Financial Crisis.  For decades Minsky’s work was outside of the mainstream Economic and Political Economy paradigms.  The 2008 Global Financial Crisis changed this.

          In this chapter I will explain and motivate the use of the Financial Instability Theory (FIT) as an explanatory model for the 2008 Global Financial Crisis.  I will start with a discussion regarding the evolution of Political Economy as a field of study, differentiating Political Economy from Political Science, Economics and International Political Economy (IPE).  I will define the delimitation and limitations of the study by defining my conception of political economy, differentiating between the global political economic system and the national systems of political economy. 

          Finally, I will motivate the use of the FIT as the study’s explanatory framework, and discuss the evolution of the theory – its roots in Keynes’ General Theory, the Post-Keynesian institutional reinterpretation of the General Theory by Minsky, Minsky’s theory of capitalist development, Minsky’s formulation of the Financial Instability Hypothesis, Kindleberger’s expansion of the hypothesis, and the centrality of government policy as a remedy for financial instability.

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16
Sep

What Is Your Theory of the Global Investment Environment?

by Riaan Nel in Graduate Research

All investment strategies have their roots in an underlying economic theory – the way the proponent of the strategy sees the world.  The success of an investment strategy is fundamentally linked to the validity of the underlying world view of the proponent. 

A significant proportion of the professional investment advice community is still caught up in a world view that is not valid any more.  We are entering a “new normal” to use a phrase popularized by PIMCO’s El-Erian, yet most financial advisors, investment newsletters, and personal finance magazines are stuck in the “old normal.” 

Below I explain the economic theory underlying the new normal, and our investment strategies.  (By the way, this theory was the only theory that actually predicted the financial crisis, and the theory is currently being discussed by the Federal Reserve).   

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4
Mar

The 2007 Global Financial Crisis – A Political Economic Analysis – Chapter One

by Riaan Nel in Graduate Research

 I’ve posted Chapter 1 of my thesis.  Comments will be appreciated….

 

Chapter 1:  Introduction[1]

 

On Thursday, August 9, 2007, traders in the international money markets in New York, London and other prominent financial centers experienced a sudden and dramatic surge in interest rates for interbank loans.  In the global political economy the supply of credit is influenced by the London Interbank Offered Rate (LIBOR), a daily reference rate of interbank loans contracted in the London wholesale money market.  Money markets represent the first stage of the monetary transmission channel, where monetary policy connects with the financial system and the global economy.  Term money market rates, like the 3-month LIBOR, influence a host of rates throughout the economy, and poorly functioning money markets impinges on the availability and cost of credit to businesses and households in the global economy (Taylor & Williams, 2008:1). 

The acute dearth of credit resulting from the surge in interbank loan rates was precipitated by an announcement the previous month by US investment bank, Bear Stearns, that two of its subprime mortgage hedge funds had lost almost all of their value.[2]  The immediate spark, though, was the announcement on August 9, 2007 by French bank, BNP Paribas, that it froze $2.2 billion in three of its funds because it could not determine the value of these funds.  The cause of these losses and uncertainty were increasing delinquencies and defaults on subprime mortgages in the United States.    

The three-month LIBOR Overnight Index Swap (OIS)[3] for this period dramatically illustrates the extent of the developing crisis. The three-month LIBOR-OIS rate is a measure of what the markets expect the US federal funds rate to be over a three-month period relative to the three-month LIBOR[4]. The LIBOR-OIS spread is used to indicate factors, other than interest rate expectations, influencing interbank rates, such as risk and liquidity factors (Taylor, 2009:15). Historically the spread has been 11 basis points on average, but on August 9, 2007, the spread surged to 34 basis points, fluctuating wildly between 30 basis points and a maximum of 106 basis points over the following months (Taylor & Williams, 2008:10-11) (see Figure 1).

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26
Aug

Research Proposal for Graduate Thesis – The 2007 Global Financial Crisis – A Political Economic Analysis

by Riaan Nel in Graduate Research

I have been absent posting on the blog due to focusing on the finalization for my Research Proposal for my graduate thesis.  I am currently enrolled in the Masters program at Stellenbosch University.  I am participating in the research based thesis program.  I decided to post my draft Research Proposal for commentary… Read the rest of this entry »