Minsky’s Theory and What Causes Financial Bubbles

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Institution
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Date
Turn in as you would a regular essay assignment on the blackboard. Due Monday, March 14 at 9 pm (not am). On this one, I will penalize if it is late (so be aware).
1 (40 points) Explain how Minsky’s theories are tied to what Cassidy talked about in the reality economics section of his book. That is, talk about asymmetric information, spillovers, prisoner’s dilemma, the law of small numbers, and herding in your answer. So what I want you to do is show how asymmetric information is part of Minsky’s theory; show how spillovers are part of Minsky’s theory; show how the prisoner’s dilemma is part of Minsky’s theory; show how the law of small numbers is part of Minsky’s theory, show how herding is part of Minsky’s theory.
One aspect of the Minsky theory that is tied to what Cassidy discussed in the reality economics section of his book is that stability is destabilizing. It is vital to discuss how the law of small numbers applies in order to understand this concept better. For example, financial institutions like banks sometimes forget hard economic times and start loaning people much money. The prisoner’s dilemma and herding support this assertion by claiming that banks tend to do this because these institutions tend to compete with each other. Sometimes managers end up loaning people money even though they know such a decision will not support the company’s success in the long term. Asymmetric information means that consumers lack enough information about specific issues in the economy. For example, banks can give their customers without doing any background check on what they are doing or their creditworthiness. On the other hand, customers might fail to inquire more on the terms of the loans, like interest rates. As a result, these loans create a spillover and enhance economic activities.
The law of small numbers forces people to believe that there will be a recession all the time. The herding and prisoner’s dilemma stop people from ...