A Keynes Moment: The Role of Behavioural Expectations in the Global Financial Collapse

This paper presents an analysis of the international financial crisis of 2007-2009 and demonstrates that behavioural (non-rational) expectations were all pervasive during the housing and the financial cycle.It concludes that this behavioural explanation is distinct from accounts of market fundamentalism, which tend to emphasize only forces such as financial regulation, financialization and monetary policy.
Moreover, it concludes that the impact of conventional and pseudo-diagnostic evaluations that were inherent in rational models of risk-management during the crisis is reminiscent of Keynes’s notion of conventionalexpectations. This implies that the crisis was marked also by a “Keynes moment” that stands as a distinct process within the so-called “Minsky moment”.

Tags: financial instability, subprime crisis, Minsky model, centralbank intervention, credit and liquidity risk, Keynes, Post Keynesian, expectations, behavioural economics

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