Ley de Comunas 39

Since the 2008 financial crisis, research on the causes of financial crises has experienced a renaissance. In particular, scholars have advanced our understanding of the interna- tional determinants of financial crises, exploring the role of global capital flows and global imbalances in fomenting crisis. Much of this literature, whether in the field of political economy or macroeconomics is positioned squarely within the orthodox neoclassical syn- thesis economic paradigm. Explanations therefore identify the sources of ”exogenous” shocks that may throw the economy out of equilibrium.

Alternatively, building on Hyman Minsky(1977) and Charles Kindleberger’s(1978) early proposition that financial crises are an inherent feature of the human system we call the market economy, scholars associated with the heterodox school of economics known as post-keynesianism have developed an alternative economic theory of financial crisis that emphasizes the cyclical behavior of financial market economies. Along with business cycles, proponents of these alternative theories identify the presence of financial cycles within market economies, the peaks of which coincide with incidence of financial sector stress and crisis.

In complex systems theory, cycles, or oscillations, are the bi-product of both positive and negative feedback loops operating among units in goal seeking agent-based complex

systems. Within the context of financial markets, the agents are just individuals and firms, who buy and sell with the goal of earning a profit. Positive feedback loops in markets are the result of human’s tendency to herd, or imitate each other (Sornette 2009; Sornette and Harras 2011). For example, the purchase of a particular type of asset motivates others to buy the same type of asset. In contrast, negative feedback loops are usually the result of a constraining mechanism within the system. In the context of an economy, this is probably real sector growth and productivity. Investors can speculate about the future value of a particular class of assets for only so long before they must confront the asset’s actual performance. Alternatively, the negative feedback could simply be investor’s tolerance for risk – a certain level of speculation is tolerable to most investors, but at some point the speculation inspires investors to sell or otherwise bet against the market.

The central insight of post-Keynesian economics is that economies regularly experi- ence financial cycles and that these financial cycles are ultimately what cause financial crises. Contemporary scholars who study financial cycles define them similarly to busi- ness cycles: the pattern of expansion, peaks, contractions, and troughs that occur in an economy’s asset prices(with an emphasis on property prices) and credit prices(Drehmann et al., 2012). These cycles are the result of “self-reinforcing interactions between per- ceptions of value and risk(property prices), [and] attitudes towards risk and financing constraints(credit), which translate into booms followed by busts.” (Borio 2014) The financial cycle is distinct from the business cycle in that it is much longer, 16 to 20 years verses 8 for the average business cycle, but it sometimes coincides or aligns with the business cycle because financial and real sectors are inextricably linked. 1_{. The period}

from 2000-2007 in the United States is an example of an alignment of the two cycles. As was also the case in 2008, the peak of financial cycles are usually associated with a period of financial distress, and often with full on financial crisis.

1_{In standard neo-Keynesian economics the mechanism for this is Bernanke’s Financial Accelerator,} in Post-Keynesian economics this is explained through the process of endogenous money creation. For formal models using both the logic of NNS financial accelerator theory, but non-linear modeling see Corsi and Sornette 2014

Figure 3.1: US Financial Cycle 1970 - 2011

Source: Drehmann, Borio, and Tsatsaronis(2012)

Figure 3.1 is an attempt by Drehmann, Borio and Tsatsaronis (2012) to plot the the US financial cycle from 1970 - 2011. They utilize turning-point analysis and frequency- based filters applied to data on credit, the credit-to-GDP ratio, property prices, equity prices and an aggregate asset price index which combines property and equity prices to construct the time series.

These advances in our understanding of the sources of financial crisis, as structural features of capitalist markets, now give us the micro and macro foundations on which to layer an understanding of how globalization and the structure of international markets can shape these events. Applying complexity and network sciences to study the structure of the international economy can help to illuminate the pattern of economic globalization, and elucidate the process of synchronization that occurs among interdependent national economies. Understanding how the financial cycles of national economies interact, such that economic and financial developments in some economies can affect these same condi- tions in other countries, will also shed light on how the structure of economic and financial globalization affects financial instability. Specifically, when the international economy is hierarchically organized around a single country, as it has been for the past fifty or more years, the financial cycle of most central country is likely to disproportionately influence the financial conditions of other countries, fueling credit and asset bubbles that culminate