TITLE:
Disequilibrium Pricing—Greek Euro Crisis
AUTHORS:
Frederick Betz
KEYWORDS:
Economic Crises, Financial Instability, Financial Models
JOURNAL NAME:
Theoretical Economics Letters,
Vol.4 No.9,
December
22,
2014
ABSTRACT: Financial instability
in Greece began in 2009 when the interest rates on Greek sovereign bonds
surged; and this can be graphed in a “price disequilibrium” model. To explain
how this came about, we create a systems-dynamics model of the Greek fiscal
system. Government fiscal systems are not a kind of a “causal” system, but a “structural-functional”
system instead. This approach is in the spirit of the Keynes-Minsky model of a
financial market as a “dynamic” of the value of capital assets. Financial
bubbles occur from “perceptions”—cognitive “reflexivity” in Soros’ term—as expectations
of the future values in a financial market. The Greek government fiscal crisis is
a “Minsky moment”, which occurs at a time when traders in a financial market
have moved from speculative finance to the unstable reflexivity in Ponzi
finance. The governments in Greece had indulged in the dynamics of a budget
policy of “Ponzi finance”. Unsound fiscal policy over many years had
accumulated a very large and increasing government debt—until bond market “reflexive
cognition” triggered the Greek fiscal crisis in 2010. The “reflexive perception”
of bond traders was that either the Greek government must “default” or be “bailed
out”.