On 3rd September , Prof. Indradeep Ghosh, Associate Professor at MDAE and PhD from MIT, gave a lecture on “Why does an Economy fall to pieces after a Financial Crisis”. This lecture was delivered at a college fest called ‘GNARITAS ‘ organised by Mithibai college.
The talk focused on the question of why a financial crisis causes output in an economy to collapse and jobs to disappear. The Japanese example of the 1990s and 2000s and the US example of the year following 2008 were used as illustrations. Prof. Ghosh highlighted the following points:
1) In both cases, a real estate bubble burst, causing havoc in financial markets and then plunging the economies into deep recessions. Amplification of shocks is identified as the main culprit.
2) The initial shock to financial markets, in the form of an asset price collapse, is transmitted to the real economy primarily through the banking system, which becomes unwilling to lend at the same time that firms and corporations become unwilling to borrow.
3) On both sides of the credit market, there is a freeze that takes a long time to thaw. In this time, various perverse feedback mechanisms are activated in the wider macro-economy as consumers and businesses cut back spending , causing output to collapse and unemployment to increase sharply.
4) Macro-economists do not yet have a good understanding of the dynamics of such phenomena, although policy can and should take a preemptive stance towards the possibility of financial crises by closely monitoring the composition of credit and ensuring that it flows towards GDP-related transactions instead of financial speculation.
The lecture was followed by a highly interactive Q & A session.
Date(s) - 03/09/2015
11:00 am - 12:00 pm