Which of the following characterises the early stage financial crises ?
Excessive euphoria about the future price of certain assets
Charles Kindleberger, building on Hyman Minsky's financial instability hypothesis, describes financial crises as passing through stages: displacement, boom, euphoria (mania), distress or profit-taking, and finally panic and crash.
In the early stage, some new development such as cheap credit, a new technology or financial deregulation raises expected returns on certain assets. Investors then become excessively optimistic about the future prices of those assets, borrowing heavily to buy them in the belief that prices will keep rising.
This excessive euphoria drives prices far above their fundamental values and creates the bubble that later bursts.
Falling residential property prices, excessive pessimism about asset prices and stagnating share prices belong to the later phase, when the bubble bursts, credit dries up and the crisis becomes visible.
Hence, Excessive euphoria about the future price of certain assets.
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