- The onset of a financial crises is more of a cascade, instead of a ‘Minsky moment’
- The actual crisis begins with events that are seemingly dissociated from the later financial crisis itself
- The “down-cycle” likely begins in a less-conspicuous corner of the capital markets
Unsuspected triggering eventsFor example, one often thinks of the Great Recession of 2008–2009 as stemming from sub-prime mortgage delinquencies and defaults. However, Bruner believes the crisis actually started with Hurricane Katrina, which devastated the housing market in the Gulf Coast states, precipitating the rise in credit card delinquencies, and moving into the housing defaults. Similarly, he believes that the panic of 1907 began with the earthquake of 1906; the 1929 Depression originated with the Mississippi flood of 1927.
Particular analyses neededSo, how does one deal with the “unknown unknowns” that require a heightened awareness in order to anticipate financial events on the scale of our recent global meltdown? Bruner suggested four tools that frame the analysis required to evaluate the likelihood of an impending crisis and that may provide us with a “heads up” before a financial crisis occurs:
- Conduct a scenario analysis, asking how could this situation go bad?
- Conduct a sentiment analysis, considering consumer and investor confidence;
- Conduct a momentum analysis, that looks are the correlation between serial and cross-sectional events, and
- Conduct a systemic stress analysis.