The Critical Stage



The standard model of the sequence of events that leads to financial crises is that a shock leads to an economic expansion that then morphs into an economic boom; euphoria develops and then there is a pause in the increase in asset prices. Distress is likely to follow as asset prices begin to decline. The pattern is biological in its regularity. A panic is likely and then a crash may follow. Lord Overstone, the leading British banker of the middle of the nineteenth century, saw a similar pattern and was quoted with approval by Walter Bagehot: ‘quiescence, improvement, confidence, prosperity, excitement, overtrading, CONVULSION [sic], pressure, stagnation, ending again in quiescence’.1 Overstone identified five stages of euphoria before the financial crisis, or, in his words, the convulsion.


Interest Rate Real Estate Asset Price Mutual Fund Federal Reserve 
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The Critical Stage

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© Palgrave Macmillan, a division of Macmillan Publishers Limited 2005

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