The paper "Mishkin’ s Liquidity Preferences " is a great example of a finance and accounting assignment. Mishkin believes that financial crises are caused by imperfect information in the market. It is a result of this imperfect information that funds channeling to the right sectors is hindered and as a result, these sectors suffer causing them to fall and bring about trickle-down changes to the economy as a whole. This imperfect information is caused by an increase in interest rates which discourages investors to invest their money in a certain sector. They might think that interest rates are too high to cover the cost of investment.
On the other hand, what they might not know is that return will cover the cost of investment and will earn them a decent return. This is because they do not have the right information or there is imperfect information that they may be discouraged to invest in a certain. Increases in uncertainty also create imperfect information at people might become too reserved and may not be able to distinguish a bad investment from a good investment.
Problems in the banking sector and Asset Market Effects on the Balance Sheets are yet other causes of imperfect information. The problems in the banking sector signal investors that something is wrong and they fly away from their investment to other countries causing liquidity problems and financial crises to occur in a country. Minsky, on the other hand, believes that financial crises occur due to the capitalist approach in which the economies are run. He believed that fragility in the financial system is the result of privately owned businesses and resources in an economy.
He also classified that firms use to hedge, speculative and Ponzi finance to run their operations. Minsky stated that in the first stage, banks were giving hedge finance to earn a return on investment. However, even after this, there was excess liquidity and banks started giving speculated finance in which they did not ask for collateral on loans and income certificate was enough to get a loan.