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    Phases of financial crisis

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    Explain the phases of financial crisis then briefly apply to: 1) LTCM, 2)Japanese Bubble,3) Southsea Bubble. Then explain discontent against the theory of constraints.

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    Financial crises typcially consist of three phases. During the first phase, lending becomes less restrictive, increasing the ability of individuals and firms to speculate. The second phase is characterized by an inflation of asset valuation, as enthusiastic investors bid up their prices. During the last phase, reality comes to roost as the bubble bursts. Investors who've realized some profits begin to sell. This triggers "panic selling" as everyone realizes that the investments aren't really worth what they paid for them. The assets' prices may plummet to even less than they were before the crisis. Many firms and individuals become insolvent, creating hardship in the financial sectors. Loans must be rewritten off and lending once again tightens.

    The Long Term Capital Management (LTCM) hedge fund was established by Salomon Brothers bond trader John Meriwether and two Nobel Prize-winning economists, Myron Scholes and Robert C. Merton in 1993 . These individuals felt they could "beat the market" with their combined expertise. They engaged in high-risk arbitrage trading strategies. Such strategies can realize large returns in short periods of time. But a single wrong ...

    Solution Summary

    Phases of financial crisis applied to the LTCM, Japanese Bubble, and Southsea Bubble; discontent against the theory of constraints