Sunday, March 18, 2012

History of of Significant Financial Crises of the World & The Lessons Learnt From the Financial Crises of the Past.

From the link:
  • A Financial Crisis is a situation when money demand quickly rises relative to money supply.
  • Until a few decades ago, a financial crisis was equivalent to a banking crisis.
  • Today it may also take the form of a currency crisis.
  • Many economists have come up with theories on how a financial crisis develops and how it could be prevented.
  • There is, however, no consensus and financial crises are still a regular phenomenon.
  • A stock market crash is an example of a financial crisis.
From the link:

What happened in previous financial crises, and what are the lessons for today? There have been a growing number of financial crises in the world, according to the International Monetary Fund (IMF).

The key lessons (or at least some of them) of previous major financial crises are:
  • Globalisation has increased the frequency and spread of financial crises, but not necessarily their severity. (Globalisation is a double edged sword - it can help, but it can hurt too)
  • Early intervention by central banks is more effective in limiting their spread than later moves. (Prevention of a Financial crisis is better than cure. But the problem is - until just before the bubble bursts, it is sooo much fun!!! It looks like win-win for all and everyone seems to believe to be in a state of perpetual prosperity. People are just unwilling / unable to see a crash coming or a bubble bursting. Most likely, this shall happen at least once in every generation, when the memory has faded / not been formed and new blood is willing to experiment and take high risks / or perhaps higher risks than the previous generation / or perhaps they think that they are much smarter than the older generation, LOL. Or perhaps not. Hats off to the craziness / frenzy of the people in the 1920s (1921 to early 1929) ---> they mush be the wackiest of all times, LOL :) Kidding. They were nice people, just caught up in the wave and enthusiasm, while being unaware of the insider tradings and the manipulation of the financial system by the big players / traders in the market - some of whom safely cashed out during the peak and exited / parachuted safely at the right time - liquid, before the crash).
  • It is difficult to tell at the time whether a financial crisis will have broader economic consequences. (No one can predict the future 100% accurately. No one can accurately pinpoint / time the crash and the effects. This is an area that needs more research. Financial ratios and analysis can help. With time, perhaps, we can do a better job of predicting crises. But then again, there is conflict of interest. Why would anyone make it public? Coz there is huge money to be made while the bubble is building up and there is huge money to be made when the bubble pops! People who can predict this rather make money out of it, rather then tell the world about it and lower their chances of profiting from the process. Why risk a good thing - good for the smart financial investors, that is. Human beings are extremely intelligent. There are people steps ahead of others in terms of financial expertise, just like there are people way behind others.)
  • Regulators often cannot keep up with the pace of financial innovation that may trigger a crisis. (The people in the private financial industry are EXTREMELY smart. Concepts like Margin Call, CDOs were smart innovations. It looks simple in retrospect, but it was smart financial engineering. Just like people build new inventions, there are brilliant inventors in the financial world too. The governments however, perhaps does not have these smart innovators. Perhaps the government jobs are not attractive enough. Perhaps they do not pay as much. Perhaps there are no million dollar bonuses in the government to reward financial innovation or financial forensics. Perhaps there are no "GreenPeace or Robinhood - not for profit NGOs to help - I know, eh? 'Not for profit Financial experts' seems like an oxymoron, LOL. Duh!" Financial Smarts on the right side of the law to track that something is wrong. The point however, is that these were not illegal. These were legal financial innovations. However, their side effects were long term, while the short term had this amazing win-win for all scenario!)
(P.S: The sentences in Blue above were written by me, and are not from the original article by BBC. - Gerry)

Another useful online resource for International Financial Crises:
(The webpage above is more general in nature and collects research on the phenomenon of financial crises).

Since the 1980s, the march of GLOBALISATION and concomitant increases in flows of capital and trade have led to high volatility in international financial markets. Some of these have erupted into crises, in the form of runs on banks - both national and multinational - as well as attacks on currencies. Resultant effects have included the significant increase in contagion and the collapse of both venerable private banks as well as national institutions. Some research on episodes of currency crises: here

Some info covered on the webpage above:
As always, our Wiki friend is an extremely useful source. Check out the link:

A noted survey of financial crises is This Time is Different: Eight Centuries of Financial Folly (Reinhart & Rogoff 2009), by economists Carmen Reinhart and Kenneth Rogoff, who are regarded as among the foremost historians of financial crises. In this survey, they trace the history of financial crisis back to sovereign defaults – default on public debt, – which were the form of crisis prior to the 18th century and continue, then and now causing private bank failures; crises since the 18th century feature both public debt default and private debt default. Reinhart and Rogoff also class debasement of currency and hyperinflation as being forms of financial crisis, broadly speaking, because they lead to unilateral reduction (repudiation) of debt.

Before 17th century:
Reinhart and Rogoff trace inflation (to reduce debt) to Dionysius of Syracuse, of the 4th century BCE, and begin their "eight centuries" in 1258; debasement of currency also occurred under the Roman empire and Byzantine empire.
Among the earliest crises Reinhart and Rogoff study is the 1340 default of England, due to setbacks in its war with France (the Hundred Years' War; see details). Further early sovereign defaults include seven defaults by imperial Spain, four under Philip II, three under his successors.

17th century:

  • 1637: Bursting of tulip mania* in the Netherlands – while tulip mania is popularly reported as an example of a financial crisis, and was a speculative bubble, modern scholarship holds that its broader economic impact was limited to negligible, and that it did not precipitate a financial crisis.
18th century:
19th century:

20th century:

21st century:

Capitalism has its BENEFITS & PERILS. Globalisation makes it an Infectious / Highly Contagious
& by definition, a world-wide phenomenon!

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