Financial crisis

A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.[1][2] Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy (e.g. the crisis resulting from the famous tulip mania bubble in the 17th century).

Many economists have offered theories about how financial crises develop and how they could be prevented. There is no consensus, however, and financial crises continue to occur from time to time.

Types

Banking crisis

When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits (see fractional-reserve banking), it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run renders the bank insolvent, causing customers to lose their deposits, to the extent that they are not covered by deposit insurance. An event in which bank runs are widespread is called a systemic banking crisis or banking panic.[3]

Examples of bank runs include the run on the Bank of the United States in 1931 and the run on Northern Rock in 2007.[4] Banking crises generally occur after periods of risky lending and resulting loan defaults.[5]

Currency crisis

A currency crisis, also called a devaluation crisis,[6] is normally considered as part of a financial crisis. Kaminsky et al. (1998), for instance, define currency crises as occurring when a weighted average of monthly percentage depreciations in the exchange rate and monthly percentage declines in exchange reserves exceeds its mean by more than three standard deviations. Frankel and Rose (1996) define a currency crisis as a nominal depreciation of a currency of at least 25% but it is also defined as at least a 10% increase in the rate of depreciation. In general, a currency crisis can be defined as a situation when the participants in an exchange market come to recognize that a pegged exchange rate is about to fail, causing speculation against the peg that hastens the failure and forces a devaluation.[6]

Speculative bubbles and crashes

A speculative bubble exists in the event of large, sustained overpricing of some class of assets.[7] One factor that frequently contributes to a bubble is the presence of buyers who purchase an asset based solely on the expectation that they can later resell it at a higher price, rather than calculating the income it will generate in the future. If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to predict whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur.[8]

Schwarzer Freitag Wien 1873
Black Friday, 9 May 1873, Vienna Stock Exchange. The Panic of 1873 and Long Depression followed.

Well-known examples of bubbles (or purported bubbles) and crashes in stock prices and other asset prices include the 17th century Dutch tulip mania, the 18th century South Sea Bubble, the Wall Street Crash of 1929, the Japanese property bubble of the 1980s, the crash of the dot-com bubble in 2000–2001, and the now-deflating United States housing bubble.[5][9][10] The 2000s sparked a real estate bubble where housing prices were increasing significantly as an asset good.[11]

International financial crisis

When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency due to accruing an unsustainable current account deficit, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight.

Several currencies that formed part of the European Exchange Rate Mechanism suffered crises in 1992–93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997–98. Many Latin American countries defaulted on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a devaluation of the ruble and default on Russian government bonds.

Wider economic crisis

Negative GDP growth lasting two or more quarters is called a recession. An especially prolonged or severe recession may be called a depression, while a long period of slow but not necessarily negative growth is sometimes called economic stagnation.

Financialcrisisconsumerspendings
Declining consumer spending.

Some economists argue that many recessions have been caused in large part by financial crises. One important example is the Great Depression, which was preceded in many countries by bank runs and stock market crashes. The subprime mortgage crisis and the bursting of other real estate bubbles around the world also led to recession in the U.S. and a number of other countries in late 2008 and 2009.

Some economists argue that financial crises are caused by recessions instead of the other way around, and that even where a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession. In particular, Milton Friedman and Anna Schwartz argued that the initial economic decline associated with the crash of 1929 and the bank panics of the 1930s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the Federal Reserve,[12] a position supported by Ben Bernanke.[13]

Causes and consequences

Strategic complementarities in financial markets

It is often observed that successful investment requires each investor in a financial market to guess what other investors will do. George Soros has called this need to guess the intentions of others 'reflexivity'.[14] Similarly, John Maynard Keynes compared financial markets to a beauty contest game in which each participant tries to predict which model other participants will consider most beautiful.[15] Circularity and self-fulfilling prophecies may be exaggerated when reliable information is not available because of opaque disclosures or a lack of disclosure.[16]

Furthermore, in many cases investors have incentives to coordinate their choices. For example, someone who thinks other investors want to buy lots of Japanese yen may expect the yen to rise in value, and therefore has an incentive to buy yen too. Likewise, a depositor in IndyMac Bank who expects other depositors to withdraw their funds may expect the bank to fail, and therefore has an incentive to withdraw too. Economists call an incentive to mimic the strategies of others strategic complementarity.[17]

It has been argued that if people or firms have a sufficiently strong incentive to do the same thing they expect others to do, then self-fulfilling prophecies may occur.[18] For example, if investors expect the value of the yen to rise, this may cause its value to rise; if depositors expect a bank to fail this may cause it to fail.[19] Therefore, financial crises are sometimes viewed as a vicious circle in which investors shun some institution or asset because they expect others to do so.[20]

Leverage

Leverage, which means borrowing to finance investments, is frequently cited as a contributor to financial crises.[16] When a financial institution (or an individual) only invests its own money, it can, in the very worst case, lose its own money. But when it borrows in order to invest more, it can potentially earn more from its investment, but it can also lose more than all it has. Therefore, leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy. Since bankruptcy means that a firm fails to honor all its promised payments to other firms, it may spread financial troubles from one firm to another (see 'Contagion' below).

The average degree of leverage in the economy often rises prior to a financial crisis. For example, borrowing to finance investment in the stock market ("margin buying") became increasingly common prior to the Wall Street Crash of 1929. In addition, some scholars have argued that financial institutions can contribute to fragility by hiding leverage, and thereby contributing to underpricing of risk.[16]

Asset-liability mismatch

Another factor believed to contribute to financial crises is asset-liability mismatch, a situation in which the risks associated with an institution's debts and assets are not appropriately aligned. For example, commercial banks offer deposit accounts which can be withdrawn at any time and they use the proceeds to make long-term loans to businesses and homeowners. The mismatch between the banks' short-term liabilities (its deposits) and its long-term assets (its loans) is seen as one of the reasons bank runs occur (when depositors panic and decide to withdraw their funds more quickly than the bank can get back the proceeds of its loans).[19] Likewise, Bear Stearns failed in 2007–08 because it was unable to renew the short-term debt it used to finance long-term investments in mortgage securities.

In an international context, many emerging market governments are unable to sell bonds denominated in their own currencies, and therefore sell bonds denominated in US dollars instead. This generates a mismatch between the currency denomination of their liabilities (their bonds) and their assets (their local tax revenues), so that they run a risk of sovereign default due to fluctuations in exchange rates.[21]

Uncertainty and herd behavior

Many analyses of financial crises emphasize the role of investment mistakes caused by lack of knowledge or the imperfections of human reasoning. Behavioural finance studies errors in economic and quantitative reasoning. Psychologist Torbjorn K A Eliazon has also analyzed failures of economic reasoning in his concept of 'œcopathy'.[22]

Historians, notably Charles P. Kindleberger, have pointed out that crises often follow soon after major financial or technical innovations that present investors with new types of financial opportunities, which he called "displacements" of investors' expectations.[23][24] Early examples include the South Sea Bubble and Mississippi Bubble of 1720, which occurred when the notion of investment in shares of company stock was itself new and unfamiliar,[25] and the Crash of 1929, which followed the introduction of new electrical and transportation technologies.[26] More recently, many financial crises followed changes in the investment environment brought about by financial deregulation, and the crash of the dot com bubble in 2001 arguably began with "irrational exuberance" about Internet technology.[27]

Unfamiliarity with recent technical and financial innovations may help explain how investors sometimes grossly overestimate asset values. Also, if the first investors in a new class of assets (for example, stock in "dot com" companies) profit from rising asset values as other investors learn about the innovation (in our example, as others learn about the potential of the Internet), then still more others may follow their example, driving the price even higher as they rush to buy in hopes of similar profits. If such "herd behaviour" causes prices to spiral up far above the true value of the assets, a crash may become inevitable. If for any reason the price briefly falls, so that investors realize that further gains are not assured, then the spiral may go into reverse, with price decreases causing a rush of sales, reinforcing the decrease in prices.

Regulatory failures

Governments have attempted to eliminate or mitigate financial crises by regulating the financial sector. One major goal of regulation is transparency: making institutions' financial situations publicly known by requiring regular reporting under standardized accounting procedures. Another goal of regulation is making sure institutions have sufficient assets to meet their contractual obligations, through reserve requirements, capital requirements, and other limits on leverage.

Some financial crises have been blamed on insufficient regulation, and have led to changes in regulation in order to avoid a repeat. For example, the former Managing Director of the International Monetary Fund, Dominique Strauss-Kahn, has blamed the financial crisis of 2008 on 'regulatory failure to guard against excessive risk-taking in the financial system, especially in the US'.[28] Likewise, the New York Times singled out the deregulation of credit default swaps as a cause of the crisis.[29]

However, excessive regulation has also been cited as a possible cause of financial crises. In particular, the Basel II Accord has been criticized for requiring banks to increase their capital when risks rise, which might cause them to decrease lending precisely when capital is scarce, potentially aggravating a financial crisis.[30]

International regulatory convergence has been interpreted in terms of regulatory herding, deepening market herding (discussed above) and so increasing systemic risk.[31][32] From this perspective, maintaining diverse regulatory regimes would be a safeguard.

Fraud has played a role in the collapse of some financial institutions, when companies have attracted depositors with misleading claims about their investment strategies, or have embezzled the resulting income. Examples include Charles Ponzi's scam in early 20th century Boston, the collapse of the MMM investment fund in Russia in 1994, the scams that led to the Albanian Lottery Uprising of 1997, and the collapse of Madoff Investment Securities in 2008.

Many rogue traders that have caused large losses at financial institutions have been accused of acting fraudulently in order to hide their trades. Fraud in mortgage financing has also been cited as one possible cause of the 2008 subprime mortgage crisis; government officials stated on 23 September 2008 that the FBI was looking into possible fraud by mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers, and insurer American International Group.[33] Likewise it has been argued that many financial companies failed in the recent crisis because their managers failed to carry out their fiduciary duties.[34]

Contagion

Contagion refers to the idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk.[31]

One widely cited example of contagion was the spread of the Thai crisis in 1997 to other countries like South Korea. However, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages.

Recessionary effects

Some financial crises have little effect outside of the financial sector, like the Wall Street crash of 1987, but other crises are believed to have played a role in decreasing growth in the rest of the economy. There are many theories why a financial crisis could have a recessionary effect on the rest of the economy. These theoretical ideas include the 'financial accelerator', 'flight to quality' and 'flight to liquidity', and the Kiyotaki-Moore model. Some 'third generation' models of currency crises explore how currency crises and banking crises together can cause recessions.[35]

Theories

Austrian theories

Austrian School economists Ludwig von Mises and Friedrich Hayek discussed the business cycle starting with Mises' Theory of Money and Credit, published in 1912.

Marxist theories

Recurrent major depressions in the world economy at the pace of 20 and 50 years have been the subject of studies since Jean Charles Léonard de Sismondi (1773–1842) provided the first theory of crisis in a critique of classical political economy's assumption of equilibrium between supply and demand. Developing an economic crisis theory became the central recurring concept throughout Karl Marx's mature work. Marx's law of the tendency for the rate of profit to fall borrowed many features of the presentation of John Stuart Mill's discussion Of the Tendency of Profits to a Minimum (Principles of Political Economy Book IV Chapter IV). The theory is a corollary of the Tendency towards the Centralization of Profits.

In a capitalist system, successfully-operating businesses return less money to their workers (in the form of wages) than the value of the goods produced by those workers (i.e. the amount of money the products are sold for). This profit first goes towards covering the initial investment in the business. In the long-run, however, when one considers the combined economic activity of all successfully-operating business, it is clear that less money (in the form of wages) is being returned to the mass of the population (the workers) than is available to them to buy all of these goods being produced. Furthermore, the expansion of businesses in the process of competing for markets leads to an abundance of goods and a general fall in their prices, further exacerbating the tendency for the rate of profit to fall.

The viability of this theory depends upon two main factors: firstly, the degree to which profit is taxed by government and returned to the mass of people in the form of welfare, family benefits and health and education spending; and secondly, the proportion of the population who are workers rather than investors/business owners. Given the extraordinary capital expenditure required to enter modern economic sectors like airline transport, the military industry, or chemical production, these sectors are extremely difficult for new businesses to enter and are being concentrated in fewer and fewer hands.

Empirical and econometric research continues especially in the world systems theory and in the debate about Nikolai Kondratiev and the so-called 50-years Kondratiev waves. Major figures of world systems theory, like Andre Gunder Frank and Immanuel Wallerstein, consistently warned about the crash that the world economy is now facing. World systems scholars and Kondratiev cycle researchers always implied that Washington Consensus oriented economists never understood the dangers and perils, which leading industrial nations will be facing and are now facing at the end of the long economic cycle which began after the oil crisis of 1973.

Minsky's theory

Hyman Minsky has proposed a post-Keynesian explanation that is most applicable to a closed economy. He theorized that financial fragility is a typical feature of any capitalist economy. High fragility leads to a higher risk of a financial crisis. To facilitate his analysis, Minsky defines three approaches to financing firms may choose, according to their tolerance of risk. They are hedge finance, speculative finance, and Ponzi finance. Ponzi finance leads to the most fragility.

  • for hedge finance, income flows are expected to meet financial obligations in every period, including both the principal and the interest on loans.
  • for speculative finance, a firm must roll over debt because income flows are expected to only cover interest costs. None of the principal is paid off.
  • for Ponzi finance, expected income flows will not even cover interest cost, so the firm must borrow more or sell off assets simply to service its debt. The hope is that either the market value of assets or income will rise enough to pay off interest and principal.

Financial fragility levels move together with the business cycle. After a recession, firms have lost much financing and choose only hedge, the safest. As the economy grows and expected profits rise, firms tend to believe that they can allow themselves to take on speculative financing. In this case, they know that profits will not cover all the interest all the time. Firms, however, believe that profits will rise and the loans will eventually be repaid without much trouble. More loans lead to more investment, and the economy grows further. Then lenders also start believing that they will get back all the money they lend. Therefore, they are ready to lend to firms without full guarantees of success.

Lenders know that such firms will have problems repaying. Still, they believe these firms will refinance from elsewhere as their expected profits rise. This is Ponzi financing. In this way, the economy has taken on much risky credit. Now it is only a question of time before some big firm actually defaults. Lenders understand the actual risks in the economy and stop giving credit so easily. Refinancing becomes impossible for many, and more firms default. If no new money comes into the economy to allow the refinancing process, a real economic crisis begins. During the recession, firms start to hedge again, and the cycle is closed.

Coordination games

Mathematical approaches to modeling financial crises have emphasized that there is often positive feedback[36] between market participants' decisions (see strategic complementarity).[37] Positive feedback implies that there may be dramatic changes in asset values in response to small changes in economic fundamentals. For example, some models of currency crises (including that of Paul Krugman) imply that a fixed exchange rate may be stable for a long period of time, but will collapse suddenly in an avalanche of currency sales in response to a sufficient deterioration of government finances or underlying economic conditions.[38][39]

According to some theories, positive feedback implies that the economy can have more than one equilibrium. There may be an equilibrium in which market participants invest heavily in asset markets because they expect assets to be valuable. This is the type of argument underlying Diamond and Dybvig's model of bank runs, in which savers withdraw their assets from the bank because they expect others to withdraw too.[19] Likewise, in Obstfeld's model of currency crises, when economic conditions are neither too bad nor too good, there are two possible outcomes: speculators may or may not decide to attack the currency depending on what they expect other speculators to do.[20]

Herding models and learning models

A variety of models have been developed in which asset values may spiral excessively up or down as investors learn from each other. In these models, asset purchases by a few agents encourage others to buy too, not because the true value of the asset increases when many buy (which is called "strategic complementarity"), but because investors come to believe the true asset value is high when they observe others buying.

In "herding" models, it is assumed that investors are fully rational, but only have partial information about the economy. In these models, when a few investors buy some type of asset, this reveals that they have some positive information about that asset, which increases the rational incentive of others to buy the asset too. Even though this is a fully rational decision, it may sometimes lead to mistakenly high asset values (implying, eventually, a crash) since the first investors may, by chance, have been mistaken.[40][41][42][43][44] Herding models, based on Complexity Science, indicate that it is the internal structure of the market, not external influences, which is primarily responsible for crashes.[45][46]

In "adaptive learning" or "adaptive expectations" models, investors are assumed to be imperfectly rational, basing their reasoning only on recent experience. In such models, if the price of a given asset rises for some period of time, investors may begin to believe that its price always rises, which increases their tendency to buy and thus drives the price up further. Likewise, observing a few price decreases may give rise to a downward price spiral, so in models of this type large fluctuations in asset prices may occur. Agent-based models of financial markets often assume investors act on the basis of adaptive learning or adaptive expectations.

History

South Sea Bubble Cards-Tree
The bursting of the South Sea Bubble and Mississippi Bubble in 1720 is regarded as the first modern financial crisis.

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.[47] 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.

Prior to 19th century

8denarii
The Roman denarius was debased over time.
Portrait of Philip II of Spain by Sofonisba Anguissola - 002b
Philip II of Spain defaulted four times on Spain's debt.

Reinhart and Rogoff trace inflation (to reduce debt) to Dionysius of Syracuse, of the 4th century BC, 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.

Other global and national financial mania since the 17th century include:

  • 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.
  • 1720: Bursting of South Sea Bubble (Great Britain) and Mississippi Bubble (France) – earliest of modern financial crises; in both cases the company assumed the national debt of the country (80–85% in Great Britain, 100% in France), and thereupon the bubble burst. The resulting crisis of confidence probably had a deep impact on the financial and political development of France.[48]
  • Crisis of 1763 - started in Amsterdam, begun by the collapse of Johann Ernst Gotzkowsky and Leendert Pieter de Neufville's bank, spread to Germany and Scandinavia.
  • Crisis of 1772 – in London and Amsterdam. 20 important banks in London went bankrupt after one banking house defaulted (bankers Neal, James, Fordyce and Down)
  • France's Financial and Debt Crisis (1783–1788)- France severe financial crisis due to the immense debt accrued through the French involvement in the Seven Years' War (1756–1763) and the American Revolution (1775-1783).
  • Panic of 1792 – run on banks in US precipitated by the expansion of credit by the newly formed Bank of the United States
  • Panic of 1796–1797 – British and US credit crisis caused by land speculation bubble

19th century

20th century

Panic of 1884
Wall Street on the morning of 14 May during the Panic of 1884.

21st century

See also

Specific:

Literature

General perspectives

  • Walter Bagehot (1873), Lombard Street: A Description of the Money Market.
  • Charles P. Kindleberger and Robert Aliber (2005), Manias, Panics, and Crashes: A History of Financial Crises (Palgrave Macmillan, 2005 ISBN 978-1-4039-3651-6).
  • Gernot Kohler and Emilio José Chaves (Editors) "Globalization: Critical Perspectives" Hauppauge, New York: Nova Science Publishers ISBN 1-59033-346-2. With contributions by Samir Amin, Christopher Chase Dunn, Andre Gunder Frank, Immanuel Wallerstein
  • Hyman P. Minsky (1986, 2008), Stabilizing an Unstable Economy.
  • Reinhart, Carmen; Rogoff, Kenneth (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton University Press. p. 496. ISBN 978-0-691-14216-6.
  • Ferguson, Niall (2009). The Ascent of Money: A Financial History of the World. Penguin. p. 448. ISBN 978-0-14-311617-2.
  • Joachim Vogt (2014), Fear, Folly, and Financial Crises – Some Policy Lessons from History, UBS Center Public Papers, Issue 2, UBS International Center of Economics in Society, Zurich.

Banking crises

  • Franklin Allen and Douglas Gale (2000), "Financial contagion," Journal of Political Economy 108 (1), pp. 1–33.
  • Franklin Allen and Douglas Gale (2007), Understanding Financial Crises.
  • Charles W. Calomiris and Stephen H. Haber (2014), Fragile by Design: The Political Origins of Banking Crises and Scarce Credit, Princeton, NJ: Princeton University Press.
  • Jean-Charles Rochet (2008), Why Are There So Many Banking Crises? The Politics and Policy of Bank Regulation.
  • R. Glenn Hubbard, ed., (1991) Financial Markets and Financial Crises.
  • Douglas Diamond and Philip Dybvig (1983), 'Bank runs, deposit insurance, and liquidity'. Journal of Political Economy 91 (3).
  • Luc Laeven and Fabian Valencia (2008), 'Systemic banking crises: a new database'. International Monetary Fund Working Paper 08/224.
  • Thomas Marois (2012), States, Banks and Crisis: Emerging Finance Capitalism in Mexico and Turkey, Edward Elgar Publishing Limited, Cheltenham, UK.

Bubbles and crashes

International financial crises

  • Acocella, N. Di Bartolomeo, G. and Hughes Hallett, A. [2012], ‘Central banks and economic policy after the crisis: what have we learned?’, ch. 5 in: Baker, H.K. and Riddick, L.A. (eds.), ‘Survey of International Finance’, Oxford University Press.
  • Paul Krugman (1995), Currencies and Crises.
  • Craig Burnside, Martin Eichenbaum, and Sergio Rebelo (2008), 'Currency crisis models', New Palgrave Dictionary of Economics, 2nd ed.
  • Maurice Obstfeld (1996), 'Models of currency crises with self-fulfilling features'. European Economic Review 40.
  • Stephen Morris and Hyun Song Shin (1998), 'Unique equilibrium in a model of self-fulfilling currency attacks'. American Economic Review 88 (3).
  • Barry Eichengreen (2004), Capital Flows and Crises.
  • Charles Goodhart and P. Delargy (1998), 'Financial crises: plus ça change, plus c'est la même chose'. International Finance 1 (2), pp. 261–87.
  • Jean Tirole (2002), Financial Crises, Liquidity, and the International Monetary System.
  • Guillermo Calvo (2005), Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?
  • Barry Eichengreen (2002), Financial Crises: And What to Do about Them.
  • Charles Calomiris (1998), 'Blueprints for a new global financial architecture'.

The Great Depression and earlier banking crises

  • Murray Rothbard (1962), The Panic of 1819
  • Murray Rothbard (1963), America`s Great Depression.
  • Milton Friedman and Anna Schwartz (1971), A Monetary History of the United States.
  • Ben S. Bernanke (2000), Essays on the Great Depression.
  • Robert F. Bruner (2007), The Panic of 1907. Lessons Learned from the Market's Perfect Storm.

Recent international financial crises

  • Barry Eichengreen and Peter Lindert, eds., (1992), The International Debt Crisis in Historical Perspective.
  • Lessons from the Asian financial crisis / edited by Richard Carney. New York, NY : Routledge, 2009. ISBN 978-0-415-48190-8 (hardback) ISBN 0-415-48190-2 (hardback) ISBN 978-0-203-88477-5 (ebook) ISBN 0-203-88477-9 (ebook)
  • Robertson, Justin, 1972– US-Asia economic relations : a political economy of crisis and the rise of new business actors / Justin Robertson. Abingdon, Oxon ; New York, NY : Routledge, 2008. ISBN 978-0-415-46951-7 (hbk.) ISBN 978-0-203-89052-3 (ebook)

2007–2012 financial crisis

References

  1. ^ Charles P. Kindleberger and Robert Aliber (2005), Manias, Panics, and Crashes: A History of Financial Crises, 5th ed. Wiley, ISBN 0-471-46714-6.
  2. ^ Luc Laeven and Fabian Valencia (2008), 'Systemic banking crises: a new database'. International Monetary Fund Working Paper 08/224.
  3. ^ Fratianni, M. and Marchionne, F. 2009. The Role of Banks in the Subprime Financial Crisis available on SSRN: "Archived copy". SSRN 1383473.
  4. ^ Shin, Hyun Song (1 January 2009). "Reflections on Northern Rock: The Bank Run that Heralded the Global Financial Crisis". The Journal of Economic Perspectives. 23 (1): 101–119. doi:10.1257/089533009797614045 (inactive 2019-03-10).
  5. ^ a b Michael Simkovic, Competition and Crisis in Mortgage Securitization Archived 7 June 2012 at WebCite
  6. ^ a b "What is a currency crisis, currency crisis definition and summary | TheGlobalEconomy.com". TheGlobalEconomy.com. Archived from the original on 2 October 2017. Retrieved 2017-07-20.
  7. ^ Markus Brunnermeier (2008), 'Bubbles', in The New Palgrave Dictionary of Economics, 2nd ed.
  8. ^ Peter Garber (2001), Famous First Bubbles: The Fundamentals of Early Manias. MIT Press, ISBN 0-262-57153-6.
  9. ^ "Transcript". Bill Moyers Journal. Episode 06292007. 2007-06-29. PBS.
  10. ^ Justin Lahart (24 December 2007). "Egg Cracks Differ In Housing, Finance Shells". Wall Street Journal. WSJ.com. Archived from the original on 13 August 2017. Retrieved 2008-07-13. It's now conventional wisdom that a housing bubble has burst. In fact, there were two bubbles, a housing bubble and a financing bubble. Each fueled the other, but they didn't follow the same course.
  11. ^ Price, S. (2009). Real estate and the financial crisis: how turmoil in the capital markets is restructuring real estate finance. Real Estate Issues. Retrieved from http://search.proquest.com/docview/214013947/13AAB36905E4EBC93F5/4
  12. ^ Milton Friedman and Anna Schwartz (1971), A Monetary History of the United States, 1867–1960. Princeton University Press, ISBN 0-691-00354-8.
  13. ^ '1929 and all that', The Economist, 2 October 2008.
  14. ^ 'The Theory of Reflexivity', speech by George Soros, April 1994 at MIT. Archived 28 December 2009 at the Wayback Machine
  15. ^ J. M. Keynes (1936), The General Theory of Employment, Interest and Money, Chapter 12. (New York: Harcourt Brace and Co.).
  16. ^ a b c Michael Simkovic, "Secret Liens and the Financial Crisis of 2008" Archived 7 June 2012 at WebCite American Bankruptcy Law Journal, Vol. 83, p. 253, 2009.
  17. ^ J. Bulow, J. Geanakoplos, and P. Klemperer (1985), 'Multimarket oligopoly: strategic substitutes and strategic complements'. Journal of Political Economy 93, pp. 488–511.
  18. ^ R. Cooper and A. John (1988), 'Coordinating coordination failures in Keynesian models.' Quarterly Journal of Economics 103 (3), pp. 441–63. See especially Propositions 1 and 3.
  19. ^ a b c D. Diamond and P. Dybvig (1983), 'Bank runs, deposit insurance, and liquidity'. Journal of Political Economy 91 (3), pp. 401–19. Reprinted Archived 29 August 2012 at the Wayback Machine (2000) in Federal Reserve Bank of Minneapolis Quarterly Review 24 (1), pp. 14–23.
  20. ^ a b M. Obstfeld (1996), 'Models of currency crises with self-fulfilling features'. European Economic Review 40 (3–5), pp. 1037–47.
  21. ^ Eichengreen and Hausmann (2005), Other People's Money: Debt Denomination and Financial Instability in Emerging Market Economies.
  22. ^ Torbjörn K A Eliazon (2006) [1] – Om Emotionell intelligens och Œcopati (ekopati)
  23. ^ Kindleberger and Aliber (2005), op. cit., pp. 54–58.
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External links

1997 Asian financial crisis

The Asian financial crisis was a period of financial crisis that gripped much of East and Southeast Asia beginning in July 1997 and raised fears of a worldwide economic meltdown due to financial contagion.

The crisis started in Thailand (known in Thailand as the Tom Yum Goong crisis; Thai: วิกฤตต้มยำกุ้ง) with the financial collapse of the Thai baht after the Thai government was forced to float the baht due to lack of foreign currency to support its currency peg to the U.S. dollar. At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.Indonesia, South Korea, and Thailand were the countries most affected by the crisis. Hong Kong, Laos, Malaysia and the Philippines were also hurt by the slump. Brunei, China, Singapore, Taiwan, and Vietnam were less affected, although all suffered from a loss of demand and confidence throughout the region. Japan was also affected, though less significantly.

Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast Asian Nations (ASEAN) economies in 1993–96, then shot up beyond 180% during the worst of the crisis. In South Korea, the ratios rose from 13% to 21% and then as high as 40%, while the other northern newly industrialized countries fared much better. Only in Thailand and South Korea did debt service-to-exports ratios rise.Although most of the governments of Asia had seemingly sound fiscal policies, the International Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis. The efforts to stem a global economic crisis did little to stabilize the domestic situation in Indonesia, however. After 30 years in power, Indonesian President Suharto was forced to step down on 21 May 1998 in the wake of widespread rioting that followed sharp price increases caused by a drastic devaluation of the rupiah. The effects of the crisis lingered through 1998. In 1998, growth in the Philippines dropped to virtually zero. Only Singapore and Taiwan proved relatively insulated from the shock, but both suffered serious hits in passing, the former due to its size and geographical location between Malaysia and Indonesia. By 1999, however, analysts saw signs that the economies of Asia were beginning to recover. After the crisis, economies in the region worked toward financial stability and better financial supervision.Until 1999, Asia attracted almost half of the total capital inflow into developing countries. The economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result, the region's economies received a large inflow of money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, Singapore and South Korea experienced high growth rates, of 8–12% GDP, in the late 1980s and early 1990s. This achievement was widely acclaimed by financial institutions including IMF and World Bank, and was known as part of the "Asian economic miracle".

1998 Russian financial crisis

The Russian financial crisis (also called Ruble crisis or the Russian Flu) hit Russia on 17 August 1998. It resulted in the Russian government and the Russian Central Bank devaluing the ruble and defaulting on its debt. The crisis had severe impacts on the economies of many neighboring countries. Meanwhile, James Cook, the senior vice president of The U.S. Russia Investment Fund, suggested the crisis had the positive effect of teaching Russian banks to diversify their assets.

2008 Latvian financial crisis

The 2008 Latvian financial crisis, which stemmed from the global financial crisis of 2008–2009, was a major economic and political crisis in Latvia. The crisis was generated when an easy credit market burst, resulting in an unemployment crisis, along with the bankruptcy of many companies. Since 2010, economic activity has recovered and Latvia's economic growth rate was the fastest among the EU member states in the first three quarters of 2012.

2008–09 Belgian financial crisis

The 2008–2009 Belgian financial crisis is a major financial crisis that hit Belgium from mid-2008 onwards. Two of the country's largest banks – Fortis and Dexia – started to face severe problems, exacerbated by the financial problems hitting other banks around the world. The value of their stocks plunged. The government managed the situation by bailouts, selling off or nationalizing banks, providing bank guarantees and extending the deposit insurance. Eventually Fortis was split into two parts. The Dutch part was nationalized, while the Belgian part was sold to the French bank BNP Paribas. Dexia group was dismantled, Dexia Bank Belgium was nationalized.

2008–2011 Icelandic financial crisis

The Icelandic financial crisis was a major economic and political event in Iceland that involved the default of all three of the country's major privately owned commercial banks in late 2008, following their difficulties in refinancing their short-term debt and a run on deposits in the Netherlands and the United Kingdom. Relative to the size of its economy, Iceland's systemic banking collapse was the largest experienced by any country in economic history. The crisis led to a severe economic depression in 2008–2010 and significant political unrest.In the years preceding the crisis, three Icelandic banks, Kaupthing, Landsbanki and Glitnir, multiplied in size. This expansion was driven by ready access to credit in international financial markets, in particular short-term financing. As the international financial crisis unfolded in 2007–2008, investors perceived the Icelandic banks to be increasingly risky. Trust in the banks gradually faded, leading to a sharp depreciation of the Icelandic króna in 2008 and increased difficulties for the banks in rolling over their short-term debt. At the end of the second quarter of 2008, Iceland's external debt was 9.553 trillion Icelandic krónur (€50 billion), more than 7 times the GDP of Iceland in 2007. The assets of the three banks totaled 14.437 trillion krónur at the end of the second quarter 2008, equal to more than 11 times the national GDP. Due to the huge size of the Icelandic financial system in comparison with the Icelandic economy, the Central Bank of Iceland found itself unable to act as a lender of last resort during the crisis, further aggravating the mistrust in the banking system.

On 29 September 2008, it was announced that Glitnir would be nationalised. However, subsequent efforts to restore faith in the banking system failed. On 6 October, the Icelandic legislature instituted an emergency law which enabled the Financial Supervisory Authority (FME) to take control over financial institutions and made domestic deposits in the banks priority claims. In the following days, new banks were founded to take over the domestic operations of Kaupthing, Landsbanki and Glitnir. The old banks were put into receivership and liquidation, resulting in losses for their shareholders and foreign creditors. Outside Iceland, more than half a million depositors lost access to their accounts in foreign branches of Icelandic banks. This led to the 2008–2013 Icesave dispute, that ended with a EFTA Court ruling that Iceland was not obliged to repay Dutch and British depositors minimum deposit guarantees.

In an effort to stabilize the situation, the Icelandic government stated that all domestic deposits in Icelandic banks would be guaranteed, imposed strict capital controls to stabilize the value of the Icelandic króna, and secured a US$5.1bn sovereign debt package from the IMF and the Nordic countries in order to finance a budget deficit and the restoration of the banking system. The international bailout support programme led by IMF officially ended on 31 August 2011, while the capital controls which were imposed in November 2008 were lifted on 14 March 2017.The financial crisis had a serious negative impact on the Icelandic economy. The national currency fell sharply in value, foreign currency transactions were virtually suspended for weeks, and the market capitalisation of the Icelandic stock exchange fell by more than 90%. As a result of the crisis, Iceland underwent a severe economic depression; the country's gross domestic product dropped by 10% in real terms between the third quarter of 2007 and the third quarter of 2010. A new era with positive GDP growth started in 2011, and has helped foster a gradually declining trend for the unemployment rate. The government budget deficit has declined from 9.7% of GDP in 2009 and 2010 to 0.2% of GDP in 2014; the central government gross debt-to-GDP ratio is expected to decline to less than 60% in 2018 from a maximum of 85% in 2011.

2008–2014 Spanish financial crisis

The 2008–2014 Spanish financial crisis, also known as the Great Recession in Spain or the Great Spanish Depression, began in 2008 during the world financial crisis of 2007–08. In 2012, it made Spain a late participant in the European sovereign debt crisis when the country was unable to bail out its financial sector and had to apply for a €100 billion rescue package provided by the European Stability Mechanism (ESM).

The main cause of Spain's crisis was the housing bubble and the accompanying unsustainably high GDP growth rate. The ballooning tax revenues from the booming property investment and construction sectors kept the Spanish government's revenue in surplus, despite strong increases in expenditure, until 2007. The Spanish government supported the critical development by relaxing supervision of the financial sector and thereby allowing the banks to violate International Accounting Standards Board standards.. The banks in Spain were able to hide losses and earnings volatility, mislead regulators, analysts, and investors, and thereby finance the Spanish real estate bubble. The results of the crisis were devastating for Spain, including a strong economic downturn, a severe increase in unemployment, and bankruptcies of major companies.Even though some fundamental problems in the Spanish economy were already evident far ahead of the crisis, Spain continued the path of unsustainable property led growth when the ruling party changed in 2004. In these early times Spain had already a huge trade deficit, a loss of competitiveness against its main trading partners, an above-average inflation rate, house price increases, and a growing family indebtedness. During the third quarter of 2008 the national GDP contracted for the first time in 15 years, and, in February 2009, Spain (and other European economies) officially entered recession. The economy contracted 3.7% in 2009 and again in 2010 by 0.1%. It grew by 0.7% in 2011. By the 1st quarter of 2012, Spain was officially in recession once again. The Spanish government forecast a 1.7% drop for 2012.The provision of up to €100 billion of rescue loans from eurozone funds was agreed by eurozone finance ministers on 9 June 2012. As of October 2012, the so-called Troika (European Commission, ECB and IMF) is in negotiations with Spain to establish an economic recovery program required for providing additional financial loans from ESM. In addition to applying for a €100 billion bank recapitalization package in June 2012, Spain negotiated financial support from a "Precautionary Conditioned Credit Line" (PCCL) package. If Spain applies and receives a PCCL package, irrespective to what extent it subsequently decides to draw on this established credit line, this would at the same time immediately qualify the country to receive "free" additional financial support from ECB, in the form of some unlimited yield-lowering bond purchases.The turning point for the Spanish sovereign debt crisis occurred on 26 July 2012, when ECB President Mario Draghi said that the ECB was "ready to do whatever it takes to preserve the euro". Announced on 6 September 2012, the ECB's Outright Monetary Transactions (OMT) program of unlimited purchases of short-term sovereign debt put the ECB's balance sheet behind the pledge. Speculative runs against Spanish sovereign debt were discouraged and 10-year bond yields stayed below the 6% level, approaching the 5% level by the end of 2012.

2009 Icelandic financial crisis protests

The 2009–2011 Icelandic financial crisis protests, also referred to as the Kitchenware/Kitchen Implement or Pots and Pans Revolution (Icelandic: Búsáhaldabyltingin), occurred in the wake of the Icelandic financial crisis. There had been regular and growing protests since October 2008 against the Icelandic government's handling of the financial crisis. The protests intensified on 20 January 2009 with thousands of people showing up to protest at the parliament (Althing) in Reykjavík. These were at the time, the largest protests in Icelandic history.Protesters were calling for the resignation of government officials and for new elections to be held. The protests stopped for the most part with the resignation of the old government led by the right-wing Independence Party. A new left-wing government was formed after elections in late April 2009. It was supportive of the protestors and initiated a reform process that included the judicial prosecution before the Landsdómur of the former Prime Minister Geir Haarde.

Several referenda were held to ask the citizens about whether to pay the Icesave debt of their banks. From a complex and unique process, 25 common people, of no political party, were to be elected to form an Icelandic Constitutional Assembly that would write a new Constitution of Iceland. After some legal problems, a Constitutional Council, which included those people, presented a Constitution Draft to the Iceland Parliament on 29 July 2011.

2012–13 Cypriot financial crisis

The 2012–2013 Cypriot financial crisis was an economic crisis in the Republic of Cyprus that involved the exposure of Cypriot banks to overleveraged local property companies, the Greek government-debt crisis, the downgrading of the Cypriot government's bond credit rating to junk status by international credit rating agencies, the consequential inability to refund its state expenses from the international markets and the reluctance of the government to restructure the troubled Cypriot financial sector.On 25 March 2013, a €10 billion international bailout by the Eurogroup, European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMF) was announced, in return for Cyprus agreeing to close the country's second-largest bank, the Cyprus Popular Bank (also known as Laiki Bank), imposing a one-time bank deposit levy on all uninsured deposits there, and possibly around 48% of uninsured deposits in the Bank of Cyprus (the island's largest commercial bank). A minority proportion of it held by citizens of other countries (many of whom from Russia), who preferred Cypriot banks because of their higher interest on bank account deposits, relatively low corporate tax, and easier access to the rest of the European banking sector. This resulted in numerous insinuations by US and European media, which presented Cyprus as a 'tax haven' and suggested that the prospective bailout loans were meant for saving the accounts of Russian depositors. No insured deposit of €100,000 or less would be affected.Nearly one third of Rossiya Bank's cash ($1 billion) was frozen in Cypriot accounts during this crisis.

Banking in Russia

Banking in Russia is subject to significant regulations as banks in the Russian Federation have to meet mandatory Russian legislation requirements, and comply with numerous Bank of Russia instructions and regulations.

Effects of the Great Recession on museums

Art museums in the United States and the United Kingdom have been hit especially hard by the 2008–2012 global recession. Dwindling endowments from wealthy patrons forced some museums to make difficult and controversial decisions to deaccession artwork from their collections to gain funds, or in the case of the Rose Art Museum, to close the institution and sell the entire collection.

Such actions have prompted censure from Museum organizations such as the Museums, Libraries and Archives Council in the UK and the Association of Art Museum Directors in the US. These organizations charge that the actions of their members were in violation of not only their ethics code but also the core of their mission- to provide access to a fund of cultural heritage for future scholarship- by selling works to private buyers for purposes other than funding new acquisitions. Consideration of the dire financial state of these institutions, and the intensifying effect that any punitive action by an ethics organization will have on the finances of an individual museum, has fostered debate on the merits of deaccessioning.

Financial crisis of 2007–2008

The financial crisis of 2007–2008, also known as the global financial crisis and the 2008 financial crisis, is considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s.It began in 2007 with a crisis in the subprime mortgage market in the United States, and developed into a full-blown international banking crisis with the collapse of the investment bank Lehman Brothers on September 15, 2008. Excessive risk-taking by banks such as Lehman Brothers helped to magnify the financial impact globally. Massive bail-outs of financial institutions and other palliative monetary and fiscal policies were employed to prevent a possible collapse of the world financial system. The crisis was nonetheless followed by a global economic downturn, the Great Recession. The European debt crisis, a crisis in the banking system of the European countries using the euro, followed later.

In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was enacted in the US following the crisis to "promote the financial stability of the United States". The Basel III capital and liquidity standards were adopted by countries around the world.

Great Recession

The Great Recession was a period of general economic decline observed in world markets during the late 2000s and early 2010s. The scale and timing of the recession varied from country to country. The International Monetary Fund concluded that the overall impact was the most severe since the Great Depression in the 1930s. The Great Recession stemmed from the collapse of the United States real-estate market, in relation to the financial crisis of 2007 to 2008 and U.S. subprime mortgage crisis of 2007 to 2009, though policies of other nations contributed also. According to the National Bureau of Economic Research (the official arbiter of U.S. recessions), the recession in the United States began in December 2007 and ended in June 2009, thus extending over 19 months. The Great Recession resulted in the scarcity of valuable assets in the market economy and the collapse of the financial sector (banks) in the world economy. Some banks were bailed out by the Federal government of the United States.The recession was not felt equally around the world. Whereas most of the world's developed economies, particularly in North America and Europe, fell into a definitive recession, many of the newer developed economies suffered far less impact, particularly China and India, whose economies grew substantially during this period.

Great Recession in Russia

The Great Recession in Russia was a crisis during 2008–2009 in the Russian financial markets as well as an economic recession that was compounded by political fears after the war with Georgia and by the plummeting price of Urals heavy crude oil, which lost more than 70% of its value since its record peak of US$147 on 4 July 2008 before rebounding moderately in 2009. According to the World Bank, Russia’s strong short-term macroeconomic fundamentals made it better prepared than many emerging economies to deal with the crisis, but its underlying structural weaknesses and high dependence on the price of a single commodity made its impact more pronounced than would otherwise be the case.In late 2008 during the onset of the crisis, Russian markets plummeted and more than $1 trillion had been wiped off the value of Russia's shares, although Russian stocks rebounded in 2009 becoming the world’s best performers, with the MICEX Index having more than doubled in value and regaining half its 2008 losses.As the crisis progressed, Reuters and the Financial Times speculated that the crisis would be used to increase the Kremlin's control over key strategic assets in a reverse of the "loans for shares" sales of the 1990s, when the state sold off major assets to the oligarchs in return for loans. In contrast to this earlier speculation, in September 2009 the Russian government announced plans to sell state energy and transport holdings in order to help plug the budget deficit and to help improve the nation's aging infrastructure. The state earmarked about 5,500 enterprises for divestment and plans to sell shares in companies that are already publicly traded, including Rosneft, the country’s biggest oil producer.From July 2008 – January 2009, Russia's foreign exchange reserves (FXR) fell by $210 billion from their peak to $386 billion as the central bank adopted a policy of gradual devaluation to combat the sharp devaluation of the ruble. The ruble weakened 35% against the dollar from the onset of the crisis in August to January 2009. As the ruble stabilized in January the reserves began to steadily grow again throughout 2009, reaching a year-long high of $452 billion by year's-end.Russia's economy emerged from recession in the third quarter of 2009 after two quarters of record negative growth. GDP contracted by 7.9% for the whole of 2009, slightly less than the economic ministry's prediction of 8.5%. Experts expect Russia's economy will grow modestly in 2010, with estimates ranging from 3.1% by the Russian economic ministry to 2.5%, 3.6% and 4.9% by the World Bank, International Monetary Fund (IMF), and Organisation for Economic Co-operation and Development (OECD) respectively.

List of banks acquired or bankrupted during the Great Recession

This is a list of notable financial institutions worldwide that were severely affected by the Great Recession centered in 2007–2009. The list includes banks (including savings and loan associations, commercial banks and investment banks), building societies and insurance companies that were:

taken over or merged with another financial institution;

nationalised by a government or central bank; or

declared insolvent or liquidated.

Moody's Investors Service

Moody's Investors Service, often referred to as Moody's, is the bond credit rating business of Moody's Corporation, representing the company's traditional line of business and its historical name. Moody's Investors Service provides international financial research on bonds issued by commercial and government entities. Moody's, along with Standard & Poor's and Fitch Group, is considered one of the Big Three credit rating agencies.

The company ranks the creditworthiness of borrowers using a standardized ratings scale which measures expected investor loss in the event of default. Moody's Investors Service rates debt securities in several bond market segments. These include government, municipal and corporate bonds; managed investments such as money market funds and fixed-income funds; financial institutions including banks and non-bank finance companies; and asset classes in structured finance. In Moody's Investors Service's ratings system, securities are assigned a rating from Aaa to C, with Aaa being the highest quality and C the lowest quality.

Moody's was founded by John Moody in 1909 to produce manuals of statistics related to stocks and bonds and bond ratings. In 1975, the company was identified as a Nationally Recognized Statistical Rating Organization (NRSRO) by the U.S. Securities and Exchange Commission. Following several decades of ownership by Dun & Bradstreet, Moody's Investors Service became a separate company in 2000. Moody's Corporation was established as a holding company.

Post-2008 Irish economic downturn

The post-2008 Irish economic downturn in the Republic of Ireland, coincided with a series of banking scandals, followed the 1990s and 2000s Celtic Tiger period of rapid real economic growth fuelled by foreign direct investment, a subsequent property bubble which rendered the real economy uncompetitive, and an expansion in bank lending in the early 2000s. An initial slowdown in economic growth amid the international financial crisis of 2007–08 greatly intensified in late 2008 and the country fell into recession for the first time since the 1980s. Emigration, as did unemployment (particularly in the construction sector), escalated to levels not seen since that decade.

The Irish Stock Exchange (ISEQ) general index, which reached a peak of 10,000 points briefly in April 2007, fell to 1,987 points—a 14-year low—on 24 February 2009 (the last time it was under 2,000 being mid-1995). In September 2008, the Irish government—a Fianna Fáil-Green coalition—officially acknowledged the country's descent into recession; a massive jump in unemployment occurred in the following months. Ireland was the first state in the eurozone to enter recession, as declared by the Central Statistics Office (CSO). By January 2009, the number of people living on unemployment benefits had risen to 326,000—the highest monthly level since records began in 1967—and the unemployment rate rose from 6.5% in July 2008 to 14.8% in July 2012. The slumping economy drew 100,000 demonstrators onto the streets of Dublin on 21 February 2009, amid further talk of protests and industrial action.With the banks "guaranteed", and the National Asset Management Agency (NAMA) established on the evening of 21 November 2010, then Taoiseach Brian Cowen confirmed on live television that the EU/ECB/IMF troika would be involving itself in Ireland's financial affairs. Support for the Fianna Fáil party, dominant for much of the previous century, then crumbled; in an unprecedented event in the nation's history, it fell to third place in an opinion poll conducted by The Irish Times—placing behind Fine Gael and the Labour Party, the latter rising above Fianna Fáil for the first time. On 22 November, the Greens called for an election the following year. The 2011 general election replaced the ruling coalition with another one, between Fine Gael and Labour. This coalition continued with the same austerity policies of the previous coalition, as the country's larger parties all favour a similar agenda, but subsequently lost power in the 2016 General Election.

Official statistics showed a drop in most crimes coinciding with the economic downturn. Burglaries, however, rose by approximately 10% and recorded prostitution offences more than doubled from 2009 to 2010. In late 2014 the unemployment rate was 11.0% on the seasonally adjusted measure, still over double the lows of the mid-2000s but down from a peak of 15.1% in early 2012. By May 2016, this figure had fallen to 7.8%.

Russian financial crisis (2014–2017)

The financial crisis in Russia in 2014–2015 was the result of the sharp devaluation of the Russian ruble beginning in the second half of 2014. A decline in confidence in the Russian economy caused investors to sell off their Russian assets, which led to a decline in the value of the Russian ruble and sparked fears of a Russian financial crisis. The lack of confidence in the Russian economy stemmed from at least two major sources. The first is the fall in the price of oil in 2014. Crude oil, a major export of Russia, declined in price by nearly 50% between its yearly high in June 2014 and 16 December 2014. The second is the result of international economic sanctions imposed on Russia following Russia's annexation of Crimea and the Russian military intervention in Ukraine.The crisis has affected the Russian economy, both consumers and companies, and regional financial markets, as well as Putin's ambitions regarding the Eurasian Economic Union. The Russian stock market in particular has experienced large declines, with a 30% drop in the RTS Index from the beginning of December through 16 December 2014.

During the financial crisis, the economy turned to prevalent state ownership, with 60% of productive assets in the hands of the government. By 2016, the Russian economy rebounded with 0.3% GDP growth and was officially out of the recession. In January 2017, Russia had foreign currency reserves of around $391 billion, an inflation rate of 5.0% and interest rate of 10.0%.

Shōwa financial crisis

The Shōwa Financial Crisis (昭和金融恐慌, Shōwa Kin'yū Kyōkō) was a financial panic in 1927, during the first year of the reign of Emperor Hirohito of Japan, and was a foretaste of the Great Depression. It brought down the government of Prime Minister Wakatsuki Reijirō and led to the domination of the zaibatsu over the Japanese banking industry.

The Shōwa Financial Crisis occurred after the post–World War I business boom in Japan. Many companies invested heavily in increased production capacity in what proved to be an economic bubble. The post-1920 economic slowdown and the Great Kantō earthquake of 1923 caused an economic depression, which led to the failures of many businesses. The government intervened through the Bank of Japan by issuing discounted "earthquake bonds" to overextended banks. In January 1927, when the government proposed to redeem these bonds, rumor spread that the banks holding these bonds would go bankrupt. In the ensuing bank run, 37 banks throughout Japan (including the Bank of Taiwan), and the second-tier zaibatsu Suzuki Shoten, went under. Prime Minister Wakatsuki attempted to have an emergency decree issued to allow the Bank of Japan to extend emergency loans to save these banks, but his request was denied by the Privy Council and he was forced to resign.

Wakatsuki was succeeded by Prime Minister Tanaka Giichi, who managed to control the situation with a three-week bank holiday and the issuance of emergency loans; however, as a result of the collapse of many smaller banks, the large financial branches of the five great zaibatsu houses were able to dominate Japanese finances until the end of World War II.

Subprime mortgage crisis

The United States subprime mortgage crisis was a nationwide financial crisis, occurring between 2007 and 2010, that contributed to the U.S. recession of December 2007 – June 2009. It was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies and foreclosures and the devaluation of housing-related securities. Declines in residential investment preceded the recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines.The housing bubble preceding the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies. While elements of the crisis first became more visible during 2007, several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.There were many causes of the crisis, with commentators assigning different levels of blame to financial institutions, regulators, credit agencies, government housing policies, and consumers, among others. Two proximate causes were the rise in subprime lending and the increase in housing speculation. The percentage of lower-quality subprime mortgages originated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S. A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages. Housing speculation also increased, with the share of mortgage originations to investors (i.e. those owning homes other than primary residences) rising significantly from around 20% in 2000 to around 35% in 2006–2007. Investors, even those with prime credit ratings, were much more likely to default than non-investors when prices fell. These changes were part of a broader trend of lowered lending standards and higher-risk mortgage products, which contributed to U.S. households becoming increasingly indebted. The ratio of household debt to disposable personal income rose from 77% in 1990 to 127% by the end of 2007.When U.S. home prices declined steeply after peaking in mid-2006, it became more difficult for borrowers to refinance their loans. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value. Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U.S. and Europe.

The crisis had severe, long-lasting consequences for the U.S. and European economies. The U.S. entered a deep recession, with nearly 9 million jobs lost during 2008 and 2009, roughly 6% of the workforce. The number of jobs did not return to the December 2007 pre-crisis peak until May 2014. U.S. household net worth declined by nearly $13 trillion (20%) from its Q2 2007 pre-crisis peak, recovering by Q4 2012. U.S. housing prices fell nearly 30% on average and the U.S. stock market fell approximately 50% by early 2009, with stocks regaining their December 2007 level during September 2012. One estimate of lost output and income from the crisis comes to "at least 40% of 2007 gross domestic product". Europe also continued to struggle with its own economic crisis, with elevated unemployment and severe banking impairments estimated at €940 billion between 2008 and 2012. As of January 2018, U.S. bailout funds had been fully recovered by the government, when interest on loans is taken into consideration. A total of $626B was invested, loaned, or granted due to various bailout measures, while $390B had been returned to the Treasury. The Treasury had earned another $323B in interest on bailout loans, resulting in an $87B profit.

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