Global Financial Crisis-Tg

Financial Crisis and Global Financial Crisis
Generally, a financial crisis can occur if institutions or assets are overvalued, and
can be exacerbated by irrational or herd-like investor behavior. For example, a
rapid string of selloffs can result in lower asset prices, prompting individuals to
dump assets or make huge savings withdrawals when a bank failure is rumored.
 Banking panics were at the genesis of a number of financial crises of the

19th, 20th, and 21st centuries, many of which led to recessions or
depressions.
 Stock market crashes, credit crunches, the bursting of financial bubbles,
sovereign defaults, and currency crises are all examples of financial crises.
 A financial crisis may be limited to a single country or one segment of
financial services, but is more likely to spread regionally or globally.

NB: An economic bubble or asset bubble (sometimes also referred to as a
speculative bubble, a market bubble, a price bubble, a financial bubble, a
speculative mania, or a balloon) is a situation in which asset prices appear to be based
on implausible or inconsistent views about the future.
A global financial crisis is a financial crisis that affects many countries at the same
time. It is a period of severe difficulties which financial institutions, markets, companies,
and consumers experience simultaneously. During a global financial crisis, financial
institutions lose faith and stop lending to each other and traders stop buying financi al
instruments. Eventually, most lending stops and businesses suffer significantly.
In most global financial crises, parties to financial contracts in many countries fear that
their counterparties will not honor them.
They also conclude that the financial assets they own will be worth less than they had
previously thought.
Eventually, banks stop lending and demand early settlement of loans and other financial
instruments. Banks also start selling all the financial assets that they can.
According to ft/com/lexicon, the Financial Times’ glossary of terms:
“The result is what is often referred to as “frozen” financial markets, where trading
volumes fall considerably and parties often cannot be induced to trade financial
instruments no matter what prices are offered.”
Financial crisis – features

Financial crises come in many forms. However, they have common elements.
The information below comes from an IMF Working Paper, written by Stijn
Claessens and M. Ayhan Kose.
The authors say that at least one the following phenomena are present during a global
financial crisis:
 Credit volumes change significantly.

 Asset prices decline considerably.
 There are serious disruptions in financial intermediation.
 There is a severe disruption in the supply of external financing to many players in
the economy.
 Households, companies, financial intermediaries, and sovereigns experience
large scale-balance sheet problems.
 There is large scale government support, i.e., bailouts.
The authors add:
“As such, financial crises are typically multidimensional events and can be hard to
characterize using a single indicator.”
If a financial crisis spreads, it becomes an economic crisis. An economic crisis occurs

when the whole economy is in trouble, not just the banking and finance sectors.
The 2007/8 global financial crisis

When talking about the financial crisis of 2007/8, people often say the ‘Global Financial
Crisis’ or the ‘2008 Financial Crisis.’ It was the worst global crisis since the Wall Street
Crash and the subsequent Great Depression in the 1930s.
The 2007/8 financial crisis was followed by the Great Recession, which lasted until
2012. It was a period of general economic decline in most countries’ economies and
global markets. If there are two successive quarters of economic contraction, there is a
recession.
When a recession lasts a long time it becomes a depression. Depressions last more
than three years and reduce GDP by at least ten percent.
In September 2008, Lehman Brothers, a sprawling global bank, collapsed. This collapse
subsequently brought down the global financial system.
Taxpayers in North America, Europe, and elsewhere spent hundreds of billions of

dollars on bailouts.
Despite the massive financial help, the ensuing credit crunch exacerbated what was
already a severe downturn. In fact, what followed was the worst recession in eighty
years.
Even after 2012, when the Global Financial Crisis was over, there was a very weak and
fragile recovery. Workers have had to suffer almost a decade of below-inflation wage
increases.
Causes of the 2007/8 global financial crisis

The Economist magazine says that the crisis had multiple causes. The most obvious
culprits were the financiers. Especially those financiers who claimed to have found a
way to banish risk. In fact, what they had done was to lose track of risk.
Regulators and central bankers were also to blame because they were the ones ‘who
tolerated this folly.’
The Economist adds:
“The “Great Moderation”—years of low inflation and stable growth—fostered

complacency and risk-taking. A “savings glut” in Asia pushed down global interest
rates.”
“Some research also implicates European banks, which borrowed greedily in American
money markets before the crisis and used the funds to buy dodgy securities. All these
factors came together to foster a surge of debt in what seemed to have become a less
risky world.”
Other Financial Crisis examples

Financial crises are not uncommon; they have happened for as long as the world
has had currency. Some well-known financial crises include:
 Tulip Mania (1637). More of a speculative bubble, this crisis happened

when contract prices for bulbs of a new, fashionable tulip reached prices of
many multiples of the annual salary of a Dutch craftsman before they
collapsed, erasing many fortunes.
 Credit Crisis of 1772. After a period of rapidly expanding credit, this crisis
started in March/April in London. Alexander Fordyce, a partner in a large
bank, lost a huge sum shorting shares of the East India Company and fled
to France to avoid repayment. A panic led to a run on English banks that
left more than 20 large banking houses either bankrupt or stopping
payments to depositors and creditors. The crisis quickly spread to much of
Europe. Historians draw a line from this crisis to the cause of the Boston
Tea Party—unpopular tax legislation in the 13 colonies—and the resulting
unrest that gave birth to the American Revolution.
 Stock Crash of 1929. This crash, starting on Oct. 24, 1929, saw share
prices collapse after a period of wild speculation and borrowing to buy
shares. It led to the Great Depression, which was felt worldwide for over a
dozen years. Its social impact lasted far longer. One trigger of the crash
was a drastic oversupply of commodity crops, which led to a steep decline
in prices. A wide range of regulations and market-managing tools were
introduced as a result of the crash.
 1973 OPEC Oil Crisis. OPEC members started an oil embargo in October
1973 targeting countries that backed Israel in the Yom Kippur War. By the
end of the embargo, a barrel of oil stood at $12, up from $3. Given that
modern economies depend on oil, the higher prices and uncertainty led to
the stock market crash of 1973–74, when a bear market persisted from
January 1973 to December 1974 and the Dow Jones Industrial Average
lost 45% of its value.
 Asian Crisis of 1997–1998. This crisis started in July 1997 with the
collapse of the Thai baht. Lacking foreign currency, the Thai government
was forced to abandon its U.S. dollar peg and let the baht float. The result
was huge devaluation that spread to much of East Asia, also hitting Japan,
as well as a huge rise in debt-to-GDP ratios. In its wake, the crisis led to
better financial regulation and supervision.
 The 2007-2008 Global Financial Crisis. This financial crisis was the
worst economic disaster since the Stock Market Crash of 1929. It started
with a subprime mortgage lending crisis in 2007 and expanded into a
global banking crisis with the failure of investment bank Lehman Brothers
in September 2008. Huge bailouts and other measures meant to limit the
spread of the damage failed and the global economy fell into recession.

Global Financial Crisis-Tg

Uploaded by

Copyright:

Available Formats

Global Financial Crisis-Tg

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Global Financial Crisis-Tg

Uploaded by

Copyright:

Available Formats

Financial Crisis and Global Financial Crisis

 Banking panics were at the genesis of a number of financial crises of the

According to ft/com/lexicon, the Financial Times’ glossary of terms:

Financial crisis – features

 Credit volumes change significantly.

The authors add:

If a financial crisis spreads, it becomes an economic crisis. An economic crisis occurs

The 2007/8 global financial crisis

Taxpayers in North America, Europe, and elsewhere spent hundreds of billions of

Causes of the 2007/8 global financial crisis

The Economist adds:

“The “Great Moderation”—years of low inflation and stable growth—fostered

Other Financial Crisis examples

 Tulip Mania (1637). More of a speculative bubble, this crisis happened

You might also like