Prof. Mohd Nazari Ismail Faculty of Business and Accounting University of Malaya Financial Crises: Can They Be Prevented?
Plenty of brains… still cannot solve problem? So how? Massachusetts Institute of Technology
Presentation Outline Reasons for concern Different types of financial crises History of finance industry Central argument Conclusion
….financial crises at their core are outcomes of over-lending and over-borrowing and are thus integral to the industry itself. CENTRAL ARGUMENT
Financial Crisis “a disturbance to financial markets, associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the market’s capacity to allocate capital” B. Eichengreen, 1986
Economics Crisis Financial crisis
Other Causes of Economics Crises • Wars • Earthquakes • Floods • Draughts • Plagues
Types of Financial Crises • Currency crisis • Banking crisis • Market crashes
Argentina • Fiscal indiscipline • Public debt: • 1983 USD46 billion • 1989 USD65 billion • 1999 USD130 billion • Trade deficit • Bank run
Argentina riots… Sorry, you cannot withdraw any money today…
Argentina Foreign Debt in 2007: USD127 billion!
Examples of Market Crash • Japanese property crash (1990) • Dot.Com crash (2000) • Sup-prime mortgage crash (2007)
Japanese Crash – A Puzzle? • Successful exporter • Trade surplus • High savings rate • Hardworking and skilled workforce
Japanese problem • banks • over-borrowing • debt • speculation
Here is how it happened… Savings/funds deposited into banks Banks increased lendings Asset prices skyrocketed ?
land surrounding the Imperial Palace in Tokyo estimated to be worth more than whole of California…
Effect of Bubble Burst • Trillions of yens wiped out in markets • Spending slowed down • Economy sputtered to a halt
Low interest rates, excess liquidity in 1990s Banks lent to Sub-prime borrowers Housing boom CDOs act as booster Sub-prime Mortgage Crisis
Housing prices skyrocketed Interest rates rose CRASH! Borrowers go bust Sub-prime Mortgage Crisis (cont.)
Sub-prime Mortgage Crisis (cont.) Housing prices skyrocketed Interest rates rose CRASH! Borrowers go bust
Lenders go bust Credit Crunch Global Recession? Sub-prime Mortgage Crisis (cont.)
How serious is current crisis? • USD16.3 trillion wiped out • deep and prolonged recession • Major economies slowing down