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Financial Crises

Financial Crises

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Financial Crises

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  1. Financial Crises The term financial crisis broadly alludes to a range of situations where financial institutions or assets suddenly lose a large part of their value. Typically these involve • Banking panics • Stock market crashes • Currency crises • Sovereign defaults • Or the bursting of asset bubbles

  2. FC: Impact Financial Crises are often followed by economic downturns and recession.

  3. Financial Crises not new • Inherent in capitalism • Charles Mackay Memoirs of Extraordinary Popular Delusions and the Madness of Crowds • Reinhart and Rogoff,

  4. "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one!“

  5. Technology has changed, the height of humans has changed, and fashions have changed. Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. • Carmen Reinhart

  6. Tulip Mania, 1630s • South Sea Bubble, 1720s

  7. Closer home • Bombay Cotton boom and share mania –

  8. failure of the Bank of Bombay 1866

  9. Impact: Trends in Capital Flows

  10. US Current A/c

  11. US Budget

  12. Failure of market fundamentalism – the auto-corrective nature of the financial markets

  13. Periods of high international capital mobility have repeatedly produced international banking crises, not only famously as they did in the 1990s, but historically • Carmen M. Reinhart and Kenneth S. Rogoff

  14. Financial liberalization, capital inflows and financial crises

  15. The historical record, however, suggests that a high ratio of domestic to external debt in overall public debt is cold comfort to external debt holders. Default probabilities depend much more on the overall level of debt. • Carmen M. Reinhart and Kenneth S. Rogoff

  16. Overall Debt & Defaults