Financial Crises

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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

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FC Impact

• Financial Crises are often followed by economic
  downturns and recession.

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

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• "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!

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• 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

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

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• Closer home
• Bombay Cotton boom and share mania

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• failure of the Bank of Bombay 1866

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• Impact Trends in Capital Flows

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US Current A/c
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US Budget
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• Failure of market fundamentalism the
  auto-corrective nature of the financial markets

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• 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

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Financial liberalization, capital inflows and
financial crises
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• 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

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Overall Debt Defaults