Financial Crises The term financial crisis broadly alludes to a range of situations where financial institutions or assets suddenly lose a large part of.

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Presentation transcript:

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

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

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

"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!“

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

Tulip Mania, 1630s South Sea Bubble, 1720s

Closer home Bombay Cotton boom and share mania –

failure of the Bank of Bombay 1866

Asset Class PeriodLowHigh% Gain Housing & Real EstateSchillers %## EquitiesS&P %## SSEC % Nifty % Commodities - PreciousGold % Silver % Commodities- IndustrialCopper % Aluminium % Commodities- EnergyWTI Crude % Commodities- AgriculturalAGI Currencies - Emerging mktKRW %** INR %** TWD %## Currencies - CommoditiesAUD % CAD %** Currencies - Reserve CcyEuro % Stg % Currencies - FundingJPY %## ** USD Index %##

Impact: Trends in Capital Flows

US Current A/c

US Budget

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

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

Financial liberalization, capital inflows and financial crises

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

Overall Debt & Defaults

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