FINANCIAL CRISIS Nina Kathrina S. Pineda

DEFINITION Value of financial institutions or assets drops rapidly Value of financial institutions or assets drops rapidly Often associated with a panic or a run on the banks Often associated with a panic or a run on the banks Investors sell off assets Investors sell off assets Withdraw money from savings accounts Withdraw money from savings accounts Source: investopedia.com

Effect on Economy Source: ECON121 lecture handout

IN-DEPTH GLOBAL FINANCIAL CRISIS

Tulip Mania Netherlands, 1637

Tulip Mania Tulips imported from Turkey to the Dutch Tulips imported from Turkey to the Dutch Became a famous novelty item Became a famous novelty item Was infested with “mosaic virus” Was infested with “mosaic virus” Flames of color on petals Flames of color on petals Increased the “rarity” of the flower Increased the “rarity” of the flower An increase in price depending on virus alteration An increase in price depending on virus alteration

Tulip Mania High resale value of the tulips High resale value of the tulips True bulb buyers reacted to this craze True bulb buyers reacted to this craze Depleted supply, increased scarcity & demand Depleted supply, increased scarcity & demand Dutch reacted to the increasing price Dutch reacted to the increasing price Traded their lands, life savings, etc Traded their lands, life savings, etc Liquidated their assets Liquidated their assets

Tulip Mania Speculative bubbles Speculative bubbles Exaggerated expectations of future asset value growth, etc Exaggerated expectations of future asset value growth, etc Sell their tulips and “crystallize” profit Sell their tulips and “crystallize” profit Response of massive tulip owners Response of massive tulip owners Many are selling, Few are buying Many are selling, Few are buying Low selling price of tulips (remarkable losses) Low selling price of tulips (remarkable losses)

Tulip Mania Government reaction Government reaction Offered “honor contracts” (10%) Offered “honor contracts” (10%) Did not help, made the situation worst Did not help, made the situation worst “Investors now can know that it is better to stop and smell the flowers than to stake your future upon one.”

The Great Depression

The Great Depression 40% drop in the market (September 1929 – October 1929) 40% drop in the market (September 1929 – October 1929) Rampant “uneducated” investors Rampant “uneducated” investors Were subjected to swindling and manipulations Were subjected to swindling and manipulations “Behavioral finance” “Behavioral finance” Many invested because of good Stock Market reputation Many invested because of good Stock Market reputation Make everyone rich Make everyone rich Industrializaiton (luxuries) Industrializaiton (luxuries) No-risk, no-brain world No-risk, no-brain world Ended this 12 year depression with a declaration of war

The Great Depression The Great Plains experienced droughts and dust storms The Great Plains experienced droughts and dust storms Farmers in debt Farmers in debt Banned loans for farmers (leaving the farmers homeless & unemployed) Banned loans for farmers (leaving the farmers homeless & unemployed) Rail riders Rail riders Pres. Herbert Hoovert was replaced by Pres. Franklin Roosevelt Pres. Herbert Hoovert was replaced by Pres. Franklin Roosevelt Roosevelt closed all banks (opened them once they are stabilized) Roosevelt closed all banks (opened them once they are stabilized) NEW DEAL programs NEW DEAL programs After the bombing of Pearl Harbor and US entry to WWII, great depression ended

Wall Street Crash London, 1929

Wall Street Crash of 1929 Beginning of the 10-year Great Depression Beginning of the 10-year Great Depression October 24, 1929 (Black Thursday) October 24, 1929 (Black Thursday) Massive sell off in the stock market Massive sell off in the stock market Rise of new industries (broadcasting and carmaking) Rise of new industries (broadcasting and carmaking) Aforementioned shares fell by 13% Aforementioned shares fell by 13% 12.9 Million shares traded (to salvage losses) 12.9 Million shares traded (to salvage losses) Dow Jones Industrial Average (closed 6 points) Dow Jones Industrial Average (closed 6 points) Investment companies bought up stocks Investment companies bought up stocks

Wall Street Crash of 1929 Factors that caused Wall Street Crash of 1929 Factors that caused Wall Street Crash of 1929 Rampant proliferation of Holding Companies & Investment Trusts Rampant proliferation of Holding Companies & Investment Trusts Inability of large banks to liquidate Inability of large banks to liquidate Economic Recession prevalent Economic Recession prevalent Credit tightening by Federal Reserves Credit tightening by Federal Reserves Discount rate from 5% to 6% (August 1929) Discount rate from 5% to 6% (August 1929) Rampant Speculation Rampant Speculation Lost investment value and owed money to creditors Lost investment value and owed money to creditors

Asian Financial Crisis Asia,

Asian Financial Crisis Southeast Asia (Asian Tigers/ Asian Economic Miracle) Southeast Asia (Asian Tigers/ Asian Economic Miracle) International hotspot for investment International hotspot for investment High short-term interest rate of ASEAN countries High short-term interest rate of ASEAN countries Advantage to foreign investors Advantage to foreign investors Increased capital flow Increased capital flow

Asian Financial Crisis Large amount of credit (due to policies) Higher asset prices Massive Debt Defaults

Asian Financial Crisis Pulled out investments ASEAN pulled up Inerest rate & increased domestic money CB’s ran out of foreign reserves & capital outflow was rampant

Asian Financial Crisis Regional currencies depreciated Regional currencies depreciated Stock Markets crashed Stock Markets crashed Poverty was felt (increase in political destabilization) Poverty was felt (increase in political destabilization) IMF’s bailout packages IMF’s bailout packages Remove faults in exchange for debt defaults Remove faults in exchange for debt defaults Government expenditures cut down Government expenditures cut down Failure of banks Failure of banks Higher interest rate Higher interest rate

Dot com bubble

Dot Com Bubble “DOT COM COMPANY” “DOT COM COMPANY” Internet based company Internet based company Stocks where used to finance internet startups Stocks where used to finance internet startups Many invested with expectation of high return Many invested with expectation of high return Rampant day trading Rampant day trading Causes Causes High business spending High business spending Market correction Market correction Unemployment of computer developments and programmers Unemployment of computer developments and programmers Terrorist attacks in US (9-11 attack) Terrorist attacks in US (9-11 attack)

Housing Bubble & Credit Crisis

Housing bubble centered in US & Britain Housing bubble centered in US & Britain Credit crisis occurred around the world Credit crisis occurred around the world Resulted from Dot Com Bubbles Resulted from Dot Com Bubbles Federal reserves kept short-term interest rate Federal reserves kept short-term interest rate This condition coincided with a global savings surplus This condition coincided with a global savings surplus Due to high savings that accumulated large reserves Due to high savings that accumulated large reserves Global interest rate decreased Global interest rate decreased Investors were alarmed of this low return Investors were alarmed of this low return

Housing Bubble & Credit Crisis Great Moderation Great Moderation Associated high risk to high return Associated high risk to high return Above-average return Above-average return Below-average volatility Below-average volatility Great Moderation coincided with the housing boom Great Moderation coincided with the housing boom High real estate prices High real estate prices AAA-rated securities mortagages AAA-rated securities mortagages

Housing Bubble & Credit Crisis Decline of the housing boom Decline of the housing boom Decrease in prices Decrease in prices Large losses (resulted to World’s largest bank crisis) Large losses (resulted to World’s largest bank crisis) Credit crisis Credit crisis Stocks fell 50% or more Stocks fell 50% or more Remarkable volatility in financial market Remarkable volatility in financial market Bankruptcy of corporations (corporate bonds) Bankruptcy of corporations (corporate bonds)

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