Question

When Discussing the stability/instability of the financial system. Address the historic frequency of financial crises and the negative externalities associated with the financial system

Answer 1

Major Financial Crisis in world history covers 7 major financial crises that the world witnessed in the last 100 years. The 7 crises that will be presented are the Great Depression 1932; the Suez Crisis 1956; the International Debt Crisis 1982; the East Asian Economic Crisis 1997-2001; the Russian Economic Crisis 1992-97, the Latin American Debt Crisis in Mexico, Brazil and Argentina 1994-2002, and the Global Economic Recession 2007-09 and at present great recession due to coronavirus pandemic. In each instance, the global crisis was preceded by elevated growth rates and collapses in the year of financial shock.

On October 25, 1929, the New York Stock Exchange saw 13 million shares being sold in panic selling. During the 1920s the American economy grew at 42 percent and stock market values had increased by 218 percent from 1922 to 1929 at a rate of 20 percent a year for 7 years. No country had ever experienced such a run-up of stock prices which attracted millions of Americans into financial speculation. before this crisis, Americans believed in permanent prosperity. There was no rational explanation for the collapse of the American markets in October 1929. this incident taught one lesson to the investor and stock vendor to be more cautious about the market situation. In the aftermath of the US stock market crash, a series of bank panics emanated from Europe in 1931 spreading financial contagion to the United States, United Kingdom, France, and eventually the whole world came under the Great Depression. The Great Depression lasted from 1929 to 1939 and was the worst economic downturn in history. By 1933, 15 million Americans were unemployed, 20,000 companies went bankrupt and a majority of American banks failed. The monetary contraction in the United States culminated in a depression in Germany. The foreign reserves of gold and foreign exchange declined sharply. In May 1931, Austria’s largest Bank, the Kreditanstalt collapsed. As investors feared that their money would be frozen or lost, there was a huge capital exodus. Germany failed to obtain the foreign credits needed to halt the crisis. To halt the capital outflow, Germany had to close banks, devalue the mark, negotiate standstill agreements with foreign creditors, and impose exchange controls. significant withdrawals from the United Kingdom resulting in a weakening of the pound. 35 Nations had abandoned gold and gold-exchange standards. Economic recovery as indicated by industrial activity was visible in Great Britain, France, and Germany, with the United States witnessing a rapid industrial upturn during April and May 1933.

The SUES crisis, On July 26, 1956, Egypt nationalized the Suez Canal Company. France, Israel, and the United Kingdom initiated joint military action, with Israel invading the Sinai on October 29, 1956. The military action lasted two months and in the midst of the turmoil and uncertainty, a financial crisis erupted. The Suez Canal was closed for 6 months resulting in trade diversion, cost increases, and delivery delays impacting the current account balances of all four countries. The pound sterling came under heavy speculative pressure and the United Kingdom witnessed short term capital outflows. This involvement gave IMF the role of an International Crisis Manager. The Suez Crisis was the first major financial crisis of the post-war era. The UK has a current-account surplus which leads to differentiation with the US.

International Debt crisis began on August 20, 1982. Mexico could not repay the loan that was due and engulfed 20 countries. in this crisis, repayment made costlier for easter Europe and Latin Ameria. The commercial debt crisis erupted in 1982 and lasted till 1989. Each one faced serious debt problems but each one had unique problems in origin and implications. Long-term growth in most heavily indebted countries required innovation and a broader strategy.

The East Asian Crisis, A major economic crisis struck many East Asian economies in 1997. The East Asian economies, which we're witnessing rapid growth and improvement in living standards, got embroiled in a severe financial crisis. Interrupting a decade of unparalleled economic growth. Creditors believed that Thailand’s large current account deficit reflected high business investment, as it was backed by high savings rates and government budget surplus. The Korean economic crisis emerged because its business and financial institutions had incurred short term foreign debts of nearly US$ 110 billion wide swings in the dollar/ yen exchange rate contributed to the build-up in the crisis through shifts in international competitiveness which proved unsustainable. the Thai currency collapse, which had a great impact ton its foreign investors.

The Russian crisis happened In the mid-1990s, Russia was coming out of the post-Soviet period to a market economy. There was a massive social dislocation, a fall in living standards, inflation in excess of 300 percent. Feeble attempts to cut the budget deficits were made in 1995. The Government sought to control the money growth by keeping the exchange rate of the ruble vis-a-vis the US dollar within a preannounced band. Thus money growth was controlled to maintaining the exchange rate. The strong external current account, rising international reserves, and an appreciation in the exchange rate, covered up the challenges of high debt servicing costs, short term structure of maturities and impact that a sudden depreciation of exchange rate could have on the Nation.

Latin American crisis In the 20th century, Latin America witnessed a major crisis in 1982 – Mexico’s default, 1994/ 95 – the Tequila crisis, in 2001/02 Argentina’s default, 1999/03 – Brazil’s crisis and 2008/09 Global Financial Crisis. Latin America’s crisis filled history is invaluable for studying financial crises. During 1994, investors’ concerns about the sustainability of the current account deficit began to increase, against the background of dramatic adverse political events in Mexico. To stem capital outflows, the authorities raised interest rates and depreciated the peso. The 2002 Argentina crisis was not driven by large money financed deficits and hyper-inflation but by fragility in the public sector debt dynamics. Argentina seemed trapped in a monetary policy regime that constrained policy choices.

The Great recession 2008 severe recession hamper in the United States and Europe which was the deepest slump in the world economy since 1930 and the first annual contraction since the postwar period. The financial crisis which erupted in 2007 with the US sub-prime crisis deepened and entered a tumultuous phase by 2008. • The impact was felt across the global financial system including in emerging markets. The 2008 deterioration of global economic performance followed years of sustained expansion built on the increasing integration of emerging and developing economies into the global economy. Lax regulatory and macroeconomic policies contributed to a buildup in imbalances across financial, housing, Policymakers tried to stabilizing financial conditions while simultaneously nursing their economies through a period of slower growth and containing inflation. Multilateral efforts were particularly important. During this period, China’s geopolitical standing enhanced significantly. and commodity markets. The international financial system was devastated. By October 2009, economic growth turned positive as wide-ranging policy intervention supported demand and lowered the uncertainty of systemic risks to the financial system.

The Europian Crisis presents the euro area crisis countries of Greece (201, 2012), Ireland (2010), Portugal (2011) and Cyprus (2013) faced problems of public and private balance sheet vulnerabilities with large current account imbalances within the Euro Area. The crisis in the Euro Area was unprecedented, coming against the backdrop of the global financial crisis, the risks of contagion were very high. The key challenges included abrupt loss of market access, need for orderly adjustments in countries with deep imbalances and no recourse to exchange rate policies, and absence of euro area firewalls. The stabilization programs were successful in giving time to build firewalls, preventing the crisis from spreading and restoring growth and market access.

Recession due to coronavirus 2020 has shown a new story of recession here the virus paling a great role to make the world economy paralyzed. due to lock down almost all world production got shut down. it a situation where the single intervention can't solve the problem. so the world needs to come together and take a suitable development policy to settle world economy.