Financial crisis

Financial crisis

Overview
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

s coincided with these panics. Other situations that are often called financial crises include stock market crash
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...

es and the bursting of other financial bubbles
Economic bubble
An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...

, currency crises
Currency crisis
A currency crisis, which is also called a balance-of-payments crisis, is a sudden devaluation of a currency caused by chronic balance-of-payments deficits which usually ends in a speculative attack in the foreign exchange market. It occurs when the value of a currency changes quickly, undermining...

, and sovereign default
Sovereign default
A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay or only partially pay its debts , or the de facto cessation of due payments...

s.
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Encyclopedia
The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

s coincided with these panics. Other situations that are often called financial crises include stock market crash
Stock market crash
A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic as much as by underlying economic factors...

es and the bursting of other financial bubbles
Economic bubble
An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...

, currency crises
Currency crisis
A currency crisis, which is also called a balance-of-payments crisis, is a sudden devaluation of a currency caused by chronic balance-of-payments deficits which usually ends in a speculative attack in the foreign exchange market. It occurs when the value of a currency changes quickly, undermining...

, and sovereign default
Sovereign default
A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay or only partially pay its debts , or the de facto cessation of due payments...

s. Financial crises directly result in a loss of paper wealth
Paper wealth
Paper wealth means wealth as measured by monetary value, as reflected in the price of assets – how much money one's assets could be sold for. Paper wealth is contrasted with real wealth, which refers to one's actual physical assets....

; they do not directly result in changes in the real economy unless a recession or depression follows.

Many economists have offered theories about how financial crises develop and how they could be prevented. There is little consensus, however, and financial crises are still a regular occurrence around the world.

Banking crisis



When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits (see fractional-reserve banking
Fractional-reserve banking
Fractional-reserve banking is a form of banking where banks maintain reserves that are only a fraction of the customer's deposits. Funds deposited into a bank are mostly lent out, and a bank keeps only a fraction of the quantity of deposits as reserves...

), it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run may leave the bank in bankruptcy, causing many depositors to lose their savings unless they are covered by deposit insurance. A situation in which bank runs are widespread is called a systemic banking crisis or just a banking panic. A situation without widespread bank runs, but in which banks are reluctant to lend, because they worry that they have insufficient funds available, is often called a credit crunch
Credit crunch
A credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...

. In this way, the banks become an accelerator of a financial crisis.

Examples of bank runs include the run on the Bank of the United States in 1931 and the run on Northern Rock
Northern Rock
Northern Rock plc is a British bank, best known for becoming the first bank in 150 years to suffer a bank run after having had to approach the Bank of England for a loan facility, to replace money market funding, during the credit crisis in 2007.  Having failed to find a commercial buyer for...

 in 2007. The collapse of Bear Stearns in 2008 has also sometimes been called a bank run, even though Bear Stearns was an investment bank rather than a commercial bank
Commercial bank
After the implementation of the Glass–Steagall Act, the U.S. Congress required that banks engage only in banking activities, whereas investment banks were limited to capital market activities. As the two no longer have to be under separate ownership under U.S...

. The U.S. savings and loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...

 of the 1980s led to a credit crunch which is seen as a major factor in the U.S. recession of 1990–91.

Speculative bubbles and crashes



Economists say that a financial asset (stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

, for example) exhibits a bubble when its price exceeds the present value of the future income (such as interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

 or dividends) that would be received by owning it to maturity
Maturity (finance)
In finance, maturity or maturity date refers to the final payment date of a loan or other financial instrument, at which point the principal is due to be paid....

. If most market participants buy the asset primarily in hopes of selling it later at a higher price, instead of buying it for the income it will generate, this could be evidence that a bubble is present. If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to tell in practice whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur.

Well-known examples of bubbles (or purported bubbles) and crashes in stock prices and other asset prices include the Dutch tulip mania
Tulip mania
Tulip mania or tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed...

, the Wall Street Crash of 1929
Wall Street Crash of 1929
The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...

, the Japanese property bubble
Japanese asset price bubble
The was an economic bubble in Japan from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble's collapse lasted for more than a decade with stock prices initially bottoming in 2003, although they would descend even further amidst the global crisis in 2008. The...

 of the 1980s, the crash of the dot-com bubble
Dot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...

 in 2000–2001, and the now-deflating United States housing bubble
United States housing bubble
The United States housing bubble is an economic bubble affecting many parts of the United States housing market in over half of American states. Housing prices peaked in early 2006, started to decline in 2006 and 2007, and may not yet have hit bottom as of 2011. On December 30, 2008 the...

.

International financial crises



When a country that maintains a fixed exchange rate
Fixed exchange rate
A fixed exchange rate, sometimes called a pegged exchange rate, is a type of exchange rate regime wherein a currency's value is matched to the value of another single currency or to a basket of other currencies, or to another measure of value, such as gold.A fixed exchange rate is usually used to...

 is suddenly forced to devalue
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....

 its currency because of a speculative attack
Speculative attack
A speculative attack is a term used by economists to denote a precipitous acquisition of something by previously inactive speculators. The first model of a speculative attack was contained in a 1975 discussion paper on the gold market by Stephen Salant and Dale Henderson at the Federal Reserve Board...

, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt, this is called a sovereign default. While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop
Sudden stop (economics)
A sudden stop in capital flows is defined as a sudden slowdown in private capital inflows into emerging market economies, and a corresponding sharp reversal from large current account deficits into smaller deficits or small surpluses. Sudden stops are usually followed by a sharp decrease in output,...

 in capital inflows or a sudden increase in capital flight
Capital flight
Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event and that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic...

.

Several currencies that formed part of the European Exchange Rate Mechanism
European Exchange Rate Mechanism
The European Exchange Rate Mechanism, ERM, was a system introduced by the European Community in March 1979, as part of the European Monetary System , to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of...

 suffered crises in 1992–93 and were forced to devalue or withdraw from the mechanism. Another round of currency crises took place in Asia in 1997–98. Many Latin American countries defaulted
Latin American debt crisis
The Latin American debt crisis was a financial crisis that occurred in the early 1980s , often known as the "lost decade", when Latin American countries reached a point where their foreign debt exceeded their earning power and they were not able to repay it.-Origins:In the 1960s and 1970s many...

 on their debt in the early 1980s. The 1998 Russian financial crisis resulted in a devaluation of the ruble and default on Russian government bonds.

Wider economic crises



Negative GDP growth lasting two or more quarters is called a recession. An especially prolonged recession may be called a depression, while a long period of slow but not necessarily negative growth is sometimes called economic stagnation
Economic stagnation
Economic stagnation or economic immobilism, often called simply stagnation or immobilism, is a prolonged period of slow economic growth , usually accompanied by high unemployment. Under some definitions, "slow" means significantly slower than potential growth as estimated by experts in macroeconomics...

. Since these phenomena affect much more than the financial system they are not usually considered financial crises as such though there are clearly links between the two.


Some economists argue that many recessions have been caused in large part by financial crises. One important example is the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

, which was preceded in many countries by bank runs and stock market crashes. The subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....

 and the bursting of other real estate bubbles around the world also led to recession in the U.S. and a number of other countries in late 2008 and 2009.

Some economists argue that financial crises are caused by recessions instead of the other way around, and that even where a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession. In particular, Milton Friedman
Milton Friedman
Milton Friedman was an American economist, statistician, academic, and author who taught at the University of Chicago for more than three decades...

 and Anna Schwartz
Anna Schwartz
Anna Jacobson Schwartz is an economist at the National Bureau of Economic Research in New York City, and according to Paul Krugman "one of the world's greatest monetary scholars"...

 argued that the initial economic decline associated with the crash of 1929
Wall Street Crash of 1929
The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...

 and the bank panics of the 1930s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the Federal Reserve, a position supported by Ben Bernanke
Ben Bernanke
Ben Shalom Bernanke is an American economist, and the current Chairman of the Federal Reserve, the central bank of the United States. During his tenure as Chairman, Bernanke has overseen the response of the Federal Reserve to late-2000s financial crisis....

.

Strategic complementarities in financial markets



It is often observed that successful investment requires each investor in a financial market to guess what other investors will do. George Soros has called this need to guess the intentions of others 'reflexivity
Reflexivity (social theory)
Reflexivity refers to circular relationships between cause and effect. A reflexive relationship is bidirectional with both the cause and the effect affecting one another in a situation that does not render both functions causes and effects...

'. Similarly, John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...

 compared financial markets to a beauty contest game
Keynesian beauty contest
A Keynesian beauty contest is a concept developed by John Maynard Keynes and introduced in Chapter 12 of his work, General Theory of Employment Interest and Money , to explain price fluctuations in equity markets.-Overview:...

 in which each participant tries to predict which model other participants will consider most beautiful.

Furthermore, in many cases investors have incentives to coordinate
Coordination game
In game theory, coordination games are a class of games with multiple pure strategy Nash equilibria in which players choose the same or corresponding strategies...

 their choices. For example, someone who thinks other investors want to buy lots of Japanese yen
Japanese yen
The is the official currency of Japan. It is the third most traded currency in the foreign exchange market after the United States dollar and the euro. It is also widely used as a reserve currency after the U.S. dollar, the euro and the pound sterling...

 may expect the yen to rise in value, and therefore has an incentive to buy yen too. Likewise, a depositor in IndyMac Bank
IndyMac Bank
OneWest Bank is a federal savings bank with 82 retail branches in southern California and approximately $14 billion in deposits as of February 2010....

 who expects other depositors to withdraw their funds may expect the bank to fail, and therefore has an incentive to withdraw too. Economists call an incentive to mimic the strategies of others strategic complementarity.

It has been argued that if people or firms have a sufficiently strong incentive to do the same thing they expect others to do, then self-fulfilling prophecies may occur. For example, if investors expect the value of the yen to rise, this may cause its value to rise; if depositors expect a bank to fail this may cause it to fail. Therefore, financial crises are sometimes viewed as a vicious circle
Virtuous circle and vicious circle
A virtuous circle and a vicious circle are economic terms. They refer to a complex of events that reinforces itself through a feedback loop. A virtuous circle has favorable results, while a vicious circle has detrimental results...

 in which investors shun some institution or asset because they expect others to do so.

Leverage



Leverage, which means borrowing to finance investments, is frequently cited as a contributor to financial crises. When a financial institution (or an individual) only invests its own money, it can, in the very worst case, lose its own money. But when it borrows in order to invest more, it can potentially earn more from its investment, but it can also lose more than all it has. Therefore leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....

. Since bankruptcy means that a firm fails to honor all its promised payments to other firms, it may spread financial troubles from one firm to another (see 'Contagion' below).

The average degree of leverage in the economy often rises prior to a financial crisis. For example, borrowing to finance investment in the stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...

 ("margin buying") became increasingly common prior to the Wall Street Crash of 1929
Wall Street Crash of 1929
The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...

.

Asset-liability mismatch



Another factor believed to contribute to financial crises is asset-liability mismatch, a situation in which the risks associated with an institution's debts and assets are not appropriately aligned. For example, commercial banks offer deposit accounts which can be withdrawn at any time and they use the proceeds to make long-term loans to businesses and homeowners. The mismatch between the banks' short-term liabilities (its deposits) and its long-term assets (its loans) is seen as one of the reasons bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...

s occur (when depositors panic and decide to withdraw their funds more quickly than the bank can get back the proceeds of its loans). Likewise, Bear Stearns
Bear Stearns
The Bear Stearns Companies, Inc. based in New York City, was a global investment bank and securities trading and brokerage, until its sale to JPMorgan Chase in 2008 during the global financial crisis and recession...

 failed in 2007–08 because it was unable to renew the short-term debt
Money market
The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit,...

 it used to finance long-term investments in mortgage securities.

In an international context, many emerging market governments are unable to sell bonds denominated in their own currencies, and therefore sell bonds denominated in US dollars instead. This generates a mismatch between the currency denomination of their liabilities (their bonds) and their assets (their local tax revenues), so that they run a risk of sovereign default
Sovereign default
A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay or only partially pay its debts , or the de facto cessation of due payments...

 due to fluctuations in exchange rates.

Uncertainty and herd behavior



Many analyses of financial crises emphasize the role of investment mistakes caused by
lack of knowledge or the imperfections of human reasoning. Behavioral finance
Behavioral finance
Behavioral economics and its related area of study, behavioral finance, use social, cognitive and emotional factors in understanding the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market...

 studies
errors in economic and quantitative reasoning. Psychologist Torbjorn K A Eliazonhas also analyzed failures
of economic reasoning in his concept of 'œcopathy'.

Historians, notably Charles P. Kindleberger
Charles P. Kindleberger
Charles Poor "Charlie" Kindleberger was a historical economist and author of over 30 books. His 1978 book Manias, Panics, and Crashes, about speculative stock market bubbles, was reprinted in 2000 after the dot-com bubble. He is well known for hegemonic stability theory.-Life:Kindleberger was born...

, have pointed out that crises
often follow soon after major financial or technical innovations that present
investors with new types of financial opportunities, which he called "displacements"
of investors' expectations.
Early examples include the South Sea Bubble and Mississippi Bubble of 1720,
which occurred when the notion of investment in shares of company stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...

 was
itself new and unfamiliar,
and the Crash of 1929, which followed the introduction of new electrical and transportation
technologies.
More recently, many financial crises followed changes in the investment
environment brought about by financial deregulation, and the crash of the dot com bubble
in 2001 arguably began with "irrational exuberance" about Internet technology.

Unfamiliarity with recent technical and financial innovation
Financial innovation
There are several interpretations of the phrase financial innovation. In general, it refers to the creating and marketing of new types of securities.- Why does financial innovation occur? :...

s may help explain how
investors sometimes grossly overestimate asset values. Also, if the first investors
in a new class of assets (for example, stock in "dot com" companies)
profit from rising asset values as other investors learn about the innovation
(in our example, as others learn about the potential of the Internet),
then still more others may follow their example, driving the price even higher
as they rush to buy in hopes of similar profits. If such "herd behavior" causes
prices to spiral up far above the true value of the assets, a crash may become inevitable.
If for any reason the price briefly falls, so that investors realize
that further gains are not assured, then the spiral may go into reverse,
with price decreases causing a rush of sales, reinforcing the decrease in prices.

Regulatory failures



Governments have attempted to eliminate or mitigate financial crises by regulating the financial sector. One major goal of regulation is transparency
Transparency (market)
In economics, a market is transparent if much is known by many about:* What products, services or capital assets are available.* What price.* Where....

: making institutions' financial situations publicly known by requiring regular reporting under standardized accounting procedures. Another goal of regulation is making sure institutions have sufficient assets to meet their contractual obligations, through reserve requirement
Reserve requirement
The reserve requirement is a central bank regulation that sets the minimum reserves each commercial bank must hold of customer deposits and notes...

s, capital requirement
Capital requirement
Capital requirement refers to -The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements, Federal Deposit...

s, and other limits on leverage
Leverage (finance)
In finance, leverage is a general term for any technique to multiply gains and losses. Common ways to attain leverage are borrowing money, buying fixed assets and using derivatives. Important examples are:* A public corporation may leverage its equity by borrowing money...

.

Some financial crises have been blamed on insufficient regulation, and have led to changes in regulation in order to avoid a repeat. For example, the Managing Director of the IMF, Dominique Strauss-Kahn
Dominique Strauss-Kahn
Dominique Gaston André Strauss-Kahn , often referred to in the media, and by himself, as DSK, is a French economist, lawyer, politician, and member of the French Socialist Party...

, has blamed the financial crisis of 2008 on 'regulatory failure to guard against excessive risk-taking in the financial system, especially in the US'. Likewise, the New York Times singled out the deregulation of credit default swap
Credit default swap
A credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...

s as a cause of the crisis.

However, excessive regulation has also been cited as a possible cause of financial crises. In particular, the Basel II Accord has been criticized for requiring banks to increase their capital when risks rise, which might cause them to decrease lending precisely when capital is scarce, potentially aggravating a financial crisis.

International regulatory convergence has been interpreted in terms of regulatory herding, deepening market herding (discussed above) and so increasing systemic risk. From this perspective, maintaining diverse regulatory regimes would be a safeguard.

Fraud



Fraud has played a role in the collapse of some financial institutions, when companies have attracted depositors with misleading claims about their investment strategies, or have embezzled
Embezzlement
Embezzlement is the act of dishonestly appropriating or secreting assets by one or more individuals to whom such assets have been entrusted....

 the resulting income. Examples include Charles Ponzi
Charles Ponzi
Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, , commonly known as Charles Ponzi, was a businessman and con artist in the U.S. and Canada. Born in Italy, he became known as a swindler in North America for his money making scheme. His aliases include Charles Ponei, Charles P. Bianchi, Carl and Carlo...

's scam in early 20th century Boston, the collapse of the MMM investment fund in Russia in 1994, the scams that led to the Albanian Lottery Uprising
1997 rebellion in Albania
The 1997 unrest in Albania, also known as the Lottery Uprising or Anarchy in Albania, was an uprising sparked by Ponzi scheme failures...

 of 1997, and the collapse of Madoff Investment Securities
Bernard Madoff
Bernard Lawrence "Bernie" Madoff is a former American businessman, stockbroker, investment advisor, and financier. He is the former non-executive chairman of the NASDAQ stock market, and the admitted operator of a Ponzi scheme that is considered to be the largest financial fraud in U.S...

 in 2008.

Many rogue trader
Rogue trader
A rogue trader is an authorised employee making unauthorised trades on behalf of their employer. It is most often applicable to financial trading, and as such is a term used to describe persons - professional traders - making unapproved financial transactions....

s that have caused large losses at financial institutions have been accused of acting fraudulently in order to hide their trades. Fraud in mortgage financing has also been cited as one possible cause of the 2008 subprime mortgage crisis
Subprime mortgage crisis
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....

; government officials stated on September 23, 2008 that the FBI
Federal Bureau of Investigation
The Federal Bureau of Investigation is an agency of the United States Department of Justice that serves as both a federal criminal investigative body and an internal intelligence agency . The FBI has investigative jurisdiction over violations of more than 200 categories of federal crime...

 was looking into possible fraud by mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers
Lehman Brothers
Lehman Brothers Holdings Inc. was a global financial services firm. Before declaring bankruptcy in 2008, Lehman was the fourth largest investment bank in the USA , doing business in investment banking, equity and fixed-income sales and trading Lehman Brothers Holdings Inc. (former NYSE ticker...

, and insurer American International Group
American International Group
American International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in...

. Likewise it has been argued that many financial companies failed in the recent crisis because their managers failed to carry out their fiduciary duties.

Contagion



Contagion refers to the idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk.

One widely-cited example of contagion was the spread of the Thai crisis in 1997 to other countries like South Korea
South Korea
The Republic of Korea , , is a sovereign state in East Asia, located on the southern portion of the Korean Peninsula. It is neighbored by the People's Republic of China to the west, Japan to the east, North Korea to the north, and the East China Sea and Republic of China to the south...

. However, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages.

Recessionary effects


Some financial crises have little effect outside of the financial sector, like the Wall Street crash of 1987
Black Monday (1987)
In finance, Black Monday refers to Monday October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin...

, but other crises are believed to have played a role in decreasing growth in the rest of the economy. There are many theories why a financial crisis could have a recessionary effect on the rest of the economy. These theoretical ideas include the 'financial accelerator
Financial accelerator
The financial accelerator in macroeconomics refers to the idea that adverse shocks to the economy may be amplified by worsening financial market conditions...

', 'flight to quality' and 'flight to liquidity', and the Kiyotaki-Moore model
Kiyotaki-Moore model
The Kiyotaki–Moore model of credit cycles is an economic model developed by Nobuhiro Kiyotaki and John H. Moore that shows how small shocks to the economy might be amplified by credit restrictions, giving rise to large output fluctuations. The model assumes that borrowers cannot be forced to repay...

. Some 'third generation' models of currency crises explore how currency crises and banking crises together can cause recessions.

Marxist theories



Recurrent major depressions in the world economy at the pace of 20 and 50 years (often referred to as the business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...

) have been the subject of studies since Jean Charles Léonard de Sismondi
Jean Charles Léonard de Sismondi
Jean Charles Léonard de Sismondi , whose real name was Simonde, was a writer born at Geneva. He is best known for his works on French and Italian history, and his economic ideas.-Early life:...

 (1773–1842) provided the first theory of crisis in a critique of classical political economy's assumption of equilibrium between supply and demand. Developing an economic crisis theory
Crisis theory
Crisis theory is generally associated with Marxian economics. In this context crisis refers to what is called, even currently and outside Marxian theory in many European countries a "conjuncture" or especially sharp bust cycle of the regular boom and bust pattern of what Marxists term "chaotic"...

 become the central recurring concept throughout Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...

's mature work. Marx's law of the tendency for the rate of profit to fall
Tendency of the rate of profit to fall
The tendency of the rate of profit to fall is a hypothesis in economics and political economy, most famously expounded by Karl Marx in chapter 13 of Das Kapital Vol. 3. It was generally accepted in the 19th century...

 borrowed many features of the presentation of John Stuart Mill
John Stuart Mill
John Stuart Mill was a British philosopher, economist and civil servant. An influential contributor to social theory, political theory, and political economy, his conception of liberty justified the freedom of the individual in opposition to unlimited state control. He was a proponent of...

's discussion Of the Tendency of Profits to a Minimum (Principles of Political Economy Book IV Chapter IV). The theory is a corrollary of the Tendency towards the Centralization of Profits.

In a capitalist system, successfully-operating businesses return less money to their workers (in the form of wages) than the value of the goods produced by those workers (i.e. the amount of money the products are sold for). This profit
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...

 first goes towards covering the initial investment in the business. In the long-run, however, when one considers the combined economic activity of all successfully-operating business, it is clear that less money (in the form of wages) is being returned to the mass of the population (the workers) than is available to them to buy all of these goods being produced. Furthermore, the expansion of businesses in the process of competing for markets leads to an abundance of goods and a general fall in their prices, further exacerbating the tendency for the rate of profit to fall.

The viability of this theory depends upon two main factors: firstly, the degree to which profit is taxed by government and returned to the mass of people in the form of welfare, family benefits and health and education spending; and secondly, the proportion of the population who are workers rather than investors/business owners. Given the extraordinary capital expenditure required to enter modern economic sectors like airline transport, the military industry, or chemical production, these sectors are extremely difficult for new businesses to enter and are being concentrated in fewer and fewer hands.

Empirical and econometric research continue especially in the world systems theory
World Systems Theory
The world-systems theory is a multidisciplinary, macro-scale approach to world history and social change....

 and in the debate about Nikolai Kondratiev
Nikolai Kondratiev
Nikolai Dmitriyevich Kondratiev , Russian: Николай Дмитриевич Кондратьев , was a Russian economist, who was a proponent of the New Economic Policy in the Soviet Union....

 and the so-called 50-years Kondratiev waves. Major figures of world systems theory, like Andre Gunder Frank
Andre Gunder Frank
Andre Gunder Frank was a German-American economic historian and sociologist who promoted "dependency theory" after 1970 and "World Systems Theory" after 1984...

 and Immanuel Wallerstein
Immanuel Wallerstein
Immanuel Maurice Wallerstein is a US sociologist, historical social scientist, and world-systems analyst...

, consistently warned about the crash that the world economy is now facing. World systems scholars and Kondratiev cycle researchers always implied that Washington Consensus
Washington Consensus
The term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten relatively specific economic policy prescriptions that he considered constituted the "standard" reform package promoted for crisis-wracked developing countries...

 oriented economists never understood the dangers and perils, which leading industrial nations will be facing and are now facing at the end of the long economic cycle which began after the oil crisis
1973 oil crisis
The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...

 of 1973.

Minsky's theory


Hyman Minsky
Hyman Minsky
Hyman Philip Minsky was an American economist and professor of economics at Washington University in St. Louis. His research attempted to provide an understanding and explanation of the characteristics of financial crises...

 has proposed a post-Keynesian
Post-Keynesian economics
Post Keynesian economics is a school of economic thought with its origins in The General Theory of John Maynard Keynes, although its subsequent development was influenced to a large degree by Michał Kalecki, Joan Robinson, Nicholas Kaldor and Paul Davidson...

 explanation that is most applicable to a closed economy. He theorized that financial fragility is a typical feature of any capitalist
Capitalism
Capitalism is an economic system that became dominant in the Western world following the demise of feudalism. There is no consensus on the precise definition nor on how the term should be used as a historical category...

 economy
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...

. High fragility leads to a higher risk of a financial crisis. To facilitate his analysis, Minsky defines three approaches to financing firms may choose, according to their tolerance of risk. They are hedge finance, speculative finance, and Ponzi finance. Ponzi finance leads to the most fragility.
  • for hedge finance, income flows are expected to meet financial obligations in every period, including both the principal and the interest on loans.
  • for speculative finance, a firm must roll over debt because income flows are expected to only cover interest costs. None of the principal is paid off.
  • for Ponzi finance, expected income flows will not even cover interest cost, so the firm must borrow more or sell off assets simply to service its debt. The hope is that either the market value of assets or income will rise enough to pay off interest and principal.


Financial fragility levels move together with the business cycle
Business cycle
The term business cycle refers to economy-wide fluctuations in production or economic activity over several months or years...

. After a recession
Recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

, firms have lost much financing and choose only hedge, the safest. As the economy grows and expected profits
Profit (economics)
In economics, the term profit has two related but distinct meanings. Normal profit represents the total opportunity costs of a venture to an entrepreneur or investor, whilst economic profit In economics, the term profit has two related but distinct meanings. Normal profit represents the total...

 rise, firms tend to believe that they can allow themselves to take on speculative financing. In this case, they know that profits will not cover all the interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....

 all the time. Firms, however, believe that profits will rise and the loans will eventually be repaid without much trouble. More loans lead to more investment, and the economy grows further. Then lenders also start believing that they will get back all the money they lend. Therefore, they are ready to lend to firms without full guarantees of success.

Lenders know that such firms will have problems repaying. Still, they believe these firms will refinance from elsewhere as their expected profits rise. This is Ponzi financing. In this way, the economy has taken on much risky credit. Now it is only a question of time before some big firm actually defaults. Lenders understand the actual risks in the economy and stop giving credit so easily. Refinancing
Refinancing
Refinancing may refer to the replacement of an existing debt obligation with a debt obligation under different terms. The terms and conditions of refinancing may vary widely by country, province, or state, based on several economic factors such as, inherent risk, projected risk, political...

 becomes impossible for many, and more firms default. If no new money comes into the economy to allow the refinancing process, a real economic crisis begins. During the recession, firms start to hedge again, and the cycle is closed.

Coordination games



Mathematical approaches to modeling financial crises have emphasized that there is often positive feedback
Positive feedback
Positive feedback is a process in which the effects of a small disturbance on a system include an increase in the magnitude of the perturbation. That is, A produces more of B which in turn produces more of A. In contrast, a system that responds to a perturbation in a way that reduces its effect is...

 between market participants' decisions (see strategic complementarity). Positive feedback implies that there may be dramatic changes in asset values in response to small changes in economic fundamentals. For example, some models of currency crises (including that of Paul Krugman
Paul Krugman
Paul Robin Krugman is an American economist, professor of Economics and International Affairs at the Woodrow Wilson School of Public and International Affairs at Princeton University, Centenary Professor at the London School of Economics, and an op-ed columnist for The New York Times...

) imply that a fixed exchange rate may be stable for a long period of time, but will collapse suddenly in an avalanche of currency sales
Speculative attack
A speculative attack is a term used by economists to denote a precipitous acquisition of something by previously inactive speculators. The first model of a speculative attack was contained in a 1975 discussion paper on the gold market by Stephen Salant and Dale Henderson at the Federal Reserve Board...

 in response to a sufficient deterioration of government finances or underlying economic conditions.

According to some theories, positive feedback implies that the economy can have more than one equilibrium
Nash equilibrium
In game theory, Nash equilibrium is a solution concept of a game involving two or more players, in which each player is assumed to know the equilibrium strategies of the other players, and no player has anything to gain by changing only his own strategy unilaterally...

. There may be an equilibrium in which market participants invest heavily in asset markets because they expect assets to be valuable, but there may be another equilibrium where participants flee asset markets because they expect others to flee too. This is the type of argument underlying Diamond and Dybvig's model
Diamond-Dybvig model
The Diamond–Dybvig model is an influential model of bank runs and related financial crises. The model shows how banks' mix of illiquid assets and liquid liabilities may give rise to self-fulfilling panics among depositors.-Theory:The model, published in 1983 by Douglas W...

 of bank run
Bank run
A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...

s, in which savers withdraw their assets from the bank because they expect others to withdraw too. Likewise, in Obstfeld's model of currency crises, when economic conditions are neither too bad nor too good, there are two possible outcomes: speculators may or may not decide to attack the currency depending on what they expect other speculators to do.

Herding models and learning models



A variety of models have been developed in which asset values may spiral excessively up or down
as investors learn from each other. In these models, asset purchases by a few agents
encourage others to buy too, not because the true value of the asset increases
when many buy (which is called "strategic complementarity"), but because
investors come to believe the true asset value is high when they observe others buying.

In "herding" models, it is assumed that investors are fully rational, but only have partial
information about the economy. In these models, when a few investors buy some type of asset,
this reveals that they have some positive information about that asset,
which increases the rational incentive of others to buy the asset too. Even though this is a fully
rational decision, it may sometimes lead to mistakenly high asset values (implying, eventually, a crash)
since the first investors may, by chance, have been mistaken.

In "adaptive learning" or "adaptive expectations" models, investors are assumed to be
imperfectly rational, basing their reasoning only on recent experience. In such models,
if the price of a given asset rises for some period of time, investors may begin to believe
that its price always rises, which increases their tendency to buy and thus drives the
price up further. Likewise, observing a few price decreases may give rise to a downward
price spiral, so in models of this type large fluctuations in asset prices may occur.
Agent-based models
Agent-Based Computational Economics
Agent-based computational economics is the major aspect of computational economics that studies economic processes, including whole economies, as dynamic systems of interacting agents. As such, it falls in paradigm of complex adaptive systems...


of financial markets often assume investors act on the
basis of adaptive learning or adaptive expectations.

History




A noted survey of financial crises is This Time is Different: Eight Centuries of Financial Folly , by economists Carmen Reinhart
Carmen Reinhart
-External links:*...

 and Kenneth Rogoff
Kenneth Rogoff
Kenneth Saul "Ken" Rogoff is currently the Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard University. He is also a chess Grandmaster.-Early life:...

, who are regarded as among the foremost historians of financial crises. In this survey, they trace the history of financial crisis back to sovereign default
Sovereign default
A sovereign default is the failure or refusal of the government of a sovereign state to pay back its debt in full. It may be accompanied by a formal declaration of a government not to pay or only partially pay its debts , or the de facto cessation of due payments...

s – default on public debt, – which were the form of crisis prior to the 18th century and continue, then and now causing private bank failures; crises since the 18th century feature both public debt default and private debt default. Reinhart and Rogoff also class debasement
Debasement
Debasement is the practice of lowering the value of currency. It is particularly used in connection with commodity money such as gold or silver coins...

 of currency and hyperinflation
Hyperinflation
In economics, hyperinflation is inflation that is very high or out of control. While the real values of the specific economic items generally stay the same in terms of relatively stable foreign currencies, in hyperinflationary conditions the general price level within a specific economy increases...

 as being forms of financial crisis, broadly speaking, because they lead to unilateral reduction (repudiation) of debt.

Prior to 19th century


Reinhart and Rogoff trace inflation (to reduce debt) to Dionysius of Syracuse
Dionysius of Syracuse
Dionysius of Syracuse may refer to:*Dionysius I of Syracuse, tyrant of Syracuse from 405 BC to 367 BC.; father of Dionysius II*Dionysius II of Syracuse, tyrant of Syracuse from 367 BC to 357 BC and again from 346 BC to 344 BC.; son of Dionysius I...

, of the 4th century BCE, and begin their "eight centuries" in 1258; debasement of currency also occurred under the Roman empire
Roman Empire
The Roman Empire was the post-Republican period of the ancient Roman civilization, characterised by an autocratic form of government and large territorial holdings in Europe and around the Mediterranean....

 and Byzantine empire
Byzantine Empire
The Byzantine Empire was the Eastern Roman Empire during the periods of Late Antiquity and the Middle Ages, centred on the capital of Constantinople. Known simply as the Roman Empire or Romania to its inhabitants and neighbours, the Empire was the direct continuation of the Ancient Roman State...

.

Among the earliest crises Reinhart and Rogoff study is the 1340 default of England, due to setbacks in its war with France (the Hundred Years' War
Hundred Years' War
The Hundred Years' War was a series of separate wars waged from 1337 to 1453 by the House of Valois and the House of Plantagenet, also known as the House of Anjou, for the French throne, which had become vacant upon the extinction of the senior Capetian line of French kings...

; see details). Further early sovereign defaults include seven defaults by imperial Spain, four under Philip II
Philip II of Spain
Philip II was King of Spain, Portugal, Naples, Sicily, and, while married to Mary I, King of England and Ireland. He was lord of the Seventeen Provinces from 1556 until 1581, holding various titles for the individual territories such as duke or count....

, three under his successors.

Other global and national financial mania since the 17th century include:
  • 1637: Bursting of tulip mania
    Tulip mania
    Tulip mania or tulipomania was a period in the Dutch Golden Age during which contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels and then suddenly collapsed...

    * in the Netherlands – while tulip mania is popularly reported as an example of a financial crisis, and was a speculative bubble, modern scholarship holds that its broader economic impact was limited to negligible, and that it did not precipitate a financial crisis.
  • 1720: Bursting of South Sea Bubble (Great Britain) and Mississippi Bubble (France) – earliest of modern financial crises; in both cases the company assumed the national debt of the country (80–85% in Great Britain, 100% in France), and thereupon the bubble burst.
  • Crisis of 1772
  • Panic of 1792
    Panic of 1792
    The Panic of 1792 was a financial credit crisis that occurred during March and April of 1792 due to the speculation of William Duer and Alexander Macomb against stock held by the Bank of New York. While Duer attempted to drive the price of stocks up, the Livingston family attempted to drive the...

  • Panic of 1796–1797

19th century

  • Danish state bankruptcy of 1813
    Danish state bankruptcy of 1813
    A state bankruptcy occurred in Denmark on 5 January 1813. The country had been waging the Gunboat War since 1807, something which eventually caused a financial crisis. The Danish state, heavily indebted, went bankrupt....

  • Panic of 1819
    Panic of 1819
    The Panic of 1819 was the first major financial crisis in the United States, and had occurred during the political calm of the Era of Good Feelings. The new nation previously had faced a depression following the war of independence in the late 1780s and led directly to the establishment of the...

     – pervasive USA economic recession w/ bank failures; culmination of U.S.'s 1st boom-to-bust economic cycle
  • Panic of 1825
    Panic of 1825
    The Panic of 1825 was a stock market crash that started in the Bank of England arising in part out of speculative investments in Latin America, including the imaginary country of Poyais...

     – pervasive British economic recession in which many British banks failed, & Bank of England nearly failed
  • Panic of 1837
    Panic of 1837
    The Panic of 1837 was a financial crisis or market correction in the United States built on a speculative fever. The end of the Second Bank of the United States had produced a period of runaway inflation, but on May 10, 1837 in New York City, every bank began to accept payment only in specie ,...

     – pervasive USA economic recession w/ bank failures; a 5 yr depression ensued
  • Panic of 1847
    Panic of 1847
    The Panic of 1847 was started as a collapse of British financial markets associated with the end of the 1840s railway industry boom. As a means of stabilizing the British economy the ministry of Robert Peel passed the Bank Charter Act of 1844...

     – a collapse of British financial markets associated with the end of the 1840s railroad boom.
  • Panic of 1857
    Panic of 1857
    The Panic of 1857 was a financial panic in the United States caused by the declining international economy and over-expansion of the domestic economy. Indeed, because of the interconnectedness of the world economy by the time of the 1850s, the financial crisis which began in the autumn of 1857 was...

     – pervasive USA economic recession w/ bank failures
  • Panic of 1866
    Panic of 1866
    The Panic of 1866 was an international financial downturn that accompanied the failure of Overend, Gurney and Company in London, and the corso forzoso abandonment of the silver standard in Italy.-References:...

     – the Overend Gurney crisis (primarily British)
  • Panic of 1873
    Panic of 1873
    The Panic of 1873 triggered a severe international economic depression in both Europe and the United States that lasted until 1879, and even longer in some countries. The depression was known as the Great Depression until the 1930s, but is now known as the Long Depression...

     – pervasive USA economic recession w/ bank failures, known then as the 5 yr Great Depression & now as the Long Depression
    Long Depression
    The Long Depression was a worldwide economic crisis, felt most heavily in Europe and the United States, which had been experiencing strong economic growth fueled by the Second Industrial Revolution in the decade following the American Civil War. At the time, the episode was labeled the Great...

  • Panic of 1884
    Panic of 1884
    The Panic of 1884 was a panic during the Recession of 1882-85. Gold reserves of Europe were depleted and the New York City national banks, with tacit approval of the United States Treasury Department, halted investments in the rest of the United States and called in outstanding loans. A larger...

  • Panic of 1890
    Panic of 1890
    The Panic of 1890 was an acute depression, although less serious than other panics of the era. It was precipitated by the near insolvency of Barings Bank in London. Barings, led by Edward Baring, 1st Baron Revelstoke, faced bankruptcy in November 1890 due mainly to excessive risk-taking on poor...

  • Panic of 1893
    Panic of 1893
    The Panic of 1893 was a serious economic depression in the United States that began in 1893. Similar to the Panic of 1873, this panic was marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures...

     – a panic in the United States marked by the collapse of railroad overbuilding and shaky railroad financing which set off a series of bank failures
  • Australian banking crisis of 1893
    Australian banking crisis of 1893
    The 1893 banking crisis occurred in Australia when several of the commercial banks of the colonies within Australia collapsed.During the 1880s there was a speculative boom in the Australian property market...

  • Panic of 1896
    Panic of 1896
    The Panic of 1896 was an acute economic depression in the United States that was less serious than other panics of the era precipitated by a drop in silver reserves and market concerns on the effects it would have on the gold standard. Deflation of commodities prices drove the stock market to new...

     – an acute economic depression
    Recession
    In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way...

     in the United States
    United States
    The United States of America is a federal constitutional republic comprising fifty states and a federal district...

     precipitated by a drop in silver reserve
    Free Silver
    Free Silver was an important United States political policy issue in the late 19th century and early 20th century. Its advocates were in favor of an inflationary monetary policy using the "free coinage of silver" as opposed to the less inflationary Gold Standard; its supporters were called...

    s and market concerns on the effects it would have on the gold standard
    Gold standard
    The gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard...


20th century

  • Panic of 1901
    Panic of 1901
    The Panic of 1901 was the first stock market crash on the New York Stock Exchange, caused in part by struggles between E. H. Harriman, Jacob Schiff, and J. P. Morgan/James J. Hill for the financial control of the Northern Pacific Railway. The stock cornering was orchestrated by James Stillman and...

     – limited to crashing of the New York Stock Exchange
  • Panic of 1907
    Panic of 1907
    The Panic of 1907, also known as the 1907 Bankers' Panic, was a financial crisis that occurred in the United States when the New York Stock Exchange fell almost 50% from its peak the previous year. Panic occurred, as this was during a time of economic recession, and there were numerous runs on...

     – pervasive USA economic recession w/ bank failures
  • Panic of 1910–1911
  • 1910 – Shanghai rubber stock market crisis
    Shanghai rubber stock market crisis
    Shanghai Rubber Stock Market Crisis , was an economic crisis caused by the bankers and stock-holders overstimulating the rubber stocks in Shanghai in 1910. This crisis led to a great number of bankruptcies of Chinese native banks in Tianjing, Guangzhou, etc...

  • Wall Street Crash of 1929
    Wall Street Crash of 1929
    The Wall Street Crash of 1929 , also known as the Great Crash, and the Stock Market Crash of 1929, was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout...

    , followed by the Great Depression
    Great Depression
    The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

     – the largest and most important economic depression in the 20th century
  • 1973 – 1973 oil crisis
    1973 oil crisis
    The 1973 oil crisis started in October 1973, when the members of Organization of Arab Petroleum Exporting Countries or the OAPEC proclaimed an oil embargo. This was "in response to the U.S. decision to re-supply the Israeli military" during the Yom Kippur war. It lasted until March 1974. With the...

     – oil prices soared, causing the 1973–1974 stock market crash
  • Secondary banking crisis of 1973–1975
    Secondary banking crisis of 1973–1975
    The Secondary Banking Crisis of 1973–75 was a dramatic crash in property prices in Great Britain which caused dozens of small lending banks to be threatened with bankruptcy.-Crisis:...

     – United Kingdom
  • 1980s – Latin American debt crisis
    Latin American debt crisis
    The Latin American debt crisis was a financial crisis that occurred in the early 1980s , often known as the "lost decade", when Latin American countries reached a point where their foreign debt exceeded their earning power and they were not able to repay it.-Origins:In the 1960s and 1970s many...

     – beginning in Mexico in 1982 with the Mexican Weekend
    Mexican Weekend
    The Mexican Weekend marked the beginning of the Latin American debt crisis. In August 1982, Mexican Secretary of Finance Jesús Silva Herzog Flores flew to Washington, D.C., to declare Mexico's foreign debt unmanageable, and announce that his country was in danger of defaulting...

  • Bank stock crisis (Israel 1983)
    Bank stock crisis (Israel 1983)
    The Bank stock crisis was a financial crisis that occurred in Israel in 1983, during which the stocks of the four largest banks in Israel collapsed, and were nationalized by the state.-Background:...

  • 1987 – Black Monday (1987)
    Black Monday (1987)
    In finance, Black Monday refers to Monday October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong and spread west to Europe, hitting the United States after other markets had already declined by a significant margin...

     – the largest one-day percentage decline in stock market history
  • 1989–91 – United States Savings & Loan crisis
    Savings and Loan crisis
    The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...

  • 1990 – Japanese asset price bubble
    Japanese asset price bubble
    The was an economic bubble in Japan from 1986 to 1991, in which real estate and stock prices were greatly inflated. The bubble's collapse lasted for more than a decade with stock prices initially bottoming in 2003, although they would descend even further amidst the global crisis in 2008. The...

     collapsed
  • early 1990s – Scandinavian banking crisis: Swedish banking crisis, Finnish banking crisis of 1990s
    Finnish banking crisis of 1990s
    The Finnish Banking Crisis of 1990s was a deep systemic crisis of the entire Finnish financial sector that took place mainly in the years 1991–1993, after several years of debt-based economic boom in the late 1980s. Its total taxpayer cost was roughly 8% of the Finnish GNP, making it the most...

  • 1992–93 – Black Wednesday
    Black Wednesday
    In politics and economics, Black Wednesday refers to the events of 16 September 1992 when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism after they were unable to keep it above its agreed lower limit...

     – speculative attacks on currencies in the European Exchange Rate Mechanism
    European Exchange Rate Mechanism
    The European Exchange Rate Mechanism, ERM, was a system introduced by the European Community in March 1979, as part of the European Monetary System , to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of...

  • 1994–95 – 1994 economic crisis in Mexico
    1994 economic crisis in Mexico
    The 1994 Economic Crisis in Mexico, widely known as the Mexican peso crisis, was caused by the sudden devaluation of the Mexican peso in December 1994....

     – speculative attack and default on Mexican debt
  • 1997–98 – 1997 Asian Financial Crisis – devaluations and banking crises across Asia
  • 1998 Russian financial crisis

21st century

  • 2000–2001 – Turkish Crises
  • 2001 – Argentine Crises
  • 2001 – Bursting of dot-com bubble
    Dot-com bubble
    The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...

     – speculations concerning internet companies crashed
  • 2007–10 – Financial crisis of 2007–2010, followed by the late 2000s recession
    Late 2000s recession
    The late-2000s recession, sometimes referred to as the Great Recession or Lesser Depression or Long Recession, is a severe ongoing global economic problem that began in December 2007 and took a particularly sharp downward turn in September 2008. The Great Recession has affected the entire world...

     and the 2010 European sovereign debt crisis
    2010 European sovereign debt crisis
    From late 2009, fears of a sovereign debt crisis developed among investors concerning some European states, intensifying in early 2010 and thereafter.....


See also

  • Bailout
  • Bank run
    Bank run
    A bank run occurs when a large number of bank customers withdraw their deposits because they believe the bank is, or might become, insolvent...

  • Credit crunch
    Credit crunch
    A credit crunch is a reduction in the general availability of loans or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates...

  • Flight-to-liquidity
    Flight-to-Liquidity
    A flight-to-liquidity is a financial market phenomenon occurring when investors sell what they perceive to be less liquid or higher risk investments, and purchase more liquid investments instead, such as US Treasuries...

  • Global debt levels
    Global debt levels
    -Flows:World-Wide Debt, Equity and Equity-related issuance reached record-breaking levels in 2003 with over $5 trillion in proceeds raised, surpassing 2001’s record of $4.4 trillion...

  • Kondratiev waves
  • Lender of last resort
    Lender of last resort
    A lender of last resort is an institution willing to extend credit when no one else will. The term refers especially to a reserve financial institution, most often the central bank of a country, intended to avoid bankruptcy of banks or other institutions deemed systemically important or 'too big to...

  • Liquidity crisis
    Liquidity crisis
    In financial economics, liquidity is a catch-all term that may refer to several different yet closely related concepts. Among other things, it may refer to Asset Market liquidity In financial economics, liquidity is a catch-all term that may refer to several different yet closely related...

  • Macroprudential policy
    Macroprudential policy
    Macroprudential policy is a concept in the banking regulation and supervision literature which has to do with defining conditions which can result in financial instability and how to prevent such outcomes through public policy.-Origin:...

  • Nikolai Kondratiev
    Nikolai Kondratiev
    Nikolai Dmitriyevich Kondratiev , Russian: Николай Дмитриевич Кондратьев , was a Russian economist, who was a proponent of the New Economic Policy in the Soviet Union....

  • Oil crisis
    Oil crisis
    Oil crisis may refer to:1970s*1970s energy crisis*1973 oil crisis*1979 energy crisisPost 1970s*Oil price increase of 1990*2000s energy crisis...

  • Real estate bubble
    Real estate bubble
    A real estate bubble or property bubble is a type of economic bubble that occurs periodically in local or global real estate markets...



Specific:
  • 2000s energy crisis
  • 2007–2008 world food price crisis
    2007–2008 world food price crisis
    World food prices increased dramatically in 2007 and the 1st and 2nd quarter of 2008 creating a global crisis and causing political and economical instability and social unrest in both poor and developed nations. Systemic causes for the worldwide increases in food prices continue to be the subject...

  • Financial crisis of 2007–2010
  • Great Depression
    Great Depression
    The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...

  • Subprime mortgage crisis
    Subprime mortgage crisis
    The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages....

  • America's Great Depression
    America's Great Depression
    America's Great Depression is a 1963 treatise on the 1930s Great Depression and its root causes, written by Austrian School economist and author Murray Rothbard. The fifth edition was released in 2000.-Brief summary:...


General perspectives

  • Walter Bagehot (1873), Lombard Street: A Description of the Money Market.
  • Charles P. Kindleberger and Robert Aliber (2005), Manias, Panics, and Crashes: A History of Financial Crises(Palgrave Macmillan, 2005 ISBN 9781403936516).
  • Gernot Kohler and Emilio José Chaves (Editors) "Globalization: Critical Perspectives" Hauppauge, New York: Nova Science Publishers ISBN 1-59033-346-2. With contributions by Samir Amin
    Samir Amin
    Samir Amin is an Egyptian economist. He currently lives in Dakar, Senegal.- Biography :Samir Amin was born in Cairo, the son of an Egyptian father and a French mother . He spent his childhood and youth in Port Said; there he attended a French High School, leaving in 1947 with a Baccalauréat...

    , Christopher Chase Dunn, Andre Gunder Frank
    Andre Gunder Frank
    Andre Gunder Frank was a German-American economic historian and sociologist who promoted "dependency theory" after 1970 and "World Systems Theory" after 1984...

    , Immanuel Wallerstein
    Immanuel Wallerstein
    Immanuel Maurice Wallerstein is a US sociologist, historical social scientist, and world-systems analyst...

  • Hyman P. Minsky (1986, 2008), Stabilizing an Unstable Economy.

Banking crises

  • Franklin Allen and Douglas Gale (2000), 'Financial contagion'. Journal of Political Economy 108 (1), pp. 1–33.
  • Franklin Allen and Douglas Gale (2007), Understanding Financial Crises.
  • Jean-Charles Rochet (2008), Why Are There So Many Banking Crises? The Politics and Policy of Bank Regulation.
  • R. Glenn Hubbard, ed., (1991) Financial Markets and Financial Crises.
  • Douglas Diamond and Philip Dybvig (1983), 'Bank runs, deposit insurance, and liquidity'. Journal of Political Economy 91 (3).
  • Luc Laeven and Fabian Valencia (2008), 'Systemic banking crises: a new database'. International Monetary Fund Working Paper 08/224.

Bubbles and crashes

  • Didier Sornette
    Didier Sornette
    Didier Sornette is Professor on the Chair of Entrepreneurial Risks at Swiss Federal Institute of Technology Zurich . He is also a professor of the Swiss Finance Institute, a professor associated with both the department of Physics and the department ofEarth Sciences at ETH Zurich, an Adjunct...

     (2003), Why Stock Markets Crash, Princeton University Press.
  • Robert J. Shiller (1999, 2006), Irrational Exuberance.
  • Markus Brunnermeier
    Markus Brunnermeier
    Markus K. Brunnermeier is a financial economist specializing in financial crises and panics. His work focuses on the role financial frictions play in the formation and collapse of economic bubbles...

     (2008), 'Bubbles', New Palgrave Dictionary of Economics, 2nd ed.
  • Markus K. Brunnermeier (2001), Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding, Oxford University Press. ISBN 0198296983.

International financial crises

  • Paul Krugman (1995), Currencies and Crises.
  • Craig Burnside, Martin Eichenbaum, and Sergio Rebelo (2008), 'Currency crisis models', New Palgrave Dictionary of Economics, 2nd ed.
  • Maurice Obstfeld (1996), 'Models of currency crises with self-fulfilling features'. European Economic Review 40.
  • Stephen Morris
    Stephen Morris (game theorist)
    Stephen Morris is an economic theorist and game theorist especially known for his research in the field of global games. In 2007 he became the Alexander Stewart 1886 Professor of Economics at Princeton University. He is the editor of Econometrica for the period 2007-2011.- Biography :Morris...

     and Hyun Song Shin
    Hyun Song Shin
    Hyun-Song Shin is a South Korean economic theorist and financial economist who did research in the field of global games. In 2006 he became the Hughes-Rogers Professor of Economics at Princeton University...

     (1998), 'Unique equilibrium in a model of self-fulfilling currency attacks'. American Economic Review 88 (3).
  • Barry Eichengreen (2004), Capital Flows and Crises.
  • Charles Goodhart and P. Delargy (1998), 'Financial crises: plus ça change, plus c'est la même chose'. International Finance 1 (2), pp. 261–87.
  • Jean Tirole (2002), Financial Crises, Liquidity, and the International Monetary System.
  • Guillermo Calvo (2005), Emerging Capital Markets in Turmoil: Bad Luck or Bad Policy?
  • Barry Eichengreen (2002), Financial Crises: And What to Do about Them.
  • Charles Calomiris (1998), 'Blueprints for a new global financial architecture'.

The Great Depression and earlier banking crises

  • Milton Friedman and Anna Schwartz (1971), A Monetary History of the United States.
  • Ben S. Bernanke (2000), Essays on the Great Depression.
  • Robert F. Bruner (2007), The Panic of 1907. Lessons Learned from the Market's Perfect Storm.

Recent international financial crises

  • Barry Eichengreen and Peter Lindert, eds., (1992), The International Debt Crisis in Historical Perspective.
  • Lessons from the Asian financial crisis / edited by Richard Carney. New York, NY : Routledge, 2009. ISBN 9780415481908 (hardback) ISBN 0415481902 (hardback) ISBN 9780203884775 (ebook) ISBN 0203884779 (ebook)
  • Robertson, Justin, 1972– US-Asia economic relations : a political economy of crisis and the rise of new business actors / Justin Robertson. Abingdon, Oxon ; New York, NY : Routledge, 2008. ISBN 9780415469517 (hbk.) ISBN 9780203890523 (ebook)

2007–2010 financial crisis

  • Roubini N., Mihm S. (2010), Crisis Economics: A Crash Course in the Future of Finance. ISBN 978-0-141-04593-1.
  • Fengbo Zhang (2008): 1. Perspective on the United States Sub-prime Mortgage Crisis , 2. Accurately Forecasting Trends of the Financial Crisis , 3. Stop Arguing about Socialism versus Capitalism .
  • Robert J. Shiller (2008), The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do About It. ISBN 0691139296.
  • JC Coffee
    John C. Coffee
    John C. "Jack" Coffee, Jr. is the Adolf A. Berle Professor of Law at Columbia Law School and director of the Center on Corporate Governance at Columbia University Law School.-Education:...

    , ‘What went wrong? An initial inquiry into the causes of the 2008 financial crisis’ (2009) 9(1) Journal of Corporate Law Studies 1
  • Fratianni M., Marchionne F. (2009), The Role of Banks in the Subprime Financial Crisis available on SSRN: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1383473
  • Markus Brunnermeier (2009), 'Deciphering the liquidity and credit crunch 2007–2008'. Journal of Economic Perspectives 23 (1), pp. 77–100.
  • Paul Krugman (2008), The Return of Depression Economics and the Crisis of 2008. ISBN 0393071014.
  • "The myths about the economic crisis, the reformist left and economic democracy" by Takis Fotopoulos
    Takis Fotopoulos
    Takis Fotopoulos , born , is a political philosopher and economist who founded the inclusive democracy movement. He is noted for his synthesis of the classical democracy with the libertarian socialism and the radical currents in the new social movements...

    , The International Journal of Inclusive Democracy
    Inclusive Democracy
    Inclusive Democracy is a political theory and political project that aims for direct democracy, economic democracy in a stateless, moneyless and marketless economy, self-management and ecological democracy...

    , vol 4, no 4, Oct. 2008.
  • Nitasha Kaul (2009), "The economics of turning people into things". Open Democracy 20 April, Available online http://www.opendemocracy.net/article/the-economics-of-turning-people-into-things
  • Funnell, Warwick N. In government we trust : market failure and the delusions of privatisation / Warwick Funnell, Robert Jupe and Jane Andrew. Sydney : University of New South Wales Press, 2009. ISBN 9780868409665 (pbk.)
  • Read, Colin, 1959– Global financial meltdown : how we can avoid the next economic crisis / Colin Read. New York : Palgrave Macmillan, c2009. ISBN 9780230222182
  • The American housing crisis / Susan Hunnicutt, book editor. Farmington Hills, Michigan : Greenhaven Press, c2009. ISBN 9780737743104 (hbk.) ISBN 9780737743098 (pbk.)
  • United States. Congress. House. Committee on the Judiciary. Subcommittee on Commercial and Administrative Law. Working families in financial crisis : medical debt
    Medical debt
    Medical debt refers to debt incurred by individuals due to health care costs and related expenses.Medical debt is different from other forms of debt, because it is usually incurred accidentally or faultlessly...

     and bankruptcy : hearing before the Subcommittee on Commercial and Administrative Law of the Committee on the Judiciary, House of Representatives, One Hundred Tenth Congress, first session, July 17, 2007. Washington : U.S. G.P.O. : For sale by the Supt. of Docs., U.S. G.P.O., 2008. 277 p. : ISBN 9780160813764 ISBN 016081376X http://purl.access.gpo.gov/GPO/LPS99198
  • Davis Polk Financial Crisis Manual
  • Dwyer, Gerald P. and Paula Tkac. 2009. "The Financial Crisis of 2008 in Fixed-income Markets" Journal of International Money and Finance 28 (December 2009), 1293–1316, available in working paper version at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1464891.

External links