MSc International Business
Financial Crises, slumps and booms, causes and effects, history and future
Jihad Al Naddaf
What are the causes of the booms and slumps in the financial system? What are the factors that will influence how long it is before the next cycle begins?
The global financial system had been through a lot of booms and slumps through history, some lasted for few years, some for decades; some had a minor effect, some had a major effect. But they all clearly show that the financial system is subject to fluctuation over years, and is more vulnerable than we think.
Financial expansions and contractions affected the wider economy through their impact on the fiscal situation of the economies, the production and purchase power and other phases. (Financial Sector Ups and Downs and the Real Sector: Up by the Stairs and Down by the Parachute – May 2012)
HISTORIC OVERVIEW; causes and effects:
The world has come over 71 systemic financial crises in the past 140 years between 1870 and 2009.
As what will be shown below, it explains that most of the financial slumps came in reality as a result of preceding booms; of course there are more direct causes that can be scientifically studied. These causes could range from the acceleration of credit growth, and overoptimistic lending policy by the financial institutions based on false indications and most importantly the expansion of the balance sheets of the financial intermediaries/institutions with no clear, well-planned future vision of the massive amount of liquid money. Most causes can be summarized by the expansion in investments with no future perspective, sudden change in the rates and policies, panic to retain investments, shifting towards liquidation, inability to handle such huge amounts in a quite short period of time, loss of confidence due to some signals.
The below table shows a quick review of the countries and the financial crises they faced through years:
Country | ISO | Financial Crisis Dates | Australia | AUS | 1893, 1989 | Canada | CAN | 1873, 1906, 1923, 1983 | Denmark | DNK | 1877, 1885, 1902, 1907, 1921, 1931, 1987 | France | FRA | 1882, 1889, 1904, 1930, 2008 | Germany | DEU | 1880, 1891, 1901, 1931, 2008 | Italy | ITA | 1887, 1891, 1907, 1931, 1930, 1935, 1990, 2008 | Japan | JPN | 1882, 1907, 1927, 1992 | Netherlands | NLD | 1897, 1921, 1939, 2008 | Norway | NOR | 1899, 1921, 1931, 1988 | Spain | ESP | 1920, 1924, 1931, 1978, 2008 | Sweden | SWE | 1876, 1897, 1907, 1922, 1931, 1991, 2008 | Switzerland | CHE | 1870, 1910, 1931, 2008 | United kingdom | GBR | 1890, 1974, 1984, 1991, 2007 | United States | USA | 1873, 1884, 1893, 1907, 1929, 1984, 2007 |
Reinhart and Rogoff (2009), and Bordo et al. (2001). Source: Schularick and Taylor (2009).
* 1907 Banker's Panic
It was triggered by the massive inflation along with poor speculation. The stock market crashed in March, and a second crash in October led to a run on banks and every trust in New York, notably causing the massive National Bank of North America to fail.
* German Hyperinflation, 1918-1924
In 1914, the exchange rate between the U.S. dollar and the German Mark was about 1 to 4. By 1923, the rate had mushroomed to $1 to 1 trillion Marks.
* The Great Depression 1929
The main indicator was the crash of Wall Street which can be marked as the most devastating crash in US stock market history. During that period, on the road to Black Tuesday, countless men were turned into millionaires, whom invested huge amount of money in stock companies.
The interest rate was increased by the government, and that led to panic among investors and they desperately looked to liquidate their stocks, meanwhile the banks failed to afford this amount of solvent money (the banks invested in stock market as well). The result was the vanish of $ 10 billion ($95 billion of today’s figures)
As a result,