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For the crisis in 2008-2009, please refer to the global financial crisis in 2008-2009.
The word financial crisis is widely used in various situations, in which some financial institutions or assets suddenly lose most of their value. In the19th century and the early 20th century, many financial crises were related to bank panic, and many recessions coincided with these fears. Other situations commonly referred to as financial crisis include the collapse of stock market and other financial bubbles, currency crisis and sovereign default. [ 1][2]
Many economists have put forward theories about how the financial crisis develops and how to prevent it. However, there is almost no consensus that financial crisis is still a frequent occurrence all over the world.
Content [hide]
1 Types of financial crisis
1. 1 banking crisis
1.2 Speculative bubbles and crashes
1.3 international financial crisis
1.4 broader economic crisis
2 The causes and consequences of the financial crisis
Strategic Complementarity of Financial Markets
2.2 lever
2.3 Asset-liability mismatch
2.4 Uncertainty and herding behavior
2.5 Regulatory failure
2.6 Fraud
2.7 Infection
2.8 recession impact
3 financial crisis theory
3. 1 world system theory
3.2 Minsky's Theory
3.3 Coordination game
3.4 Herd model and learning model
4 history
5 See also
6 literature
7 references
8 external links
[Editor] Types of financial crisis
[Editor] Bank Crisis
Main article: bank run
When a bank encounters a sudden run by depositors, it is called a bank run. Because banks lend most of their deposits (see some reserve banks), it is difficult for banks to repay all their deposits quickly if they suddenly need them. Therefore, a bank run may lead to bank bankruptcy and many depositors lose their deposits unless they have deposit insurance. The common situation of bank run is called systemic banking crisis, or just bank panic. There is no large-scale bank run, but banks are reluctant to lend because they are afraid of not having enough available funds. This situation is often called credit crunch. In this way, banks have become the accelerators of the financial crisis. [3]
Examples of bank funds are 193 1 Bank of America run, and Northern Rock run in 2007. The collapse of Bear Stearns in 2008 is sometimes called a bank run, even though Bear Stearns is an investment bank rather than a commercial bank. /kloc-The American savings and loan crisis in the 1980s led to the credit crunch, which is regarded as the main factor of the American economic recession.
[Editor] Speculative bubbles and crashes
Main article: stock market crash and bubble (economics)
Economists say that when the price of a financial asset (such as a stock) exceeds the present value of future income (such as the interest or dividend that can be earned by holding the asset until maturity), it will appear a bubble. [4] If most market participants buy assets mainly in the hope of selling them at a higher price in the future, rather than for the income it will generate, this may be evidence of the existence of a bubble. If there is a bubble, there is also the risk of asset price collapse: as long as market participants expect others to buy, they will continue to buy, and when many people decide to sell, the price will fall. However, in practice, it is difficult to judge whether the price of an asset is actually equal to its fundamental value, so it is difficult to find bubbles reliably. Some economists insist that bubbles never or almost never appeared. [5]
Examples of well-known bubbles (or so-called bubbles) and the collapse of stock prices and other asset prices include the tulip frenzy in the Netherlands, the Wall Street collapse in 1929, the Japanese real estate bubble in 1980, the internet bubble collapse in 2000-200 1 and the American real estate bubble that is now tightening. [6][7]
[Editor] International financial crisis
When a country with a fixed exchange rate is suddenly forced to devalue its currency because of speculative attacks, it is called a currency crisis or a balance of payments crisis. When a country cannot repay its sovereign debt, it is called sovereign default. Although both devaluation and default may be voluntary decisions of the government, they are often regarded as involuntary results of changes in investors' mood, which leads to a sudden stop of capital inflow or a sudden increase of capital flight.
Several currencies that constitute a part of the European exchange rate mechanism suffered a crisis in 1992-93 and were forced to depreciate or withdraw from the mechanism. Another round of currency crisis occurred in Asia 1997-98. Many Latin American countries defaulted on their debts in the1980s. 1998 The Russian financial crisis led to the devaluation of the ruble and the default of Russian national debt.
[Editor] The broader economic crisis
Main article: recession and depression (economics)
Negative GDP growth lasting for two or more quarters is called recession. A particularly long recession can be called depression, while a long period of slow but not necessarily negative growth is sometimes called economic stagnation.
Consumer spending has fallen. Because these phenomena affect not only the financial system, they are not usually considered as financial crises. But some economists believe that many recessions are largely caused by the financial crisis. An important example is the Great Depression, before which there were bank runs and stock market crashes in many countries. It is widely expected that the subprime mortgage crisis and the bursting of other real estate bubbles around the world will lead the United States and some other countries to fall into recession in 2008.
Nevertheless, some economists believe that the financial crisis is caused by recession, not the other way around. In addition, even if the financial crisis is the initial shock that triggered the recession, other factors may be more important in prolonging the recession. In particular, Milton Friedman and Anna Schwartz believe that [8] the initial recession related to the collapse of 1929 and the bank panic in 1930 would not become a long-term depression without the monetary policy mistakes of the Federal Reserve, and Ben Bernanke admits that he agrees with this view. [9]
[Editor] The causes and consequences of the financial crisis
[Editor] Strategic Complementarity of Financial Markets
Main article: strategic complementarity and self-realization prophecy
It is often observed that successful investment requires every investor in the financial market to guess what other investors will do. George soros called this need to guess others' intentions "reflexivity". [10] Similarly, john maynard keynes compared the financial market to a beauty contest, in which each participant tried to predict which model other participants thought was the most beautiful. [ 1 1]
Moreover, in many cases, investors have an incentive to coordinate their choices. For example, people who think that other investors want to buy a lot of yen may expect the yen to appreciate, so they also have the motivation to buy yen. Similarly, depositors of IndyMac Bank may expect the bank to close down if they expect other depositors to withdraw their funds, so they also have an incentive to withdraw. Economists call the incentive to imitate others' strategies strategic complementarity. [ 12]
Some people think that if people or companies have strong enough motivation to do what they expect others to do, then self-fulfilling prophecy may happen. [13] For example, if investors expect the value of the Japanese yen to rise, this may lead to an increase in its value; If depositors expect the bank to fail, it may lead to the bank's failure. [14] Therefore, the financial crisis is sometimes seen as a vicious circle, and investors avoid certain institutions or assets because they expect others to do the same. [ 15]
[edit] leverage
Main article: leverage (finance)
Leverage, that is, borrowing to finance investment, is often considered as one of the causes of financial crisis. When a financial institution (or individual) only invests its own funds, it may lose its own funds in the worst case. But when it borrows money to increase its investment, it may gain more from the investment, but it may also lose more. Therefore, leverage magnifies the potential return on investment, but it also brings the risk of bankruptcy. Since bankruptcy means that a company can't fulfill all its promised payments to other companies, it may spread financial problems from one company to another (see "contagion" below).
The average leverage ratio in the economy usually rises before the financial crisis. For example, before the Wall Street crash 1929, borrowing money to invest in the stock market ("financing buying") became more and more common.
[Edit] Asset-liability mismatch
Main article: mismatch between assets and liabilities
Another factor that is believed to lead to the financial crisis is the mismatch between assets and liabilities, which is a situation that is not properly matched with the risks related to the debts and assets of institutions. For example, commercial banks provide deposit accounts that can be withdrawn at any time, and they use the deposit proceeds to issue long-term loans to enterprises and homeowners. The mismatch between a bank's short-term liabilities (its deposits) and its long-term assets (its loans) is regarded as one of the reasons for the bank run (when depositors panic and decide to withdraw funds faster than the bank can recover the loans). [14] Similarly, Bear Stearns failed in 2007 and 2008, because it could not renew the short-term debt used for long-term investment in mortgage-backed securities.
In the international context, many emerging market governments can't sell local currency bonds, so they sell dollar bonds instead. This leads to currency mismatch between their liabilities (bonds) and assets (local taxes), so they face the risk of sovereign default due to exchange rate fluctuations. [ 16]
[Editor] Uncertainty and Herd Behavior
Main articles: economic psychology and herding behavior
Many analyses of the financial crisis emphasize the role of investment mistakes caused by lack of knowledge or imperfect human reasoning. Behavioral finance studies errors in economic and quantitative reasoning. Psychologist Thorbjoern ·K·A· Eliasson also analyzed the failure of economic reasoning in his "concept". Comorbidity [ 17]
Historians, especially Charles P. Kindleberger, pointed out that crises are often followed by major financial or technological innovations that bring new financial opportunities to investors, which he called "displacement" expected by investors. Early examples include 1720' s south sea bubble and Mississippi bubbles, which occurred when the concept of investment company stock itself was new and unfamiliar, [20] and 1929' s collapse, which was accompanied by the introduction of new electrical and transportation technologies. [2 1] Recently, many financial crises occurred after the changes in the investment environment brought about by financial deregulation. The bursting of the Internet bubble in 2006 can be said to have started with the "irrational prosperity" of Internet technology. [22]
Unfamiliarity with recent technological and financial innovations may help explain how investors sometimes overestimate the value of assets. In addition, if the first investors of a new asset class (for example, the stocks of "Internet" companies) benefit from the rising asset value when other investors learn about innovation (in our case, others know about the potential of the Internet), then more others may follow their example and push up the price even higher when they are eager to buy and hope to get similar profits. If this "herd behavior" leads to a spiral rise in prices, far exceeding the true value of assets, a collapse may be inevitable. If, for any reason, the price drops briefly and investors realize that further income is not guaranteed, then the spiral may be reversed, and the price drop will lead to selling and aggravate the price drop.
[Editor] Regulatory failure
Main articles: financial supervision and banking supervision
Governments try to eliminate or alleviate the financial crisis by supervising the financial sector. One of the main objectives of supervision is transparency: to disclose the financial position of financial institutions by requiring regular reports in accordance with standardized accounting procedures. Another goal of supervision is to ensure that institutions have sufficient assets to fulfill their contractual obligations through reserve requirements, capital requirements and other leverage restrictions.
Some financial crises were blamed on inadequate supervision and led to regulatory reform to avoid a recurrence of the crisis. For example, Dominique Strauss-Kahn, managing director of the International Monetary Fund, blamed the 2008 financial crisis on "the failure of regulators to prevent excessive risk-taking in the financial system, especially in the United States". [23] Similarly, The New York Times pointed out that deregulation of credit default swaps was one of the reasons for the crisis. [24]
However, over-regulation is also considered as a possible cause of the financial crisis. In particular, Basel II has been criticized for requiring banks to increase capital when risks rise, which may lead banks to reduce loans when capital is scarce, which may aggravate the financial crisis. [25]
[Editor] Fraud
Main articles: Ponzi scheme and securities fraud
Fraud played a role in the collapse of some financial institutions, because companies attracted depositors with misleading statements about their investment strategies, or embezzled the resulting income. Examples include the scam in Charles Ponzi in the early 20th century, the collapse of Russian MMM investment fund in 1994, the scam that led to the Albanian lottery uprising in 1997, and the collapse of Madoff's investment securities in 2008.
Many rogue traders who have caused huge losses to financial institutions have been accused of fraud in order to conceal their transactions. Insufficient mortgage financing is also considered as a possible reason for the subprime mortgage crisis in 2008; On September 23, 2008, government officials said that the FBI was investigating the possible fraud of mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers and insurance company American International Group. [26]
[edit] contagion
Main articles: financial contagion and systemic risk
Contagion means that the financial crisis may spread from one institution to another, just as bank runs spread from several banks to many other banks, or from one country to another, just as currency crisis, sovereign default or stock market crash spread to many countries. When the failure of a specific financial institution threatens the stability of many other institutions, it is called systemic risk. [27]
A widely cited example of contagion is 1997, when the Thai crisis spread to other countries such as South Korea. However, economists often argue whether the crises observed in many countries at about the same time are really caused by contagion from one market to another, or by similar fundamental problems, which will affect every country even without international ties.
[Editor] Decline effect
Some financial crises have little impact outside the financial sector, such as the Wall Street crash 1987, but other crises are considered to have played a role in reducing the growth of other areas of the economy. There are many theories to explain why the financial crisis has a recessionary effect on other parts of the economy. These theoretical viewpoints include "financial accelerator", "transfer to quality", "transfer to liquidity" and Kiyotaki-Moore model. Some "third-generation" currency crisis models discuss how currency crisis and banking crisis jointly lead to recession. [28]