Financial Crises Throughout History

Financial Crises: A Historical Overview

• Since the early 1970s, there have been four waves of banking crises, each involving large changes in the prices of commodities, currencies, bonds, stocks, and real estate relative to their long-run average prices.

• Each country that experienced a banking crisis also had a recession as household wealth declined in response to the sharp fall in the prices of securities and real estate, and as the banks became much more reluctant suppliers of credit as their own capital was depleted.

• The first wave of banking crises was in the early 1980s when Mexico, Brazil, Argentina, and ten other developing countries defaulted on their $800 billion of US-dollar-denominated indebtedness.

• Japan was the key country in the second wave of banking crises that began in the early 1990s, real estate prices and stock prices had increased by a factor of five to six in the second half of the 1980s.

• The Asian Financial Crisis that began in mid-1997 was the third wave; initially Thailand, Malaysia, and Indonesia were involved and subsequently South Korea, Russia, Brazil, and Argentina were impacted.

• The fourth wave began in September 2008 with the failure of Fannie Mae and Freddie Mac, the two large US-government- sponsored mortgage lenders and the collapse of Lehman Brothers a few days later.

• Each of these waves of banking crises was preceded by surges in cross-border investment inflows, which led to increases in the prices of currencies and increases in the prices of securities and real estate in the countries that experienced these inflows.

• The changes in the prices of individual currencies were much larger than those that were suggested by the differences between the inflation rate in a country and the inflation rates in its major trading partners.

• The number of bank failures during the 1980s and the 1990s was much larger than in earlier decades, and several of these failures resulted from systemic shocks that led to dramatic changes in the financial environment.

• The sharp declines in prices of residential real estate in the United States, Britain, Ireland, and several other countries that began toward the end of 2006 led to massive government investments in the banks so they could remain open and their depositors would not incur losses.

• The costs of these crises were extremely high in terms of several metrics – the losses incurred by the banks as a ratio of a country’s GDP and as a share of government spending, the slowdowns in the rates of economic growth, the increases in unemployment and in the output gaps in each country.

• The massive number of bank failures, the large changes in the prices of currencies and sharp variability in the prices of securities were systematically related and resulted from rapid changes in the global economic environment.

• The 1970s was a decade of accelerating inflation, the largest-ever sustained increase in the US price level in peace-time, and the US dollar price of gold surged because some investor bought the precious metal on theFinancial crises and market developments in the 1970s-1990s

• Inflation rates in the US and globally were predicted to accelerate in the 1970s.

• The real rates of return on US dollar bonds and stocks were negative in the 1970s due to declining prices and increasing goods price levels.

• Developing countries' foreign indebtedness increased from $125 billion in 1972 to $800 billion in 1982.

• The Federal Reserve's contractive monetary policy in 1979 led to a surge in interest rates on US dollar securities.

• Japan experienced a financial boom in the 1980s with a significant increase in real estate and stock prices.

• Japanese banks rapidly increased deposits, loans, and capital, leading to a surge in bank capital as securities prices increased.

• Real estate and stock prices in Japan crashed at the beginning of the 1990s, leading to many leading Japanese banks and financial institutions becoming bankrupt.

• Financial market developments in Finland, Norway, and Sweden followed those in Japan, with banking crises occurring in the late 1980s.

• Mexico experienced a reduction in annual inflation rates from 140% to less than 10% in four years due to a contractive monetary policy by the Bank of Mexico.

• Cross-border investment flows to Mexico accelerated due to high real rates of return on government securities and prospective profit rates on industrial investments.

• The price of the Mexican peso increased in real terms, and its trade deficit climbed to 7% of GDP, and its external debt to 60% of GDP.

• Investors anticipated Mexico to become a low-cost base for producing automobiles and washing machines and other manufactured goods for US and Canadian markets.

Financial Crises: A Historical Overview

• Since the early 1970s, there have been four waves of banking crises, each involving large changes in the prices of commodities, currencies, bonds, stocks, and real estate relative to their long-run average prices.

• Each country that experienced a banking crisis also had a recession as household wealth declined in response to the sharp fall in the prices of securities and real estate, and as the banks became much more reluctant suppliers of credit as their own capital was depleted.

• The first wave of banking crises was in the early 1980s when Mexico, Brazil, Argentina, and ten other developing countries defaulted on their $800 billion of US-dollar-denominated indebtedness.

• Japan was the key country in the second wave of banking crises that began in the early 1990s, real estate prices and stock prices had increased by a factor of five to six in the second half of the 1980s.

• The Asian Financial Crisis that began in mid-1997 was the third wave; initially Thailand, Malaysia, and Indonesia were involved and subsequently South Korea, Russia, Brazil, and Argentina were impacted.

• The fourth wave began in September 2008 with the failure of Fannie Mae and Freddie Mac, the two large US-government- sponsored mortgage lenders and the collapse of Lehman Brothers a few days later.

• Each of these waves of banking crises was preceded by surges in cross-border investment inflows, which led to increases in the prices of currencies and increases in the prices of securities and real estate in the countries that experienced these inflows.

• The changes in the prices of individual currencies were much larger than those that were suggested by the differences between the inflation rate in a country and the inflation rates in its major trading partners.

• The number of bank failures during the 1980s and the 1990s was much larger than in earlier decades, and several of these failures resulted from systemic shocks that led to dramatic changes in the financial environment.

• The sharp declines in prices of residential real estate in the United States, Britain, Ireland, and several other countries that began toward the end of 2006 led to massive government investments in the banks so they could remain open and their depositors would not incur losses.

• The costs of these crises were extremely high in terms of several metrics – the losses incurred by the banks as a ratio of a country’s GDP and as a share of government spending, the slowdowns in the rates of economic growth, the increases in unemployment and in the output gaps in each country.

• The massive number of bank failures, the large changes in the prices of currencies and sharp variability in the prices of securities were systematically related and resulted from rapid changes in the global economic environment.

• The 1970s was a decade of accelerating inflation, the largest-ever sustained increase in the US price level in peace-time, and the US dollar price of gold surged because some investor bought the precious metal on theFinancial crises and market developments in the 1970s-1990s

• Inflation rates in the US and globally were predicted to accelerate in the 1970s.

• The real rates of return on US dollar bonds and stocks were negative in the 1970s due to declining prices and increasing goods price levels.

• Developing countries' foreign indebtedness increased from $125 billion in 1972 to $800 billion in 1982.

• The Federal Reserve's contractive monetary policy in 1979 led to a surge in interest rates on US dollar securities.

• Japan experienced a financial boom in the 1980s with a significant increase in real estate and stock prices.

• Japanese banks rapidly increased deposits, loans, and capital, leading to a surge in bank capital as securities prices increased.

• Real estate and stock prices in Japan crashed at the beginning of the 1990s, leading to many leading Japanese banks and financial institutions becoming bankrupt.

• Financial market developments in Finland, Norway, and Sweden followed those in Japan, with banking crises occurring in the late 1980s.

• Mexico experienced a reduction in annual inflation rates from 140% to less than 10% in four years due to a contractive monetary policy by the Bank of Mexico.

• Cross-border investment flows to Mexico accelerated due to high real rates of return on government securities and prospective profit rates on industrial investments.

• The price of the Mexican peso increased in real terms, and its trade deficit climbed to 7% of GDP, and its external debt to 60% of GDP.

• Investors anticipated Mexico to become a low-cost base for producing automobiles and washing machines and other manufactured goods for US and Canadian markets.

Financial Crises: A Historical Overview

• Since the early 1970s, there have been four waves of banking crises, each involving large changes in the prices of commodities, currencies, bonds, stocks, and real estate relative to their long-run average prices.

• Each country that experienced a banking crisis also had a recession as household wealth declined in response to the sharp fall in the prices of securities and real estate, and as the banks became much more reluctant suppliers of credit as their own capital was depleted.

• The first wave of banking crises was in the early 1980s when Mexico, Brazil, Argentina, and ten other developing countries defaulted on their $800 billion of US-dollar-denominated indebtedness.

• Japan was the key country in the second wave of banking crises that began in the early 1990s, real estate prices and stock prices had increased by a factor of five to six in the second half of the 1980s.

• The Asian Financial Crisis that began in mid-1997 was the third wave; initially Thailand, Malaysia, and Indonesia were involved and subsequently South Korea, Russia, Brazil, and Argentina were impacted.

• The fourth wave began in September 2008 with the failure of Fannie Mae and Freddie Mac, the two large US-government- sponsored mortgage lenders and the collapse of Lehman Brothers a few days later.

• Each of these waves of banking crises was preceded by surges in cross-border investment inflows, which led to increases in the prices of currencies and increases in the prices of securities and real estate in the countries that experienced these inflows.

• The changes in the prices of individual currencies were much larger than those that were suggested by the differences between the inflation rate in a country and the inflation rates in its major trading partners.

• The number of bank failures during the 1980s and the 1990s was much larger than in earlier decades, and several of these failures resulted from systemic shocks that led to dramatic changes in the financial environment.

• The sharp declines in prices of residential real estate in the United States, Britain, Ireland, and several other countries that began toward the end of 2006 led to massive government investments in the banks so they could remain open and their depositors would not incur losses.

• The costs of these crises were extremely high in terms of several metrics – the losses incurred by the banks as a ratio of a country’s GDP and as a share of government spending, the slowdowns in the rates of economic growth, the increases in unemployment and in the output gaps in each country.

• The massive number of bank failures, the large changes in the prices of currencies and sharp variability in the prices of securities were systematically related and resulted from rapid changes in the global economic environment.

• The 1970s was a decade of accelerating inflation, the largest-ever sustained increase in the US price level in peace-time, and the US dollar price of gold surged because some investor bought the precious metal on theFinancial crises and market developments in the 1970s-1990s

• Inflation rates in the US and globally were predicted to accelerate in the 1970s.

• The real rates of return on US dollar bonds and stocks were negative in the 1970s due to declining prices and increasing goods price levels.

• Developing countries' foreign indebtedness increased from $125 billion in 1972 to $800 billion in 1982.

• The Federal Reserve's contractive monetary policy in 1979 led to a surge in interest rates on US dollar securities.

• Japan experienced a financial boom in the 1980s with a significant increase in real estate and stock prices.

• Japanese banks rapidly increased deposits, loans, and capital, leading to a surge in bank capital as securities prices increased.

• Real estate and stock prices in Japan crashed at the beginning of the 1990s, leading to many leading Japanese banks and financial institutions becoming bankrupt.

• Financial market developments in Finland, Norway, and Sweden followed those in Japan, with banking crises occurring in the late 1980s.

• Mexico experienced a reduction in annual inflation rates from 140% to less than 10% in four years due to a contractive monetary policy by the Bank of Mexico.

• Cross-border investment flows to Mexico accelerated due to high real rates of return on government securities and prospective profit rates on industrial investments.

• The price of the Mexican peso increased in real terms, and its trade deficit climbed to 7% of GDP, and its external debt to 60% of GDP.

• Investors anticipated Mexico to become a low-cost base for producing automobiles and washing machines and other manufactured goods for US and Canadian markets.

Financial Crises: A Historical Overview

• Since the early 1970s, there have been four waves of banking crises, each involving large changes in the prices of commodities, currencies, bonds, stocks, and real estate relative to their long-run average prices.

• Each country that experienced a banking crisis also had a recession as household wealth declined in response to the sharp fall in the prices of securities and real estate, and as the banks became much more reluctant suppliers of credit as their own capital was depleted.

• The first wave of banking crises was in the early 1980s when Mexico, Brazil, Argentina, and ten other developing countries defaulted on their $800 billion of US-dollar-denominated indebtedness.

• Japan was the key country in the second wave of banking crises that began in the early 1990s, real estate prices and stock prices had increased by a factor of five to six in the second half of the 1980s.

• The Asian Financial Crisis that began in mid-1997 was the third wave; initially Thailand, Malaysia, and Indonesia were involved and subsequently South Korea, Russia, Brazil, and Argentina were impacted.

• The fourth wave began in September 2008 with the failure of Fannie Mae and Freddie Mac, the two large US-government- sponsored mortgage lenders and the collapse of Lehman Brothers a few days later.

• Each of these waves of banking crises was preceded by surges in cross-border investment inflows, which led to increases in the prices of currencies and increases in the prices of securities and real estate in the countries that experienced these inflows.

• The changes in the prices of individual currencies were much larger than those that were suggested by the differences between the inflation rate in a country and the inflation rates in its major trading partners.

• The number of bank failures during the 1980s and the 1990s was much larger than in earlier decades, and several of these failures resulted from systemic shocks that led to dramatic changes in the financial environment.

• The sharp declines in prices of residential real estate in the United States, Britain, Ireland, and several other countries that began toward the end of 2006 led to massive government investments in the banks so they could remain open and their depositors would not incur losses.

• The costs of these crises were extremely high in terms of several metrics – the losses incurred by the banks as a ratio of a country’s GDP and as a share of government spending, the slowdowns in the rates of economic growth, the increases in unemployment and in the output gaps in each country.

• The massive number of bank failures, the large changes in the prices of currencies and sharp variability in the prices of securities were systematically related and resulted from rapid changes in the global economic environment.

• The 1970s was a decade of accelerating inflation, the largest-ever sustained increase in the US price level in peace-time, and the US dollar price of gold surged because some investor bought the precious metal on theFinancial crises and market developments in the 1970s-1990s

• Inflation rates in the US and globally were predicted to accelerate in the 1970s.

• The real rates of return on US dollar bonds and stocks were negative in the 1970s due to declining prices and increasing goods price levels.

• Developing countries' foreign indebtedness increased from $125 billion in 1972 to $800 billion in 1982.

• The Federal Reserve's contractive monetary policy in 1979 led to a surge in interest rates on US dollar securities.

• Japan experienced a financial boom in the 1980s with a significant increase in real estate and stock prices.

• Japanese banks rapidly increased deposits, loans, and capital, leading to a surge in bank capital as securities prices increased.

• Real estate and stock prices in Japan crashed at the beginning of the 1990s, leading to many leading Japanese banks and financial institutions becoming bankrupt.

• Financial market developments in Finland, Norway, and Sweden followed those in Japan, with banking crises occurring in the late 1980s.

• Mexico experienced a reduction in annual inflation rates from 140% to less than 10% in four years due to a contractive monetary policy by the Bank of Mexico.

• Cross-border investment flows to Mexico accelerated due to high real rates of return on government securities and prospective profit rates on industrial investments.

• The price of the Mexican peso increased in real terms, and its trade deficit climbed to 7% of GDP, and its external debt to 60% of GDP.

• Investors anticipated Mexico to become a low-cost base for producing automobiles and washing machines and other manufactured goods for US and Canadian markets.