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Market Meltdowns THE GLOBAL CONTAGION Today’s financial marketplace is as globally integrated as it has ever been. The impact of events outside America’s borders will directly impact the U.S. Here’s how past global events have shaped our economy. 1992 1819 1819 Adverse Financial Adverse Financial Conditions in Europe Conditions in Europe The Maastricht Treaty 1931 1931 The Collapse of the Bank The Collapse of the Bank Credit-Anstalt in Austria Credit-Anstalt in Austria 2008 2008 TimeLine 1931 The collapse of the bank Credit-Anstalt in Austria in 1931 had a domino effect on global financial markets and hastened the Great Depression. Credit-Anstalt was considered “too big to fail” and was rescued by the government and the Austrian National Bank, leading to bank runs in Poland and Hungary, the end of the Austrian gold standard and concerns about the German economy. 2008 The Asian crisis and the American crisis in 2008 both involve the basic characteristics of a boom-bust event. In both cases, easy credit, much of it tied to real estate, and an overly optimistic private sector created a boom that would inevitably lead to a bust. Investor expectations were too aggressive, and when reality became apparent, financial markets corrected themselves. 1819 1992 The Asian The Asian Crisis Crisis Adverse financial conditions inEurope impactedthe United States, leadingto the Panic of 1819 and the depression of 1819-1922. The Maastricht Treaty in 1992 and eventual creation of a common currency (the euro) didn’t set sovereign fiscal policy parameters, so European nations are free to pursue nonaligned fiscal policies. Countries such as Greece can run up massive debt while EU nations such as Germany are more restrained, creating the possibility for catastrophic national debt defaults. If there is a loss of investor confidence arising from any catastrophic financial event in Europe, the impact upon American banks, investors, and the overall domestic economy will likely be swift and significant. Source: John Moore, associate professor at Walsh College; Richard S. Grossman and Christopher M. Meissner of University of California at Davis; J. Bradford DeLong of University of California at Berkeley.