Download FINANCIAL CRISIS

FINANCIAL
CRISIS
Nina Kathrina S. Pineda
DEFINITION
 Value of financial institutions or assets drops
rapidly
 Often associated with a panic or a run on the
banks
 Investors sell off assets
 Withdraw money from savings accounts
Source: investopedia.com
Effect on Economy
Source: ECON121 lecture handout
IN-DEPTH
GLOBAL FINANCIAL
CRISIS
Tulip Mania
Netherlands, 1637
Tulip Mania
 Tulips imported from Turkey to the Dutch
 Became a famous novelty item
 Was infested with “mosaic virus”
 Flames of color on petals
 Increased the “rarity” of the flower
 An increase in price depending on virus
alteration
Tulip Mania
 High resale value of the tulips
 True bulb buyers reacted to this craze
 Depleted supply, increased scarcity &
demand
 Dutch reacted to the increasing price
 Traded their lands, life savings, etc
 Liquidated their assets
Tulip Mania
 Speculative bubbles
 Exaggerated expectations of future asset
value growth, etc
 Sell their tulips and “crystallize” profit
 Response of massive tulip owners
 Many are selling, Few are buying
 Low selling price of tulips (remarkable
losses)
Tulip Mania
 Government reaction
 Offered “honor contracts” (10%)
 Did not help, made the situation worst
“Investors now can know that it is better to stop
and smell the flowers than to stake your
future upon one.”
The Great
Depression
1930
The Great Depression
 40% drop in the market (September 1929 – October 1929)
 Rampant “uneducated” investors
 Were subjected to swindling and manipulations
 “Behavioral finance”
 Many invested because of good Stock Market reputation
 Make everyone rich
 Industrializaiton (luxuries)
 No-risk, no-brain world
Ended this 12 year depression with a declaration of war
The Great Depression
 The Great Plains experienced droughts and dust storms
 Farmers in debt
 Banned loans for farmers (leaving the farmers homeless &
unemployed)
 Rail riders
 Pres. Herbert Hoovert was replaced by Pres. Franklin Roosevelt
 Roosevelt closed all banks (opened them once they are stabilized)
 NEW DEAL programs
After the bombing of Pearl Harbor and US entry to WWII, great depression
ended
Wall Street
Crash
London, 1929
Wall Street Crash of 1929
 Beginning of the 10-year Great Depression
 October 24, 1929 (Black Thursday)
 Massive sell off in the stock market
 Rise of new industries (broadcasting and carmaking)
 Aforementioned shares fell by 13%
 12.9 Million shares traded (to salvage losses)
 Dow Jones Industrial Average (closed 6 points)
 Investment companies bought up stocks
Wall Street Crash of 1929
 Factors that caused Wall Street Crash of 1929
 Rampant proliferation of Holding Companies & Investment
Trusts
 Inability of large banks to liquidate
 Economic Recession prevalent
 Credit tightening by Federal Reserves
 Discount rate from 5% to 6% (August 1929)
 Rampant Speculation
 Lost investment value and owed money to creditors
Asian
Financial Crisis
Asia, 1997-1999
Asian Financial Crisis
 Southeast Asia (Asian Tigers/ Asian Economic
Miracle)
 International hotspot for investment
 High short-term interest rate of ASEAN
countries
 Advantage to foreign investors
 Increased capital flow
Asian Financial Crisis
Large amount
of credit (due
to policies)
Higher asset
prices
Massive Debt
Defaults
Asian Financial Crisis
Pulled out
investments
ASEAN pulled up
Inerest rate &
increased domestic
money
CB’s ran out of
foreign reserves &
capital outflow was
rampant
Asian Financial Crisis
 Regional currencies depreciated
 Stock Markets crashed
 Poverty was felt (increase in political destabilization)
 IMF’s bailout packages
 Remove faults in exchange for debt defaults
 Government expenditures cut down
 Failure of banks
 Higher interest rate
Dot com
bubble
1995-2000
Dot Com Bubble
 “DOT COM COMPANY”
 Internet based company
 Stocks where used to finance internet startups
 Many invested with expectation of high return
 Rampant day trading
 Causes
 High business spending
 Market correction
 Unemployment of computer developments and programmers
 Terrorist attacks in US (9-11 attack)
Housing
Bubble &
Credit Crisis
2007-2009
Housing Bubble & Credit Crisis
 Housing bubble centered in US & Britain
 Credit crisis occurred around the world
 Resulted from Dot Com Bubbles
 Federal reserves kept short-term interest rate
 This condition coincided with a global savings surplus
 Due to high savings that accumulated large reserves
 Global interest rate decreased
 Investors were alarmed of this low return
Housing Bubble & Credit Crisis
 Great Moderation
 Associated high risk to high return
 Above-average return
 Below-average volatility
 Great Moderation coincided with the housing boom
 High real estate prices
 AAA-rated securities mortagages
Housing Bubble & Credit Crisis
 Decline of the housing boom
 Decrease in prices
 Large losses (resulted to World’s largest bank crisis)
 Credit crisis
 Stocks fell 50% or more
 Remarkable volatility in financial market
 Bankruptcy of corporations (corporate bonds)
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