Topics: Financial Crisis

Financial Crisis

Financial crisis is a broad term applied to certain events in which some economic institutions or resources abruptly drop a large part of their value. In the 19th and 20th centuries, many financial crises were linked to banking runs, stock crashes and recessions, coinciding or not with these panics. Other situations that are regularly called financial crises include stock market crashes and the bursting of financial bubbles, currency crises, and sovereign defaults. While many economists have offered several hypothesis about the causes and solutions for financial crises, there is little consensus and these events are still usual events in all countries.

A short list of some major financial crises since 20th century:

1910 – Shanghai rubber stock market crisis

1920 - The president was President Warren G. Harding, who ran for the Republican Party against James M. Cox and his VP candidate, the young Franklin D. Roosevelt. Warren G. Harding was elected to bring back order after World War I, with apposite policies to the unpopular previous socialist govern of Woodrow Wilson. His policy was based on Reduce spending and taxes. His policies – approved for a favorable congress – ended the recession after one year.

“Before the massive government interventions of the 1930s, all recessions were short-lived. The severe depression of 1921 was over so rapidly, for example, that Secretary of Commerce Hoover, despite his interventionist inclinations, was not able to convince President Harding to intervene rapidly enough; by the time Harding was persuaded to intervene, the depression was already over, and prosperity had arrived. When the stock market crash arrived in October, 1929, Herbert Hoover, now the president, intervened so rapidly and so massively that the market– adjustment process was paralyzed, and the Hoover–Roosevelt New Deal policies managed to bring about a permanent and massive depression, from which we were only rescued by the advent of World War II. Laissez-faire—a strict policy of non-intervention by the government —is the only course that can assure a rapid recovery in any depression crisis.”

Source: Murray N. Rothbard’s, Introduction to his work America’s Great Depression, Third Edition, The Ludwig von Mises Institute, 1975

1929 – The Great Depression – the largest and most important economic depression in the 20th century

“The Wall Street collapse of September–October 1929 and the Great Depression which followed it were among the most important events of the twentieth century. They made the Second World War possible, though not inevitable, and by undermining confidence in the efficacy of the market and the capitalist system, they helped to explain why the absurdly inefficient and murderous system of Soviet communism survived for so long. Indeed, it could be argued that the ultimate emotional and intellectual consequences of the Great Depression were not finally erased from the mind of humanity until the end of the 1980s, when the Soviet collectivist alternative to capitalism crumbled in hopeless ruin and the entire world accepted there was no substitute for the market. (…) We now see, thanks to Rothbard’s insights, that the Hoover– Roosevelt period was really a continuum, that most of the “innovations” of the New Deal were in fact expansions or intensifications of Hoover solutions, or pseudo-solutions, and that Franklin Delano Roosevelt’s administration differed from Herbert Hoover’s in only two important respects—it was infinitely more successful in managing its public relations, and it spent rather more taxpayers’ money. And, in Rothbard’s argument, the net effect of the Hoover–Roosevelt continuum of policy was to make the slump more severe and to prolong it virtually to the end of the 1930s. The Great Depression was a failure not of capitalism but of the hyperactive state.”

Source: Paul Johnson, Introduction to Murray N. Rothbard’s America’s Great Depression, Fifth Edition, The Ludwig von Mises Institute, 2000

1973 – 1973 oil crisis – oil prices soared, causing the 1973–1974 stock market crash

1980s – Latin American debt crisis – beginning in Mexico

1987 – Black Monday (1987) – the largest one-day percentage decline in stock market history

1989-91 – United States Savings & Loan crisis

1990s – Japanese asset price bubble collapsed

1992-93 – Black Wednesday – speculative attacks on currencies in the European Exchange Rate Mechanism

1994-95 – 1994 economic crisis in Mexico – speculative attack and default on Mexican debt

1997-98 – 1997 Asian Financial Crisis – devaluations and banking crises across Asia

2007-09 – The American financial crisis of 2007–2009 helped create the global financial crisis of 2008–2009, thus creating the late 2000s recession