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- Charles Kindleberger: Manias, Panics, and Crashes: A history of the financial crisis
- Manias, Panics, and Crashes: A History of Financial Crises
- Financial crisis
The first edition of Charles Kindleberger's brilliant, panoramic history, published in , summarized the pattern of. Robert Z. Aliber probes the sequence of four. With an updated Foreword from Robert M. Solow and a new Afterword from Lord.
Charles Kindleberger: Manias, Panics, and Crashes: A history of the financial crisis
A financial crisis is any of a broad variety of situations in which some financial assets suddenly lose a large part of their nominal value. In the 19th and early 20th centuries, many financial crises were associated with banking panics , and many recessions coincided with these panics.
Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles , currency crises , and sovereign defaults. Many economists have offered theories about how financial crises develop and how they could be prevented. There is no consensus, however, and financial crises continue to occur from time to time. When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits see fractional-reserve banking , it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run renders the bank insolvent, causing customers to lose their deposits, to the extent that they are not covered by deposit insurance.
An event in which bank runs are widespread is called a systemic banking crisis or banking panic. Examples of bank runs include the run on the Bank of the United States in and the run on Northern Rock in A currency crisis, also called a devaluation crisis,  is normally considered as part of a financial crisis.
Kaminsky et al. In general, a currency crisis can be defined as a situation when the participants in an exchange market come to recognize that a pegged exchange rate is about to fail, causing speculation against the peg that hastens the failure and forces a devaluation. A speculative bubble exists in the event of large, sustained overpricing of some class of assets.
If there is a bubble, there is also a risk of a crash in asset prices: market participants will go on buying only as long as they expect others to buy, and when many decide to sell the price will fall. However, it is difficult to predict whether an asset's price actually equals its fundamental value, so it is hard to detect bubbles reliably. Some economists insist that bubbles never or almost never occur.
Well-known examples of bubbles or purported bubbles and crashes in stock prices and other asset prices include the 17th century Dutch tulip mania , the 18th century South Sea Bubble , the Wall Street Crash of , the Japanese property bubble of the s, the crash of the dot-com bubble in —, and the now-deflating United States housing bubble.
When a country that maintains a fixed exchange rate is suddenly forced to devalue its currency due to accruing an unsustainable current account deficit, this is called a currency crisis or balance of payments crisis. When a country fails to pay back its sovereign debt , this is called a sovereign default.
While devaluation and default could both be voluntary decisions of the government, they are often perceived to be the involuntary results of a change in investor sentiment that leads to a sudden stop in capital inflows or a sudden increase in capital flight. Several currencies that formed part of the European Exchange Rate Mechanism suffered crises in —93 and were forced to devalue or withdraw from the mechanism.
Another round of currency crises took place in Asia in — Many Latin American countries defaulted on their debt in the early s.
The Russian financial crisis resulted in a devaluation of the ruble and default on Russian government bonds. Negative GDP growth lasting two or more quarters is called a recession. An especially prolonged or severe recession may be called a depression , while a long period of slow but not necessarily negative growth is sometimes called economic stagnation.
Some economists argue that many recessions have been caused in large part by financial crises. One important example is the Great Depression , which was preceded in many countries by bank runs and stock market crashes.
The subprime mortgage crisis and the bursting of other real estate bubbles around the world also led to recession in the U. Some economists argue that financial crises are caused by recessions instead of the other way around, and that even where a financial crisis is the initial shock that sets off a recession, other factors may be more important in prolonging the recession.
In particular, Milton Friedman and Anna Schwartz argued that the initial economic decline associated with the crash of and the bank panics of the s would not have turned into a prolonged depression if it had not been reinforced by monetary policy mistakes on the part of the Federal Reserve,  a position supported by Ben Bernanke.
It is often observed that successful investment requires each investor in a financial market to guess what other investors will do. George Soros has called this need to guess the intentions of others ' reflexivity '.
Furthermore, in many cases, investors have incentives to coordinate their choices. For example, someone who thinks other investors want to heavily buy Japanese yen may expect the yen to rise in value, and therefore has an incentive to buy yen, too. Likewise, a depositor in IndyMac Bank who expects other depositors to withdraw their funds may expect the bank to fail, and therefore has an incentive to withdraw, too.
Economists call an incentive to mimic the strategies of others strategic complementarity. It has been argued that if people or firms have a sufficiently strong incentive to do the same thing they expect others to do, then self-fulfilling prophecies may occur.
Leverage , which means borrowing to finance investments, is frequently cited as a contributor to financial crises. When a financial institution or an individual only invests its own money, it can, in the very worst case, lose its own money. But when it borrows in order to invest more, it can potentially earn more from its investment, but it can also lose more than all it has.
Therefore, leverage magnifies the potential returns from investment, but also creates a risk of bankruptcy. Since bankruptcy means that a firm fails to honor all its promised payments to other firms, it may spread financial troubles from one firm to another see 'Contagion' below.
The average degree of leverage in the economy often rises prior to a financial crisis. Another factor believed to contribute to financial crises is asset-liability mismatch , a situation in which the risks associated with an institution's debts and assets are not appropriately aligned.
For example, commercial banks offer deposit accounts that can be withdrawn at any time and they use the proceeds to make long-term loans to businesses and homeowners. The mismatch between the banks' short-term liabilities its deposits and its long-term assets its loans is seen as one of the reasons bank runs occur when depositors panic and decide to withdraw their funds more quickly than the bank can get back the proceeds of its loans.
In an international context, many emerging market governments are unable to sell bonds denominated in their own currencies, and therefore sell bonds denominated in US dollars instead. This generates a mismatch between the currency denomination of their liabilities their bonds and their assets their local tax revenues , so that they run a risk of sovereign default due to fluctuations in exchange rates.
Many analyses of financial crises emphasize the role of investment mistakes caused by lack of knowledge or the imperfections of human reasoning. Behavioural finance studies errors in economic and quantitative reasoning.
Historians, notably Charles P. Kindleberger , have pointed out that crises often follow soon after major financial or technical innovations that present investors with new types of financial opportunities, which he called "displacements" of investors' expectations.
Unfamiliarity with recent technical and financial innovations may help explain how investors sometimes grossly overestimate asset values. Also, if the first investors in a new class of assets for example, stock in "dot com" companies profit from rising asset values as other investors learn about the innovation in our example, as others learn about the potential of the Internet , then still more others may follow their example, driving the price even higher as they rush to buy in hopes of similar profits.
If such "herd behaviour" causes prices to spiral up far above the true value of the assets, a crash may become inevitable. If for any reason the price briefly falls, so that investors realize that further gains are not assured, then the spiral may go into reverse, with price decreases causing a rush of sales, reinforcing the decrease in prices. Governments have attempted to eliminate or mitigate financial crises by regulating the financial sector. One major goal of regulation is transparency : making institutions' financial situations publicly known by requiring regular reporting under standardized accounting procedures.
Another goal of regulation is making sure institutions have sufficient assets to meet their contractual obligations, through reserve requirements , capital requirements , and other limits on leverage.
Some financial crises have been blamed on insufficient regulation, and have led to changes in regulation in order to avoid a repeat. For example, the former Managing Director of the International Monetary Fund , Dominique Strauss-Kahn , has blamed the financial crisis of — on 'regulatory failure to guard against excessive risk-taking in the financial system, especially in the US'.
However, excessive regulation has also been cited as a possible cause of financial crises. In particular, the Basel II Accord has been criticized for requiring banks to increase their capital when risks rise, which might cause them to decrease lending precisely when capital is scarce, potentially aggravating a financial crisis.
International regulatory convergence has been interpreted in terms of regulatory herding, deepening market herding discussed above and so increasing systemic risk. Fraud has played a role in the collapse of some financial institutions, when companies have attracted depositors with misleading claims about their investment strategies, or have embezzled the resulting income.
Examples include Charles Ponzi 's scam in early 20th century Boston, the collapse of the MMM investment fund in Russia in , the scams that led to the Albanian Lottery Uprising of , and the collapse of Madoff Investment Securities in Many rogue traders that have caused large losses at financial institutions have been accused of acting fraudulently in order to hide their trades.
Fraud in mortgage financing has also been cited as one possible cause of the subprime mortgage crisis ; government officials stated on 23 September that the FBI was looking into possible fraud by mortgage financing companies Fannie Mae and Freddie Mac , Lehman Brothers , and insurer American International Group.
Contagion refers to the idea that financial crises may spread from one institution to another, as when a bank run spreads from a few banks to many others, or from one country to another, as when currency crises, sovereign defaults, or stock market crashes spread across countries. When the failure of one particular financial institution threatens the stability of many other institutions, this is called systemic risk.
One widely cited example of contagion was the spread of the Thai crisis in to other countries like South Korea. However, economists often debate whether observing crises in many countries around the same time is truly caused by contagion from one market to another, or whether it is instead caused by similar underlying problems that would have affected each country individually even in the absence of international linkages.
Some financial crises have little effect outside of the financial sector, like the Wall Street crash of , but other crises are believed to have played a role in decreasing growth in the rest of the economy. There are many theories why a financial crisis could have a recessionary effect on the rest of the economy. These theoretical ideas include the ' financial accelerator ', ' flight to quality ' and ' flight to liquidity ', and the Kiyotaki-Moore model.
Some 'third generation' models of currency crises explore how currency crises and banking crises together can cause recessions. Developing an economic crisis theory became the central recurring concept throughout Karl Marx 's mature work.
The theory is a corollary of the Tendency towards the Centralization of Profits. In a capitalist system, successfully-operating businesses return less money to their workers in the form of wages than the value of the goods produced by those workers i.
This profit first goes towards covering the initial investment in the business. In the long-run, however, when one considers the combined economic activity of all successfully-operating business, it is clear that less money in the form of wages is being returned to the mass of the population the workers than is available to them to buy all of these goods being produced. Furthermore, the expansion of businesses in the process of competing for markets leads to an abundance of goods and a general fall in their prices, further exacerbating the tendency for the rate of profit to fall.
Given the extraordinary capital expenditure required to enter modern economic sectors like airline transport, the military industry, or chemical production, these sectors are extremely difficult for new businesses to enter and are being concentrated in fewer and fewer hands.
Empirical and econometric research continues especially in the world systems theory and in the debate about Nikolai Kondratiev and the so-called years Kondratiev waves. Major figures of world systems theory, like Andre Gunder Frank and Immanuel Wallerstein , consistently warned about the crash that the world economy is now facing.
Hyman Minsky has proposed a post-Keynesian explanation that is most applicable to a closed economy. He theorized that financial fragility is a typical feature of any capitalist economy.
High fragility leads to a higher risk of a financial crisis. To facilitate his analysis, Minsky defines three approaches to financing firms may choose, according to their tolerance of risk.
They are hedge finance, speculative finance, and Ponzi finance. Ponzi finance leads to the most fragility. Financial fragility levels move together with the business cycle. After a recession , firms have lost much financing and choose only hedge, the safest. As the economy grows and expected profits rise, firms tend to believe that they can allow themselves to take on speculative financing.
In this case, they know that profits will not cover all the interest all the time. Firms, however, believe that profits will rise and the loans will eventually be repaid without much trouble. More loans lead to more investment, and the economy grows further.
Then lenders also start believing that they will get back all the money they lend.
Manias, Panics, and Crashes: A History of Financial Crises
Although it's not so much a history of financial crises as an analysis of their causes and effects, Charles Kindleberger's Manias, Panics, and Crashes is indisputably a classic of modern finance. The book is of course intriguing now for its relevance to our current economic crisis, one that appeared with such mysterious speed and devastation that making sense of the forces that created it - and trying to piece together the solutions that will end it - is perhaps a little premature. Yet reading Mr Kindleberger's book now, without the benefit of hindsight, can still help us understand the many ways in which governments and central banks have reacted to the crisis. For much of their reaction falls in line with his theories about boom and bust cycles, the salve for which he says is muscular action from the economic powers that be. The use of central banks as lenders of last resort, cash injections and assets and lowered interest rates are all measures the author endorses - and measures that central banks have taken to breathe life into the financial system. In his steady, academic tone, Mr Kindleberger, an economic historian who died in , rummages through history's dustbins and finds plenty of turmoil that comes across as all too familiar today. It's only unfortunate that his analysis had to end with the dot-com crash of
[MOBI] Manias, Panics, And Crashes: A History Of Financial Crises require the ebook swiftly, you can straight get it. broadly defined to include money, banking, capital markets, public and private finance, international.
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It seems that you're in Germany. We have a dedicated site for Germany. Authors: Aliber , Robert Z. This seventh edition of an investment classic has been thoroughly revised and expanded following the latest crises to hit international markets. Renowned economist Robert Z.
A monthly brief of new insights on important economic, financial and policy issues. Those who have read it, but not recently, should read it again. This economic classic, first published in , should be a regular staple for all, from central bankers to ordinary bankers, from investors to regular businessmen and women, in the halls of government and in the average living room. He also has a full appreciation for human weakness in the face of easy profits as opposed to the hard labor and uncertainty associated with real wealth creation. Speculation can be both stabilizing and destabilizing, or, when allowed to intensify unchecked, may result in a panic or crash and the extent of the excess is realized. Kindleberger does not blame markets per se for creating the circumstances in which irrationality takes over—on the whole he regards markets as generally efficient but often in need of help.
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