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.^[1]^[2] Financial crises directly result in a loss of paper wealth but do not necessarily result in significant changes in the real economy (for example, the crisis resulting from the famous tulip mania bubble in the 17th century).

Many economists have offered theories about how financial crises develop and how they could be prevented. There is little consensus and financial crises continue to occur from time to time. It is apparent however that a consistent feature of both economic (and other applied finance disciplines) is the obvious inability to predict and avert financial crises.^[3] This fact raises the question as to what is known and also capable of being known (i.e. the epistemology) within economics and applied finance.

for hedge finance, income flows are expected to meet financial obligations in every period, including both the principal and the interest on loans.

for speculative finance, a firm must roll over debt because income flows are expected to only cover interest costs. None of the principal is paid off.

for Ponzi finance, expected income flows will not even cover interest cost, so the firm must borrow more or sell off assets simply to service its debt. The hope is that either the market value of assets or income will rise enough to pay off interest and principal.

1637: Bursting of in the Netherlands – while tulip mania is popularly reported as an example of a financial crisis, and was a speculative bubble, modern scholarship holds that its broader economic impact was limited to negligible, and that it did not precipitate a financial crisis.

tulip mania

1720: Bursting of (Great Britain) and Mississippi Bubble (France) – earliest of modern financial crises; in both cases the company assumed the national debt of the country (80–85% in Great Britain, 100% in France), and thereupon the bubble burst. The resulting crisis of confidence probably had a deep impact on the financial and political development of France.^[51]

South Sea Bubble

- started in Amsterdam, begun by the collapse of Johann Ernst Gotzkowsky and Leendert Pieter de Neufville's bank, spread to Germany and Scandinavia.

Crisis of 1763

– in London and Amsterdam. 20 important banks in London went bankrupt after one banking house defaulted (bankers Neal, James, Fordyce and Down)

Crisis of 1772

France's Financial and Debt Crisis (1783–1788)- France severe financial crisis due to the immense debt accrued through the French involvement in the Seven Years' War (1756–1763) and the American Revolution (1775–1783).

– run on banks in US precipitated by the expansion of credit by the newly formed Bank of the United States

Panic of 1792

– British and US credit crisis caused by land speculation bubble

Panic of 1796–1797

Walter Bagehot (1873), .

Lombard Street: A Description of the Money Market

and Robert Aliber (2005), Manias, Panics, and Crashes: A History of Financial Crises (Palgrave Macmillan, 2005 ISBN 978-1-4039-3651-6).

Charles P. Kindleberger

Gernot Kohler and Emilio José Chaves (Editors) "Globalization: Critical Perspectives" Hauppauge, New York: ISBN 1-59033-346-2. With contributions by Samir Amin, Christopher Chase Dunn, Andre Gunder Frank, Immanuel Wallerstein

Nova Science Publishers

(1986, 2008), Stabilizing an Unstable Economy.

Hyman P. Minsky

; Rogoff, Kenneth (2009). This Time is Different: Eight Centuries of Financial Folly. Princeton University Press. p. 496. ISBN 978-0-691-14216-6.

Reinhart, Carmen

(2009). The Ascent of Money: A Financial History of the World. Penguin. pp. 448. ISBN 978-0-14-311617-2.

Ferguson, Niall

Joachim Vogt (2014), , UBS Center Public Papers, Issue 2, UBS International Center of Economics in Society, Zurich.

Fear, Folly, and Financial Crises – Some Policy Lessons from History

Read, Charles (2022). Calming the storms : the carry trade, the banking school and British financial crises since 1825. Cham, Switzerland. 978-3-031-11914-9. OCLC 1360456914.{{cite book}}: CS1 maint: location missing publisher (link)

ISBN

. BBC, 3 September 2007.