USA 1929:
Nature of crisis: The 1920s experienced a major stock market boom associated with massive investment. The US stock market crashed in 1929 following a tight Federal Reserve policy after a speculative buildup. The financial crisis began in the fall and winter of 1930-31, when large numbers of US banks failed, leading to a deflationary downward spiral and deepening recession. In May 1931, the Austrian Creditanstalt failed. The crisis then spread to Germany which defaulted on its large foreign debts and left the Gold Standard. Pressure then shifted to the US which saw a run on its gold.
Impact of crisis: The recession began in 1930. It reduced output via wealth effects on consumption, reduced investment and reduced velocity. A series of banking panics erupted in 1930-33.
The banking panics in turn impacted the real economy, the deflation spread abroad through the fixed exchange rate links of classical gold standard. The year 1932 is considered to be the worst year in US economic history.
World 1987:
Nature of crisis: Black Monday refers to Monday, October 19, 1987, when stock markets around the world crashed, shedding a huge value in a very short time. The crash began in Hong Kong, spread west through international time zones to Europe, hitting the United States after other markets had already declined by a significant margin. The Dow Jones Industrial Average (DJIA) dropped by 508 points to 1738.74 (22.6%).
Impact of crisis: By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, Spain 31%, the United Kingdom 26.4%, the United States 22.7%, and Canada 22.5%. New Zealand's market was hit especially hard, falling about 60% from its 1987 peak, and taking several years to recover.
East Asian Crisis 1997
Nature of crisis: Under the framework of a pegged exchange rate regime, Thailand had enjoyed a decade of robust growth performance, but by late-1996 pressures on the baht emerged. Pressure increased through the first half of 1997 amidst an unsustainable current account deficit, a significant appreciation of the real effective exchange rate, rising short-term foreign debt, a deteriorating fiscal balance, and increasingly visible financial sector weaknesses, including large exposure to the real estate sector, exchange rate risk and liquidity risk. Finance companies had disproportionately the largest exposure to the property sector and were the first institutions affected by the economic downturn. Following mounting exchange rate pressures and ineffective interventions to alleviate these pressures, the baht was floated on July 2, 1997. In light of weak supportive policies, the baht depreciated by 20% against the U.S. dollar in July. The devaluation of the Thai baht in July 1997, the subsequent regional contagion, and the crash of the Hong Kong stock market sent shock waves to the Korean financial system. Korea's exchange rate remained broadly stable through October 1997. However, the high level of short-term debt and the low level of usable international reserves made the economy increasingly vulnerable to shifts in market sentiment. In Korea, while macroeconomic fundamentals continued to be favorable, the growing awareness of problems in the financial sector and in industrial groups (chaebols) increasingly led to difficulties for the banks in rolling over their short-term borrowing. In Malaysia the persistent pace of credit expansion at an annual rate of nearly 30% to the private sector, in particular to the property sector and for the purchase of stocks and shares, exposed the financial system to potential risks from price declines in property and other assets that occurred in 1997. In the wake of market turbulence and contagion effects in the second half of 1997, concerns among market participants about the true condition and resilience of the financial system increasingly became a central issue, highlighted by known fragilities among finance companies.
Impact of crisis: By May 2002, the Bank of Thailand had closed 59 (of 91) financial companies that in total accounted for 13% of financial system assets and 72% of finance company assets. It closed 1 (out
of 15) domestic bank and nationalized 4 banks. Nonperforming loans peaked at 33% of total loans and were reduced to 10.3% of total loans in February 2002. 97.7% of GDP was the estimated output loss and GDP declined by 10.5%.
In Korea, through May 2002, 5 banks were forced to exit the market through "purchase and assumption" and 303 financial institutions shut down (215 were credit unions); another 4 banks were nationalized. Output loss was 50.1% and GDP declined by 6.9%.
In Malaysia, the finance company sector was restructured, and the number of finance companies was reduced from 39 to 10 through mergers. Two finance companies were taken over by the Central Bank, including the largest independent finance company. Non-performing loans peaked between 25-35% of banking system assets and fell to 10.8% by March 2002. Output loss was 50.0 per cent of GDP and GDP declined by 7.4%.
Dot.com bubble 2000
Nature of crisis: The "dot-com bubble" (or the "I.T. bubble") was a speculative bubble covering roughly 1998-2001 (with a climax on March 10, 2000 with the NASDAQ peaking at 5132.52) during which stock markets in Western nations saw their equity value rise rapidly from growth in the recent Internet sector and related fields. The period was marked by the founding (and, in many cases, spectacular failure) of a group of new Internet-based companies commonly referred to as dot-coms. A combination of rapidly increasing stock prices, market confidence that the companies would turn future profits, individual speculation in stocks, and widely available venture capital created an environment in which many investors were willing to overlook traditional metrics such as price-to earnings ratios in favor of confidence in technological advancements.
Over 1999 and early 2000, the Federal Reserve increased interest rates six times, and the economy was beginning to lose speed. The dot-com bubble burst, on March 10, 2000, when the technology heavy NASDAQ Composite index peaked at 5,048.62 (intra-day peak 5,132.52), more than double its value just a year before. The massive initial batch of sell orders processed on Monday, March 13 triggered a chain reaction of selling that fed on itself as investors, funds, and institutions liquidated positions. In just six days the NASDAQ lost nearly 9%, falling from roughly 5,050 on March 10 to 4,580 on March 15.
Impact of crisis: The financial Internet bubble finally burst in the spring of 2000. The Nasdaq plunge erased 62% of the Nasdaq's value, which plummeted from a high of 4,260 to a low of 1,620 12 months later. Many dot-coms ran out of capital and were acquired or liquidated; various supporting industries, such as advertising and shipping, scaled back their operations as demand for their services fell. Telecoms loan defaults totaled $ 60 billion; there were redundancies in the thousands at investment banks; more than 300,000 jobs were destroyed in six months at telecoms equipment manufacturers and as many as 200,000 jobs in components suppliers and associated industries. The stock market value of all telecom operators and manufacturers fell by $ 3800 billion since its peak of $ 6300 billion in March 2000. In comparison, the combined cost of the crisis of the late 1990s was only $ 813 billion.
The Great Recession 2008:
Nature of crisis: It all started in US. In US, a boom in the housing sector was driving the economy to a new level. A combination of low interest rates and large inflows of foreign funds helped to create easy credit conditions where it became quite easy for people to take home loans. As more and more people took home loans, the demands for property increased and fuelled the home prices further. As there was enough money to lend to potential borrowers, the loan agencies started to widen their loan disbursement reach and relaxed the loan conditions.
However, as the saying goes, “No boom lasts forever”, the housing bubble was to burst eventually. Overbuilding of houses during the boom period finally led to a surplus inventory of homes, causing home prices to decline beginning from the summer of 2006. Once housing prices started depreciating in many parts of the U.S., refinancing became more difficult. Home owners, who were expecting to get a refinance on the basis of increased home prices, found themselves unable to re-finance and began to default on loans as their loans reset to higher interest rates and payment amounts.
The old proverbial truth that the rest of the world sneezes when the US catches a cold appeared to be vindicated as systemically important economies in the European Union and Japan went collectively into recession by mid-2008.
Impact of crisis: The drastic impact was a slowdown in the growth of industrial world. At the same time, a number of countries have experienced a mild impact on the labor market in terms of rising unemployment, Oil and food prices rolled high. There was a sharp decline in the GDP of the developing and the developed countries. The recession lead to the crash of the stock market which leads the share prices of nearly all the companies to fall.
From 2004-07, the top five U.S. investment banks each significantly increased their financial leverage, which increased their vulnerability to a financial shock. These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of USA nominal GDP for 2007. Lehman Brothers was liquidated, Bear Stearns and Merrill Lynch were sold at fire-sale prices, and Goldman Sachs and Morgan Stanley became commercial banks, subjecting themselves to more stringent regulation. With the exception of Lehman, these companies required or received government support.
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