Final Thoughts

This blog started out as a way to look at past financial crises and compare them to the most recent one. The topic is an interesting one. It is incredibly vast and there are many different theories. As you grow up you learn from your mistakes. You learn from your past. Financial markets don't seem to. There are still some underlying things that are the same, but given that regulation, governments, policies and technologies are constantly changing comparing them is quite hard to do. There may have been a bubble each time; people never really change I guess. There is always a supply of easy money and after each crisis there was regulation to try and prevent the next one, to try and fix the problems of the past. 

Even taking all that into consideration I still can't help but think that no one really knows the answer. No one is sure what to do because you cannot regulate for every possibly conceivable event. That markets don't seem to learn from their previous mistakes is obvious. Bubbles could be something, that no matter how hard we try, will always be there. Financial crises could be something we can never stop only something we can prepare for. 

Pick n Mix

In my research for my last couple of post I came across a number of things. So this post is just like a big scrap book of things I found interesting or useful.


First is this short video from It's a wonderful life shows an example of a bank run

“Wall Street people learn nothing and forget everything" - Benjamin Graham

In his book Crisis Economics, Nouriel Roubini in the very first chapter describes a financial crisis.

Then came the crash, and as it echoed up and down in the canyons of Wall Street, venerable institutions tottered, besieged by fearful creditors. During lulls in the storm, some declared that the worst had passed, but then condition worsened. Financial firms slid towards the abyss, and though a few investment banks - most notably Goldman Sachs - managed to escape the conflagration, other firms collapsed overnight. Lines of credit evaporated, and the financial system's elaborate machinery of borrowing and lending seized up, leaving otherwise creditworthy companies scrambling to refinance their debts.

As the stock market crashed, foreclosures mounted, firms failed, and consumers stopped spending. Vast Ponzi schemes came to light, as did evidence of wise spread fraud and collusion throughout the financial industry.

When the Levee Breaks

A now tired and dog-eared phrase is "When the United States sneezes, the rest of the world catches a cold." This may be true, but disease and illness tends to only affect those with already weakened immune systems, be that due to stress, an already present underlying illness or just being run down in general. Thanks to the massive interbank network the slightest sniffle could be transmitted with ease.

As the pandemic spread there were a lot of fatalities and injuries along the way. 

I'll be the Reckless One

There are so many different theories as to when and why the recent crisis erupted that if I try to go through them all both you (reading) and I (typing) could be here a very long time. However I will try sum up the before and after, probably in two separate posts.

With the past behind them people look ahead to an optimistic future with sunny skies. When house prices started to rise people once again believed that they would never fall.

With this belief and the past forgotten there was a housing bubble, not only in the US, but each country had their own housing bubble i.e. Ireland, Dubai, United Kingdom etc. In fact The Economist  observed that "It looks like the biggest bubble in history."  There was easy credit, NINJA loans, CDO, securitization, massive bonuses to bankers, which could have increased moral hazard leading them to take on greater risk than they would have before. Deposit insurance was available, there was a lender of last resort.

"There may be a recession in stock prices, but not anything in the nature of a crash" - Irving Fisher

On the 24th of October, Black Thursday as it was named, several bankers met in a bid to hold an intervention to the tumbling stock markets. A bit like J.P. Morgan did in 1907. In 1907, J.P. Morgan gathered up New York's leading bankers to his private library to help stop the bank run. When they couldn't come to an agreement he locked them into his library until they eventually agreed on a solution. J.P. Morgan, along with various other well known names such as John D. Rockefeller and George B. Cortelyou agreed to deposit money in the banks to help end the bank run.

It started with a war

The roaring twenties, as they were christened, were bookended by two momentous events. First we had the end of World War I. The aftermath of WWI wasn't great for Germanys economy. After the war they were left with a bill of 132 billion marks in reparations to pay off. A task they completed about 1.5 years ago. Hyperinflation in 1921-23 in Germany lead to the Reparations Committee declaring Germany in default which in turn lead to the Dawes Plan. The U.S. being the dominate economic power invested heavily in Germany who could then continue their repayments. This boosted the economies leading to prosperity in many countries.