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.

And it all comes crashing down

When the bubble burst in April 1825 commercial failures followed. This coupled with the usual seasonal stress the country banks usually felt lead to the failing of some country banks. The country banks multiplied during the war years, and the over issued notes. Problems began to appear in the autumn, banks started to fail. A run began. Under the strain the country banks turned to their London counterpart. As the strain was passed down the chain, much like an illness spreading, the London banks had little option but to turn to the Bank of England with their hands open.

Sunspot Economics

I sat down to write this blog post initially about the 1929 Wall Street crash and discuss the different events that lead up to it. However I couldn't summon the energy or brain power required to think and condense a large amount of information into a blog post. So I decided to take a little detour again, and I know I shouldn't necessarily do this but sometimes in life you just have to. That coupled with the fact that I get distracted very easily especially by things I find remotely obscure and interesting. Like the topic of this next post.  Sunspots.

In the beginning

There was many crises prior to 1825, including the South Sea Bubble, Mississippi bubble, paper money which allowed countries to simply print their way out of debt with greater ease than debasing the currency, or there was the route of default, like Edward III in the 14th century causing chaos in Italy's financial markets. None of these things affected the economy globally. However in 1825 the aftermath was felt globally.

In 1825 United States was not the financial epicentre of the world like it is today, in fact it was an emerging economy at the time. The role of epicentre in the 19th Century fell to England. In this time the Bank of England wasn't a central bank like it is today, but a commercial one with loyalties to its shareholders, the government and commercial bankers.

Gregor MacGregor and the Republic of Poyais

This post is slightly off topic, it is just something I found interesting.I don't know if it is naivety or nostalgia for the past, but when I think of the 19th Century, fraud is not the first word that springs to mind. I have no reason to assume that fraud did not take place in the 19th Century, it just didn't occur to me. However before I started this blog, when my idea for a topic was just a thought rattling around in my head I was in Waterstones, not looking for finance books but rather an escape from finance when I stumbled upon a book called "Crisis economics" by Nouriel Roubini and Stephen Mihm. Nouriel Roubini was refered to as a number of things including "The seer who saw it coming" (The New York Times) on and "The man known as 'Dr Doom'" (Financial Times). Intrigued I decided to get it.

As I made my way through the book I came across this:

"...the panic of 1825 reverberated around the world. It began in Britain and had all the hallmarks of a classic crisis: easy money (courtesy of the Bank of England), an asset bubble (stocks and bonds linked to investments in the emerging market of Peru), and even widespread fraud (feverish selling of the bonds of a fictitious nation called the Republic of Poyais to credulous investors)." (Roubini & Mihm, 2010)

Hand in Hand

Like cupcakes and sprinkles, or cookies and milk many things go well with financial crises. For example there is usually a bubble; in the most recent crises this was a housing bubble, in the late 1920s the speculative boom with fuelled rises in share prices created a bubble, and there is Japan's economic bubble which saw housing and share prices rise between 1986-1991. During these times the bubble starts to inflate. A vast range of people from banks to ordinary consumers leverage themselves, buying into the belief that prices can only keep rising. There could also be a supply of easy money as credit becomes more readily available. 

An Introduction

The term financial crisis is a broad one. It can be applied to various situations where either institutions or assets lose their value, usually quite a large part. The term covers a mixture of different crises, including but not limited to, banking panics, stock market crashes, bubble bursting etc. However these financial crises are not a modern invention. Reinhart and Rogoff note that "they have been around since the development of money and financial markets." In fact Max Winkler, in his book Foreign Bonds: An Autopsy, traces inflation, with the view to reduce debt, back to Dionysius of Syracuse who was around in the 4th Century BC (Reinhart & Rogoff, 2009) (Winkler, M. p21) One of the first bubbles to burst was the tulip mania in the Netherlands. 


Nor are they are a rare event. If you look back over history you can see records of many different crises dating all the way from the 3rd Century up until the present day. In this blog I will look at various different crises during history and the events leading up to and surrounding them. I will also looking at the similarities between past crises and also looking at similarities between past crises and the most recent crisis, which started in 2007.