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What is a financial crisis? In both developed and developing countries, in what form did the financial crisis erupt?
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"The stock market is about to collapse", "the unemployment rate is too high", "the economy is shrinking", "the real economy is not working", "the global economy will enter the Great Depression", "foreign economic malaise", recently heard a lot of unoptimistic voices, those so-called experts can not come out to give a better explanation, then today Xiaobian will take you to understand, what is the economic and financial crisis, how did it happen? What are the special manifestations of both developed and developing emerging economies when financial crises erupt?
How did the financial crisis happen?
The occurrence of the financial crisis refers to the violent fluctuation of the financial system that aggravates the information asymmetry, causing very serious adverse selection and moral hazard problems, making it impossible for the financial market to provide capital to residents or enterprises with productive investment opportunities, thereby causing the contraction of economic activities.
The following six factors played a very important role in the outbreak of the financial crisis:
1. The impact of asset markets on balance sheets
2. The deterioration of the balance sheets of financial institutions
3. Banking crisis
4. Increased uncertainty
5. Rising interest rates
6. Government financial imbalance
Second, we understand the six major factors before the financial crisis, so did the developed countries have the above characteristics or outbreak methods before the financial crisis?
Based on the experience of more than a dozen financial crises and the Great Depression, the outbreak of financial crises in developed countries such as the United States has occurred in the following ways:
1. Improper management of financial liberalization/financial innovation, such as the Korean financial crisis in the 90s, the tulip economic crisis in Europe;
2. The accumulation and collapse of asset-price bubbles, such as the Japanese real estate bubble after the Plaza Accord;
3. Increased uncertainty caused by rising interest rates and the collapse of major financial institutions, such as the subprime mortgage crisis in the United States;
The result is a significant exacerbation of adverse selection and moral hazard problems, resulting in a contraction in lending and a decline in economic activity. The deterioration of corporate financial positions and bank balance sheets optimized the second phase of the financial crisis, namely, the massive collapse of the banking sector, that is, the banking crisis.
The resulting decline in the number of banks has led to a loss of information capital, which in turn has led to a more severe contraction in lending and a downward spiral in economic activity. In this case, an economic downturn would cause a severe fall in prices, which would increase the actual liabilities of enterprises, erode their net worth, and trigger a contraction in debt. The decline in corporate net worth further exacerbates the problems of adverse selection and moral hazard.
As a result, loans, investment spending, and overall economic activity will continue to shrink for a long time. The worst financial crisis in U.S. history, triggered the Great Depression, a typical case of debt contraction.
Third, what are the manifestations or paths of the outbreak of financial crises in emerging market countries such as developing countries?
There are two basic paths for the outbreak of financial crises in emerging market countries represented by China:
1. Improper management of financial liberalization/financial innovation weakens banks' balance sheets.
2. Serious financial imbalance.
Both of the above will trigger a speculative impact on the local currency, and eventually lead to a currency crisis, that is, a sharp decline in the value of the local currency. The decline in the value of the local currency has exacerbated the debt burden of domestic companies, causing a decrease in net worth, as well as an increase in inflation and interest rates.
The problems of adverse selection and moral hazard worsened, causing shocks in lending and economic activity. A deterioration in the economic environment and rising interest rates can cause severe losses to banks, which in turn will lead to a banking crisis, which further exacerbates the contraction in lending and overall economic activity.
From the above analysis, do you know anything about the financial crisis?
Leave two topics for discussion:
1. How will asset price bubbles in the stock market trigger financial crises?
2. How will an unexpected drop in the price level lead to a decline in loans?
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