Ludwig von Mises Institute

Financial crisis

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The term financial crisis refers to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value.[citation needed]

They include sovereign defaults, which occur when a government fails to meet payments on its external or domestic debt obligations or both. Then there are banking crises, typically when a significant part of a banking sector has become insolvent after heavy investment losses, banking panics, or both. Another important class of crises consists of exchange rate crises, where the value of a country’s currency falls precipitously, often despite a government "guarantee" that it will not allow this to happen under any circumstances. Some crises are marked by bouts of very high inflation. These separate types of crisis often occur in clusters.[1]

Properties[edit]

Carmen Reinhart and Kenneth Rogoff argue, that systemic banking crises are typically preceded by asset price bubbles, large capital inflows and credit booms.

Banking crises dramatically weaken fiscal positions of governments, with revenues invariably contracting, and fiscal expenditures often expanding sharply. Three years after a financial crisis central government debt increases, on average, by about 86 percent. The fiscal burden of banking crisis extends far beyond the commonly cited cost of the bailouts. The busts of real estate price bubbles average four to six years.[2]

History[edit]

Before 19th century[edit]

The first true international debt crisis had its roots in loans made by Italian merchants to England starting in the late 13th century. Italian loans helped to finance a long series of wars between England and France. Edward III of England defaulted in 1340 after a series of military defeats and a bank run hit Florence's economy. The whole affair played out in slow motion by modern standards. One major Italian lender, the Peruzzi Bank, went bankrupt in 1343, and another, the Bardi Bank, did in 1346.[3]

19th century[edit]

20th century[edit]

21st century[edit]

See also[edit]

References[edit]

  1. ↑ Carmen M. Reinhart & Kenneth S. Rogoff. This Time Is Different: Eight Centuries of Financial Folly (pdf), Preface, see also the summary page. Referenced 2011-01-08.
  2. ↑ Carmen M. Reinhart and Kenneth S. Rogoff. "Banking Crises: An Equal Opportunity Menace", December 17, 2008. Referenced 2011-02-23.
  3. ↑ Carmen M. Reinhart and Kenneth S. Rogoff. "This Time is Different", Princeton University Press, ISBN 978-0-691-14216-6, p.69-70. Referenced 2011-07-11.
  • Atwell, William (1998), "Ming China and the emerging world economy, c. 1470–1650", in Twitchett, Denis and Mote, Frederick W. (eds.), The Cambridge History of China: Volume 8: The Ming Dynasty: 1368–1644, Cambridge: Cambridge University Press, pp. 376–416, ISBN 0521243335 

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