Top 10: Financial Crises

The rise of capitalism as the predominant economic system around the world has seen many (although certainly not all) people benefit from increased living standards and greater prosperity. But occasionally, it is a system that goes wrong. And when it does go wrong, it can be spectacular.

Financial markets seem to possess a peculiar emotional element to them. They suffer from nerves, panic and irrationality. And if too many people get swept up by these emotions, it can lead to a crisis. Here are ten of the biggest financial crises of recent history.

Number 10

Japan’s “Lost Decade,” 1990-2000

The collapse of the Japanese asset bubble in 1991 led to a prolonged period of low growth, a period that has since been extended to incorporate the decade since the year 2000. The original lost decade was caused by an unsustainable level of speculation, large amounts of credit and low interest rates (sound familiar?). When the government stepped in to control this, credit became much harder to obtain, and capital investment dropped significantly. It led to a virtual halt in economic expansion during the 1990s, hence the lost decade.

Japan was fortunate in avoiding a depression, but the effects of 1991 are still being felt, even today. It is a situation that some commentators feel could be repeated in Western economies in the near future, if care is not taken.

Number 9

1907 Banker’s Panic

The fourth so-called “panic” in 34 years, the Panic of 1907 saw the Dow drop almost 50% from the high of the previous year. It was triggered by the usual suspects: overexpansion and poor speculation. The stock market crashed in March, and a second crash in October led to a run on banks and every trust in New York, notably causing the massive National Bank of North America to fail.

The U.S. Treasury department — with exceptional help from J.P. Morgan and some select executives — raced in with federal money and some creative financial “redirection.” Confidence in the market had been restored by February 1908, and in May, Congress passed the Aldrich-Vreeland Act, which created the National Monetary Commission that later recommended the Federal Reserve Act in an effort to squash any future panics before they were able to do such tremendous damage to the economy.

Number 8

Black Monday, 1987

No one is entirely certain about the causes of Black Monday, on October 19th 1987. But what is certain is that billions of dollars were wiped from stock markets across the globe. Hong Kong lost a massive 45.8% of its value, the United Kingdom lost 26.4%, Australia dropped 41.8%, and New Zealand dropped a full 60% from its peak.

Some people suggested it was an accident waiting to happen, and theories such as program trading, disputes about monetary policy and fears over inflation have all been proposed to explain what happened. It could even simply have been a panic that spread with no rational explanation. What is certain is that it cost an awful lot of people an awful lot of money.

Number 7

Ruble Crisis, 1998

Stricken by corruption, lacking an effective economic reform policy, the devaluation of the ruble and political instability sent Russia into a massive financial crisis as the millennium came to a close. Additionally, as the exporter of one-third of the world’s oil and natural gas reserves, Russia was extremely vulnerable to price fluctuations. When foreign investors pulled their money out of the country, the banks were crippled to such an extent that even an IMF loan was largely ineffective. Annual bond yields stood at a staggering 200%. The crisis also hit the Dow, which suffered one of its biggest point drops in history.

Number 6

East Asian Financial Crisis, 1997

The so-called “Asian economic miracle” turned disastrous in July 1997 when investors did what they do so well: lost confidence, particularly in currencies. High yield rates made Asian markets appealing, but when the U.S. tried to stem their own recession by lowering interest rates, they made themselves more attractive and, as a consequence, the Asian markets looked too risky.

A domino effect followed, beginning in Thailand and spreading through the Philippines, Hong Kong, Indonesia, Malaysia, and beyond, triggering an unprecedented global crisis. Asian markets that had enjoyed some rare prosperity were slammed: Thailand dipped 75%, Hong Kong’s HSI, 23% and Singapore dipped 60%. Not a single global market went untouched.

Number 5

European Sovereign Debt Crisis, 2009 Onward

This is the most recent of the crises on our list, and no one is yet certain about when, or how, it is going to end. Markets have grown increasingly concerned about the ability of nations, particularly Greece, Ireland, Spain, Portugal, and Italy, to pay their debts, and the exposure of international banks to these potentially toxic debts has played a large part in the enormous market falls of recent days – some of the worst on record.

But the sovereign debt crisis, while perhaps initially a European problem, has also spread to the U.S., and wrangling between Republicans and Democrats over the debt ceiling saw the U.S. have its credit rating cut for the first time in its history.

The implications of poor economic figures, continued low growth and large sovereign debts remain potentially huge. It is not inconceivable that this crisis will move further up our list as it continues to play out.

Number 4

1973 Oil Crisis

In the midst of the Yom Kippur war between Syria and Egypt against Israel, OPEC employed oil as a weapon with the Arab Oil Embargo against those who supported Israel. Crude oil costs rose while production was cut, specifically to the U.S. and the Netherlands.

The embargo lasted only five months, but the effects continue today: OPEC member states realized a level of wealth unfathomable only years before; in six weeks shares on the NYSE lost $97 billion in value. Japanese car makers began to counter the American-made gas guzzlers with smaller cars, giving them a tremendous market share. The U.S. enacted a 55-mph speed limit in an effort to conserve oil, and in 1977, President Carter created the Department of Energy, which promptly developed the U.S.’s strategic petroleum reserve.

Number 3

The Great Recession

In 2008, the shock collapse of the Lehman Brothers Bank, which held assets worth $600 billion USD, became the symbolic start of the most dramatic financial crisis since the Great Depression. The causes have been attributed variously to the likes of a deregulated financial sector, poor public monetary policies and an international economy that was ultimately based upon a house of sand, with unsustainable levels of debt in both public and private sectors.

Wherever the responsibility really lies, the effects are undeniable. Between the credit crunch, the stock market collapse and the ensuing recession, growth in recent years has been stunted, unemployment has remained high and governments have struggled to retain control over their own finances. It was estimated by one financier that by March 2009, up to 45% of global wealth had been destroyed. It could take years to reclaim it.

Number 2

German Hyperinflation, 1918-1924

While the hyperinflation that engulfed Weimar Germany is not the worst in history (see Zimbabwe) it had arguably the most devastating impact.

In 1914, the exchange rate between the U.S. dollar and the German Mark was about 1 to 4. By 1923, the rate had mushroomed to $1 to 1 trillion Marks.

In the aftermath of the First World War, the “victors” sought reparations from Germany for the cost of the war, worth about one-third of the German deficit in this period. Some accused Germany of deliberately sabotaging its own economy to avoid making these payments.

By introducing a new type of currency in 1923, the Rentenmark, followed by the Reichmark in 1924, Germany did eventually regain control of its runaway inflation. However, this period almost certainly proved to be crucial in the rise of National Socialism, and all its terrible consequences.

Number 1

The Great Depression

The Great Depression was the longest and most severe depression in global economic history, lasting for virtually the entire period between 1929 and the outbreak of World War II. As a stark contrast to the roaring twenties, a period of prosperity and ostentatious wealth, the depression era created massive and virtually instantaneous poverty.

The beginning of this period was marked by the Wall Street Crash, which remains the single-most devastating crash in U.S. stock market history. On October 29, 1929, $10 billion (around $95 billion today) turned to dust. For some, it took entire lifetimes just to break even from the losses made at this point.

In the years leading up to Black Tuesday, the Dow was turning countless men into millionaires. The market became a hobby for many ignorant investors, who readily poured all their money into the stocks of companies (many of which were fraudulent) that they didn’t understand.

When the government raised interest rates, panic ensued. Investors were desperate to liquidate their stocks, but the money simply wasn’t there. Unfortunately, banks also invested in stocks and the panic led to a run on those banks that reduced many to insolvency and failure. The country was thrust into the Great Depression, and much of the world followed.