Overview

A financial crisis occurs when the value of a country’s financial assets falls rapidly. The crisis is often associated with bank runs, investor panic and massive withdrawal of funds from banking institutions. This scenario predicts that everything is going downhill, hence the need to withdraw all savings and investments from all financial sectors.

When assets are deemed to be overvalued, rapid sell-offs occur, leading to a financial crisis. If left unchecked, the situation can further lead to declining asset values ​​and massive withdrawals by investors. The result is mass hysteria that sends the economy into recession or depression.

The economy is in a tailspin if:

• There is a significant drop in the housing sector;
• An increase or increase in the number of unemployed;
• There is an apparent decline in economic output.

Investments can be affected if financial markets take a nosedive. Recession always comes after a peak in the business cycle is reached. There is a decline in profits and employment after each expansion. Recession occurs when this scenario occurs with wages and prices of goods being the same as in the peak period.

This then leads to a declining economy resulting in a gutter or depression. The duration of the depression is critical as it determines the severity of employment and economic output bottoming out while waiting for the next cycle of recovery to begin.

The world’s financial markets in a tailspin?

Every central bank in the world is in a state of panic in the fourth quarter of 2013. Every economy in the world assessed the situation as grim and embarked on strategies to control the damage. The big bubble-bursting story centered around China’s interbank liquidity problems and spiraling overnight interest rates.

China’s stock market is now in free fall and is down 20% today. The Central Bank of China tried to appease investor confidence by assuring the market that there is liquidity in the banking sector. But the market did not react and investors were cautious despite assurances from China.

In the United States, there were acrimonious debates about the Fed’s ability to rein in quantitative easing (QE) from late 2013 to mid-2014. Based on historical data, the Fed failed miserably to stimulate economic growth. It had only succeeded in creating stock market bubbles while draining the financial markets of high-quality collateral.

The leverage situation today is worse than it was in 2008 due to the Fed’s intervention. However, as has been seen in recent weeks, the reaction of bonds and equities to the Fed’s intervention in the market is critical ; and if you remove support, your entire system may be at risk.

With bond markets collapsing in Europe, there are fears that higher interest rates will come next. This new emerging market scenario is catastrophic with all the world’s economies frozen in a debt bubble. The world’s central banks can only watch as they lose control of the financial markets. The emerging scenario looks bleak and industry stalwarts say the situation may be worse than what happened in 2008.

The economic crisis in 2007 and 2008

What happened in this two-year period may be similar to the pre-Fed era. The market was in a panic with people dumping their assets causing prices to drop to unpredictably low levels. What happened then was that people came out, all at the same time. weather. The mass hysteria hit short-term instruments like repos, bonds, stocks, commodities and real estate.

The wave of terror not only affected short-term investments but also long-term instruments. This global meltdown caused the collapse of pivotal companies like Merrill Lynch, Lehman Brothers, Bear Stearns, Washington Mutual, Wachovia, and Countrywide Financial.

The next financial crisis is expected to be the same one that happened in 2008, 1987, 1929, 1907 and so on. The bank run will be systemic, credit will be frozen, large numbers of people will lose their jobs, and millions of people will see their life savings decimated. It happened in the 19th century when central banks didn’t exist yet, and it didn’t stop even after the appearance of the Fed in 1913.

There is no trigger factor that would determine if the crisis had started. Depositors at banks like Wells Fargo, Citibank and Bank of America did not panic to alert the nation. It was the Federal Reserve that realized that the major banks were undercapitalized, overleveraged and insolvent before presenting a rescue package.

The economic meltdown of 2007-2008 hit the stock market as it realized that the banking community did not have the resources to absorb the run. What happened was a lack of confidence in the stock market that caused him to suffer immensely. What saved the day were the guarantees made by the Fed and the Treasury in the stock markets, which would guarantee bank deposits of up to $250,000 and inject billions of capital to save the country from total financial collapse.

It is now very seriously argued that in order to save the financial markets from future runs, there must be enough capital or strength funds to meet their run obligations. Losing trust in banks and lenders who withdraw their funds from one or more banks can be disastrous for the banking system. Banks need the continuous flow of short-term inflows of funds to meet their long-term obligations. Without this continuity, another bank run would inevitably begin.

Can the global economy handle another financial crisis?

It must be reiterated that the world economy is connected than many experts believed. While it is important to stay on top of how the US economy is doing, it is still part of the global economy where many players are positioned at the top. China had become an economic dragon rivaling the US for the top position. China has a presence in many parts of the global economy including raw materials and material sectors.

China’s most recent moves in shifting from an outward-driven economy to its domestic markets is causing significant problems with its trading partners. China’s Gross Domestic Product is watched more carefully as the global arena relies heavily on its rapidly growing economy. The financial debacles in China are closely watched by global markets, as its fall could wreak havoc on all the world’s economies.